Earnings Call: Q1 2019

Apr 23, 2019

Welcome to the Costamari Inc. Conference Call on the First 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. I must advise you that this conference is being recorded today, Tuesday, April 23, 2019. 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 would now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir. Thank you and good morning, ladies and gentlemen. During the Q1 of the year, the company delivered solid results. Larger vessels continue to benefit from strong fundamentals with low supply and strong demand. The number of IME ships has fallen across all vessel segments as liner companies launch new services. We have been active during the quarter and we have chartered in total 10 ships benefiting from a rising market in the larger asset classes. We have 15 post panamax ships opening over the next year, which positions us favorably should market momentum continue. Moving now to the slide presentation. On Slide 3, you can see the highlights. The adjusted EPS is $0.12 Over the last months, we have chartered in 10 vessels. We do maintain a strong balance sheet with approximately 45% leverage and no off balance sheet financing. Regarding the market, larger vessels showed a remarkable increase in time charter rates. The idle fleet has dropped to 2.1% and the fleet projected net growth for 2019 is at around 3%. On Slide 4, you can see a summary of our recent chartering activity. What is worth mentioning here is the increase of about 35% in the charter rates for the larger vessels compared to last done. Over the next year, 15 Post Panamax containerships are due for re chartering, which provides us with significant upside should the momentum continue. Moving on to Slide 5. On Slide 5, you can see our dividend payments as well as the sale for scrap of 2 older ships. On Slide 6, you can see the Q1 2019 results. During the Q1 of this year, the company generated revenues of $113,000,000 and adjusted net income of $13,600,000 Based on the above, the Q1 adjusted EPS amounts to $0.12 Our adjusted figures take into consideration the following noncash items. Via accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other non cash charges. On Slide 7, we are showing the revenue contribution for our fleet. 80% excuse me, 98% of our contracted cash comes from 1st class charters like Maersk, MSC Evergreen, Yang, Inc. And Capac Lloyd. Today, we have $2,200,000,000 in contracted revenues and the remaining time charter duration of about 3.7 years. On the last slide, we're discussing the market. Regarding charter rates, there has been a strengthening in the market during Q1, especially for the larger tonnage. The idle fleet stands at a low level of 2%. The order book remains at about 13%. As already mentioned, we are actively looking for new opportunities in this market environment. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now. Thank you. And the first question comes from the line of Donald McLee of Berenberg. Please go ahead. Good morning, guys. Could you comment on what you're seeing in the charter market as you negotiate for some of your upcoming charter maturities? It looks like conditions have generally improved from a rate perspective since the start of the year. Do you think that shift is driven by maybe charters getting more comfortable with the tariff overhang? Or is there something else that's supporting that uptick in rates? Hi, Donald. Good morning. First of all, regarding charter rates, as I mentioned, what we have seen is that an increase in rates, especially for the post Panamax ships. This is about 6 and a half 1000 TEUs. And the fixtures we've done is more or less for a year, but sort of our charter rates, which is substantially higher from last done. Now this all has to do with supply and demand. And also to remind you that at this point in time, liner companies, they are now launching new services. There are few big quality ships available. There is demand and there is demand from charterers, and this is what brings charter rates up. So I wouldn't necessarily correlate this to the potential trade war and trade barriers in the Trans Pacific trade. It does supply and demand for the larger vessels, which has much tighter fundamentals, especially compared to Q3 and Q4 of 2018. Okay. And so what do you think has to change for there to be an increase in charter duration There have been also fixtures for longer charter periods, especially again for the larger ships. We have seen commitments for 3 years or not of that recently. It's just that in our case, for instance, for the 10RO, we decided to go for 1 year at the rate to slightly below 40,000. This is 39,950. Considering that probably today, it might not be optimal to fix for 2 or 3 years. But I would say that there is market. We've seen fixtures for 2, 3 years or also north of that. Okay. That's good to know. And then just one more around your growth. Are you still considering near term growth opportunities following the York JV acquisition? And how would you maybe prioritize the different growth alternatives between additional JV acquisitions, secondhand purchases and new build orders? We're looking at pretty much everything. So it could either be a new bridge or secondhand vessels and secondhand vessels with or without charter. And in the past, we have also bought older ships. So in that respect, we are pretty much flexible. Now our agreement with York, there is a type of exclusivity, meaning that whatever transaction we are considering at the Costamare Inc. Level, we need to share it with York. And then our partners have a time period within which they need to reflect on whether they want to participate or not. So they may want to participate like they've done in the past or on certain transactions, they may decide to pass. For instance, in the 5, 13,000 TEU new building deals deal we did last year. We did it at the Costamare level and our ownership there is 100%. It depends. In the past, we've done new buildings with York. There is an investment period which goes up until 2020. And this exclusivity, I referred to earlier, applies until that time. But if Europe does not want to participate in some deals and we feel that those transactions make sense for us as long term oriented ship owner. We're going to proceed by ourselves. But the bottom line is that we are pretty much flexible regarding the asset and or the participation in the JV. Okay. And I guess maybe one more follow-up on the flexibility of your growth. That's still within the container ship segment. I'm assuming just kind of touching on your competitor shifting into another shipping segment. Is that something you guys would consider? Or maybe do you view that as an shipping segment. Is that something you guys would consider or maybe do you view that as an opportunity to maybe to gain share among the containership owner operator group? Yes. I cannot comment about what other people may be doing. But as far as we are concerned, our focus is in container shipping. So we have been managing exclusively containers since 1990 2. And our focus and our growth moving forward is going to be only in container shipping. Okay. I appreciate you taking my questions. Thanks. Thank you. Thanks a lot, Garav. The next question will come from Chris Wetherbee of Citigroup. I Wanted to ask about blank sailings, just wanted to get a sense of sort of reconciling the idle capacity in the market relative to what we were hearing a month or 2 ago about a rise in blank sailings from the liners. Just want to get a sense of maybe what the what you feel sort of the real demand environment is currently. Has it like materially improved over the course of the last several weeks or months? Or does it feel like we're sort of still in the same sort of a little bit of uncertainty, but a bit of a balance right now? Yes. I think that the blank sailings over the last month or so had to do with sort of liner companies managing capacity more efficiently, which had a direct effect on box rates. Now regarding the supply and demand of the vessels, which directly applies to charter rates, we've seen the launching now of new services. I would say that generally, we have also seen a slowdown in the speed of the vessels. And there are and the fundamentals and the supply demand are much tighter now. So overall, and especially for the larger vessels, the market over the last weeks, or I would say, months since the beginning of the year, has been moving up substantially. I would have to give you an example, just an 8,500 TEU vessel In the past, I mean, the last quarter, we had seen it close to getting for a year 12,005 100, 13,000. And now the rate for those ships is like 23,000, 24,000 for a year. So the change has been substantial. I would not correlate this 100% to blank sailing, which mainly applies to boat Okay. Okay. That's helpful. I appreciate that. When you think about the second half of the year, what's your estimation on the percent of the fleet that's going to be in the docks getting scrubbers? How much do you think that impacts not necessarily your utilization, but overall fleet utilization for the container market? Yes. I would say that generally based on the info we have today, that will be scrubber fitted could be close to 10% of the global demand in container ships in terms of capacity. In terms of ships, it would be 5%, but mainly because it is the larger vessels that are fitted with scrubbers, we talk about the 10% or so percentage. Now it is estimated that on average, a ship may need like 4, 5 weeks to be off hire in order to be retrofitted. So of course, this I mean, for this month, for this week, this sort of takes some supply out of the market, and it is definitely helping the supply and demand dynamics. But I would consider this to be a short term type of effect. I don't think that we're going to be seeing this in 2021, 2022. However, in the short term, having off hire a substantial amount of the fleet for a year, most probably coinciding the same like the Q4 of this year beginning the Q1 of next year, would definitely share supply and demand fundamentals. Okay. Do you get a sense that that's sort of part of the reason why you're seeing this uptick in sort of relatively short term chartering, people want to get past this sort of potential disruption? Or does that sort of not play into the discussions that you're having with your customers? From our experience up to now, it is not. Now of course, I mean, the closer we get to year end or like the 3rd or Q4 of this year, there may be some relevance. But for the time being, for instance, we have chartered now ships 11,000 TEU for a year, the Tenaro. I'm not sure that this is like 1 month of hire for the ships that will be retrofitted was like a crucial factor. But then it depends on the circumstances of each liner separately. So some liners they do go full for scrubbers. Others have stated publicly that most probably they're going to be moving ahead with low sulfur fuel oil. So it depends also on the liner company by itself. Yes. Okay. That makes sense. And then last question for me. Just want to get a sense. You have a bunch more ships coming up for charter. My guess is the answer is in this environment, you're just going to recharter and continue on. Is there anything though that you want to do in terms of sales or divestitures of any of these Generally, look, normally, I mean, the ships the largest ships we have now coming off charter over the next 12 months, these are ships like ranging from 2,006,000,000 to 2013,000,000,000. These are high spec assets. And I think that there is today I know that today there is and in the future, there also there will be interest for those ships. So for the larger vessels, I don't think that now we are in a position that like we would be disposing of those ships, quite the opposite. If you look at the past, normally, we have been disposing of all the donuts, all ships that like we feel moving forward, they wouldn't have a potential like. In this quarter, we disposed of the Piraeus, a 2,004 Panamax ships, Panamax vessels. This is the low Panamax ships. This is 4,900 TEUs, which bearing in mind where the market is today, what is the potential for those vessels and the fact that the ship had to also undergo a dry docking, we felt that it was preferable to sell this for demolition. That was the thought process behind the sale. The next question will come from Fotis Giannakoulis of Morgan Stanley. Please go ahead. Yes. Hi, Greg, and thank you. You mentioned about potential new opportunities. I assume that these opportunities are for larger vessels. Can you give us a little bit more color of the type of transactions, durations that you see if the returns have been comparable with the previous ones that they were double digit EBITDA yields? And also how do you think that you can finance these potential opportunities? How much is your liquidity available liquidity for new acquisitions? And I see that you have also a couple of some vessels, these 9,000 TEU vessels that they are due for refinancing. Is there ability to lever up and get any additional liquidity from these ships? Yes. A couple of things. Now regarding opportunities moving forward, as I mentioned earlier, I think we are looking both at secondhand ships with or without charter and could also be newbuildings depending on the circumstances and depending on where the market is. In every shipping transaction and also in the U. Billings, we are first trying to cover our downside. We also look at the quality of the charter. And after that, we look at like cash flow yields, EBITDA yields, etcetera. So I'm not in a position now to provide with any target yield figures. But in the past, the deals we did, I think, first of all, they were also they were with the top charters, top credits. And also, from a cash flow perspective and accretion to the shareholders, they made sense. Now for the ships that we have to be refinanced next year, this is 2020, it's 5,900 TEU ships, 2013 build, which are coming out of 7 year charter in 2020. I think the loan outstanding on those ships today and also at the expiry of the charter party and of the long term or next year is not high. So I don't foresee this to be a problem to have them refinance, quite the opposite at the end. And I think the question is, as you mentioned, whether we're going to be levering up and also creating some liquidity for new business. But the refinancing itself considering where the value of those ships is today, I don't think that it is an issue at all. And the reason is because as I'm sure you know very well, we are repaying our loans quite fast and we have a very steep debt amortization profile, which means that the loan outstanding on those vessels today is at very low levels. It's something else which I didn't Yes. Can you give me an estimate of the total liquidity that you have or you forecast to have after this upcoming refinancings that can be available for growth? Yes. Look, today also as of the end of this quarter, we had cash on balance sheet of close to 155,000,000 euros This is a ballpark figure. The refinancings we discussed, I mean, it's not done yet. So I mean, I wouldn't like to speculate. However, we would seek to refinance, first of all, the low cost of debt for a longer period taking into consideration the sort of age of the vessels and also provide us also with some liquidity. I cannot give specific numbers, but I don't think I mean, for us, liquidity has never been the issue in order to enter into new transactions. We do have access to commercial bank debt at quite competitive terms. So I don't think that this would be an issue at all. Thank you, Greg. And in regards to your capital allocation priorities, the market is improving. You have rechartered some ships at much higher rates than we expected a few months ago. The cash flow seems that is improving as a result of this charter rate increases. At what level would you consider or what would you expect to see in order to increase your distribution? And also if you would have to prioritize your goals between returning capital to shareholders, between growing your fleet or delevering, how would you rank them? I think, 1st of all, I want to make sure that we keep the same debt repayment strategy. Of course, we cover our operating expenses. We cover the debt service as it is today without backloading it. We do have some cash on the side for new business in order to grow, in order to renew the fleet, in order to enter into accretive acquisitions. And of course, the dividend, it is definitely something we care because we have a 56 close to 26 percent ownership in the company. And I would say that we are the main recipients of the cash dividend generally. So it of importance. However, it will have to come at the same time with long term new contracted cash flows. And after covering our downside and making sure that, I mean, as I mentioned, we will be always in a position to cover our obligations and have some sort of some liquidity for the site for growth. But I mean, don't get me wrong, the dividend itself, which is quite important to us, because we have a company where the major holders' interests are fully aligned with the rest of the freight load. Thank you very much, Greg. I appreciate your answers. Thanks. The next question will come from Ben Nolan of Stifel. Please go ahead. Great. Thank you, operator, and thanks, Greg, for the time. I had a couple of questions. The first just relates to the Piraeus and getting rid of it, it's 15 year old ship. I know you mentioned that it was, I think, a narrow beam and so there's not as much of an appetite for those as there used to be. But still, 15 years is pretty young for you guys, I would say, really done well operating older equipment. Well, first of all, are there other ships in the same category that are in the fleet? Looks like there are that you probably will be getting rid of at some point before too long? Yes. Look, the Piraeus, I mean, it's a part of 3 sister ships. We also have the ZIM New York and the ZIM Shagai. However, for those ships, we have an agreement with ZIM. We have a put option to put the ships to ZIM on a yearly basis. So I think it would make no sense today to sell those ships for demolition. Now specifically for the Piraeus, you're right, this is a 2,004 built 15 year old vessel. And the thought process I can be specific. The thought process is that the vessels have to go dry docking. The market today for those ships is between $7,000,000 $7,500,000 which is max, $8,000 per day. Of course, you can take a long term view. But the question is whether you think that those narrow beam maxi Panamax is the 5,000 TEUs. What is their car generating capacity over the next 2 to 3 years? So the calculation was this is the dry docking. If the market improves by so much over the next 2 to 3 years, do I make my money? Or in case I sell today at a relatively high scrap price of close to $4.50 and repay the debt outstanding. And like in this case, we put we realized a cash payment of close to €3,000,000 simply because the loan outstanding was very low. So take the €3,000,000 today, also to have the drydocking, continue repaying the debt, and then in 2 or 3 years' time, see whether it makes sense to sell it, but you also get the risk of a lower scrap price. And more importantly, we don't believe that those MAXI Panamaxes, those like wide beams are the asset of the future, quite the opposite. These are purpose built vessels. And there is a reason why the market today is pricing them below the 4000 TEU Panamax. Okay. Now that's very helpful and descriptive. Along those lines or well or maybe similar to that, as you'd mentioned earlier, there's been a pretty strong acceleration of charter rates for the larger vessels. But while it hasn't been bad, the smaller ships certainly haven't participated as much, particularly anything below 5,000. What specifically would you attribute that to? I mean, it would seem as though if demand is good as a function of more cargo movements and that would have an impact across the board? Yes. But I think that for the smaller vessels, I agree with you that we've seen the number of 5 gs fleet going down, and we've seen generally demand. However, the charter rates for the smaller vessels do not correspond and do not correlate to today having an aggregate of close to 2%. I think that it's kind of, 1st of all, with the Panamax ships that stand in the middle, the classic Panamax vessels. And also in the past, most of the ships that have been idle, the biggest proportion of this most of the times has been the Panamax ships, which are pushing down the rates for the rest of the smaller vessels. And for the larger ships, you had very few ships, good assets being available in the spot market when chartered, 1 to 2 chartering those ships. And this is why, as I mentioned earlier, for the 8.5 vessels from like 12,000, 13,000, we've seen rates at 24,000 for a year. The Tenero, the 11,000 TEU ship, initially, when we accept the delivery, those ships, they were targeted at the region of $17,000 $18,000 per day. And now we have this $40,000 per day. And the reason we did not hire to charter out those vessels a couple of years ago is because we thought that there is a lot of potential for those ships. Today, for us, those ships, they have a $20,000 more or less break even cost. So for the smaller vessels, I think the supply and demand and the fact that most of the other ships have been Panamax vessels and below doesn't help at all today. I'm not saying don't get me wrong, I don't make a forecast at all. I'm not saying that the market will not improve for those vessels or vice versa. I'm just describing the situation today. Okay. And then lastly, just sort of in keeping with that, even for the larger ships, as you've done, the rates have improved quite a lot. But what's been interesting to me is that the actual box rates, whether that's transpacific or Asia to Europe, which do use the much larger ships have absolutely plummeted since the beginning of the year. I think they're down 37% since the beginning of the year. So the liners are making a whole lot less money and yet they're being a lot more aggressive in the chartering of assets. Any thinking as to what they might be up to there? A couple of things. First of all, for the Transpacific, if you compare like the chart to the box rates for the last, I would say, a couple of months compared to very high box rates experienced in Q4 that had to do with the sort of China U. S. Trade war. I think you start from a very high base in order to do the comparison. This is the first point. Apparently, 9 companies, they want to like the massive demand coming forward or sort of they want to charter in some like good vessels for the future because for the larger ships, we have also seen fixes for 3 years. We've seen committed for 3 years. And also, let me remind you, in our previous quarterly result, the 5 9000 TEU ships we have chartered to MSC, we have installed scrubbers and we have extended the charter period for 3 years starting from 2023 onwards. So liner companies must apparently, they want to secure in some like modern or high spec donuts. But I cannot go into more detail. Probably this is a question that initially should be addressed to them, I would say. Right. No, that's you're right. I'm just curious if maybe they were communicating something to you. It's also something I need to make sure that we Average speed message speed going down. So I'm not sure whether this also plays into the equation of supply and demand, because apparently this is creating more supply for the same demand. So this is also another factor. Also to a short to a small extent as mentioned earlier the fact that some ships close to 10% of the global capacity or part of it may be going for retrofitting during Q3, Q4 of this year and also beginning of that of next year may also have a small effect there. Yes. No, interesting. That's very good points. I appreciate it. Thanks, Craig. Okay. Thank you. Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Mr. Zikos for his closing remarks. Thank you very much for dialing in today. I appreciate your interest in Cosamara. We look forward to speaking with you again during our next conference call results. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.