Earnings Call: Q2 2021

Jul 28, 2021

Welcome to the Costa Mare, Inc. Conference Call on the Second Quarter 2021 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Wednesday, July 28, 2021. We would like to remind you that this conference call contains forward looking statements. Please take a moment to turn the slide number 2 of the presentation, which contains the forward looking statements. And I will now pass the floor to your speaker today, Mr. Zico. Please go ahead, sir. Thank you, and good morning, ladies and gentlemen. The container market rebound That has begun in the second half of last year, has continued into the first half of this year, drawing strength for favorable supply and demand dynamics. Slow consumer demand, low inventory levels and supply chain constraints have all contributed to record charter rates and local charter durations. We are pleased to report the acquisition of 21 additional vessels since we first announced our entry into the sector. Our drybulk fleet comprised of 37 vessels in total between 32,000 and 85,000 deadweight with an average age of 10 years. Up to now, 13 ships have been delivered with the rest of the fleet expected to be delivered by year end. The drybulk acquisitions This results from our decision to invest in this liquid sector, where supply is limited by a low order book and demand is being driven by increased Infrastructure spending and commodity consumption. So More than 4 years from our containership fleet, we have 15 containerships coming off charter over the next 18 months and 37 drybulk presses Operating in the spot market, favorably positioned our company should the currently strong market conditions continue. Moving now to the slide presentation. On Slide 3, you can see the highlights. Net income for the quarter is 82 point €8,000,000 and the EPS is €0.67 Adjusted net income is €58,300,000, up 84% compared to the Q2 of last year. Entagraca EPS is $0.47 increased 81% relative to the year ago period. 20 3 ships are expected to be delivered between now and the end of the year. Moving to the next slide. We have taken delivery of 3 more containerships during the quarter, and we expect to take delivery of 2 more vessels between now and the end of the year. Incremental revenues from these vessels are around $200,000,000 We have also concluded the sale of 1 vessel and expect the sale of 2 other ships To be concluded, we see 2021 with a total estimated capital gain of around EUR 32,000,000. On Slide 5, we can see a review of financial management of our last earnings release. In total, we have concluded financing of about BRL 650,000,000 As we have, we have a new financing committee subject to documentation of €150,000,000 All our containership and drivable processes that have not yet been delivered That funding in place. We do maintain a strong balance sheet with liquidity of about $600,000,000, market value based leverage of 31% A non meaningful debt maturity for fiscal 2025. On Slide 6, You can see our new chartering arrangements. We have entered into new or extended charters of certain vessels at much higher levels. On average, the new charters were fixed at the rate of 2.1 times higher with a lower average duration. Our most recent fixtures, the COSCO Guancheu and the COSCO Limbo, were down at $72,700 per day per vessel for 3 years, More than 2.4x higher than the current rate. In addition, we have a double of extreme consensus coming off charter over the next 18 months. Moving to the next slide. On Slide 7, you can see the chartering of our dry vessels. We have chartered in total 7 ships at very healthy rates. On top of this, we have also fixed 4 vessels whose delivery is expected to be delivered to is expected to procure within 2021. Slide 8. The condenser trucking market has continued to rise on the back of positive supply and demand fundamentals. Geiger fleets reached 0.7% in July, indicating a fully deployed market. The drybulk market has also reached levels not since 2010 Last demand for commodities is surging. We have also paid our 42nd dividend in April, We will pay our quarterly dividend in the coming quarters. Slide 9. On this slide, you can see the Q2 2021 results. The company generated revenues of RMB467 1,000,000 and adjusted net income of RMB58 1,000,000. Based on the above, the 2nd quarter adjusted EPS is $0.47 up 81% year over year. Our adjusted figures take into consideration the following noncash items, which are the revenues, accounting gains orders from asset disposals, On Slide 10, you can see our capital structure. Our leverage is comfortably at about 31% based on current market values. EBITDA or net interest is at 6.2x when our governance have a minimum requirement of 2.5x coverage. On Slide 11, you can see the distribution for our redundancy fleet. Our revenue We have EUR 3,300,000,000 in contracted revenues and the remaining times have a duration of about 4.3 years. On the next two slides, we discuss the comprehensive market. Sharpen rates have significantly improved since q2222020 across all vessel sizes. Both rates have increased by approximately 300% on a yearly basis. Slide 13. The idle fleet is at 0.7% from a high of 20% 1 year ago. The order book has risen to 21% as new ordering has accelerated over the past quarters. It should be noted, however, that it takes close 3 years including the inflection and majority of the operating expenses that have been ordered will not be delivered until 2023 onwards. In the last two slides, we will discuss the driver's market. As shown on Slide 14, charter rates have significantly improved since Q3 2020. Although asset values have been trending upwards since late '20s, they have backed the increase in charter rates. On the last slide, you can see that the rebound in consumer spending combined with customer stimulus has created positive momentum, meaning the seaborne commodity strength. At the same time, the order book for the dry vessels remains at historic low levels, especially for the sizes that we have invested in, Efrain growth is expected to decline over the next several years. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now. Thank you. And our first question today comes from Chris Wetherbee with Citi. Hey, guys. James on for Chris. First question I wanted to ask was around the bulk fleet And what's your ultimate plan for it might be? Is this something where you see customer evolving to having exposure to both markets? Do you see Possible split. And if you do see a possible split, what size or scale would people want to target? Just some color around how you're thinking about that would be great. Yes. Look, for the dry powder, as you've seen, we have invested in those 37 vessels up to now. It's mainly smaller vessels, Akutasamax. And This type of asset is something we feel that it doesn't make sense for the future. Now we cannot predict and I'm not in a position to predict now whether we're going to continue our processes in the dry haul vessels. This depends on market conditions. Now the second part of the question, I mean, what's going to be happening in the future, whether this fleet is going to be split Well, no, I mean, again, there are a lot of options. Nothing has been decided yet. And we have bought those ships over the last couple of months. Only 14 ships have been delivered. The rest are going to be delivered. The remaining 23 will be delivered until year end. So I think this is a bit premature. There is no decision taking. One thing that I need to add, however, is that we have secured a debt funding for all the dry powder vessels There is some facilities we have already in place with European Financial Institutions. So regarding the delivery of the remaining 23 Drive ships. The debt has already been in place, and it is committed. Got it. And just as a follow-up to that, like how do you actually see yourself balancing the investment between the 2? Will you actually be balancing them fairly evenly? Or do you actually see sort of more incremental investment going to bulk at Just trying to understand sort of like where the incremental capital dollar will go. Look, I think This is a question of pure capital allocation. We have got those ships recently Because we believe that the economics makes sense. But this is a market And in shipping, you need to adapt. So I don't know how the market will be over the next quarters Over the next year. All I can tell you is that we are flexible. We can be efficient in executing. We have equity, and we also have access to commercial bank debt. So Having all those ingredients in place, I think it's just a Question of where we feel that it's better use for our capital. But I cannot tell you from now that we're going to be investing so much In this sector and so much in the other sector, it's all subject to market conditions going forward. Got it. And speaking of market or markets evolving one way or another, the can you talk about sort of the current discussions you're having with customers are in charter terms. Are they sort of are you seeing it evolve towards even higher rates? Are you seeing links Pushed out. Like what are the terms which are sort of most sort of in play? And which direction are they going? Any color on that would also be great. And that's it for me. Yes. Look, for the containerships, we see that If you look at the latest figures for the sector, you will see that there is a clear trend Obviously, for higher rates and also for longer periods. If you look at our latest fixtures, As an example, I will take the 2 Costco vessels, which have been chartered to have a 3rd chartered a new chartered on a forward basis. And those ships will be getting $72,700 per day per vessel Compared to slightly below 31,000 that we're getting also that we're getting now, And this is for a 3 year charter starting from next year. So charterers are willing to fix longer periods, also for higher rates and also on a forward basis, meaning for ships That will be available for delivery Q1, Q2 2022 or even later. This is what we see today. And from our side, in order to optimize our cash flows, we're going to We seek to charter for the longest period available at charter rates that make sense. Also, if you look at the latest chartering of our Panamax vessel, this has been charted for $39,000 per day. This is a classic panel like the 2,007 build. Dollars 39,000 per day for close to 5 years. So this is what we see today. Now where the market is going to be In 2, 3, 4 quarters, we never predict the market. But let me tell you that every time in different market situation, What we're going to be doing? And for the time being, we are fixing for a longer period at the highest possible rate And also on a forward basis, Sure. Thank you. Our next question comes from John Nolan with Stifel. Hey, good morning, Greg. So I wanted to make sure that I have all the numbers right. Can you maybe give How much CapEx is remaining for the drybulk slate in the back half of the year based on what you've spent so far for The 30 seconds. Yes. For the 23 vessels to be delivered For the drybulk versus the 22 to be delivered, the debt has already been committed. So our equity CapEx requirement is going to be in the region of €100,000,000 €100,000,000 to €120,000,000 depending on the leverage. We can go 50%, 55 percent leverage, we'll see. But I think the $100,000,000 to $220,000,000 equity CapEx For the remaining of the drybulk vessels, this is the right estimate. Now for the containership vessels that We have the capital to be delivered. There is no incremental equity CapEx commitment. So for the whole fleet, it's only this comes to $20,000,000 which is going to be covering all the 37 Dry pack ships. Okay. And that's very helpful. But what's the total like? I'm trying to get a sense of how much you've Spent in total for all 37? Look, we haven't given a total number. And but I mean, If you see that sort of on average, these are 10 year old Chips close to, I would say, 50,000 deadweight. You can sort of get the picture, I mean, how much it's going to be. But I mean, we don't give the full number. It's definitely No more than $500,000,000 debt and equity, but I mean, we don't give the exact number. Okay. That's fine. We'll see in time with the filings. But To that end though, it sounds like you're still very much in the market to continue to build on that fleet. 37% is not sort of the terminal number here yet by any means. Is that a fair assumption? Look, this is how to market conditions. So as mentioned earlier, we cannot predict how the market is going to be over the next Essentially, it's also a question of capital allocation. Of course, we are looking at drybulk vessels, but At the same time, we have also been actively looking in the contingency sector. Let's not forget that. And during the last quarter, we also took it from the beginning of the year, we did acquire a substantial number of containerships And the extended delivery is a substantial number of vessels as well. For instance, I can mention the 5, 11,000 TEUs were like We bought this holding of York out of those vessels, plus some other acquisitions. So it shows how to market conditions. We are flexible. We have the cash. We have equity. As mentioned, we have access to commercial bank debt. All those deals have been fully funded from a debt perspective for those 37 vessels. So as long as we have With that integrity in place and we can be flexible and efficient in executing, I think it's your upside. But I cannot tell you from now how many ships. It depends. Okay. Now Switching gears a little bit over to the container side of the business, obviously, you've been pretty busy there. There have been, as you highlighted, a bunch New vessel orders. Really, to me, it's almost shockingly number of new vessel orders. But obviously, the liners Or have still been very much in the market to do that and find people to own the ships for them. Where do you stand on that? I mean, you guys interested in having those conversations or the economics at all in a place that would get you to be active there? You referred to new buildings or to say new buildings? New buildings. Yes, yes, new buildings. Yes, We look at newbuildings. And traditionally, we have been doing a lot of newbuildings transactions over the last years Yes, we look at new buildings, but we need to make sure that, first of all, there's going to be charter coverage in place. And the numbers, it makes sense from a return perspective. So of course, there have been a lot of deals. But I mean, we need to make sure that the returns are such so that The transaction is going to be justified. But yes, we do look at new buildings Like we have always done. I think there is something, of course, we will let you know. But it has always been I must add that in interest. The thing is that the transaction we've seen up to now, I think that the returns that from our side we show Didn't justify entering into those markets. Right. And that was a really nice question. So far, Relative to, let's say, other opportunities, the economics on a newbuilding Transaction right now or here to floor haven't hit sort of your haven't been the best use of your capital. Is that sort of How you've looked at it? Look, we believe that, first of all, we should continue looking at the new buildings Yes, for sure. And sort of depending on the yields we see, we will decide whether we proceed or not. At the same time, the dry bulk versus the real growth, As you've seen, of course, it is in the spot market, but the gross to the base are getting $25,000, $28,000 per day, And they have a very low breakeven. So I mean, we definitely think that these are deals that do make sense From a fuel returns perspective. And also, I need to highlight to you that we have the dry fleet of the 37 vessels. And we can be opportunistic there based on like where we feel the market will be heading. At the same time, let's not forget that We have the buffer of the $3,300,000,000 of contracted revenues from Cosamare from the containerships With a tax charge duration of north of 4 years and we have been chartering on a follow-up basis ships at very high rates, Which definitely provide a buffer and also a downside protection. So the downside protection, it is there. And at the same time, opportunistically, we try to enhance our equity returns Also with the drybulk fleet. Yes, for sure. All right. Well, one last one. I mean, You talked to sort of the order book on new buildings starting to creep up, but it doesn't really take effect until 20 23. But as you do look out to 2023 and the order book of being over 20% now, Is it getting to a level where you're starting to be a little bit more cautious or think that maybe a correction is A possible point? Look, I cannot predict the market. Now the 20% order book today, Of course, compared to the 5% or 7% we had in the previous year, it looks a high number. Compared to the 60 percent order book we had in 2,008 is low. It shows a class in demand. We cannot We cannot predict. If it is a new bid transaction with charter cover that we feel makes sense, we will definitely consider them. Our next question comes from Omar Mukhtar with Clarksons. Thank you. Hi, Greg. Yes. Hi, Omar. Good morning. Good morning. Yes, just wanted to ask maybe a little bit more about the dry bulk rates. And I know you talked about it With the last two questions. But just you mentioned basically the acquisition going forward and it will be based on market conditions. I guess if you kind of think about conditions as they are today, if they were to stay, is there sort of a critical math that you want to achieve And the drybulk business, are you comfortable with 37 being the number? Or have you had internal discussions about a certain target number You'd like to get to a feel that you've got a very good base of operations to work with? No. We don't have a specific target number. Target, let's say, 50, 70, 500 versus whatever that is. Then In order to achieve that, at some point, you are not going to be looking at the transaction economics. You're going to be just looking I'd like to meet your target. So if it's something that makes sense, we might continue. If not, then we don't have to grow. We will pause the same thing we did for containers where we did a lot of acquisitions the last quarter of last year And the 1st couple of quarters of this year. And then we stopped Sikorsky, and we felt that from a capital allocation perspective, it made more sense to invest in the drybulk fleet. But we don't have any predetermined growth rate, neither for the containers, not for the dry bulk. And there is no minimum like Growth rate, that is also for the whole fleet, for the whole company. Okay. No, that's fair. And I understand that. And then what do we think then about the back to the container business, some of the you've sold A handful of older smaller ships. Should we continue to think about the how should we continue to think about the sub-two thousand TEU vessels? Are those Are those, you think, going to be monetized here in this market? Look, if we If the ships, especially the smaller ships, older 8, if they continue to be charter at healthy rates that makes sense, We may not dispose of them. It depends. If we feel that the equity release from those disposals It's going to be accretive compared to According on to those assets and continue trading them, we may sell them. It's all, I mean, a question whether the equity released, it's going to provide us with returns higher than sort of keeping the vessel, continue operating the ship At today's levels and then take a forward view about our residual value risk at the expiry Just a matter of capital allocation, what we feel is going to be making stands for our shareholders and Eventually, for our equity returns, which is the only question, but we don't need to grow or like we don't need to sell. As long as we have no restrictions there and as I mentioned, as long as we can be flexible and opportunistic, We're going to continue the same way. Okay. Got it. And then, Greg, finally, just How do you see the dividend evolving? Obviously, you've got a pretty deep backlog at the moment. And as you mentioned, you've got 4 years of contract visibility on the container fleet. I know you took the dividend out from $0.10 to $0.11.5 Are you guys having any discussions or just any thoughts about A further boost from here considering just how much the earnings quality is becoming? Look, we like dividends. It's really close to 60% of the company, and this is our main income from shipping. We did raise a dividend some months ago, 15%. Now As I said, we discussed everything. Now the dividend, it is a poor decision. I'm not authorized, but I think the last dividend This was pretty recent. So the board, it reassesses, I mean, It's dividend policy. We'll see. But let's not forget that we have very recently increased it. We have used our capital for a lot of acquisitions, which we do feel makes sense. We have been chartering on a forward basis containers at total increased charter rates. So I don't see why the dividend cannot be also increased in the future, but let's not forget that we did increase a couple of months ago. So I think it is a bit This discussion today, I think it is a bit premature at least. Okay. Thanks, Doug. That's it for me. Thank you. Thanks a lot. This concludes our question and answer session. I'd like to pass the call back to Mr. Dikos for closing remarks. Thank you very much for being here with us today. We look forward to speaking again during our next quarter