Costamare Inc (CMRE) 2018 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the First Quarter 2018 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, May 2, 2018. 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. During the first quarter of the year, the market continued with a positive momentum across the board, with larger vessels capturing most of the upswing. During the same period, the company delivered profitable results. On April 27, we accepted delivery of the containership vessel Polar Brasil, which is the second of the 2 3,500 TEU newbuildings ordered together with our partners, York. Upon delivery, the vessel commenced its 7-year time charter to Maersk Line.

In April, we acquired the 2008-built 1,300 TEU sister containerships, Michigan and Trader. These acquisitions were funded with available cash. On the chartering side, we charted in total 16 ships since last quarter and today, we have no ship laid out.

Finally, on the dividends, we declared our 30th consecutive quarterly dividend since going public. Insiders have decided that has been the case since June 2016, to reinvest in full, their cash dividends in new shares.

Moving now to the slide presentation. On Slide 3, you can see the highlights of our first quarter. Our adjusted earnings per share for Q1 was $0.12. We have no vessels laid out and we have entered into new or extended time charters for 16 of our ships since the beginning of the year. We recently acquired 2 second hand ships of 1,300 TEUs each with equity.

Last week, we took delivery of our last 2,500 TEU newbuilding, which concluded our current newbuilding program. The vessel was bought under our JV with York and upon delivery, should commence their charter employment with Maersk.

We do maintain a strong balance sheet with net debt to book equity standing at 65%. Factoring in market values and based on our compliance certificates delivered to our lenders, we have a leverage ratio in the region of 45%. We have no off balance sheet financing and we currently have no further capital commitments. On the market, charter rates have increased substantially across the board since the beginning of the year, with larger vessels capturing most of the upside. The increased containership demand has resulted in the percentage of 5 [decreased], dropping at 1.4%.

On Slide 4, you can see a summary of our recent chartering activity. More ships are employed and you can see that the majority of the vessels have been rechartered at higher rates.

On Slide 5, you can see the details on the refinancing of our original $1 billion facility, which has resulted in increased liquidity of $65 million over the next 3 years. We also extended the balloon payment of circa $13 million in one of our facilities for one more year. During the previous quarter, we declared $0.10 cash dividend per share on our common equity, a dividend for all 4 classes of our preferred stock.

Insiders have decided to invest on their first quarter cash dividend in new shares under our dividend reinvestment plan.

On Slide 6, you can see the first quarter 2018 results. During the first quarter of this year, the company generated revenues of around $93 million and adjusted net income of around $13 million.

Based on the above, the first quarter adjusted EPS amounts to $0.12. Our adjusted figures take into consideration the following noncash items: the accrued charter revenues, accounting gains or losses from asset disposals, swaps breakage costs and prepaid lease rentals and other noncash charges.

On Slide 7, we are showing the revenue contribution for our fleet. Almost 100% of our contracted costs comes from first-class charterers like Evergreen, MSC, Maersk, Cosco and Hapag-Lloyd. We have $1.2 billion of contracted revenues in the remaining time charter duration of about 3 years.

Moving on to Slide 8. As of the end of this quarter, we have cash on balance sheet of around $250 million. We are conservatively managing our balance sheet, having brought down net debt from $1.7 billion in 2013 to less than $1 billion as of today, which represents a net debt to equity ratio of 65%. During a 5-year period, we have raised debt funding of close to $750 million for new business.

And on the last slide, we are discussing the market. Charter rates have moved up substantially since the end of 2017. The idle fleet, as already mentioned, currently is at a low level of 1.4%. 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 our first question will come from Chris Wetherbee of Citigroup.

This is James on for Chris. First question I wanted to ask is actually around the 2 smaller vessels you acquired, the Michigan and the Trader. Was that more an indication of sort of values on the market. Or in case you want to position yourself to get more exposure to improving rates?

Those 2 ships, these are 2 1,300 TEU 2008-built vessels, which have been bought with equity during the last quarter. And now, the vessels go through dry docking. We bought them because considering the physical condition of the vessels and the specs. We found that it made sense to buy those ships. Now, it doesn't mean that we have a preference for smaller versus larger (inaudible). As you can see from our fleet list, we are quite flexible. We have ships up to 14,000 TEUs. If that's not -- opportunistically, we said that the values of those ships considering the -- and its potential is something that made sense.

And you said that you basically saw because of the condition that they're in, what --can you elaborate on that a little bit more?

I think it is the specs of vessels, and considering whether the earnings potential and the remaining useful life of those assets and what are the charter rates expected to be received from those ships. And considering the price, we felt that it is something definitely that made sense. I cannot go into more detail now but hopefully in the next quarter, we are going to be able to provide you with more information regarding the chartering of those ships.

And then could you also just give us a sense of how many more sorts of transactions like this you could possibly see become available? And if this is something that we might see an uptick of in the future? Or if this was more of it's something that's sort of one-off and opportunistic?

No. I think there are a lot deals to look at, either second hand ships with our charter like those 2. Or second hand ships with a medium to long term charter which is something we look at as well. And I also have to mention that the new building market is much more active now compared to the marketspaces a couple of years ago. So we are actively looking at transactions in all those 3 sectors, meaning second hand ships with or without long-term charter, and those in new buildings.

Our next question will come from Noah Parquette of JPMorgan.

I just wanted to ask, you have a few ships around 20 years or approaching 20 years, if you can talk a little bit about your strategy. Do you think you can still extract value from some of these older ships before you scrap them? Or what are you thinking there?

Yes I mean, first of all, I have to say that the containerships, they have a useful life of 30 years. And also in the past, we were managing ships older than 50 years old. So if you look at our recent chartering activity, you will see a 1997-built ship where it's like 21 years old now, the Maersk Kawasaki, 7,500 TEUs, which has been chartered for around 16,000 for a year. So as long as we feel comfortable with the technical characteristics and also the seaworthiness of the vessel and as long as the asset is properly maintained, if there is a market out there which today, for some vessels, definitely there is, like this example I gave you, we see no reason why to scrap those vessels. And asset manager, we do have experience in managing older ships. And a lot of times, the vessel does, may come out of a rechartering and also the deleveraging older assets.

Okay, great. And just one last one is, it's been a bit since the alliances have shaken out and we've seen some operation now for some time. Can you see -- can you tell us if you've seen any sort of increase in efficiency of how the ships are utilized or maybe more percentage of loaded containers? Is there anything that's going on there that has kind of increased [shadow] supply?

Look, regarding efficiencies and load rates, I don't want to enter into a discussion with numbers, because it may vary from trade route to trade route and from line to line. So I don't want to give a generic answer, which may be misguiding. However, if you want to talk about trade growth, I can tell you that since the beginning of the year -- of this year of 2018, trade growth has been quite promising and has been quite strong. But load factors, et cetera, I think this is something that should be firstly addressed to the liner companies.

Our next question will come from Ben Nolan of Stifel.

So coming back to what you were talking about a little bit on the first question, there's been a bit of noise out there that you guys are involved in a rather sizeable new building order with a liner company. And it may or may not be true, but the -- my question really revolves around how you are thinking about the capital needed for such transactions. Where do things, I guess, stand with respect to the York joint venture? Would you expect any new business of that type to be done with them or not? And then ultimately, how are you thinking through capital that's available for bigger things like that?

First of all, regarding those rumors you are referring to, we have also read related articles, and I cannot comment on those. The second point is that we are looking at things and our joint venture with York has an investment period which expires in mid-2020, and there is still appetite. Now, we look both at newbuildings, as we mentioned earlier, where we charter and also, our second hand ships with or without charter. We have cash on balance sheet. We have cash on balance sheet north of $200 million. We have a low level and so, however you look at it, book values or sort of market values of the vessels, et cetera, we have a leverage in the region of 50% or less. We have 6 ships which are debt free. We have positive cash flow from operation. You know that we are repaying our debt very prudently. So there is cash available and either with York or also on a standalone basis, if York does not wish to participate in some transactions, we will be actively looking at new business either second hand or newbuilding. Of course, the first priority is to cover our downside and make sure that the downside risk is something manageable. But we feel that space circumstances makes sense if someone wants to continue investing in container ships.

Okay, that's helpful. And I guess, we'll just cross that bridge when we come to it, I suppose, but -- and then I wanted to follow on something that Noah was asking about your employment of older assets, and I think that's obviously been a hallmark of the company, being able to stretch the useful life of things pretty, pretty well. But I was curious, especially on some of these ships that are north of 20 or north of 25 years old that you are continuing to be able to get contracts on. What sort of maintenance costs, obviously, there's special surveys and that kind of thing. How much does it cost to keep those vessels in the market? And just thinking through, what sort of returns you need to be able to generate or cash flows you need to be able to generate in order to cover the presumably higher costs associated with your older assets.

Yes, this depends on the specific asset size, whether it's a smaller or a larger vessel. But I can tell you on average, if you go to our income statement and then divide operating expenses by the ownership days, you will see that we have OpEx in the region of $5,500 per day or slightly less for a fleet, which is not like 3 or 5 year old. So I mean the delta is not something which the (inaudible) the operating expenses. It's not something that is prohibiting us from employing those ships on a profitable basis. We've never chartered ships at below breakeven levels, and there's no reason to do it, it doesn't make any sense at all. However, as you mentioned, we have experience in managing older ships. It's something that the company has traditionally also been doing and we've been in shipping for over 40 years. So if you have a 21-year old vessel, 7,500 TEUs which today, get 16,000 from a total of charterer for like a year or so, we see absolutely no reason why not to continue employing that vessel. And I can tell you that whatever slight difference in the OpEx does not make this chartering less profitable or sort of nonprofitable at all. Especially those ships whose debt has been more or less been paid back as the debt obligations are sort of very large (inaudible) flexibility there regarding tenure and (inaudible). So we will continue employing older vessels without of course, meaning that we're not going to be looking at newbuildings or (inaudible). However, we feel that covering a mix of ships does make sense.

And our next question will come from Michael Webber of Wells Fargo Securities.

I wanted to follow-up on Ben's question around, I mean, obviously, you guys have been tied to the (inaudible) deal for a string of I believe 12,000 (inaudible) ships. I'm just curious, you mentioned you hadn't chartered anything below breakeven and I think operational breakeven, sure, but when you look at it on a pure cash breakeven basis, some of the recent charters across the market on post-Panamax tonnage have been pretty close to the cash breakeven. And so I'm just curious, when you think about that within the context of a new deal and another string of large assets, has your math and your risk tolerance around residual value risk changed at all from, say, today kind of relative to where you were when you maybe started the York JV? Are you less willing to take on residual value risk, just given some of the evidence we've seen of charter opportunities for open post-Panamax tonnage?

Look, no, I mean, our tolerance levels and our risk appetite has not changed. So I mean, again [our biggest] priority is to monitor our downside. However, let me say that today's new bidding price as compared to the new bidding prices we witnessed back in 2005, '06, '07, '08, '09 whatever, it's much lower. So by default, you have a better deal. And you start from a lower CapEx point with something that make the build more solid. It's something that has to do with the market. Leaving that aside, our sort of risk appetite levels have not changed. They do remain the same, but it definitely make sense to do deals now compared to deals that were effective back in 2007.

Yes, I guess the question was around appetite and maybe versus pace, right? So if you're -- I guess, your answer that your cost basis on these ships has come so the required rate is -- required rate of return, the sort of rate needed to get to your return hurdle is wider. And then I guess, do you need more term now than maybe you did 2 or 3 years ago? I mean, I guess, if nothing has changed in those parameters, I guess my question would be why when we're seeing -- we saw a pretty healthy stretch where there was little to no employment for large tonnage out of -- when we were out of the peak season and then even this year, I mean, with year-over-year the tonnage -- the charter rates available for post-Panamax tonnage even though they're up, it's still well below the expected rate associated with those vessels, I'm assuming, for even those -- the return calculations at the time of purchase. So I'm just curious, what else has changed within your math? And if nothing, why?

No. In our math, I cannot say that look, our risk tolerance levels and our expected returns have not changed. We're doing exactly the same math on new business we were doing years ago. If the deal doesn't make sense, we will simply not do it. We don't have a reason to grow for the sake of growing. So again, we're going to be looking at the quality of the charter. We're going to be looking at the purchase price. We're going to be looking at the specs of the vessel, the charter hire and also, at the tenure of the charter party in order to see whether the risk assumed on our equity makes sense or not. Those sort of fundamental things and the way we look at numbers have not changed, I can tell you that.

All right. Maybe just then moving on the -- I've asked you this -- I think I've asked you this before you, but we get some accounting changes coming down the pipes in a few years that should impact at least some of the public counterparties that you have in terms of how they recognize their operating uses for the vessels. (inaudible) your biggest -- your biggest counterparty is private, so it doesn't look like it's going to be -- it's going to directly impact the majority of your book, but with Maersk and some others will the exposed -- the reclassification of some of their operating leases. I'm curious, have you noticed any change in behavior from them around different -- there are certain end around and certain structures that are available that could alleviate that burden either kind of JVs, COA structures. We've seen this, I think we've started to see the development of in LNG. I'm just curious, has that started to come up with that little -- that subset of counterparty that you've got yet? Or is it still -- still a ways up?

That's a good question. No, up to now, we haven't noticed any change regarding the appetite of liner companies to charter in for a longer period versus a shorter one due to changes in accounting. And June 2017, we chartered 3 ships to a major liner company. The 2 of them for 7 years, which go up until 2024. And the third one for 3 years, which goes up until 2022, which is after sort of -- which is after the implementation of those new accounting stuff. So I don't think that those new accounting rules have changed the chartering tenure. So we have not noticed anything. Now, I cannot predict the future but up to now, if someone wants to charter for a longer period, then they may well charter. And those, I need to say, that I'm not sure whether those new accounting rules apply globally. So I'm not sure what based on what -- yes, it's new.

Yes, but it doesn't mean they can't still do it. It just means that it's going to be recognized in their balance sheets, so you just have to think about it a bit more.

Yes. For Asian companies, which may be working under some specific Asian country accounting rules, I'm not sure whether they apply or not. I know that they apply under IFRS. They maybe apply under [the US government] but I'm not sure whether they apply in every single accounting jurisdiction globally. But even if that is the case, we haven't noticed anything up until now, and I gave you some examples of long-term charters concluded in 2017.

Yes. And again, the bulk of book is not going to be impacted by that (inaudible). I guess, the last question, I know I've asked you this before, but we've seen a couple other lines now step in with some dual fuel options for long-term tonnage. And just kind of relate that to how do you think about residual value risk, especially with the greenhouse targets that we've now set in the Maritime Space for 2050. Have you -- are you guys -- have you done any more work around getting comfortable with dual fuel options in terms of owning LNG powered tonnage, potentially for any of your customers? Or is it still spotty within the major lines in one of those steps?

Look, we have looked at, first of all, regarding the new regulations kicking in, in 2020 regarding sulfur low emissions. We have looked at various options and sort of -- and I can tell you that how the situation stands today, we would not hope for a scrubbers related type of solution. We don't think that it is -- that it makes sense neither from a financial point of view nor from a pure environmental point of view. And we -- and also -- if most people do not install scrubbers like it is the case as of today, you may find yourself on the wrong side in case you decide to install them by yourself. So we don't feel that this is something that today make sense. Now, we are evaluating various options. I don't think that today, I can get into more detail, but the scrubbers is something that we don't feel it makes sense from any point of view.

Yes, I mean, I would assume you're burning or dealt the amount (inaudible) to begin with. It is more around that kind of a long-term CapEx cycle and whether people are actually pushing for LNG power tonnage. I know CMA has, I don't think the MSC has not. There, it seems like there are couple more liners that are popping up that I'm looking at. I'm just curious whether or not that's something that you've been asked to kind of investigate whether you got any more comfortable with it.

No, up to now, we have not (inaudible) those mainly relate to new buildings for larger vessels. It's not something that sort as of the -- we have been asked. However, we are following the situation and the things are sort of moving forward. But they cannot say something specifically on that at this.

Our next question will come from Donald Mclee of Berenberg.

Greg, it looks like the number of your charter extensions were of relatively short-term nature despite gaining [centered] higher rates. Could you just comment on how far along you think we are in the sector recovery and how that might be influencing your chartering strategy?

The new chartering agreements we had, they were for previous, ranging from some weeks to 1 year-plus. Overall, if you look at the market, the average charter tenure the first quarter of 2018 versus, let's say, 2016 or sort of like beginning of 2017, has become longer. At some point, where the market is today, we may not also want to commit for historically low levels for a much longer period. But the bottom line is that both charter rates have been moving up substantially since last year. And also that the charter tenures have been becoming longer. So I mean, we can't discuss having -- if you want to discuss specifically some vessels because from a market perspective, I think that this is the situation there, which is positive news for containership owners.

Okay, that's fine. I can always follow-up and ask specifically about a vessel. Going back to your earlier comments about the earnings potential for the 2 feeders and just given your liquidity, how do you think about a potential larger scale to strategic transaction in the feeder space? Specifically did you look at the (inaudible) deal and is that something that you might consider?

Look, we look at everything. Whether it's smaller ships or larger vessels, with or without charter. Now, for smaller ships to have a long-term charter, of course, the numbers need to make sense and the numbers need to work. So I don't know all the details of the transaction you are referring to. But as far as we are concerned going forward, if there are any large deals without the small or with bigger vessels, we will definitely look at it. And this is what we have been doing as mentioned earlier, we are generally active.

Okay, that make sense. And then the last one, just on the Blue Net chartering JV. It's been up and running for about 3 months now, can you comment on any tangible impact that you've seen so far?

No, this is mainly a brokerage platform, which is managing our ships together with vessels from other ship owners. So and we started operations beginning of this year. As you mentioned, it is a relatively short period and it's nothing more than a chartering brokerage type of activity. So I don't think that there is anything tangible or sort of noteworthy for me to mention at this stage.

(Operator Instructions) Our next question will come from Fotis Giannakoulis of Morgan Stanley.

This is Max Yaras on for Fotis. Can you give us some additional color on the refinancing? Maybe, what's the interest cost on that? And then how do you compare your cost of capital or estimate your cost of capital relative to your peers?

Yes. First of all, regarding the refinancing, this refers to an old facility, which was signed in 2008 of originally $1 billion. The loan outstanding as of the end of 2017 -- of fiscal '17 was $300 million. And during the quarter, we decided and we fully refinanced this facility of $300 million on a bilateral basis. This facility was amortizing down to 0. So now, we have a deal with a lender, a balloon of $88 million. Based on the new repayment on file and the balloon now that is in place, the facility is maturing in June 2021. During this 3-year period, I would say that we have an incremental liquidity benefit of close to $65 million. Now, the cost of that facility is along the lines of the facility that was refinanced. I'm not at liberty to sort of give the sort of exact margin number, but I can tell you that our cost of debt and our ability to access commercial bank debt today, I think it is something that is relatively competitive.

Okay, that helps. And then maybe you could talk about the market a bit. I mean, what is your kind of projection for market tightening or loosening in '18 or '19? Where do you see demand going in coming months?

We normally don't predict the market, especially for 1.5 years up until 2019 because container shipping which is a very, very long period. I can tell you that up to now, we have seen [the market] tightening in terms of charter rates, in terms of ships availability and in terms of ships laid out, being now less than 2%, which is a very low figure. And we believe that the market may continue to strengthen over the next months as well. However, I cannot go after that and I don't want to predict the market. But I can tell you that today overall, from both straight growth perspective, ships availability, charter rates and momentum and charter duration, I think these are all positive factors. And let's not forget that we have an order book which stands below 13%, which is again, a historically low number for newbuildings in container shipping. At the peak of the market, I have to remind you that at some point, we had an order book of 60%. Now at 12% to 13% order book, which is very same from 2020 onwards, I think that the fundamentals, the (inaudible) fundamentals are there.

And why do you think the larger ships are getting higher rates or seeing rate growth faster than the smaller ships? I mean, is it a trade thing or certain routes are growing faster than others?

Look, this is what we saw during the first quarter of this year, and I will give an example that a 10,500 TEU ship, which in 2016 was yielding, I would say, $7,000, $8,000 per day, it has been chartered. And sort of now, it's getting $20,000-plus for a period of 6 to 12 months. So I think that it's all about supply and demand and there is a lot of demand for those vessels and limited supply. So generally, the larger vessels have -- over the last months, have outperformed the rest of the market without meaning that I mean, the market has not tightened across the board. But I mean, most of the gains have come from the larger ships.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Zikos for any closing remarks.

Thank you very much for dialing in today in our Q1 results call. We are looking forward to speaking with you again at our Q2 results conference. Thank you very much. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.