Costamare Inc (CMRE) 2018 Q2 法說會逐字稿

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Costamare Inc. Conference Call on the Second 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, July 25, 2018. We would like you -- 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. Thank you.

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 second quarter, the company delivered profitable results. As already announced, we entered with Yang Ming with a 10-year charter agreement for 515,000 TEU newbuildings to be delivered between the second quarter of 2020 and the second quarter of 2021.

Last week, we concluded with a leading European financial institution, the bid financing of the 2 recently acquired 5,000 TEU widebeam vessels. We have accepted delivery of the first ship which commenced its 7-year charter to Maersk.

As it is common during this period of the year, the market has softened over the last weeks and the falling demand for (inaudible) has pushed out the idle fleet. We have chartered, however, 27 ships during the quarter, including our recent acquisitions.

Finally, on the dividends, we declared our 31st consecutive quarterly dividend since going public. (inaudible) have decided, as has been the case since June 2016, to reinvest in full, their cash dividends, in new shares.

And moving now to the slide presentation. On Slide 3, you can see the highlights of the second quarter. Our adjusted EPS for Q2 was $0.10. Over the last quarter, we have chartered 27 vessels, including our recent acquisitions. We maintain a strong balance sheet with close to 40% leverage.

Regarding the market, the idle fleet is, as already mentioned, 1.4% of the total fleet and the order book less than 12%.

On Slides 4 and 5, you can see a summary of our recent chartering activity. What is worth mentioning here is the recent chartering of our 11,000-TEU ship, Cape Sounio, for a rate of about $30,000 per day.

Moving on to Slide 6. You can see our dividend payments as well as the sale for scrap of 2 older vessels.

Slide 7 shows the second quarter 2018 results. During the second quarter of this year, the company generated revenues of $91 million and adjusted net income of $10.5 million. Based on the above, the second quarter adjusted EPS amounts to $0.10. Our adjusted figures exclude the following noncash items: the accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other noncash charges.

On Slide 8, we are showing the revenue contribution for our fleet. 99% of our contracted cash comes from first-lot charterers like Maersk, MSC, Evergreen, Yang Ming, Cosco and Hapag-Lloyd. We currently have $1.8 billion in contracted revenues and a remaining time-chartered duration of about 3.7 years.

As you can see on Slide 9, as of the end of this quarter, we had cash of $160 million. We are conservatively managing our balance sheet, having brought down net debt from $1.7 billion in 2015 to $900 million as of today, which presents a net debt to equity ratio of 68%. Over the last 5.5 years, we have raised debt financing of close to $750 million for new business.

On the last slide, we're discussing the market. Regarding charter rates, there has been some shortening in the market, which is not uncommon for this time of the year. The idle fleet still stands at the low level. The order book remains at historically low levels of less than 12%. As already mentioned in the past, we are actively looking for new transaction in this market environment.

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

(Operator Instructions) The first question is from Chris Wetherbee of Citi.

This is William on for Chris. So of the 27 vessels you entered into new charters for during the quarter, seems that a few of them saw some pretty significant increases in rates. Should we see this as kind of like indicative of a potential, like, turn in the market higher? And do you think that you'll be able to continue to see the same level of rate increases going forward on new charters?

Look, most of the vessels, they have been chartered at higher levels. And as mentioned, during the presentation, for instance, the 11,000 TEU ship, the Cape Sounio, it was getting on average $18,000, and now it's getting above $30,000. So compared to last year or the beginning of last year, the market is definitely at, like, much better stage, especially for the larger vessels. Now I cannot predict whether market will be shedding. And as mentioned, we have seen some softening in the charter rates over the last weeks, which partly has to do with this time of the year, partly it is attributed to seasonality. But overall, I think that if you look over, like, the last 12, 18 months, charter rates have moved substantially up. So since most of the ships we have the -- especially the smaller vessels, they have been fixed, like, for 9, 12 months or for generally short-term periods, I think that for those ships, we are now seeing some upside.

Got it. And I guess, focusing on, like, the time frame, I guess particularly for those small vessels, are -- as rates kind of improve, are you going to continue to look for new 9- to 12-month charters? Or are you going to kind of consider taking longer-term charters? I'm just thinking about your perspective on the length of the charters.

Well, it depends on the rates. If we feel that the rate is at so that it can justify a medium- or long-term commitment, and assuming that there is a market there for a medium-term charter, we'll do it. We are pretty flexible. Otherwise, we may keep a charter in for like 6, 9 to 12 months, and especially for ships that have been bought in the low-asset-value environment, as are most of our secondhand vessels. Those are -- we have been buying over the last 2 to 3 years. I think there is fairly more upside rather than downside. But regarding the turnover, it is a function of the charterer, a function of the charterer's appetite for, like, medium- or long-term commitment and the charter rate we will be offered..

Got it. And just one final question. As you guys kind of think about capital allocation going forward, I know you guys placed a new building orders and have purchased a couple of vessels recently, so I'm just think about, going forward, how do you see your focus in terms of capital allocation?

I guess, we are pretty much flexible. First of all, our main priority is to cover our downside in every single transaction, whether it's, like, a new building, secondhand vessels with or without charter. So as you've seen, we've done, like, newbuildings with a 10-year charter back-to-back upon delivery. We've done secondhand ships, 2015-built with, like, a 7-year charter. And in the past or, like, recently, we have also done secondhand vessels that are charter free. As long as the numbers work and as long as we are -- we feel comfortable with our residual value risk, we are pretty much flexible. We're going to do everything as long as it has to do with container shipping. And if you look at our fleet list, you will see that we start, like, from 1,500-TEU ship up to 14,000 TEU newbuildings. So what matters is the numbers and whether we feel that, first of all, the risk associated with every transaction is within our tolerance levels. And secondly, of course, there needs to be some upside for our shareholders.

The next question is from Fotis Giannakoulis of Morgan Stanley.

Jumping to business. I want to ask you about, if you have seen any impact from this trade frictions and the tariff discussion and if you have any views of how the industry will be impacted by this potential U.S. tariffs on Chinese goods. And how your company and other companies in the industry are prepared for such a scenario?

Yes, first of all, I think, today, it's a bit early to forecast or to judge what's going to be the effects going forward because there are various discussions regarding whether there will be some tariffs imposed on, like, what value of goods, et cetera. So this is like a -- it's something that has not been crystalized yet, so it's not something that I'm prepared to forecast, what's going to be the effect, if any, on the Trans-Pacific or generally on the trade. So at the same time, I need to mention that we have seen some line of companies cutting their schedules, especially from the Trans-Pacific. But we need to remember that this part of the year, it is the [flat] season for container shipping. So there are also some seasonality factors there. Admittedly, it's not only seasonality, but I think it's too early to judge what's going to be the impact on the Trans-Pacific. Now from our side, we have ships that are chartered at the long-term contracts. And we have especially smaller ships that may be on the spot market, 6-, 9-months charters. So we continue doing the same business and the same strategy as before, and I'm not in a position now to judge what's going to be the effect over the next 3, 6 or 9 months. I think that it's in the benefit of no one to have any new trade barriers. But it remains to be seen how this is going to play out.

Can you also comment how is your company protected or prepared for any scenario that might affect the trade?

Look, it's I think -- very simply, we have low leverage. We're paying our debt prudently. We are trying to buy low and charter at the low charter rate so that this is a deal which is beneficial for both, the line of company, our customer and ourselves. We have net debt, as you may have seen, of $900 million and -- as of the end of this quarter. And we're repaying north of $200 million of capital every year. So I mean, we are deleveraging very rapidly. And I think that we are one of the very few companies that -- during the post-Lehman crisis, we didn't even breach a single financial covenant. So I don't think that we have not been tested in previous crisis. In case there's going to be one [average], it may not be the case at all. Also, we feel very comfortable with the quality of our charters and with -- and those are without the contracted cash flows. And we make sure that, always, we have cash on the side in order to service our obligations first, and then, opportunistically, do some new transactions. I think this is what we have been doing and that we will continue doing, irrespective of any potential trade barriers.

I want to jump on this new deals that you announced recently, the 5 newbuildings and the 2 modern vessels with Maersk. First of all, these are among the very few transactions that we have seen with very-long-term contracts after a very long time, especially for newbuildings. Can you give us a little bit of a background of how did you get these deals? And what was the competition for these transactions? Why Yang Ming needs this vessels? If -- how do you view Yang Ming? This is a new name in your portfolio. And also, if you can comment about the returns of these deals, how they compare with the previous transactions that they were giving double-digit EBITDA yields?

Yes, first of all, regarding the Yang Ming newbuildings, with Yang Ming, we did have a relation in the past. We had some ships chartered to them. But I agree that this is the first newbuilding transaction we have with this company. We are very happy with the expansion of this relation with the Yang Ming. And this was simple competitive bid process where also other shipowners participated, providing a bid for the vessels. And apparently, Costamare won 5 ships, and 5 other ships were won by another shipowner. But this was a competitive bid process that took place some months ago. Now regarding the returns and the numbers, I'm not at liberty to discuss those publically. But I can say that the returns, more or less, reflect the previous newbuilding transactions we've done in the past. We are now in the process of arranging the financing for those ships on the pre and postdelivery basis. And hopefully, during next quarterly results call, we will be in a position to announce the closing of this funding. Now apart from the Yang Ming transaction, there were 2 2013 widebeam vessels, which we bought and on a -- back-to-back from a third-party and we chartered on, on a back-to-back basis to Maersk. This mirrors another transaction we did with Maersk in 2017 for the (inaudible) and for the (inaudible), similar vessels, again for 7 years. There are not a lot of long-term -- medium- to long-term commitments -- charter commitments in the market today for secondhand ships. And we are very happy that we concluded this deal with Maersk, which is one of our main clients today. So those 2 transactions today, we talk about contracted revenues of close to $650 million in aggregate for both deals. And I think that these are deals that are definitely accretive and make sense for the company.

And can you comment a little bit on why you managed to have the more – most competitive bid for this long-term charters? Was it a matter of cost of capital or financing? Did you know what type of financing you would be able to get when you were bidding for this vessels? And give us, if you can, some idea about the cost of construction of the newbuildings. I see on Clarksons that the prices for 13,000- to 14,000-TEU newbuilding has jumped from $108 million to $112 million. I'm just trying to see if this value that we see on the Clarksons, they are close to what you are buying this vessels. And what was the competitive edge that you had?

Yes, first of all, I don't have information about what potential shipowners offered. But I can tell you that we tried to put together a competitive bid that had to do with a newbuilding price, we'll try to do with the charter rate, into the charter rate offering we have factored in our cost of funding, and we try to be competitive there. So I mean, it's not only the charter rate, it is a whole package which is provided to the line of company. It apparently -- this is something that may tends for Yang Ming, and we are very happy with that. Now regarding the newbuilding prices, I'm afraid, again, I cannot reveal the price. But I think the $110 million or something, I think we had a more competitive price compared to those figures.

And can you also comment about the potential of new transactions and where do you view the opportunities going forward? We saw a very spectacular rally for the smaller ships. How -- shall we view the fact that you chartered so many vessels during this quarter? Is this more of a defensive approach or just an opportunity that it was too good to take it? And also, where do you see that among the different classes, they are better returns going forward? In the past you have been -- you have said that you will avoid the traditional Panamax vessels. Has this view changed given the recent improvements in rates for Panamaxes?

Yes, first of all, as mentioned earlier, we look at pretty much everything, whether it is secondhand or it is in newbuildings, and we are actively looking at new transactions both in newbuildings and secondhand vessels. Now regarding the Panamax ships, as you can also see in our fleet list, we have a very few traditional Panamaxes in our fleet, and these are ships that we bought years ago with a long-term charter. And the 2 ships now, we have chartered for 7 years to Maersk, these are, like, 5,000 widebeam ships. So these are not -- these are definitely not the traditional Panamax vessels. I agree, the charter rates for the Panamax ships, for the traditional 4,250 TEUs, they have moved up from -- like, from 2016, up until now like beginning of this year. Still, we feel that we could make a better use of our funds, if we invested in other ship types compared to the traditional Panamax vessels. Because today, they are getting close to $15,000 per day let's say, but still, we don't view a lot of upside on this specific asset class. So at the end I think that most probably, you will not see us entering into any secondhand Panamax-type transactions.

And one last question about the favorite topic of the year and the IMO 2020, if you've seen the approach of the liners changing at all, the last few months, we've been hearing in other sectors a lot of companies willing to install scrubbers. How do you view that the containership industry overall will address this new regulations? And what will be the impact also on speed over the fleet and also the profitability of the industry overall?

Look, generally the scrubbers, when there is a long-term charter, it's normal and it makes sense to enter into an open discussion with the charterer. Regarding the scrub, the cost of installing the scrubbers and that is something that we know should be discussed with the charterer. For smaller secondhand ships, older vessels, it's more a wait-and-see type of approach for much -- for the time being. We are now evaluating the situation, I cannot tell you that today we are prepared to start installing scrubbers in the whole of the fleet, it doesn't make sense. But for long-term charters, we are in discussion with the current charterer or with future charterers that have an interest in the vessel how to allocate the cost of the scrubbers. I think this is pretty much it, but for secondhand ships or, like, for older vessels, we're not in a position now to start installing scrubbers, especially when we don't have a clear view about the payback period and mainly whether there will be any payback at all.

And can you comment from the perspective of the line of operators, how do they view the new regulations? Are they going to install in scrubber in the last part of the fleet? Do you have an estimate, if it's going to be 10%, 20%, 30% of the fleet? Or if they will go with the new low sulfur fuel? And what would be the impact on the average speed of global fleet with new regulations?

I think, I don't have a concrete number for the whole sector right now, and in this equation this would be mainly addressed to the liners. But I think different liner companies have come out publicly with a different approach. Some have said that most probably, they will not be installing scrubbers, others have been more positive on scrubber potential. So I don't think that today there is a common view to be followed by, sort of, all the sector participants. So its line of companies has its own circumstances and, like, concerns and may follow a different path. Some of them have publically mentioned that they will not be installing scrubbers, others have hinted that may be doing the opposite. So I'm afraid there is not a clear answer here.

Our next question is from Michael Webber of Wells Fargo Securities.

Just want to -- I think, there are probably a handful of questions left, but just digging back into, I guess, both the newbuild deal and then maybe the scrubbers. Maybe starting on scrubbers just because you just left off. Forgive me if you mentioned it in your prepared remarks but the newbuilds that you're providing to Yang Ming, are those going to be scrubber ready? And was that something that was specified in the tender or was that left open to the shipowners to make their best estimates on?

No, this is something that -- that was specified in the tender. There is an agreement with the charterer, regarding the use or probably not the use of scrubbers. I think, I cannot go into more details, but I can tell you for sure that there has been an agreement with the charterer regarding the potential use of scrubbers in the future.

So it would be safe for us to consider those new scrub -- those newbuilds scrubber-ready, at least?

Yes, you can say that. But as I said, this is a common decision, we think that -- I mean, this was a discussion that took place during the bidding process with the charterer, and there is a very specific timeframe, we think, which to sort of decide whether to install scrubbers or not.

Okay. Now I guess within that conversation and others you've had, are you noticing what's within the container lines? Are they in your customer base? Are they starting to have a -- are they starting to get a bit more specific around their views, where maybe 6 months ago it was left wider open. I guess, are more people on -- in your customer base starting to make up their mind now and then maybe, if you -- maybe about some of your recent conversations -- that you had any recent conversation with liners, where they just weren't sure about what they were going to do?

I think that for the long-term charterers, liners are investigating the possibility of installing scrubbers, subject to agreeing on the cost. There are discussions. So there definitely many more discussions for long-term charterers compared to discussions we've had on the scrubbers like 6 months ago or a year ago, obviously. So there are discussions, but I cannot say that this is an easy decision. There is some interest, but I'm not sure in how many cases this interest will finally lead us to installing scrubbers or not. I cannot tell. But there are definitely discussions with others.

That type of math is going to be different for your smaller ships that are going to be on shorter-term employment.

For shorter-term...

Have you got -- has that started to permeate maybe the way you think about the residual value risk versus -- you got that some older ships in the smaller size -- in your smaller-scale tonnage that's -- are pretty fixable but I think provide a lot of utility to the container line. They don't -- it doesn't drive a lot of your cash flow, but I think it's nice to your customers. I'm just curious, have you guys internally with those ships, knowing that if you put scrubbers on them, you're probably going to have to pay for it. Is that something that you guys have made your mind up about yet? And just how you think about it for -- specifically for the Panamax and then below.

No, for those ships, unless we have a very clear picture and conviction that, I mean, there's going to be a payback period for those scrubbers, no one would start investing in something without having an investment plan. And the payback, unless it is clear, I don't think any shipowner will be willing to put money for something that -- not sure whether this will be paid back or not and over what period of time. Especially for shipments after 6- or like 9-months' time charter, it's going to be difficult. So for those ships, I think, we are considering our options, but as the situation is today we wait and see, we're not ready to proceed installing scrubbers on those ships.

So for smaller container ship tonnage, it's more likely we see people wait after 2020 to see how spread shaped (inaudible) where at that point you'd go in. That makes sense. Just one more on the deal on adding the term tonnage. I know you guys have left some of the specifics out, but with the revenue guidance moving kind of back into a rate, and there's obviously a fair amount of sensitivity in terms of price. But can you give us a vague sense of an EBITDA multiple you think we could apply to that tonnage? If I just -- if I think about it, it might be a rate of little over -- between 35 and 36 a day, if this -- it does (inaudible) the price like -- what the data stream that Fotis was referencing, that implies a multiple that's in the low to mid-double digits. If that price, more like 10,000 TEU vessels that -- kind of at or below 100, and that's something around 10.5x, which seems a bit more palatable. I'm just curious within that -- with that kind of context, can you help us out with discerning exactly how much you paid for these ships?

Look, I cannot comment on any figures, neither on the charter rate nor the acquisition price. But I can tell you that the economics of those transactions are very similar to the economics of previous newbuilding transactions that we've done. But I cannot -- I'm afraid I cannot discuss...

Where would you ballpark the payback period on those ships? I mean, you've got -- I mean, getting color on exactly how much you paid for a pretty big investment, I think, is pretty reasonable, right? So without getting too specific for -- giving any kind of trade secret, like some ballpark number around either payback period or even a range of EBITDA multiples, they're probably big enough to drive bus through would be helpful at this point. Are we talking about the EBITDA multiple that's north of 11x?

Look, regarding the capital commitment, okay, to start with, I think in our 6-K we will have some disclosure because it is acquired and you will see it then. Now, regarding the -- again, EBITDA multiple, no, will have a different EBITDA multiple for a 10-year deal compared to a 5- or 7-year deal. So I'm afraid I cannot provide an EBITDA multiple. There have been, but if you see the capital commitments for those 5 vessels and also knowing that the economics are pretty similar to previous newbuilding transactions we have for a similar tenure of like 10 years. I think it's going to be pretty obvious what's going to be the EBITDA multiple of what is the range of the time charter rate. But I'm afraid I cannot enter into more discussions here on the numbers.

Yes. No, but I -- you sort of meant -- what I'm saying is when I apply that historical math, I get to a EBITDA multiple that's pretty high. That implies -- a pretty healthy amount of residual value risk, which is why I was hoping you could give a bit of a range. So -- and again, because that pricing is fuzzy, but I can wait until the filing comes out where we get some actual pricing detail, but it's just -- it's helpful for owners of your stock to know what you're paying for big (inaudible).

I understand, I understand. No, no, I fully understand, and I wish at liberty to discuss more because I truly believe that these are very good transactions and accretive transactions for our shareholders. And because they are done in a low asset value environment, I consider them to be good transactions both for the line of company and for ourselves. So there will be some disclosure in our 6-K, and we can take it from there. I think is the wisest way forward.

Our next question is from Donald McLee of Berenberg.

So a lot of the questions have already been addressed, but I just wanted one follow-up on the Cape Sounio charter. Could you provide more color on the negotiating process there? Was there an opportunity for more term or was that duration dictated by the charter?

I think the ship -- it was getting around $18,000, and this was extended with the same charterer for a period of 7 to 9 months at above $30,000, it is close to $30,700 or so. The reason is that the charterer apparently -- he needed a vessel. This is a 2017 newbuild. We can -- back in June in Philippines, and then market for those types of vessels has moved up substantially compared to where the market was in 2017, beginning or like in May 2017. So especially those types of vessels have moved up a lot. Now we didn't fix for a longer period because we feel quite comfortable with the earnings potential there of the vessel. At this point, we decided to extend the ship for 7 to 9 months, and there we'll see. But the $30,000 plus charter hire is more than enough in order to service the ships debt obligations, and provide us with an equity return.

Got it. And then just looking at some of the sister ships, the [Acretis] and the [Courtier]. There is similar level of interest for rechartering discussions there?

Yes, there is some interest. And the second ship -- the second sister ship, it opens up in October, we are in discussion with potential charterers for period and for charter hire, we'll see. But the market today definitely is not where it like used to be in the region of $18,000, it's a much healthier market environment for those ships today.

There appear that there are no further questions in the queue at the moment. Give us some closing comments.

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

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating and you may now disconnect your lines.