Earnings Call: Q3 2020

Oct 28, 2020

Thank you for standing by, ladies and gentlemen, and welcome to the Customare Inc. Conference Call on the Q3 2020 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, October 28, 2020. We would like to remind you that this conference call contains forward looking statements. Please take a moment to read Slide number 2 of the presentation, 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 Q3, the company continued its profitability. As part of our fleet renewal program, we sold for demolition 2 vessels with an average age of 23 years and we agreed to acquire 3 larger secondhand ships on average 11 years younger. The new acquisitions will be initially funded with equity. Meanwhile, our new building program is progressing on schedule and we have now accepted delivery of 3 out of 5 15,000 TEU vessels which have commenced their 10 year charters. On the market, the inactive contingency fleet continues to shrink to levels below 2% or the back of healthy demand for container shipping. Charter rates have been rising and we have chartered in total 13 ships during the quarter. We have 14 ships coming off charter over the next 6 months, which positions us favorably should market momentum continue. With liquidity of about 200,000,000, no meaningful debt maturities over the next 3 years and minimal CapEx commitments, we are well positioned for acquisition opportunities increasing shareholder value and returns. Moving now to the slide presentation. On Slide 3 we are presenting a company snapshot. More than 45 years in the shipping industry uninterrupted dividend payments is going public, strong sponsor support, never had to restructure our debt, smooth debt repayment profile, fully aligned interest, no related party acquisitions, steady management and ownership and high growth potential with no legacy debt restrictions. Moving to the next slide, here you can see the resilience of our business model, steadily having some income in a highly volatile shipping environment. On Slide 5, you can see the highlights. Adjusted net income for the quarter is $27,000,000 and the adjusted EPS is $0.22 Our adjusted net income for the 1st 9 months of this year is $91,000,000 and the EPS is $0.76 We do maintain a strong balance sheet with liquidity of about $210,000,000 leverage of approximately 42% and no meaningful debt maturities until 20 24. Moving to the next slide, as part of our fleet renewal program, we continue the sale of order donuts. Over the past quarter, we sold 2 containers with an average age of 23 years and replaced them with 3 younger vessels with an average age of 12 years. The 3 new vessels will be initially funded with equity. We have a heavy delivery of 213,000 TEU container ships out of a series of 5 sister vessels. The ships have commenced their 10 year charters with Yandex. Slide 7, we have chartered in total 15 vessels during the quarter. The charter market has been rising on the back of positive supply and demand fundamentals. The idle fleet has dropped to 1.8% and the order book is at 8% and it is expected to remain low. We have 14 vessels coming off charter over the next 6 months, which positions us favorably should market momentum continue. Finally, we will pay our 40th consecutive quarterly dividend in November. Insiders have been participating in the DRIP and since inception has in total invested $92,000,000 In the next slide, you can see the Q3 2020 results. During this quarter, the company generated revenues of $108,000,000 and adjusted net income of $27,000,000 dollars The 3rd quarter adjusted EPS is $0.22 Our adjusted figures take into consideration the following non cash items, via good charter revenues, account gains or losses from asset disposals, prepaid lease rent and other non cash charges. On Slide 9, we're discussing our capital structure. Our leverage is comfortably below 45%. Net debt to 12 month trailing EBITDA is 3.3 times and EBITDA over net interest is at 5 times and our current has a minimum requirement of 2.5 times coverage. On Slide 10, we are showing the revenue contribution for our fleet. Almost 100 percent of our contracted cash comes from 1st start charters like Maersk, MSC, Evergreen, Costco, Yandling and Hapag Lloyd. We have $2,100,000,000 contracted revenues and the remaining time charter duration of about 3.5 years. Slide 11 shows the contracted revenue by vessel size. As you can see, more than 90% of our contracted revenues come from vessels which are above 7,000 TEU. On the last two slides, we're discussing the market. As shown on Slide 12, charter rates have significantly improved since Q2 2020 across all vessel sizes, but especially for the larger vessels. Box rates have increased by more than 70% on a yearly basis. Slide 13, the idle fleet has been reduced to 1.8% from 7.9% almost 3 months ago. The order book has fallen to 8% and is expected to remain at low levels. Today, the order book is very thin from 2022 onwards. Our main priority is to cover our downside risk while at the same time looking for opportunities in a favorable market environment. This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now. Thank Our first question will come from Chris Wetherbee with Citi. Please go ahead. Hey, guys. Good morning. James on for Chris. Wanted to first touch on some of the sort of, I guess, the incremental here. Revenue declined sequentially, but OpEx was actually up sequentially, which given the chartering environment, it's a little bit surprising. So recognizing that there probably was some voyage expense in the OpEx side, just want to know if there is any sort of cat tip OpEx in there that might have been deferred from 2Q and that you actually incurred in 3Q? Then also on the revenue side, just kind of wanted to get an understanding of what you were thinking about maybe going into the 4th quarter from Q3? Should we expect revenue to increase sequentially from here? Just vessel count was relatively flat, but yet the TCE rate was down. So just trying to understand the puts and takes there. Yes. First of all, regarding the OpEx, you are right they are slightly higher this quarter. On average for the whole fleet is close to $5,500 per day. In the previous quarter, it was close to $5,000 per day or slightly below that. The reason, as you mentioned, has to do with some sort of incremental crew expenses that's got to do with repatriation of crew coming of our ships. This is something we expected and I think that going forward over the next quarters, this is something that will be normalized. So for this quarter, you can treat it as probably a one off type of item. Now moving forward for the next quarter and regarding the revenues, this was the second part of the question. As we mentioned, we have ships coming off charter over the next 6 months, close to 14 vessels. And the market for those vessels today, especially for the larger ships, it is higher compared to like the charter they are receiving today. So generally, in a rising chartering environment and if we assume that the situation will remain the same for Q4 and for the Q1 of 2020, we would normally expect revenues coming from those vessels to generally increase. If you look at our latest fixtures, we charted the Forester, say, 2,000, 6,500 TEU vessel for close to for 17 months to 19 months, ICA $21,000 per day. We charted the 9,500, 2006 built vessels for about $30,000 per day and these rates are much higher from the latest fixtures. So should this trend continue, I think there's generally upside. Now regarding the revenues of this quarter, in this quarter, you see revenues of some ships that have been chartered during the 1st and second quarter of this year in a market environment where charter rates did not pick up, charter rates started picking up after June, July of this year. So, fixtures concluded into the Q1 or like April, May of this year at levels lower compared to the pre COVID levels. Got it. And so just one quick follow-up on the expense side. How much was the incremental crew expense? I don't think I caught that. Just if you could quantify that. Generally, our ships are running on average. If you look at the previous quarter and the quarter before, our ships are running on average for the whole fleet close to $5,000 per day. This quarter we were close to $5,400 per day or so. So I would expect that this sample that will be normalized over the next couple of quarters. So we should be in the region of $5,000 $5,100 per day on average. Got it. And then just looking ahead into the Q4 and the Q1, it seems like you have some ships coming due or vessels coming due that for re chartering. Is there like the market is how would you think about the current rate relative to those and what you're likely to get in terms of a premium? And then I'll hand it over. Yes, look, we have I will give you a specific example. We have 29,500 TEU ships opening over the next 6 months, the COSCO vessels. Today, they are now getting a rate of like below $20,000 Their sister ships have been recently chartered in this quarter at around $31,000 per day. So I mean you can see the difference. I cannot predict where the market will be next quarter or in 2 quarters' time, but I can tell you that today the market for those vessels, it's much higher compared to the latest fixtures. Also the Panamax vessels we have, the traditional Panamax vessels today, they are airing for 9 to 12 months. We have seen rates up to like $17,000 $18,000 per day for a standard 4,250 TEU vessel. We have Panamax vessels chartered during the Q1 of this year and are now getting slightly below $8,000 per day. Those vessels are going to be opening over the next 6 to 9 months. So I mean, you can see the difference in the charter rates assuming that we don't go back to the COVID level type of market where the biomass vessels were getting in the below $8,000 per day. I think the difference and the upside should this still continue, it's quite important. Got it. And do you think you would be able to enter or recharter those Panamax vessels in Q4, Q1 or is it probably closer to the expiration date? Look, today those vessels today I can tell you that the ships above 3,000 500 TEUs, most of them are being sold out. And all the ships are opening are like there's a lot of demand for donuts from liner companies. I cannot predict the market, I will not do that and I cannot tell you where the market will be in 2 quarters' time. However, assuming the same dynamic, we are in a much better I have to remind you that during the Q1 of this year, there were predictions that the container trades would go down by 10% to 12% based on the latest brokers and analyst estimates. These are not our estimates, but these are analyst estimates. Contrailers rate is going to decrease by close to 4% for the whole year on a TEU basis, which is a much smaller contraction compared to the one initially anticipated. So in container shipping, we have seen up to now a much better market, both with regards to box rates and to charter rates compared to the market people thought at the beginning of the year and there's dynamic and the supply and demand fundamentals today seem to be quite positive. Okay. Thank you a lot. Thank you, James. Our next question will come from Ben Nolan with Stifel. Please go ahead. Hi, Greg. Good afternoon. I want to dig in a little bit on sort of what you're seeing in the market. Obviously, we've all seen the rates a lot higher and it seems like they're pressing higher every day and the utilization is lower and that's not really a mystery to anybody. The one thing that I think would be a little bit more telling is if you were starting to see tenors lengthen, in your discussions with which obviously would mean that the liners are tenors stretching out from 12 months to 24 months or 36 months or anything of that sort? Yes, Ben, you're right. Yes, we've seen that. And you can also see that in our latest features, for instance, this is 6,500 TEU Ship, 2000 built, this is a 20 year old vessel. And this now was fixed at $21,250 per day for a period of 'seventeen to 'nineteen months for a 2000 old vessel. The previous fixture was for a shorter period. So there is a trend, this is just an example, there is a trend. So also I can tell you that the Fosco vessels that we chartered, they have been chartered for longer than a year And we have seen, for instance, the traditional Panamax vessels getting between $7,000 to $8,000 for periods of 6 to 9 months. Now we have seen 10 hours of 12 months or like north of that. And one last example I will give you is that we have an 11,000 TEU vessel, which like we have extended the charter for 2 years. Initially, we had the charter build up until 2023 and during the quarter we have extended for 2 more years up until 2025. This is the Cape Athanasio and the rate for the 5 year period is 36,600 and and $50 So generally, I would say yes, that there is a tendency for longer periods and also a tendency for shorter extension options awarded to the charters. So from that respect, I would say that the market is tightening, it's common to see longer periods with shorter extension options when the charter rates have been moving up. Sure. Yes, although again, if there was an anticipation of the liners that maybe this is just seasonal or something, then maybe there would be a little bit less apt to go long tonnage. The changing topics a little bit, as you had mentioned, there hasn't been much the order book is low. There's been virtually no ordering of size all year. There's been some rumors, including some of which you guys have been involved in, that maybe that's picking up a little bit. First of all, are you in the market, if the terms are right to be ordering ships? But secondly, has there been any change in the return profile? I know publicly one of your biggest competitors has said they're not really looking for new buildings at the moment, but has that had any impact or the availability of capital or whatever had any impact on sort of the types of returns or the rate of return that you might be able to get on new builds? Yes, on the newbuildings a couple of things. First of all, yes, there have been some articles about some potential newbuilding projects, which are all the projects which generally were put on the side because of the COVID situation, but these are just discussions. But I would say that generally we have all seen that the liner companies and ship owners have shown a lot of discipline in newbuilding ordering over the last quarters, which is something positive for the whole sector. Now as far as we are concerned, we have been traditionally doing both secondhand deals and new building transactions. We have 2 more new buildings to be delivered to us within the next couple of quarters and this is part of our business. In any case, as far as we are concerned, our strategy, it is the same. First of all, we do try to cover our downside risk to make sure that the fundamentals of the dealers are solid, that the residual value risk assumed by us, it is something that it is within our risk tolerance levels. And of course, and of course in the end there needs to be some upside and some sort of return on our equity. This has not changed as far as we are concerned. The fact that has changed is that there is a lot of discipline that we have a very low order book for which today especially it is very thin for like 2022 and it takes almost 2 years to build a container ship vessel. And however, our strategy of looking both at secondhand ships and at new buildings with the same risk profile like in the past, it has not changed, it is exactly the same. And just to follow-up quickly with that, almost everything that you've done in the last few years has been on a standalone basis not part of your joint venture. To the extent that we're looking forward, is that what we should expect that effectively you're sort of incrementally adding solely on the part of Costa Maran? Look, the last replacement transaction we did, you're right, the 5,000 TEU ships with Yanming, yes, they were on a standalone basis. However, we do have an excellent relationship with York, which still continues. And this is a matter and the subject of discussion. So York has been our partner. We've done a lot of this together with York. For instance, we did with York in the past the 5,000, 14000 TEU vessels. We have done 2,300 TEU ship new buildings, charter to merge. So it depends on the circumstances where this time that could be done with Europe. However, if Europe does not want to participate, of course, we do have the means to do it on a personal standalone basis. I think this is an additional option there is in the table, but it doesn't mean that we may not do the deal 100% at the cost of matter level like we did in the past. Okay. And then last, just for my modeling purposes, can you maybe walk through what the remaining CapEx is on for the Q4 and then the first half of twenty twenty two for the new building? Yes, for the we still have to accept delivery of 2 13,000 TEU new buildings, which will be delivered the latest within the Q2 of next year. The remaining equity CapEx commitment, because those ships are fully funded from a debt perspective, the remaining equity CapEx commitment for Costa Amare is close to $12,000,000 So this is very this is a very low figure and this is why we mentioned that like we have minimal CapEx commitments. What is it all in though, sorry, including debt, just debt and equity? Look, we have not disclosed the acquisition price for those vessels and this is the reason you seem a bit skeptical. So this is why I'm mainly discussing our sort of equity CapEx commitments of 12,000,000 dollars in aggregate for the 2 remaining new buildings. So it's like $6,000,000 per vessel, which is nothing for the size of the company and for our cash balance. Okay, sounds good. Thanks, Craig. Thank you. Thanks, At this time, I'm showing no further questions. So this will conclude our Q and A session. I would like to hand the conference over to Mr. Zikas for closing remarks. Thank you very much for dialing in today and for your interest Costamare. We are looking forward to speaking with you again during the Q4 2020 results call. Thank you.