Costamare Inc (CMRE) 2018 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Conference Call on the Third Quarter 2018 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. (Operator Instructions) I must advise that this conference is being recorded today, Thursday, 25 of October, 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 would now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.

Thank you, and good morning, ladies and gentlemen. During the third quarter, the company delivered profitable results. Seasonality, combined with concerns about demand growth and trade tensions, have resulted in a softer market, both in terms of charter rates and asset prices. We have, however, chartered in total 25 ships during the quarter. This includes the agreement to install scrubbers on 5 Post Panamax container vessels, subject to an increase in the current charter hire and a further extension of the original charter tenor for 3 years. We recently acquired with equity, 2 1996-built, 8,000 TEU sister containerships, which we chartered to Maersk for a fixed period of 2.5 years. We are currently in discussions regarding the debt financing of those ships.

Finally, on the financing side, we have concluded with a leading financial institution on a pre- and post-delivery basis, the debt finance for the 5 13,000 TEU newbuildings chartered to Yang Ming for 10 years. The vessels are expected to be delivered between the second quarter of 2020 and the second quarter of 2021.

Moving now to the slide presentation. On Slide 3, you can see the highlights of our third quarter. Our adjusted EPS for Q3 was $0.09. Over the last quarter, we have chartered in total 25 vessels. We maintain a strong balance sheet with a 40% leverage. Regarding the market, the idle fleet is 2.6% and the order book stands at less than 13%.

On Slides 4 and 5, you can see a summary of our recent chartering activity. On the top of the page, you can see the 5 MSC ships whose charter was extended until 2026 and 2027 as a result of a scrubber installation.

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

On Slide 7, you can see the third quarter 2018 results. During the third quarter of this year, the company generated revenues of $91 million and adjusted net income of $10 million. Based on the above, the third quarter adjusted EPS amounts to $0.09. Our adjusted figures take into consideration the following noncash items: The accrued charter revenues; accounting gains and losses from asset disposals; prepaid lease rentals; and other noncash charges.

On Slide 8, we're showing the revenue contribution for our fleet. 99% of our contracted cash comes from firsthand charterers like Maersk, MSC, Evergreen, Yang Ming, Cosco and Hapag-Lloyd. We currently have $2 billion in contracted revenues and the remaining time charter duration of about 3.9 years.

As you can see on Slide 9, as of the end of this quarter, we had cash of $155 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 represents a net debt-to-equity ratio of about 71%. Over the past 6 years, we have raised funding of close to $800 million for new business. Our estimated leverage calculated, as per our refinancing agreements, is in the region of 40%.

And on the last slide, we're discussing the market. Regarding charter rates, there has been a softening in the market. The idle fleet stands at the level of 2.6%. The order book remains at low levels of less than 13%. As already mentioned in the past, 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) And your first question comes from the line of Noah Parquette with JPMorgan.

I just wanted to ask, following up on the ships that you're putting scrubbers on, do you have any more discussions ongoing with other charterers for a similar situation? And then with the Yang Ming vessels, will those have scrubbers as well?

Yes, Noah, look, there are currently ongoing discussions with other charterers, for ships in the water, with long-term charterers. And also, there are discussions with Yang Ming as well. So as long as there is a long-term charter and the deal makes sense for both parties on a commercial basis, of course, we are willing to cater to our clients' needs.

Okay. And then with the existing arrangements, let me just make sure I understand it correctly, are you guys footing the CapEx and then you're getting repaid? Or is the charterer funding part of it? Or how exactly does that work?

Well, it works in the following. Those ships that have an original time charter expiration, some of them in 2023 and some of them in 2024. Upon the scrubber installation, which is expected to be by the end of 2019, there -- the charter will be paying an additional charter hire, up until the original delivery date, which is 2023 and 2024. From now, we have already agreed an extension for 3 more years, which goes to 2026 and 2027 at a new rate, which also includes some calculations regarding the scrubber amortization. So the whole scrubber investment will be amortized over the extended charter period. Is this clear?

Yes. No, I got it, that's great. And then, I want to ask, one of the arguments, or like, kind of the bullish arguments on containers in 2020, is that the higher fuel cost may cause the fleet to slow down. Do you guys see room for that to happen now? I mean, how are vessel speeds? How have they been on the ballast and laden?

Well, generally, vessel speeds, I mean, compared to the past, they have come down now. It is one scenario that slow steaming will be increased further, but I cannot predict from now. I mean, these sort of regulations kick in 1st of January, 2020, but those will be in place for quite some time going forward. So I cannot predict what the situation is going to look like. But I agree with you, that one possible scenario is that ships may slow down charter fleets. Regarding the supply and demand dynamics, this is something positive for the shipowners, correct.

Next question comes from the line of Fotis Giannakoulis with Morgan Stanley.

Congratulations on this charter extension. I want to clarify, Greg, whether the extension rate is higher than the current rate of $43,000 and $42,000, respectively, because these vessels were chartered at a much higher -- were originally chartered at a much higher rate environment, and I was wondering if the extension is better.

Yes, those ships today, you're right, they are getting $42,000 and $43,000. And to this amount, an incremental charter hire payment will be paid as soon as the scrubbers are installed. And then for the extension, I'm afraid I cannot go into more detail for commercial reasons. What I can tell you is that we feel that the extension period, together with the new pre-agreed rate, makes commercial sense, both for the charterers and also for us. But I'm afraid I cannot go into more details. But it is definitely a charter rate which make sense for both parties. And it is, I guess, a win-win situation for both the charterer and Costamare.

Greg, can you also describe how is the deal flow that you see out there right now to make acquisitions? Obviously, the market since early summer has softened. I wonder whether you see more deals available, what type of deals do you see? Is it secondhand acquisitions or potential larger deals with long-term contracts? And what kind of competition do you see right now compared to earlier in the year?

Yes, first of all, there is activity. There is also activity in the newbuilding market, and we recently have some newbuilding projects, especially for smaller feeder vessels. Also as you rightly mentioned, the market has softened recently. And this applies both to charter rates and to asset value. So there is activity. There are deals for secondhand ships with or without charter; also for older vessels. And as an example, we've done recently 2 old ships, 1996-built, however, with back-to-back with a 2.5-year charter to Maersk. There is activity and the competition, first of all, compare this competition to the competition we used to see back in 2007, '08, there's a huge difference. But today, there is definitely much less competition. There is not a lot of players in the containership sector that have the financial means to fund, either newbuildings or secondhand ships with long-term charters. So there is competition, but it is definitely limited compared to the competition we used to see some years ago.

And can you explain to us why is this softening taking place in the last couple of months? Is this something that worries you? Is it the seasonality? Is it the concerns about some slowdown in the trade or the impact of the tariffs? How do you see the market developing in the next year or 1.5 years?

Yes, I think, first of all, the situation there, I think it's pretty much a mixed bag, I mean, more or less all the factors you mentioned. There is definitely seasonality. And the last 2 quarters of the year traditionally, they are not the strongest quarters for container shipping. At the same time, you look at the supply and demand dynamics, and some specific trades, for instance Asia to Europe, this trade, which is the biggest one. This is the trade where all the largest ships are being employed. The demand there is not as strong as was expected. At the same time, ships are being delivered throughout the year. So it is, at this point in time, supply and demand. It is seasonality and also, trade tensions generally do not help the sentiment in containerships. However, I have to say that in trans-Pacific, up to now, we have seen a positive trend, which -- in demand, which is also reflected in box rates. You can argue that part of it is because of front-loading because -- before the new tariffs kick in from the beginning of 2019. But up to now, we see trade growth in the trans-Pacific to be quite healthy. And I have to add something here, regarding our vessels, I have to say that we have 5 11,000 TEU ships. And those ships, they are most commonly used in the trans-Pacific trade. We feel quite comfortable for those vessels. We recently chartered a couple of those at $28,000 per day for a short period. We could go for a longer period, but because we feel comfortable about the supply and demand dynamics going forward, and especially for those vessels and how many ships like those are currently in the market, we decided to go for a shorter period. So although we don't forget the market, I have to say, however, that we don't feel negative regarding the potential of those vessels and the supply and demand dynamics over the coming quarters.

Greg, one last question about your growth strategy, whether you are in a growth mode right now? And what is your acquisition capacity? I see in your balance sheet, you have $112 million of liquid cash. Although you have rarely dropped below $100 million, are there sources of potential capital that you have in mind? Is this an environment that you are looking to grow? And how do you view your cost of capital relative to the industry, both in access for -- to commercial debt and other sources of funding?

Yes, so first of all, we have cash on balance sheet of $155 million, $154 million, to be exact. And take away the restricted cash, which is, ballpark figures, $30 million. So I mean, it's north of $120 million, our liquid cash capacity today. We have access to commercial bank debt. And we've shown this by financing today the newbuildings. We raised debt for 12 years, 2 years pre and 10 years post-delivery. And we are in the process of financing the older ships as well. So our growth strategy, I mean, we are not going to be growing for the sake of growing in order to create volume. The deals need to make sense, and in this environment, especially over the last couple of months that we've seen asset values dropping, we may be more active, depending, of course, on the transactions that we see in front of us. Now, our cost of capital and competitive advantage, where we are generally, we tend to have a competitive cost of capital base. Take for instance the commercial bank debt, the fact that we never have had to restructure. We never breached any financial covenant over the last 40 years or so. We never breached any covenant since the -- since the company went public and even after the Lehman crisis. And the fact that we never gave any trouble to our lenders, so this track record definitely helps in securing debt at terms that make sense. And also, I have to stress here that commercial bank debt today is available for shipping. And also for -- and also for container shipping. It may be true that the banks have become more...

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which is a healthy signal, but bank debt is available today for clients that the banks consider to be the top tier clients in the sector.

Your next question comes from the line of Ben Nolan with Stifel.

This is Frank Galanti, on for Ben. So the vessels that come off contract for the next 2 years or so, have you guys considered installing scrubbers on them to make them more competitive for long-term charter?

Normally, we would install scrubbers when we have an agreement with the charterer. So if a ship is, let's say, relatively smaller, without a long-term employment, it will be a bit awkward to have an agreement with the charterer to install scrubbers of those vessels. In container shipping, contrary to some other shipping sectors, the fuel expense is a passed cost to the charterer. So whatever type of investment we decide to do regarding scrubbers, I think this needs to be on the basis of a commercial agreement with a charterer who will be taking all the benefit of the scrubber installation. So the long story short, if it is a ship coming out of charter over the next months and without a long-term or a medium-term employment and without an agreement with the charterer regarding the payback period of this investment, we wouldn't be installing scrubbers.

Okay, that make sense. And then a kind of a balance sheet question. So you have a couple of preferreds that are going to become callable soon. Just wanted to see how you guys are thinking about those and how they fit within the capital structure, kind of versus debt or growth CapEx in the next, say, year or so?

Yes, first of all, our CapEx commitments, to start from that, are pretty manageable. Because as you've seen, we have funded the Yang Ming vessels at quite attractive terms. So there are no CapEx commitments without the debt funding already in place. Now you're right that a couple of the preferreds are callable or sort of will be callable over the next year or so. We are considering all the options. Of course, one of them is to call them, but then it's going to be also a decision of where do we allocate our capital, and whether it makes sense to call the whole, like, type of instrument or part of it and at what point in time? But we do have the flexibility and this is something to consider, especially next year, when the second preferred is becoming subject to call.

Next question comes from the line of Chris Wetherbee with Citi.

It's Liam, on for Chris. So just wanted to follow up on some of the questions that you've already received on scrubbers. So just really quickly, I know that you aren't really providing a lot of details on how that would -- on the rates. But I'm just wondering if overall, generally speaking, do you think that installing scrubbers will meaningfully impact the returns you expect to get back on those vessels and just kind of the unit economics of those Post Panamax vessels?

Look, the fact that we have, that we have extended today, in 2018, the charter contract on the forward basis from 2024 to 2027 at the charter rate which we feel makes sense, I think it's a positive thing, definitely. Now from the scrubbers, we don't make money out of installation of the scrubbers. This is something that we are doing after the charterer's request. But the fact that we can find an agreement with the charterer, where we are sort of extending the charter cover and we are also receiving some type of incremental cost from day 1 after the scrubber installation, I think it's definitely a positive. Those ships, they are 2013-built, so the expiry of the 2013- and 2014-built. So originally, the time charter was expiring when they will become 10 years old. And now it will be expiring when those are becoming 15 years old. So we definitely consider this to be a positive. However, the same applies for our client.

Got it. And also, just generally speaking, when you are thinking about charter renewals, I know you have quite a few vessels with charters expiring, either by the end of this year or sometime in next year. So when you're thinking about that and taking into account the overall macro environment and how it impacts the container market, are you -- when you're engaging in discussions with the charterers, how are kind of like trade, the recent trade discussions, kind of impacting those, your discussions with charterers? Is that coming into play?

I think that more simply, if it is a low charter environment, like the ones we are experiencing today, most probably, we would decide to go for a shorter period, like a shorter period could mean 6 to 9 months or sort of up to a year, and then sort of rediscuss. For example, for the 11,000 TEU ships, which are newbuildings delivered a couple of years earlier, for instance for the Cape Akritas, as usual, we chartered it for $28,000 for a short period. Although we have offers -- or there was interest from liners to go for a longer period. We decided that based on like where the market is today and feeling confident about the earnings potential of those vessels, we felt that it was the -- that the appropriate thing to do was to charter for a shorter period and then revisit. At the same time, when we're repaying your loans, and you have no leverage, like the leverage we have in those vessels, you have more flexibility in order to decide and determine your chartering strategy.

Next question comes from the line of Donald McLee with Berenberg Capital Markets.

Just to stick with the scrubbers for a bit, could you talk maybe about the cost involved? And what's the expected time line for completion?

Yes, well, the cost, it depends on the type of the scrubber. But I would say for a large containership vessel, it could be and up to $6 million, the total cost. But it depends. So now the installation, it depends, again, but it could be like 4 to 6 weeks, but it depends. I mean, then you have to look at sort of each case individually. So the cost, it is the cost of buying this equipment, of also installing, there may be some daily -- some additional daily operating expenses. It is the cost of funding. And it is also the dry-docking cost of the off-hire during the installation period.

Okay. And then just in terms of the time line, I'm assuming it's before 2020, but if I -- I'm not sure how much clarity you gave around if that CapEx is going to sit with you guys? Or it's going to be kind of amortized through the charter? But if I had to model that CapEx directly on your cash flow statement, how should I look to unwind that, over -- through 2020 or is it ahead of that?

Look, if you want to adopt a generic approach about how to amortize scrubbers, I think the appropriate thing to do would be to amortize it over the entire charter period. This would be the appropriate thing to do.

Okay. And then switching gears to the S&P purchase, could you talk a bit about what you thought was attractive? Those assets are, I believe, 20-plus years old. And then they have charters that will expire into a post IMO 2020 world. So maybe what's your long-term strategy for those vessels? And what prompted, what was the rationale behind the purchase?

Yes, so those ships, they are 1996-built, so today, they are 22 years old. They have a 2 -- 2.5-year charters. So they will be, upon the charter expiry, they will be 25 years old, actually. We have chartered them to Maersk, which is a first-class charterer. And we looked at the physical condition of the vessel, our expected cash outflows for the operating expenses, the charter hire and the potential of financing. We are in discussions regarding the funding of those vessels overall and without factoring in any further chartering activity of those vessels, so I mean, taking a more conservative scenario, we feel that the economics made sense. Now in the past, we had ships of -- with some other trading up until the age of 30 or like 35 years old. I cannot claim that this is what we count on those vessels, so -- but so conservatively, we have taken -- we have looked and then at the numbers, factoring in only this 30-month charter period.

Okay. And did you guys give any -- are you able to give any color around what the CapEx was for those vessels?

I'm afraid not, but when we're going to be -- in the next quarterly results call, we may be announcing the financing of those vessels. So I guess, you'll may be getting an idea about the sort of actual CapEx. But I tell you that although they are older vessels, there is a misconception, older vessels can provide very good returns and can also be financeable, as long as there is a proper technical management and also a credit borrower for your charter.

Okay. One more, just on where you guys sit and how has your view changed on counter-party risk from the liners over the past 12 months? There has been a bunch of -- or a couple of headwinds that have emerged, rising fuel cost for the liners, all the tariff overhangs, so how comfortable are you guys there?

Look, we have a slide with a pie chart showing the composition of our charterers, where the contracted cash flows of $2 billion come from. And with all those names, we feel very comfortable regarding their credit quality today.

Next question comes from the line of Michael Webber with Wells Fargo Securities.

This is Sahm, on for Mike. So you guys talked a little bit about the fleet. And when I look at the -- there's a couple of tranches of vessels in your fleet that's at the age and tenor profile of the MSC vessels that are going to be installing those scrubbers. Do we expect that this is the type of deal for other vessels in your fleet? And have you noticed or foresee a tipping point where other charterers might start engaging more aggressively to get those installations completed?

Yes, we are currently in discussions with other charterers as well for scrubber installation and those discussions have to do with the cost of this investment and how this investment cost is going to be allocated between the charterer and the owner during the charter tenor. So there are discussions as we speak. And I think that should we find a solution which makes sense for both parties, it's going to be a win-win situation, both for the charterer and for the owner.

Great. And then you touched on this a little bit, but can you talk a little bit more about the timing mechanics of the actual installations and whether or not those are going to be incorporated into existing dry dock schedules or if they're going to need to come into new dry docks, like what is the timing look like for that?

This depends on the vessels. And also on the specific dry-docking schedule of each vessel individually. For those ships that you know we're discussing, we would expect to have the scrubbers installed, of course, prior to the 1st of January 2020 and most probably during the third and fourth quarter of 2019.

Okay, great. And then just taking a quick step back, I guess, you're looking at demand dynamics across vessel sizes, how -- like what is your perspective on looking at your future fleet and replenishing some of your older, smaller vessels? Do you see that -- the need to maintain that fleet for those specific trades? Or how are you looking at your fleet going forward in the next couple of years?

Look, we don't have any like -- I mean, if you look at our fleet list, you will see that we have pretty much all the sizes, from like 1,300 TEUs, including 14,000 TEUs. These are the ships we have together with York Capital. So like we are pretty flexible, we focus -- we mainly focus on how much we buy a vessel, what is the vessel's physical condition and its capacity, funding potential? And we first try to cover our downside risk. And then of course, we also want to make sure that there will be also some outside for our shareholders. But we don't analyze each vessel type with each type of trade, et cetera. We have a view for some ships, especially, I mean, as you've seen all the newbuilding transactions we've done, these are mainly for larger vessels. So we tend to focus on larger newbuilding deals. Without doing, however, that if the numbers make sense, that we wouldn't be doing new buildings. So we are pretty much flexible as long as we feel comfortable with the asset and its earnings potential.

And I would like to pass back to Mr. Zikos for closing remarks.

Thank you for dialing in today and for your interest in Costamare. We are looking forward to speaking with you again at our Q4 results conference call. Thank you.

Thank you. That does conclude our conference call for today. Thank you all for participating. You may now disconnect.