Earnings Call: Q2 2020

Jul 28, 2020

Thank you for standing by, ladies and gentlemen, and welcome to the Costumer, Inc. Conference Call on the Second Quarter 2020 Financial Results. With us, we have Mr. Gregory Zikos, Chief Financial Officer of the company. At this time, all participants are in listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this event is being recorded today, Tuesday, July 28, 2020. We'd 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'll pass the floor to your speaker today, Mr. Ciekos. Please go ahead, sir. Thank you, and good morning, ladies and gentlemen. During the Q2, the company delivered strong results. Liquidity stood at around 220 $1,000,000 And as already announced, during the Q2 of the year, we concluded our refinancing program, resulting in a smooth repayment profile with no meaningful debt maturities until 2024. On the market side, data capacity has started decreasing, indicating improving market conditions. Demand continues to favor the larger and medium sizes and especially ships above 8,000 TEUs. Market activity has picked up and we have chartered in total 24 ships during the quarter. After months of inactivity, the demolition market has reopened. And as part of our fleet renewal program, we have sold for demolition to 7,000 TEU ships, which we plan to replace with younger tonnage. Moving now to the slide presentation. On Slide 3, you can see the highlights. We do maintain a strong balance sheet with liquidity of about $220,000,000 leverage of approximately 40% and no meaningful debt maturities until 2024. Adjusted net income for the quarter rose by approximately $5,000,000 to 32,000,000 The adjusted EPS is $0.26 a 13% increase compared to Q2 2019. The net loss of $84,000,000 is due to one off non cash losses of close to $110,000,000 relating to asset disposals. Moving to Slide 4. Our adjusted net income for the first half of the year rose by approximately $25,000,000 to $64,000,000 The adjusted EPS is $0.54 a 54% increase compared to the first half of twenty nineteen. Net losses for the first half of the year amounted to $58,000,000 due to one off non cash losses of about $110,000,000 relating again to asset disposals. Since the beginning of the year, we have raised more than $435,000,000 in debt financing. Slide 5. We have continued our efficient fleet operation with competitive operating expenses of just over $4,900 per day per vessel. We have recently taken delivery of our first 13,000 TEU container ship out of a series of 5 seater vessels. The ship has commenced its 10 year charter with Yanming. The remaining 4 new buildings will also commence their respective 10 year charters upon their deliveries. Finally, as part of our fleet renewal program, we sold 2 23 year old sister vessels. And as already mentioned, we plan to replace them with younger tonnage. Moving to Slide 6. In a volatile charter environment, we have chartered in total 24 vessels during the quarter. Although the containership market has been negatively affected by the COVID outbreak, there are signs of improvement in charter rates and market activity over the past 2 months. The idle fleet has been decreasing, while the order book has dropped to 9% and is expected to remain low. Finally, we will pay our 39th consecutive quarterly dividend in August. Insiders have been participating in the DRIP and since inception have reinvested in total $90,000,000 On the next slide, this is Slide 7, you can see the Q2 2020 results. During the Q2 of this year, the company generated revenues of $112,000,000 and adjusted net income of $32,000,000 Based on the above, the 2nd quarter adjusted EPS increased by 13% from last year to $0.26 Our adjusted figures take into consideration the following noncash items, the accrued charter revenues, accounting gains or losses from asset disposals and other noncash items. On Slide 8, we are discussing our capital structure. Our leverage is comfortably below 50%. Net debt to 12 month trailing EBITDA is 3.3 times, and EBITDA over net interest expense is at 5.2x when our cabinets have a minimum requirement of 2.5x coverage. On Slide 9, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from fracile charters like Maersk, MSC, Evergreen, Cosco, Yang Ming and Hapag Lloyd. We have $2,100,000,000 in contracted revenues at the remaining time charter duration of about 3.5 years. On the last two slides, we're discussing the market. As shown on Slide 10, charter rates are showing signs of improvement, mainly for the larger vessels. Box rates have risen by 25% over the past 3 months. On Slide 11, the idle fleet has been reduced to slightly below 8%. The order book has fallen to 9%, and TINT is expected to remain at low levels. As mentioned, our main priority is to cover our downside risk, while at the same time looking for opportunities in such a volatile market environment. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now. Thank you. The first question comes from Chris Wetherbee of Citi. Please go ahead. Hi, this is Liam on for Chris. Thank you for taking my question. Hi, good morning. So I just wanted to start off with the charter market. I know things have been challenging there recently, but I just wondered if you could provide your thoughts on the outlook going forward and also your perspective on charter durations and if you think that they might shorten in the current environment? Thank you. Yes. Generally, over the last couple of months, we have seen charter rates picking up. And as I mentioned in my commentary, this is especially for ships of 8,000 TEUs and above where the supply and demand dynamics are favorable. Of course, we are not at the 2019 or sort of the Q4 of 2019 charter levels. But definitely, the market has been picking up, both in terms of activity as well as in terms of charter rates. The same applies for the Panamax for the mini Panamax vessels. The feeder ships, they have not seen a lot of upside recently, leaving aside the smaller eco vessels. But generally, for the larger sizes, I see that the margin has been slightly improving. Apart from like increased activity, of course, there are definitely extension options in Charter's favor. However, we have seen fixtures ranging for longer periods now compared to the fixtures we saw, let's say, in March, April. So I would say that generally, there are positive signs in the charter market. Now we cannot predict the market, and we never do it. Container shipping is, I would say, 100% correlated to global GDP. So the more economies are opening up and people are likely resuming their daily activities. I think the better is going to be for the global trade and consequently for container shipping. Got it. And I guess as an additional question, we obviously understand that the order book is at historically low levels and that new building activity has been pretty minimal lately. But I'm just wondering, in your opinion, like what is driving this? Is this more structural in nature, such as being related to the IMO regulations? Or is it just based on the current macro environment? It's a lot of things. First of all, yes, you are right. Like the order book today is close to 9%, which is probably the lowest figure we have experienced over the last years. And it's a couple of things. First of all, liners or like ship owners that don't want to commit today, especially where there's still some uncertainty in the market, especially for charter owners like us, it would be difficult to commit without especially for the larger vessels, without a fixed employment in place. Secondly, the capital markets, markets, commercial bank debt, although it is there, it's much more scarce compared to the debt levels we saw in the past. And so until people feel more comfortable regarding where the market is heading, I think it's going to be difficult to see, I would say, increased activity in new building ordering soon, which, as you understand, this is positive for the supply and demand dynamics. And I would say that from 2022 onwards, today's order book is very, very thin. So overall, this is, I would say, a positive development. And on top of that, I would have to add that we have also seen some increased activity in demolition. We know that the demolition market was closed because of the COVID outbreak during the Q2 of the year. Demolition activity has resumed. I cannot predict what's going to be the total number of TEUs, which we'll describe during the year. But this is also a positive sign as well. Got it. And just really quickly, one final question. I know you guys have preferred shares buyback program. Can you just please update us on that program and how much you guys have repurchased to date and possibly in the Q2 and then how much is that still outstanding from that program? We didn't do any in total the program has been for like up to $50,000,000 We didn't make any purchases during the last months because the price of the preferred has moved up. I think today is $20, dollars 21 and and above. We did some process during the Q1, which like we announced in April, but since then, we haven't done anything. I think the program is still open and opportunistically, we're going to be accessing it. But at the level of $20,000,000 $21 I think we would wait. All right. Thank you very much for taking my questions. Sure. Thank you. Our next question comes from Ben Nolan of Stifel. Please go ahead. Well, thank you. Good morning, Greg. So I wanted to circle around on a couple of things. 1st, with respect to the balance sheet and the debt specifically, subsequent to the refinancing, I just looked and there was the previous $230,000,000 repayments scheduled for 2020 and then $291,000,000 for 2021. Can you maybe update me on what this post refinancing repayment schedule looks like for this year next? Yes. For the second half of twenty twenty, the repayment schedule is close to 77,000,000 dollars And for 2021, the whole repayment schedule, including some small balloons, is now close to $135,000,000 And for 2022, it's 129,000,000 dollars Nice. Perfect. Now that's helpful. The next thing I was going to ask is really related to the new building market and you talked a little bit about sort of the state of the world as it relates to where we are at the moment. But I'm curious if there's been any uptick among the liners for potentially looking to add new buildings or is it a little too early for that? And then also maybe you could comment on sort of the competitive landscape for some of those new building orders. Is there still a lot of capital chasing that kind of thing? Or has it become a little bit more selective? Look, we haven't seen any real new building activity recently apart from a couple of small exceptions where previous options have been exercised for a couple of new buildings from liner companies. But apart from that, we have not seen any real activity. Now of course, as the market develops and this may change, and as I said, from 2022 onwards, the order book is very, very thin, is like minimal. We haven't seen anything today. Now as a company, generally, we have been quite active in newbuilding transactions. And this is something we would definitely look at. And we've done a lot of newbuilding deals in the past. So this is something that is definitely of interest to us. But I think today, it is a bit premature to forecast when the new building market is going to return. This could be sooner or later. I don't think it's a matter of time. But today, I don't think that we have any clear visibility. Okay. Helpful. And then I have 2 just little quick ones, if I could. The first is on the idle capacity. Obviously, it's coming down closer to 8%. It's definitely moving in the right direction. Looks like maybe you guys only have 1, maybe 1 or 2 that are idle. Have you guys been able to deploy your ships without sort of being hit by some of this downturn as much as everybody else? Or could you maybe talk to sort of how you fared and expect to fare in the environment that we're in? Yes. We have a couple of ships today that don't have employment yet, but we are in the process of employing them. I would say that but these are small ships, so I don't think that they could change the fundamentals of our P and L for this quarter or like for the next quarter. Generally, we have been active. We did, in total, 24 new chartering arrangements since the last quarterly results, which I do consider to be a big figure. I'd say there are a couple of small shifts where we are now discussing employment. And generally, I wouldn't worry about those. I think up to now, we have been chartering our vessels, admittedly, at levels which are lower compared to, as I said earlier, the last quarter of 2019 or like beginning of 2020. But still, these are at above breakeven levels. And you saw our profitability this quarter like adjusted EPS of $0.26 which is something that I would say makes sense. It's something respectable. Yes, I agree. And then last for me is that the write off is pretty big. Could you maybe just talk through obviously, I guess it's forced by selling assets, but maybe as you look at your balance sheet as compared to the state of the market, first of all, is there do you think a need to maybe do further write offs in the future? And B, is it simply selling ships that is a catalyst to cause that to happen? Or is there another mechanism? I think, look, the write off, and that could be more specific, it comes from the 2 7000 TEU vessels we sold, 23 years old, which like we sold for scrap at the price of close to like $10,000,000 each. And they had a book value of close to $32,000,000 And then because we have a 3rd sister vessel, we also took an impairment there. There were commercial reasons why we thought that it would make sense to scrap those ships and then use the equity generated at, I would say, a healthy scrap price in order to replace those vessels with younger tonnage. And this is what we would expect to do because with this equity generated, you can buy ships a similar size, 10 or 12 or 15 years old, so let's say 8 to 10 years younger, with minimum type of incremental cash outflows. This was the logic behind that. This pretty much is now for the future. I cannot predict, but I think those ships and they also had some due dry docking expenses, which we took into consideration. And looking at asset values today, we took the commercial decision to dispose of those ships and then use the equity for new acquisitions. This is pretty much it. Okay. And so as you look at the balance of your fleet, there aren't any other that you can foresee as of now, there aren't any other big potential write offs coming down towards you? Look, I cannot predict. We have some other ships which are of similar age. As a company, generally, we have been used and we like managing all the tonnage. We don't have an issue with that. However, it depends on market conditions. But I have to stress that having some accounting gains or losses in this instance doesn't mean that those assets have not been profitable and that they didn't have a positive cash on cash return over the last 10, 15 years we had in our fleet because those accounting losses, of course, don't take into account the cash flow generated from those vessels. It is just a difference between the book value and the sale proceeds. That's all. Right. Okay. Sure. Next question comes from Jay Mintzmeyer, Value Investors Edge. Please go ahead. Hi, good afternoon, Greg. Congrats on a stable quarter and in a period of otherwise market uncertainty. Good morning. Good morning, Jay. Excellent. Yes. So as I'm looking at your total fleet balance, I noticed that you scrapped the 2 vessels, Kolkata, and I was looking at the Cure, the 3rd sister ship. You have a short term charter on that. It was previously reported demolished, but it looks like you're employing it now. Is there any sort of update on that? You plan on demolishing that after the short term charter? Or do you think there's a market to keep her on the water? Yes. We sold the 2 vessels for the record, the Kokura and the Kawasaki. And then we have the 3rd sister ship, the Kura, which is currently under charter. For this Kure, because this is a sister ship, we have taken an impairment, which has been factored in, in the Q2 results. Now what's going to happen with this vessel? It depends on market conditions, which are generally volatile. We may take the view that we may sell this vessel and the cash proceeds could be used for younger donuts. Or depending on market condition, we may find deployment for the ship for the next 6, 9 months and then take the decision not to scrap it. I mean, those decisions are taken 100% based on market conditions rather than on consideration regarding accounting figures. So I'm afraid I cannot predict. It could be sold, but it could also be held. However, just to be consistent with the sale of the other 2 sister ships, we decided to take impairment loss on the 3rd ship as well. This is pretty much it. Excellent. So no decision on that one yet. I know it was initially came across the wire as all 3 of them being scrapped. So it's interesting change there. Look, a little detail you disclosed on the Sealand, Washington, Michigan, Illinois, Kolkata, Kingston, the set of 6 there. You disclosed that those have a base rate, I think, of 16,000. There's a fifty-fifty profit share and it's kind of a range of 12,000 to 25,000. What index is that? Is that like a context or a It is a pre agreed index with a charterer, and this is based on a specific broker who comes up with the latest fixtures for those type of vessels. And we use that index. It is a very it is a specific broker with whom we both agree to sort of determine the charter rate for those specific vessels. This happens on a monthly basis. Very interesting. We'll have to continue to follow that and see what happens. Final question, Mike. You have 4 more new builds coming in. I know the first one was just delivered here in July. Can you remind us I know they're fully financed, but can you remind us what the remaining installment payments are for those 5 vessels? Well, it's yes, they are fully financed on a pre- and post delivery basis. The post delivery, it is for a 10 year period because those ships have a 10 year charter. The remaining equity CapEx from our side, In the previous quarter, we had announced it was close to $31,000,000 Now with the delivery of the first vessel, it's around, I would say, dollars 24,000,000 25,000,000 dollars This is the remaining CapEx, equity CapEx from our side for the total of the 4 remaining new buildings to be delivered. So as you can see, it's pretty minimal. Right. Just $25,000,000 of equity CapEx. What about on the financing side? How much more financing needs to be drawn down just so we can sort of model your balance sheet going forward? The financing, it's going to be drawn over the next month up until the first half of twenty twenty one. So it's not something that's going to be drawn tomorrow, and there may be some changes in the schedule. I don't have the full figure in front of me right now. However, I have to be careful because we have not announced the acquisition price. So by giving you the full number and then you somewhat divide by 5 and make some adjustment, probably someone can come close to the acquisition price, which I'm afraid we have not announced. So I'm afraid I have to stop here. Thanks, Greg. I appreciate your time. I will follow-up offline for some more of the housekeeping stuff. Appreciate you. Sure. Thank you. We have no other questions at this time. So we'll go back to Mr. Zikos for closing remarks. Thank you. Thank you for dialing in today and being with us. We are looking forward to speaking to you again during the next quarterly results call. Thank you.