Costamare Inc (CMRE) 2017 Q4 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the Fourth Quarter 2017 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, January 24, 2017.

We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide #2 of 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. 2018 started with a positive momentum across the board. So far, larger bases have captured most of the upswing and hopefully, this will give a further boost to the smaller sizes as well. During the last quarter of the year, the company delivered profitable results. On January 23, we accepted delivery of the containership vessel, Polar Argentina, which is the first of the 2 3,800 TEU new buildings ordered together with our Partners York Capital. Upon delivery, the vessel commenced its 7-year time charter to Hamburg Süd. The acquisition has been financed with cash from operations and debt, provided by a leading Asian financial institution.

In November, we acquired the 2005 built, 2,500 TEU containership vessel CMA CGM L'Etoile. The acquisition was 100% financed with cash from operations.

On the chartering side, we chartered in total 16 ships since last quarter. And today, we have no ship laid out.

Finally, on the dividends, we declared our consecutive 29th dividend since going public. Insiders have decided, as has been the case since June 2016, to reinvest in full, their cash dividends in new shares.

Moving now to the slides presentation. On Slide 3, you can see a summary of our recent chartering activity. All ships are employed and you can see the rate at which the 11,000 TEU ships have been chartered. Since the beginning of the year, larger ships have captured most of the upside.

On Slide 4, you can see the details on the delivery of the 1 3,800 TEU newbuilding as well as on the acquisition of the secondhand ship.

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 fourth quarter cash dividends in new shares under our dividend reinvestment plan.

On Slide 6, you can see the fourth quarter 2017 results. During the fourth quarter of this year, the company generated revenues of $101 million and adjusted net income of $18.4 million. Based on the above, the fourth quarter adjusted EPS amounts to $0.17. Our adjusted figures take into consideration the following noncash items: the accrued charter revenues, accounting gains or losses from asset disposals and impairments, prepaid lease rentals and other noncash charges.

On Slide 7, we are showing the revenue contribution for our fleet. 99% of our contracted costs comes from first-class charterers like Evergreen, MSC, Maersk, Cosco and Hapag-Lloyd. We have $1.2 billion in contracted revenues at the remaining time charter duration of about 3 years.

Moving on to Slide 8. At the end of this quarter, we've had cash on balance sheet of $219 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 also raised debt financing of close to $750 million for new business. Based on the expected compliance certificates to be provided to our lenders, we have a leverage in the region of 50%.

And on the last slide, we're discussing the market. Charter rates have moved up substantially during 2017. The idle fleet currently is at the low level of 1.8%. The order book remains at historically low levels of less than 13%. As already mentioned, we are 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) And the first question comes from Fotis Giannakoulis of Morgan Stanley.

You mentioned in your last comment that you're looking for more opportunities. Can you identify where these opportunities are? We saw that you bought another secondhand vessel. So I was wondering, if the market now with the improvement that we have seen is becoming open for newbuilding acquisitions like the ones that you have done in the last year before.

Yes. Look, in the previous calls, we had mentioned that the newbuilding market has not been very active. However, I have to say that over the last months, we've seen more activity in the newbuilding market. And we feel that going forward, there will be a lot of opportunities there. Now as company, we've done a lot of newbuildings and we have arranged pre and postdelivery financing with top-class charterers. So this is definitely a source for new transactions. At the same time, the secondhand market is also active. We bought this secondhand ship, the CMA CGM L'Etoile, it's a 2005, with 2,500 TEUs with equity. It has a charter up until March of '18. We felt that this is a good acquisition, a good opportunity. And there are definitely deals to be done in the secondhand market, either with or without a medium- or long-term charter. So overall, I would say that we are positive for opportunities going forward.

And these newbuilding opportunities that they might present in the near future, how do they compare with your previous deals in terms of length of charterers that you -- that they will be offered and you will be willing to accept? And also, how do you view your cost of capital vis-à-vis other participants, other competitors? I'm talking about both other charter owners or even the Chinese leasing houses, that they have been active in other sectors in the shipping space.

Yes. First of all, for the newbuildings, I think there is possibility that the deals might be with a back-to-back charter, which could be for 5, 8, 10 or even for a longer period of charter coverage. Traditionally, we have been doing newbuildings with long-term charter coverage. These Hamburg Süd vessels -- they have a 7-year time charter. In the past, the 14,000 TEU ships we've done, they had a 10-year time charter. So there's nothing concrete today. But generally speaking, I think that there could be opportunities with a medium- to long-term time charter attached. Now regarding cost of capital and taxes to financing, in the past we've used for newbuildings, traditional bank debt and we have also used Chinese leasing for pre and postdelivery financing. We feel today, based on our track record, based on the fact that we never had to restructure and financing compliance is with 50% leverage, that we do have quite a competitive cost of capital. And definitely, we have access to commercial bank debt at very competitive terms. Now I cannot -- I'm not allowed to give you specific figures, but I think that our cost base in financing is extremely competitive today, especially wherein some transactions we are also in a position to provide our corporate guarantee.

Can you comment also about the competition? How this cost of capital compares with other charter owners? And do you see that the leasing houses can be participants or competitors in any of these potential transactions?

Yes. I feel that, first of all, deals -- I mean, I cannot provide you with specific figures, again. And I don't know the details of what everybody has been doing. But I can tell you that our view is by looking at numbers and the market information, that regarding commercial bank debt or Chinese leasing that sort of -- we are quite competitive today. And this is a competitive advantage that we are willing to pass on to the charterer, which is our client. Now regarding Chinese lessors, they have been participating in the market. We have also used the Chinese leasing. So I think that this should be considered also as a funding source, especially in cases where traditional commercial banks are no longer willing to provide pre and postdelivery financing for long tenures, meaning 2-year predelivery financing, a date of 10-plus years postdelivery. So this gap to sort of -- to a big extent has been covered by Chinese leasing companies, which also are selective. But I think that this is a financing source which adds to our capabilities in raising commercial bank debt.

One last question. We have seen market getting much better this year, but we have seen even a more impressive decline in idle capacity. Charter rates seem that they have improved, but they have not improved as -- they have not gone as high as this below 2% idle capacity would indicate. What is your outlook for this year and the next couple of years? How do you view the supply and demand developing and illustrating after the charter rates?

Yes. A couple of points. First of all, we cannot forecast the market. But I can tell you that they start from the demand, the demand we see up to now. And especially, the demand we experienced in 2017 has been extremely positive. And we are also seeing very positive demand trends now since the beginning of 2018. Now the number of idle ships has come down at below 2% and this is a very low number and this is very encouraging taking into account that, historically, the number of idle ships has been growing prior to Chinese New Year. Whereas now we see idle capacity going down in January. And this is definitely very, very promising. Now charter rates have moved up. And especially, if someone compares 2017 to 2016, he will see a huge difference across the board. But I have to say that the year-to-date, we've seen more upside in the larger vessels, especially in the modern 10,000, 11,000 TEU ships. Although, the whole market has moved up. I cannot predict where charter rate will be going, but I can tell you that there are positive signs year-to-date.

And our next question today comes from Chris Wetherbee of Citigroup.

Wanted to ask about sort of chartering activity in the relative near term. So you did a lot of work in 4Q and early 1Q to extend a bunch of ships, I guess. As we think out -- well, I guess maybe 2 questions. First, you're in a lot of 45- to 90-day charters, how much duration or is there any duration in the market? How much of a discount would you have needed to have taken to put those ships out a little longer? And then maybe, how do you think about sort of the environment in 45 to 90 days? And will you be able to sort of charter these into what you think might be a strengthening environment?

Yes. First of all, we also have ships like the Cosco vessels, which are 9,500 TEUs, which we have chartered out for 6 months. So I think -- okay, there were some charters for 45 to 90 days, but I think that, overall, the charter length -- if someone takes a big fixture, the chart length, overall, has been improving in the market, which is a positive sign. Now it depends on the specifics of each vessel, on the characteristics of the trade, where sort of each vessel is trading which are also factors in the charter length. And of course, in the charter rate that like we're going to be receiving. But as you can see, for the 11,000 TEU ships, which have been chartered at substantially higher rate compared to the previous fixtures, we have fixed them for a year at a much higher rate. So it depends on the vessel and it depends on the trade and to the physical condition of the asset. So I don't have a specific answer because we will have to go ship by ship. But overall, I would say that the market looks stronger. And on average, chartered periods have been -- have -- are now becoming longer compared to shorter in the past.

Okay. That's helpful. And then I wanted to talk about the impairment for a minute. I don't know if you've identified the ships? Or how you think about, maybe, potential sales as you move through 2018, the sales of vessels and where you might be more interested in potentially monetizing some of these assets as they roll off of charter over the course of this year?

Yes. Those impairments, they were take -- we took in total $18 million of impairments. And if you look at, sort of, historically, from our financial statements, for a ship of 70-plus vessels, the total impairment we've taken is like $20 million, $25 million, or sort of something like that, which is a very low number. For us it's on balance sheet of north of $2 billion. Now for those vessels, this is an accounting treatment and I would say on a very conservative basis. The fact that we took an accounting impairment does not mean that those vessels will not continue trading. As long as their physical condition allows it and there is a market. So we consider it as an accounting measure, which again, has been taken based on conservative considerations. And we don't think that this reflects the value potential of those ships. Now some of those ships may be scrapped in the future. And now scrap prices are sort of relatively high. But the fact that we took those impairment does not indicate anything about the potential of those newer ships.

Okay. But I mean -- are sales still likely in terms of 2018? I mean, are you looking to potentially monetize into a slightly stronger market? Or how are you thinking about that now?

Yes. Look, we have been traditionally renewing our fleet. So if we feel that based on the scrap prices, which are now high, we can sell a ship where we feel that the potential of that asset is not great. And with that equity from the scrap proceeds, we can buy a 5- or 7-years younger vessel, with good specifics and characteristics there. Of course, we're going to be doing this and this is what we may be doing. But I mean, we will have to look at it on a case-by-case basis. In the past, we've done it a lot of times. And when you have scrap prices at close to $480 or $500 per ton, this is definitely a good opportunity to do it and we are looking into it. But it depends on what we will find to replace. If not, and if we consider replacement values too high and those ships are still operating, we could keep some of those. So I would say that overall, we are quite flexible. But of course, we know that it makes sense to renew the fleet when the scrap prices are high.

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

So this relates, I think, to something that you've mentioned or sort of part of your answer to Chris' question. When looking through the time charter market, you did renew or did have short-term renewals on some of these Cosco vessels, which are almost 10,000 TEU vessels. Although, at the same time, we've seen, including some of your own -- 11,000 vessels, numbers that are almost twice as high in terms of the charter rate. Is that a function of the age? Or is there a substantial premium in today's market for a much more modern fuel-efficient assets? Is that how we should think of...

Yes. I mean, those 11,000 TEUs, they were delivered last year, they are newbuildings. And the rates today are at around -- and of course, it depends on the charterer and also on the tenure, but the $28,000 per day, so it's a much stronger market for those ships. The Cosco vessels, they were ships which were ordered in 2003, delivered in 2006 and they came off a 12-year charter in 2018. And I still believe that the $16,000 to pay for those vessels, bearing in mind where the market is, it's a rate that makes sense. So of course, there is some difference because you have 2017 vessels and 2006 vessels built. But it doesn't mean that in a healthy market that the older vessels will not be commanding higher charter rates as well. So we felt that for the time being, having a direct continuation of those ships for 6 months and not for a longer period at the $16,000, it is something that made sense. And then we'll see.

Okay. So -- and then along those same lines, is it -- would you characterize the appetite for longer-term charters maybe almost exclusively or at least very, very heavily weighted for the more modern ships relative to older equivalent?

Yes. But I mean, you can always come up with a longer-time charter, with a fixture for a sort of older vessel. But as a rule of thumb, today, I would say yes. I have to remind you that some 2014 wide-beam ships, we bought beginning of 2017. They were chartered for 7 years or sort of 2013 vessel, it was chartered for 5 years. So I don't think that this is a specific rule. So we've seen 5- or 7-year charters for ship that could be 3- or 5-years old.

Okay. So -- and then just sort of looking forward strategically, obviously, we have the emission -- the sulfur emission regulations coming into play in less than 2 years from now. As you've pointed out, there is already very big delta between what a more modern, more efficient ship can earn and -- versus what an older ship can earn. Ideally, that would grow even wider should fuel prices inflate as a function of low sulfur regulations. How do you see that all playing out? And is that assumption correct, first of all, in your view? And then, what are you doing sort of strategically in preparation for that?

Look, this is something we know that will be happening from 2020. We are looking into it. But there are also a lot of considerations. It is the CapEx required per vessel, which could be a substantial amount of money. And we need to know how those upgrades will be paid back. So I'm not sure what's going to be the [casual] prices or the low sulfur prices in 2020. And what's going to be the difference to the fuel expenses from the fuel used today. So this is something we are considering. I don't have any answer on that yet, but this is something we're currently working on. But we need to make sure that if someone make that investment, this investment will make sense and that this will be paid back because this is our money coming from our shareholders. So I mean, this is something we definitely have to look into it quite carefully. Now in a good market, all the ships are being employed and all the ships are receiving healthy rates. So I'm not sure that I would say that after 2020, if ships are not good with the scrubbers. They will not be commanding charter rates that would -- that will make sense. I'm not sure about it at all. So I would have to be a bit more careful. And we are evaluating the situation and we will be reverting on that. But we don't want to take any decisions which will make us -- to enter into capital expenditures without making sure that those assets would be paid back.

Right. And I agree to that. And especially, as it relates to the scrubbers. I guess, I was thinking more little along the lines of how you think through, sort of, your balance of older equipment versus newer equipment?

Look, most of the ships that are of older age today in our fleet -- most of them have been bought in a low asset-value environment. So the breakeven fee -- breakeven levels there are relatively below. The problem would be, you have the large fleet of Panamax ships, 15, 20 Panamax has been delivered in 2007 or 2008. This would be the problem. Now ships bought a couple of years ago, 2,500 TEUs or 1,700 TEUs at very low prices, -- I do consider them more of an upside rather than as a problem.

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

As we track -- as we look at the idle container fleet capacity, I mean, it's less than 2%. And we're in typically a seasonally softer part of the year. I guess I'm curious, as we look back at previous times, are you surprised given how low the idle container fleet is, that rates haven't moved higher?

I think that based on that assumption that you're correct we have a low number of idle ships in January, which is the seasonal weak month of like a container shipping, and the charter rates have moved up but not that high much up. However, in theory, someone would expect that charter rates will continue going up, probably at a faster pace right after Chinese New Year, which is what history has been showing us up to now. And this is what normally someone should expect. Now I cannot say that this is what will be happening. But there is definitely a lot of potential there, especially because charter rates have not moved up to the extent we all expected, based on idle fleet at 2% or below 2%.

Okay. And then just knowing that you're much more plugged in to the market and what is going on in vessel availability, as we move into the spring, are there a lot of vessels in the current fleet that are under contract that are rolling off? Or is that -- I mean, is there any way to estimate that to see if, yes, we're going to see an acceleration in demand for ships, but we're also going to see a lot of roll-off of vessels even if you look for them?

There are some indicators and some of them are also being published by broker's availability. Over the next 3 to 6 months, as you rightly said, (inaudible) ships coming off. And I would say, that generally speaking, availability now is not at high numbers, it's quite low regarding ships coming off charter over the next 3 to 6 months. So based on that indicator, I think that this reinforces the sort of argument that generally speaking, someone would expect the market to move up after Chinese New Year. But again, that's a market which is what signs now are telling us. But of course, you can never predict.

And our next question comes from Donald Mclee of Berenberg Capital Markets.

There were a lot of questions around contract structure and charter negotiations earlier. And I was just wondering, at a high level, how have those negotiations changed with liners, both over the past couple of years as that group has consolidated?

I think, you're right as to liner companies have consolidated. And what we have been telling in the past and we still believe it, is that for the whole market, this is a healthy sign because the stronger liner companies are the better it is for the whole sector, including ourselves. Now still liner companies need to have part of their fleet chartered in and part of their fleet out. So there are discussions with liner companies as we have been doing in the past, when a ship's coming off charter, whether this is going to be a direct continuation with the current charterer or whether we're going to be marketing this asset in the open market. There are still discussions and there is still need for donors. And we have a market, which is, again, moving based on supply and demand. And you see where the charter market is in 2017 versus where it was in 2016. So you can argue that the more consolidation, the more bargaining power liner companies have. At the same time, it would have healthy and strong lines. And the bottom line is that it is still a market based on supply and demand fundamentals.

Got it. And then one more question, just looking at the order book. There were a larger number of outstanding 2017 deliveries that were undelivered as of December. Could you comment on what you've seen in terms of slippage in the overall order book and how that might impact pace of fleet growth in 2018 and 2019?

Yes. There were some ships, especially larger vessels, I think, those are the ones you are referring to, that they were pushed back in 2018 versus an originally scheduled 2017 delivery. This also had to do with the formation of alliance and some M&A activity. Now brokers, again, factor in a minimum slippage for 2018. I don't want to, sort of, give out numbers. But I think that it's always, and it is a matter of reality that some newbuildings will be delivered but could be delivered in 2019 versus 2018. Now the first quarter of 2018 will have a very heavy order book to be delivered, especially larger vessels, ships also that were pushed back from 2017 in this year. So I think it is logical to assume a minimum slippage rate close -- for 2018, close to the one we show in 2017.

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.

Thank you very much for dialing in today and for your interest in Costamare. We are looking forward to speaking with you again in the next quarterly results call. Thank you.

And thank you, sir. That does conclude our conference for today. Thank you all for participating. You may now disconnect your lines.