Earnings Call: Q4 2019

Jan 29, 2020

Thank you for standing by, ladies and gentlemen, and welcome to the Customare Inc. Conference Call on the 4th Quarter 2019 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 call is being recorded today, Wednesday, January 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, and good morning, ladies and gentlemen. During the Q4 and the year, net income and earnings per share increased substantially, boosted by higher charter rates and the addition of new ships. As part of our fleet renewal program, we acquired during the quarter 4 Panamax vessels with an average age of about 11 years and disposed of a equal number of ships with an average age of 27 years. During the year, larger vessels enjoyed a rising charter market, and today, there is supply available in the post Panamax sizes. We have 18 post Panamax ships coming off charter over the next 12 months, which positions us favorably should market momentum continue. Moving to the slide presentation. On Slide 3, you can see the highlights. Net income rose by approximately 80% in Q4 'nineteen compared to last year. The adjusted EPS is $0.32 Over the last year, net income was close to $100,000,000 posting a 47% increase compared to 2018. The adjusted EPS for 2019 is $0.91 Moving to the next slide. Over the past quarter, we sold 4 small sized containerships with an average age of 27 years and replaced them with 4 large sized Panamax vessels with an average age of 11 years. The 4 Panamaxes have been acquired with equity, and we are currently in a strong discussion with the leading European bank for their financing. Slide 5. We do maintain a strong balance sheet with approximately 41% leverage and no balance sheet financing. We also concluded 4 separated financings with leading European and U. S. Financial institutions for 4 11,000 TEU container ships owned with your capital. We raised a total $265,000,000 in total from these new financings. Regarding operational performance, during the previous quarter, we achieved utilization rates of close to 100% and very competitive operating expenses. Moving to Slide 6. Large containerships continue to benefit from a tight supply market. Over the next year, 18 of our vessels larger than 5,000 TEUs are coming off charter, which positions us favorably should market momentum continue. The idle fleet, a dozen for pressures undergoing scrubber retrofits, stands at a low 1.5%, while the order book has remained at levels close to 10%. We will be paying our 37th consecutive quarterly dividend in February. Insiders have been participating in the trip and since inception in 2016, have reinvested in total $82,000,000 Slide 7. In this slide, you can see the Q4 2019 figures. During the last quarter of this year, the combined generated revenues of $124,000,000 and adjusted net income of 38,000,000 dollars Basically above, the 4th quarter adjusted EPS nearly tripled to $0.32 from last year's 4th quarter EPS of $0.12 dollars Our adjusted figures take into consideration the following noncash items, accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other noncash charges. On Slide 8, we are discussing our capital structure. As already mentioned, there are no substantial balloon payments due over the next 12 months. Our leverage is comfortably below 50%. Net debt to adjusted EBITDA for 2019 was 3.7x and EBITDA or net interest of 4x when our covenants have a minimum requirement of 2.5x covenants. On Slide 9, we are showing the revenue contribution to our fleet. Almost 100% of our contracted cash comes from first half shutters like Maersk, MSC, Evergreen, Cosco, Yanming and Hapag Lloyd. We have today $2,200,000,000 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 for larger ships have been rising faster during 2019 compared to those of smaller vessels. The order book of slightly higher than 10% is at low levels with very good delivery schedule from 2022 onwards. On the last slide, the highly flint is showing a 6.1%. Adjusted, however, for the vessels undergoing scrubber installations, it drops to 1.5%. Box rates are rising since the end of last year. As already mentioned, we are 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. Thank And your first question comes from the line of Ben Nolan of Stifel. Please go ahead. Yes. Hi, Greg. How are you doing? Thanks for taking my questions. Yes. Hi, Greg. Good morning. Yes. I have a couple. My first one is, and you called it out in the release and in your prepared remarks there, the 10 or 11 or so vessels that are larger, 8,000 plus TEU that are coming off contracts in the next few months. I'm curious if the plan is to put those on maybe on 1 year contracts or if there is a good market for 3 to 5 year contracts? And then specifically within that, is there a wide gap between the contract a 1 year contract rate versus a 3 year or 5 year contract rate in terms of the pricing? Yes. For the first part of the question, yes, we would also consider a longer term as opposed to a 1 year charter, like it could be 3 to 4 years or even longer, 5 years, assuming that the charter rate makes sense and also assuming that we feel comfortable with the counterparty risk. Now to the second part of the question, whether there is a wide gap between the 1 year time charter rate versus the 3 or 4 year charter rate, there is a gap. But depending on the specific asset, I don't think that this is so wide. So this is something we are considering as well, assuming that we feel it makes sense to lock in contracted revenues for a longer period. This is definitely something we are discussing. But I mean, the gap, I don't think that this is as wide as sort of this has been in the past. Leave aside The fact that some years ago, there was no 3 to 5 year market for larger vessels. Now we have also seen precedence of deals where liners have been committing for a 3 to 5 year deal for like modern tonnage. Right. Okay. That's helpful. And then my next question relates to 4 vessels that you acquired. First of all, could you maybe I didn't see it, let us know how much paid for this, but also I thought it was interesting that it looks like there all 4 of them are narrow beam Panamaxes, which I think has been pretty widely discriminated against. I'm curious what your thinking is with respect to that specific asset class and especially as it relates maybe to selling much smaller ships, you think these are going to fill the place of those smaller ships in terms of their market position? Yes. For like for Coca de Ciale reasons, it's difficult for me to sort of redeem now the sort of exact acquisition price. All the ships were sort of bought together and brought in one deal. Now those 4 ships, these are the 4,250 TEU container ships built 2 of them in 2,009 and 2 of them in 2010. The market for those ships today is between, I would say, 15,500 to 15,000 or so and for a year. So and we do consider that the market rate, today's market rate, together with the potential earning capacity of those vessels compared to the purchase price, it definitely makes sense. And we shouldn't forget that those assets, they have a 30 year useful life. And as Costa Marry, we do have a lot of experience, and I think this is one of our strengths in operating all the donuts. So I mean, we do take a long term view regarding the capacity of those vessels and their sort of earnings potential. In the past, for similar prices, for similar acquisition prices, those ships a couple of years ago, they were getting between $10,000 to $11,000 per day. So it's definitely a better charter market for those vessels at prices which have not moved a lot compared to levels we saw a couple of years ago. Okay. And with respect to sort of replacing them with the older tonnage, is that sort of the idea? Do you think that they'll they're sort of being slotted into the same market position or? No. I mean, look, we generally renew our fleet. We sold 4 vessels. On average, they have an age of 26.5 years. So those ships, they have sort of earned their money a couple of times already. So I mean, they were, I think, the right candidates for scrapping. Also taking into consideration today's scrap prices, which on a relative basis, they are sort of high, close to $400 or plus per ton. We would have bought those for Panamax ships in any case, whether we scrap those for like older vessels or not. But it coincided timing wise, so there could be a difference of a couple of quarters. It coincided. But generally, we are renewing our fleet, and the sort of equity released from the sale of those vessels of the older ships together with new debt which have agreed for the for Panamax vessels. I think it makes sense because without a huge equity cash outflow, we are using the fleet with like ships 17 years younger on average and larger vessels as well. Right. Okay. And then lastly for me, and I'll turn it over. Just as it sort of relates to your customer demand for scrubbers, I know obviously, you've sort of taken the approach that if the customers will compensate you for it and that we do it. But are customers now has there been any increased sort of renewal of customers saying, okay, well, let's go ahead and do it? Or is that not really a discussion that you're having? No. We are discussing with Liners. We are in constant discussions with them. We have, up to now, agreed to install scrubbers in 15 of our vessels. These are the 5 new buildings, which are currently under the construction phase, chartered to Yanling for 10 years. And we have already agreed to install scrubbers in 4 ship charter, in 5 ship charter to MSC and 5 ship charter to Ebergrid, which are those 10 ships are already in the water. We are in discussions with liners regarding installation of scrubbers, which is going to be a package together with a charter agreement. If it's something that materializes, of course, we're going to be announcing it. But yes, there is a lot of interest from mining companies regarding the scrubber installation today. Great. All right. I appreciate it. I'll turn it over. Thank you. Okay, Ben. Thank you. Our next question today comes from Omar Nakhta of Clarksons Platou Securities. Please go ahead. Yes. Thank you. Hey, guys. Maybe just to Greg, just maybe to one of Ben's questions regarding the purchases of the Panamax vessels. You've been continuing a trend or a theme of selling your sub-three 1000 FEU ships, forgetting wide beam or narrow beam, is this simply you're looking to exit sort of that sub-three thousand segment and just going larger? Or is it just simply you're selling them as a function of their age? As you said, they were 27 years old. No. For those four particular vessels we disposed of, they have an age of 27 years old. So we dispose of them in today is like scrap prices. And the ships, as I said, they have already done their money or sort of the sort of equity investment a lot of times. So it's just that I think there were the right candidates for scrapping. It doesn't mean that we are exiting this sort of feeder vessel or like the smaller sizes. In the past, depending on sorry, in the future, depending on prices, we're looking at pretty much everything as long as it is a contingency vessel. Now we tend to have another, I mean, our sort of average ship size today is above 7,000 TEU. So we tend to prefer older ton, bigger tonnage. But generally, if it's something that makes sense, I think that if it is a smaller feeder ship, we're going to look at it. So it's not that we are exiting this segment. Those for specific vessels, I think they have reached an age that scrapping made sense from a commercial point of view. Okay. Thanks for that color. And then also just wanted to talk about, obviously, you put in the release the $265,000,000 refinancing on the 411,000 TEU ships. At first blush, it seems very attractive. You probably have your own valuations, but it seems at least to be above a 70% loan to value, which I think is quite compelling considering the shifts aren't on long term contracts. Maybe could you perhaps just give explain a little bit about how you're able to achieve that type of financing, especially without the long term contract? Yes. Look, those are for ships 2017 built. And we have refinanced them with new facilities. We've done 4 bilateral deals actually. So it's not a syndicate with a tenure of 5 years for its facility, and the terms are sort of pretty much similar. Now based on our calculation, the leverage is not 70% or like the 75%, but it is lower based on the valuations we received and based on the valuation also banks from their own sources have obtained. So and in some instances, we had a pre agreed loan amount to be drawn of €65,000,000 without the need to provide a valuation a couple of days before drawing. So it was a pre debit amount. But generally, I would say that the leverage, it's definitely below 70% for those type of vessels today. These are high spec ships, 2017 built. And I think it is the sort of value is higher than like what you have in mind for a 7% to 75% leverage. Okay. And then maybe just you sort of touched on this also in your remarks and also Ben's question. Those 4 ships in particular, they're like you said, they're high spec. What's the charter appetite look like for those? Are those vessels you think you could secure through your contracts in today's market? Yes. First of all, those ships today, 2 of them, the ones that are with a specific charter, they're getting today close to $43,000 per day. So just judging from that, I think the value of those assets is quite substantial. Now the second part of the question, yes, we think that we could definitely charter those ships today for a period of 3 to 5 years or even longer. Of course, subject to terms. But I think there is definitely a lot of returns today for like a more long term charter contract for those specific 5 assets. It's 5 ships actually. We have refinanced the 4, and we are currently looking into the 5th one. So it is 5 sister vessels. All those ships are opening, as we mentioned, within 2020. So and we definitely believe that the time of opening of those vessels, it's something that makes sense from our point of view. It is quite beneficial. Yes. Okay, very good, Greg. Thanks so much for the color. That's it for me. Sure, thank you. And our next question today comes from Chris Wetherbee of Citi. Please go ahead. Good morning. James on for Chris. Wanted to touch on scrubber capacity in Chinese New Year. Given Chinese New Year's underway, how much of a reduction of scrubber installation capacity have you seen? Have any ships essentially entered the market? Trying to understand essentially if there were charters that decided to have a scrubber installation, what's the level of capacity to essentially have it installed within before the end of the year? Okay. The line was not very clear. So the question is whether there is capacity today for new scrubber installation or sort of whether there are delays. I mean, what was the question? Just how much of a reduction in scrubber installation capacity have you seen from Chinese New Year? And then longer term, how much? We haven't seen anything today. Look, generally, it has been reported that there have been delays in the shipyard for the scrubber retrofit process. So which on average now to take between, I would say, 55 to 60 days or something, although initially people had hoped for a much shorter period. So I mean, there are some delays experienced for like a lot of shipowners and liner companies. Leaving that aside, which is something that we know, we have not seen any specific delay or sort of any specific capacity reduction because of the Chinese New Year festivities, which is something that we sort of already knew and sort of and it was accounted for. Now the fact that the Chinese New Year facilities may be extended for 1 more week as it has been reported. And what's going to be the effect of that is it remains to be seen. I cannot make any comment now. This is a bit premature. But up to now, the sort of this week, it has been already factored in the calculations regarding the scrubber capacity. Nothing has changed. Then longer term, understanding that there have been delays, is there any possibility of actually being able to place an order for scrubber retrofit and have it completed this year if you actually ordered today? Yes. I think if you made an order today, it's 2 things. 1st of all, you need to make the order the equipment. And then secondly, you need to arrange for the retrofitting process with the shipyard. Yard. So if you put an order today, I think, and depending on the ship yard you're going to choose, I think, yes, there is a capacity in order to have the scrubbers installed within this year. Now it depends on the specific vessel, asset size and shipyard and also the cost that may be sort of incurred. But I would say that for 2020 installation within this year, I would say that, yes, there is capacity. We haven't seen something to the contrary. Got it. And then in your slides, you had called out slow steaming. I wanted to understand if you had actually seen any slowdown in your fleet particularly. Any slowdown? Sorry, in what? In your fleet? No. It's, I think we are progressing. We have, okay, the 5 new buildings where the scrubbers are to be installed, they are progressing normally. And for the rest 10 of the vessels, there may be some slight delays, but nothing that is going to change dramatically the scrubber economics, I would say. So there could be some delays of like weeks or so, but it's not just going to be like delays of like a quarter or something like that. Got it. And then I think just one touch on slow, the level of slow steaming you're seeing in the market. Have you actually seen a reduction in speeds on your vessels? Yes. There have been reports that generally slow steaming is something that has been taking place. I cannot quantify exactly because it depends on the person, on the trade routes and also on the particularities of each other. But generally, the slow streaming can take some of the view over the last year or 18 months. This is something that we have been witnessing, which generally, especially for the larger vessels, it is something that does help the supply and demand economics, for sure. I cannot forecast whether the slow streaming is going to continue at what levels. However, assuming that the knowing that the fuel expenses, they have been shaping north, I think as Lois is doing, it is something that definitely makes sense. Drew. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Zikos for any final remarks. Thank you for being here with us today and for dialing in, in the conference call. We are looking forward to speaking with you again in the next quarterly results. Thank you. Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.