Earnings Call: Q1 2020

Apr 29, 2020

You for standing by, ladies and gentlemen, and welcome to the Costa Mare Inc. Conference Call on the First Quarter 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, April 29, 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, which contains the forward looking statements. And I will now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir. Thank you, Ed. Good morning, ladies and gentlemen. COVID-nineteen presents the largest shock in the global economy since the 2,008, 2009 crisis. The supply of containerized goods has experienced a rare episode of disruption, and the industry must now contend with the consequences of reduced demand. Determining the timing and shape of the recovery is a challenge, yet it is worth noting that the protective measures adopted across the world are intended to be temporary, and we believe that the restrictions and force are also creating a deferred built in demand. In this environment, the safety of our vessels crews as well as of our onshore employees remains our top priority. We have taken steps in order to protect our employees as well as to ensure uninterrupted service to our clients. For the Q1, the company delivered profitable results. Liquidity increased to $268,000,000 We have contracted revenues of $2,100,000,000 continued access to commercial bank debt, a smooth debt repayment schedule and minimal CapEx requirements. During the quarter, we chartered total 12 ships, including 311,000 TEU vessels, which were chartered for periods ranging from 1 to 3 years. Finally, we recently declared our 30th dividend is going public. As has always been the case, but especially during today's unprecedented times, our top priority is to cover our downside. Building upon that, we will continue to monitor the market and assess new initiatives in order to bolster our balance sheet and liquidity position while at the same time evaluating new opportunities in a volatile market environment. Moving now to the slide presentation. On Slide 3, you can see the highlights. Net income rose by approximately €35,000,000 in Q1 compared to last year. The adjusted EPS is $0.27 a half a 40% increase to Q1 2019. We do maintain a strong balance sheet with liquidity close to $270,000,000 levels of approximately 40% and no meaningful debt maturities over the next 12 months. Moving to Slide 4. We have concluded 3 separate pharmacies with European Financial Institutions for a total amount of £165,000,000 and maturities ranging from 4 to 5 years. Regarding operational performance, during the previous quarter, we achieved utilization rates of close to 100% and very competitive operating expenses of below $5,100 per day per vessel. Slide 5. During Q1, in a volatile charter environment, we have chartered 12 vessels, including the 311000s, chartered for periods ranging from 1 to 3 years. The containers in market has been negatively affected by the COVID outbreak. At the same time, the hydro fleet, as that progresses, other gold scrubber efforts and blank savings, owned by tonnage providers, times at 1.2%, while the order book has remained at levels close to 10% and is expected to remain low. We will pay our 28th consecutive quarterly dividend in February. Insiders have been participating in the group, and since inception have reinvested in total $87,000,000 Moving to the next slide. Can see the Q1 2020 results. During the Q1 of this year, the company generated revenues of $121,000,000 and adjusted net income of 33,000,000 euros Based on the above, the Q1 EPS comes at $0.27 more than double on a year to year basis. Our adjusted figures take into consideration the following noncash items, accrued charter revenues, account against or losses from asset disposals and other noncash charges. On Slide 7, we're discussing our capital structure. As already mentioned, there are no substantial valid payments due over the next 12 months. Our leverage is comfortably below 50%. Net debt to 12 month trailing EBITDA is 3.4x and EBITDA or net interest is at 4.9x when our financial covenants have a minimum requirement of at least 2.5x coverage. On Slide 8, we are showing the revenue contribution for our fleet. 99% of our contracted cash comes from 1st car charters like Maersk, MSC, Evergreen Court, Koyan Ming and Hapag Lloyd. We have today EUR 2,100,000,000 in contracted revenues and the remaining time charter duration of about 3.4 years. On the last two slides, we're discussing the market. As shown on Slide 9, charter rates have fallen in the 1st quarter as a result of reduced demand. Initial lag savings were followed by substantial capacity reductions in all major trades. Both rates have been under pressure for most of Q1. They stand, however, at levels close to those a year ago. Slide 10. The active fleet is shown at 10.2%. However, the number of 6 owned Pytona's providers that are today available for charter is only 1.2% of the total capacity. The order book is slightly higher than 10%, and it is expected to remain at low levels. As already mentioned, our main priority is to cover our downside risk, while at the same time looking for opportunities in such a volatile CIB environment. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now. Thank And your first question comes from the line of Chris Wetherbee of Citi. Please go ahead. Good morning. James on for Chris. Just wanted to touch on the market and the current outlook. Good morning. Just wanted to touch on the market and the current outlook, just to understand your strategy for possible managing the current environment. Looks like rates will probably be softer and you will be recharging all of the existing levels. Just wanted to get a sense of how you might map that And if the environment so weak that we should be really thinking about utilization possibly falling off to some point where it's below the historical run rate in the high 90s? Yes. 1st of all, utilization today or like in the last quarter was slightly below 100%. And generally, we had the utilization rates of between 98% to 99% plus every quarter. Now we had ships coming off charter until the end of the year, and this is something normal. You've seen that in this quarter, we started 12 ships at a rate which today they are at levels that make sense. Now what we have been doing is that, as mentioned, we do have a lot of liquidity, slightly below $270,000,000 We have proactively refinanced debt maturing over the next 12 months. We normally refinance our facilities due a year in advance. We have also been very careful regarding our operating expenses. As you have noticed, in this quarter, we had average operating expenses of close to $5,100 per day per vessel. I have to stress here that our other ship had a size of close to 7,000 TEUs. And we do maintain excellent relationship with our charters. So I believe that the utilization rate can fall, although we cannot predict the future, and we don't know yet what the recovery side will be and what the type of the recovery will be and the timing. However, even in that case, based on where we stand today, I think that considering the circumstances we are in a state where we feel comfortable about weathering the storm. We've been in Costa Nolle has been in shipping for 45 years or more. It's not the first crisis we have come across. We came across the 2,008, 2,009 crisis where we didn't reach any financial covenant during that period. Plus, in the past, we've come along a number of shipping crisis. So it's not the first time we come at home. We across the crashes like that. However, I have to say that this is unique. This is something that was definitely unexpected. But as I I Got it. And also just wanted to talk about the impact that the coronavirus has had on shipyards and dry docking, if you think what should we really be expecting for the amount of time that the dry docking takes in the current environment? Look, for scrubber retrofits, to start with that, the scrubber retrofits have been even before the coronavirus, there were delays simply because there was a lot of demand for installation of scrubbers, and the shipper capacity was not big enough in order to have the demand absorb. And now this has made even worse, and there are delays. So it could be like 2 or 3 months or even more or more than 90 days in order to have scrubbers in store. Now regarding drydodgings, scheduled drydodgings, I don't think that, I mean, I cannot predict, But normally, we would allow, depending on the vessel, the size and the circumstances, 4 to 5 weeks. Now this could be something more. I cannot say. It could be 5, 6, 7 weeks. I cannot tell from now. However, I don't think that this incremental off hire because of the scheduled dry docking, it would change the fundamentals of our income statement going forward. You talk about a fleet of 65 vessels in the water. You talk about contract with revenues of €2,100,000,000 So I don't think that the impact from those drydodgings is going to be that huge. And I'm afraid that I cannot quantify this yet. And our next question will come from Ben Nolan of Stifel. Please go ahead. Hey, Greg. I'll start with some of your contracts. Specifically on the 11,000 TEU ships, the 3 that you contracted, is there what I would think are pretty good rates. And so I assume they were probably done a little bit earlier in the timeframe. But if I'm not mistaken, there's 2 more that come off contract soon or now. Could you maybe compare or give some sort of an idea of where you think the market is for those kind of ships relative to the 38,000 or so that you were able to get on the first three? Yes. The first three ships, you mentioned those 11ks, they were chartered for 38,000, the 2 of them for 1 year, and the 3rd was chartered at 38,750 for a 3 year period. Now those charters were concluded during the Q1. Not yesterday, but I guess it was during the quarter. Now we have 2 more sister ships coming off charter, which is going to be in September, October. So it's not something imminent. If it was something if doses were coming out of charter now as well, I think it would have been wise to charter them already, but they're coming out of charter September or October. So there is still some time for those ships. These are newbuildings, 2017 built, very few efficient vessels, which have been in great demand. But I'm afraid that I cannot predict what the rate is going to be for those vessels at the Q4 of the year or sort of at the end of the Q3 or the Q4. And also the rate is also a function of the charter period. So again, we will have to take a view whether we would like to go for a longer period for ex versus going for a shorter period at a different rate. But I'm afraid where the market is today and bear in mind that there have been no other recent deals or pictures for that size, for those type of new buildings, I'm afraid I cannot predict. Now the 2 ships, just to close the 2 ships after Tuzim, they were contracted at the end of March. So it's a month ago. It's not like 3 or 4 months ago, just to make it clear. Right. Okay. No, that's helpful. Another thing, it looks like from the income statement that you guys have been buying back preferred shares. Can you maybe, if you can, quantify what you've done there and sort of what the thinking is around that? Yes. We haven't done that last for a couple of reasons. First of all, that we have been in a lockout period for the last 3, 4 weeks because of the results, and we may be resuming from tomorrow. And secondly, because there is a thin liquidity for those type of instruments. Now ballpark figures, we have bought preferred I mean, all 4 classes in aggregate at the dollar value of close to €1,400,000 and which and we had the profit of close to €600,000 So the reduction of preferred shares has been in the face value of €2,000,000 So betting cost EUR 1,400,000 and we have redeemed preferred stock EUR 2,000,000 worth. And I suppose with those preferred I think all 4 of them still trading below par, you're you once you're locked out, you're that's still something that you're interested in doing? Yes. Yes. I mean, depending on how they trade. But now they trade between $18 to $20 We managed to buy some at the price of like $14 to $16 So we had a profit of $600,000 by paying $1,400,000 which you can argue, which is quite substantial. As a percent, that's but I mean the dollar value cannot be achieved. So this is something we would resume. As you've seen, we have cash on balance sheet of close to £2.70 percent. I think this is something that makes sense. The only concern, it is the liquidity because generally, those instruments are still de traded. Sure. Yes. Okay. Now that's helpful. And then lastly, if I may, I'll turn it over. With respect to the 5 new buildings for Yanming that begin to deliver later this year, Just curious if there is any interest or capacity by either yourself or Yang Ming or shipyard to split those back a little bit? Is there any flexibility there just given the kind of state of the market and maybe shipyards might have issues crewing and staffing up and everything else. Is there is that something that may be a possibility? No, nothing that I can report at this stage. I think the first couple of ships will be delivered just with 1 month delay. This is the latest schedule we have today, which is meaningless considering that each of the 5 new buildings have a 10 year charter. So nothing to report regarding whether this could slip up or probably also come forward. Nothing to report at this stage. This is the latest schedule we have. I just have to add that for the sake of clarity that for those 5 new buildings, they have been fully funded on a preapproval delivery basis. And the remaining CapEx commitments for the total of the 5 ships from our side today is close to $31,000,000 And this is why I'm mentioning in my commentary that we have a minimal CapEx commitment. So it's like close to $6,000,000 per vessel, which, of course, it is something that can be easily paid when the time comes upon delivery. Our next question comes from Jay Mintzmeier of Value Investors Edge. Please go ahead. Hi, good afternoon, Greg. How are you? Hi. Hi, good morning. How are you? Good. Doing well. Good results. It's good to see the steady cash flows even though the market backdrop, of course, is challenging. Great dialogue before as well about the 11 ks TEU ships. We'll look forward to the next ones. I did have a question about the 9.5 ks TEU ships that came off. I believe they're at 29,000 before. You mentioned the roll, it was 3 to 6 months and it was a confidential rate. Can you provide just a big picture guide of where that was? Was that slightly below, substantially below what it was before? Yes. These are 5 sister ships in total. In total, the 5 were 9,500 TEU ships built in 2,006. We have rechartered the first two which came off charter, and we have rechartered them for a period of 3 to 6 months, as we mentioned. Now regarding the charter rate and the freight, because of confidentiality reasons, based on discussions we had with the charter, I cannot go into more detail. Probably in the future, when hopefully also the rest of the ships will be chartered and when also additional ships are going to be rechartered, then we can give more figures. But at this stage, I'm afraid that I'm not at liberty to disclose more on that. Okay. I understand. I figured I'd try. I figured some broad guidance there. But next question for you. With the coronavirus shutdown of a lot of the ship docks, I know there's been some backup in demolition as well. Now I know you have several older ships that are coming due for surveys that you might have considered scrapping. There's 92,000 builds and there's 11995 build. Are you still planning to demolish any of those vessels this year? And is that possible in this environment? Yes. Look, the finding of all, we don't plan to demote those vessels tomorrow morning, right? So depending on market conditions, we're going to take a view whether it makes sense to keep owning and managing those vessels or not, also bearing in mind what is the related CapEx for those vessels in order to continue trading. This is a decision that is going to be taken on a ship by ship basis. Now if we decide to sell for demolition of those vessels, I think that the demolition market was down, was completely locked because of the reason we all know. I hear and we understand that it is slowly coming back and wait to see when Sotovik will finally open. But I cannot give you more details because we have not approached any ship breakers for those vessels today. So I don't know what like would be the timing today if someone wanted to scrap vessels. Those ships, I don't have information. But we're going to take each one of them as it comes. But I don't think that this is something that I mean, if we decide to scrap those vessels, there may be something late. But finally, at some point, we will scrap them. So I think if we take the decision, it's going to be a matter of timing rather than whether we would be able to actually scrap them. It just it may take some more time, but I don't have more info on this topic. We don't have any ship to be scrapped immediately. This concludes our question and answer session. I would like to turn the conference back over to Mr. Zikos for his closing remarks. Thank you for being with us today. We are looking forward to speaking to you again in our Q2 2020 quarterly results. Thank you. Thank you. This does conclude our conference for today. Thank you all for participating and you may now disconnect.