Costamare Inc (CMRE) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Costamare Inc. Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Gregory Zikos, CFO. Please go ahead, sir.

Thank you, and good morning, ladies and gentlemen. During the third quarter the company delivered positive results. On the financing side, we entered into a debt financing agreement with a REIT institution for the financing of the Maersk Kowloon. The vessel has a 5-year charter to Maersk. Regarding our commitments, all of our new building program is fully funded with remaining equity commitments on amounting to only $2 million during 2018. Regarding chartering, we chartered in total of 15 ships during the quarter at substantially higher rates. We have no ships laid out. Finally, on the dividend and the Dividend Reinvestment Plan currently in place, members of the founding family have decided to reinvest in full the third quarter cash dividends. This is the 6th consecutive quarter that insiders have decided to reinvest their dividends in new shares.

Moving now to the slide presentation. On Slide 3, you can see a summary of our recent chartering activity. The way that market has been moving is obvious. On average, the ships opening have been rechartered at a 23% higher rate.

On Slide 4, you can see the new financing for Maersk Kowloon, which has been acquired in the second quarter and commenced its 5-year charter to Maersk line. The loan has been amortized during the tenure of the charter bargain. We also sold, during the quarter, 2 nearly 30-year-old container vessels for demolition. The sale of those ships resulted in an accounting gain of approximately $1.5 million.

Moving on to Slide 5. During the previous quarter, we declared $0.10 cash dividend per share on our common equity, and dividends for all 3 classes of our preferred stock. As already mentioned, insiders have decided to invest all their third quarter cash dividends in new shares and in our dividend reinvestment plan.

On Slide 6, you can see the third quarter 2017 results. During the third quarter of this year, the company generated revenues of $101 million and adjusted net income was $17.2 million. Based on the above, the third quarter adjusted EPS amounts to $0.16. Our adjusted figures take into consideration the following noncash items: we accrued charter revenues, the gain or loss on sales of vessels, the gain or loss resulting from derivatives, the amortization of the prepaid lease rentals, which is a noncash charge, and the noncash G&A expenses.

On Slide 7, we are showing the revenue contribution for our fleet. 99% of our converted cash comes from first-class customers like Evergreen, MSC, Maersk, Cosco, Hamburg Süd and Hapag-Lloyd.

We currently have $1.3 billion in contracted revenues and the remaining times are the duration of about 3 years.

On Slide 8, you can see the resilience of our business model. The bar show the revenues and the adjusting net income since '08. The dotted line is a time charter index. Irrespective of market movements, the company has been constantly performing.

Moving on to Slide 9. As of the end of this quarter, we have cash in balance sheet of $234 million. We are conservatively managing our balance sheet, having brought down net debt from $1.7 billion in 2013 to $1 billion as of today.

During the 5-year period, we have raised debt financing of close to $750 million for new business. Based on the latest compliance certificates provided to our lenders, we have a leverage in the region of 51%.

On the last slide -- charter rates moved up during the first 3 quarters of the year with the market softening since the beginning of the fourth quarter. The idle fleet currently has moved up to 3.1%. The order book remains at historically low level of around 14%.

As we already mentioned, we're actively looking for new transactions in this market environment.

This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

(Operator Instructions) Today's first question comes from Chris Wetherbee of Citigroup.

This is [Sarah Huang] on for Chris. First question is there were several vessels, I think, around 10, approaching the end of charters in next 2 months. Just wondering if you could comment on the renewal activity so far in fourth quarter?

Yes. Two points. First, as you have seen, we chartered 15 ship since our latest announcement. So we have been relatively active. And today, although the number of idle ships has come up slightly above 3%, we have no ships laid up. So I cannot possibly predict the rate and the tenures for which those ships will be chartered, but I can tell you that we will try our best in order to maximize the potential of those assets. I'm afraid I cannot give you a precise answer about the chartering of those ships. But generally speaking, we start marketing the vessels sometime before its opening, meaning before this comes out of charter, either with a current charter that followed an extension or with new charters.

I see, that's helpful. Just a follow-up, do you have any updates on the two vessels that is -- that so far are delivering in the first half of 2018?

Yes, you're referring to the 2 new buildings chartered to Hamburg Süd for several years. Those ships -- based on the latest information we have, those ships will be delivered on schedule, meaning during the first and second quarter of 2018. So the first ship will be delivered during the first quarter of the coming year and the second during the second quarter, as per the initial schedule with the CBR. The ships are chartered to Hamburg Süd for 7 years. And just to remind you that those ships have been brought on our joint venture with York, and Costamare has a 49% stake in each of those vessels.

Okay, that's helpful. If I may, can I tell that order book for container ship now, I think it's 13.8%, but there are a lot of ships to be delivered in 2018, assuming no slippage. Can you give us some color on how you think about order book and the charter with the environment next year?

Yes, you're right that we have an order book today which is slightly below 14%, which from a historical perspective is a very low number. However, there are deliveries to take place within 2018. Different people come with different projections regarding what's going to be the net additions to the fleet. And this has to do with the assumptions you make regarding slippage and demolition of older ships. The order book today is heavily skewed towards the larger vessels and there's more than 1 million TEUs to be delivered next year. Although, the precise numbers have to do, they are a function of the slippage and of the demolition, so I cannot possibly forecasts that. However, from 2019 onwards, the order book is very thin. And apart from 2 -- the 2 latest quarters from liner company which we sold, which are for large vessels 20,000 TEUs. Generally speaking, the new building market has not been very active especially compared to the previous years.

And our next question today comes from Gregory Lewis with Crédit Suisse.

This is Joe Nelson on for Greg today. So first one for me, the market looks to be off its bottom and it seems to be in the early stages of a recovery year. Are customers beginning to come to you with, sort of, longer terms on their charters, maybe looking to extend where, maybe a year ago, it was a 6-month charter now, maybe it's a year on -- at a better rate. And then, maybe a second part to that is, what do you think we need to see before we start to get those real long-term multiyear charters starting to get fixed once again?

Yes. The charter market has been moving up during the first 3 quarters of the year, from the beginning of October, which is something relatively usual in container shipping because there's some seasonality there. We have seen some softening in charter rates, especially after the week of the Chinese New Year. However, we're not sure -- I'm not sure whether this is a trend or whether this has to do with the seasonality of the business. Now as you may have seen we've chartered our 2 11,000 TEU ships for about a year. And in the second quarter, we chartered 3 secondhand ships for 5 and 7 years. So I cannot say that today that our long-term or medium term fixtures, like the ones we experienced in the past. However, there are transactions which involve longer charter durations. Now one is to be done or what do we need to see before liners committing for longer periods. This has to do with each kind of company's strategy, positioning in terms of expansion of demand growth, and plan, as I guess, they need to feel comfortable about committing for long-term charters in dollars. I cannot possibly predict when this will be happening. But we've seen some encouraging signs over the last quarters.

And then second, in thinking about your fleet, the IMO does have a couple new environmental regulations coming into effect, the ballast water treatment, sulfur caps. And some of your customers have been pretty vocal in their support of some of these rules. I think, do you have a view on what if any potential capital outlays needed in, say, the next 2 years or so to position your fleet ahead of these new rules?

Yes. First of all, regarding the water ballast treatment. This, as per the latest development, this will be effective from 2020 onwards. And this was postponed, so it's like 2.5 years in the actual implementation. We have -- internally, we have looked at numbers about how much would be the CapEx required for that. But I think it's -- in shipping like -- trying to predict 2.5 years in advance, what's going to be the situation and what's going to be the capital outlay required from 2020 onwards. I'm afraid it's going to be very generic approach. So for the next 2.5 years, as far as we know, the water ballast treatment it's something that will not be applicable. However, we have some numbers from 2020 onwards but it's just -- it is at relatively pretty much where it stays today.

And just kind of thinking, when do you think you might have to make some decisions on timing your -- any potential upgrade, is it next year or 2019...

It's about -- it's impossible to know today to whom those ships will be chartered in 2020, it's the first point. Then the second point, I guess like a year in advance or like some quarters in advance we will have a much better picture. But from our side we will make sure that whatever cash requirements are there we're going to be more than happy to make them.

(Operator Instructions) Today's next question comes from Ben Nolan of Stifel.

So I wanted to follow-up a little bit on something that you were mentioning earlier with respect to looking for new opportunities, and obviously, you did the Maersk vessel and announced it in the second quarter. Has there been much activity there among some of the liner companies looking at their existing fleets, trying to find assets that can be chartered out taken off the books and held by someone like you and doing it on longer-term charters or are more of your conversations revolving around, sort of, new builds or new opportunities?

Today, the new building market is not very active, with a couple of exceptions. Most of the discussions already know -- the new transactions we look at, they mainly have to do with secondhand vessels, either, as a leaseback or buying from a third partnership owner or buying from a financial institution and chartering out the ship to the larger company for a period. We have not engaged in any discussions regarding new buildings today and the market is not very active in that front.

Okay. But there are discussions for, maybe, existing equipment, that sort of thing is more active I guess?

Yes, say, the leasebacks or sort of buying sound distracting brackets type of vessels, which you know we can lease out a charter to liner companies. I think this is the vast majority we are currently looking at. We are engaged in a lot of discussions. We are generally active. However, we need to make sure that this will going to be an entered into. We'll also be making sense for our shareholders. The first thing we look at every transaction is first to cover our downside. And then the second step is to also make sure that there is some good return for the shareholders.

Okay. So to that extent or thinking through it, obviously, you guys had been relatively active in buying vessels without contracts over the last few years, just at distressed prices as well as a few sale leasebacks. But are there -- given the improvement in asset values, do you think that there is still good value in buying vessels without contract or is it better at this point in the cycle to be doing things that have firm contracts and guaranteed return?

I think you can still find the deal that makes sense whether it is with a charter caveat like the transactions within beginning of the year with Maersk, or you know, buying ships with equity, with short remaining times of duration. As long as we feel comfortable with the quality of the asset, and thus with its chartering potential. We are looking at both cases. Of course, if we buy something without charter caveats, we need to make sure that the price we pay is something that we feel very comfortable with the chartering potential of this vessel.

Right. And then lastly for me, this is something that has come up in a few conversations that I've been having with various owners recently. It seems like some of the bigger owners like yourselves did a relatively good job or had better success in finding employment for vessels in the really trough parts of the market rather than a lot of the smaller operators who -- it seems like they had the preponderance of layups. And there is a sense that -- among people that I've talked to, that it's increasingly harder for smaller container owners to really be viable throughout the cycle and that it makes more sense for bigger owners to sort of be that counter party for the liners. Is that something that you guys feel as well and are you seeing any difference in the level of competition out in the market?

Yes, it's a couple of points. First of all, it's a capital intensive business. And as a ship owner you need to maintain the vessel in such a way so that it can be chartered out to a major liner counter party. So part of what you say may have to do with the physical condition of the vessel and with the quality of maintenance. Most of liner companies run through chartered investments from shipowners, they know that they have the financial means to service their debts, to manage properly their vessels for the coming years. So although I don't have something specific in mind, I can tell you that generally having access to capital and being well capitalized, it's something that definitely makes sense, especially in today's market environment.

And our next question comes from Fotis Giannakoulis of Morgan Stanley.

Greg, I want to ask you about the competitive landscape and the use of the capital that you have in your balance sheet. I understand that the asset prices have moved up the last 6 months. I'm wondering whether you encounter more competition from other shipowners, when you look for new acquisitions or from liners, and how overall is the landscape out there?

I think that if you compare the competition we are seeing today with the competition that we experienced years ago, I think today relatively less competitors as few containership owners. As I was mentioning earlier, access to capital whether it is equity or whether it is commercial funds or whether it is Chinese leasing whatever -- in whatever form it's definitely important. And the competition is much less compared to what we saw in the past. This is the first point. The second point is that the customer has been shipping for over 40 years. So there are very strong relationships with all of our clients. And we need to make sure that we cater to their needs. So there is competition today, however, the competition is much less from what was in the past which is a healthy sign.

So can you give us an idea of how many deals you have seen the last 6 months since the most recent capital raise? And what were the reasons that we haven't seen any deployment of this capital? And also, would you consider using part of this capital to buyback your stock?

Yes. We have seen -- first of all, we have done some transactions since the beginning of the year, and 2 of those vessels were 2014 builds. The other was 2005 build but -- sorry, 2012 build. But we have seen transactions that -- and we have done some bids. Now we have participated in values bid processes for ships coming out from other ships owners or coming out of financial institutions. However, we were willing to bid for up to a specific price for the vessel and we didn't want to take excessive residual value risk. We might have access to commercial bank debt, cash on balance sheet of north of $200 million to use as equity. However, it doesn't mean that we're going to go and buy or commit to anything that is just out there without making sure that we feel comfortable about the quality of the counterparty and of the economics. So if you ask me, yes, we've seen a number of transactions in what would be more than, I would say, 15, 20 vessels over the last couple of quarters. But we have passed on most of them. It doesn't mean that you know -- and today, as we speak, we look at a lot of things. I think that there are definitely opportunities. Hopefully, over the next quarters we're going to be able to discuss those in more detail. But we also have some internal risk assessment and we need to make sure that we don't take excessive risk, especially, in today's market environment.

Greg, one last question. There are some articles out there about potential combination with one of the largest ship managers or ship owners in the containership space and the creation of a joint venture -- chartering joint venture with Costamare. Is there something that you can comment about to give us some color? How important it is for you that you have a large fleet to secure profitable charters versus some ship owner that has a much smaller vessel? And how this cooperation can save your bargaining power versus your customers?

I cannot say a lot at this stage also for legal reasons. The only thing I can say is that we are in discussions regarding putting together just a simple charter broker as business, that's all. I cannot tell you more and this is something that they will then discuss, I guess in the next quarterly results call.

Could you give me a brief comment of the importance of having a large fleet versus shipowners where they have 2 or 3 or 5 vessels? And how different is the competition when you're trying to secure charters?

I think that -- it's 2 things. What we're trying to -- what we are discussing with our German counterparts. I have to stick to that. It is a charter broker as business, where I think we are going to be combining the commercial chartering activities of our fleet, and that's all. We feel it is something that generally makes sense. Costamare will not be involved. It's going to be affiliate parties I think involved. Costamare will not be part of this agreement. So at this stage, I'm afraid, I cannot say anything more. However, I have to say that it is a simple, plain charter brokerage business that's all.

And our next question comes from Mike Webber, Wells Fargo.

Just a couple of questions, a lot of it has already been kind of parsed over. But I just wanted to comp, maybe, where we are this year relative to last year when rates got a bit tighter, a bit faster than everyone expected. It looks like the idle shipping capacity is up quarter-on-quarter but we're still off year-on-year, so things are naturally a bit tighter, now this year also the last year. I'm just curious how would you compare your rate expectations for the next 6 months relative to where we were last year? And do you think we're on the same kind of seasonal pattern, albeit maybe a bit amplified?

Yes, look, last year in 2016, I think it was a very bad year for container shipping, especially for charter rates. If you look at the charter rates like in Q2 or Q3 2016 versus 2017, today, the market is much better and charter rates have improved substantially during the first 9 months of this year. Now we have seen some softening beginning from October of 2017, which is something expected from our side and it's got to do with seasonality and Chinese New Year, and traditionally, the sales -- especially, the fourth quarter of every year are the weakest quarters in container shipping. Now I cannot predict that where, sort of, rates are going to be heading moving forward. However, I can tell you that there are positive signs coming from demand growth, which has been exceptional up to now this year. The order book, apart from 2 big new building orders put by liner companies, has not been very active, and you know we haven't seen a lot of new build ordering. There is up to now, at least, generally speaking, much more discipline. Charter rates, although they are much below mid-cycle levels, they sort of have improved and it remains to be seen whether they will continue. So -- and from 2019, we have very thin order book. So there are some positive signs. However, it is a market. We have been expressing a down market, generally speaking here, for the last 6, 7 years at least. I cannot possibly predict but I can tell you that, as a company, we are -- we know what to do and we have a plan under each scenario. If the market stays as it is, meaning there’s softening in the charter rates, this may provide with more opportunities. At the same time, we have ships coming out of charters over the next couple of quarters. And we know it's going to be a positive surprise to see the market moving where it was beginning of this year.

Okay. Maybe just one more strategic question. You think about the fact that you've got some real consolidation happening now among the liner complex as supposed to alliances and really going to be more capital discipline in the larger lines, the cost of capital advantage their -- relative to their -- at least their container ship. We see partner is going to be even wider and inverted. I'm just curious, when you think about the intermediate to long term with larger customers, do you think -- when you look at your fleet you've got the smaller operating vessels that probably have probably higher return business, then you've got these large slugs of vessels on the container lines. Does that business make sense in terms of those longer -- large slugs of large ships chartered into lines, 5, 6 years from now do you think you -- if you look at the split of your business do you think you are more of an operator in 5 years than you are, maybe, kind of a balance sheet provider to some of the container lines?

Look, we have always been an operator, and we want some synopsis like...

You're an operator now. Most of them are your competitors, I'm just curious -- split yet a bit wider 5 years from now. Are you doing more of that shorter term so that you can really add value from an operating perspective as opposed to just kind of chunks of capital, that's just less aggressive.

I think that -- I cannot predict the future but I can tell you that our strategy is to remain an operator. Charter outage through liner companies. Liner companies they always need to charter in some safe sense. They cannot own 100% of the fleet they operate. However, it's not part of our strategy to sort of become a financing vehicle. We -- our goal is buying, operating, financing those assets which we charter out to liner companies, and we also take the residual value risk at the expiry of the charter party. This is what we have been doing and I think this is what we will continue doing. I understand that the market, the liner company business it's much more consolidated. At the same time we discuss some positive implications because we have stronger clients who may be willing to do bigger business. But I don't think that this should change our business model.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Zikos for any closing remarks.

Okay. Thank you very much for your interest in Costamare, and for dialing in today. We're looking forward to speaking again with you at the next quarter results call. Thank you.

And thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.