Earnings Call: Q4 2018

Jan 24, 2019

Thank you for standing by, ladies and gentlemen, and welcome to the Costa Mare Inc. Conference Call on the Q4 2018 Financial Results. We have with us today 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, Thursday, January 24, 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 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, the company delivered profitable results. The year 2018 closed on a mixed note. While charter rates rallied in the first half of the year, average rates fell in the second half, finishing the year slightly below their starting point, except for the larger ships. During the last weeks, however, we have witnessed a tighter market with regards to large motor vessels where supply has been limited, driving up charter rates. We have been active during the year entering into new transactions with a total value of close to $900,000,000 These include both new buildings and secondhand ships with an average time charter duration of 8 years. Finally, on the financing side, we financed with the leading financial institution the 2 recently acquired 1996 bit 8,000 TEU system container ships as well as a $25,000,000 balloon during December of last year secured by other vessels. We have no meaningful balloon repayments over the next 12 months. Turning now to the slide presentation. On Slide 3, you can see the highlights. The adjusted EPS is $0.12 Over the last month, we have started 12 vessels. The total value of newbuilding orders and second half acquisition by the company within the year amounted to 900,000,000 dollars We financed the 28,000 TEU container ships, which were acquired in Q3 2018 and thus added to Maersk for 2.5 years. We concluded the refinancing of 2 credit facilities with an outstanding loan amount of about $44,000,000 We do maintain a strong balance sheet with approximately 50% leverage and no off balance sheet financing. Regarding the market, the annual fleet is 2.5%, and the new build deliveries in 2019 are expected to be around 5% of the existing fleet, excluding any scrapping and slippage. On Slide 4, you can see a summary of our recent chartering activity. What is worth mentioning here is the recent chartering of the 11,000 TEB vessels, Cape Sunio and Cape Patemecio at rates of above 32,000 per day. Moving on to Slide 5. You can see our dividend payments as well as the same for scrap of an older vessel. On Slide 6, you can see the Q4 2018 figures. During the Q4 of this year, the company generated revenues of £26,000,000 and a flatulent income of £13,000,000 Based on the above, the 4th quarter adjusted EPS amounts to $0.12 Our adjusted figures take into consideration the following noncash items: via pooled charter revenues, across the gains or losses for massive disposals, prepaid lease rentals and other noncash charges. On Slide 7, you can see a list of the transactions we constructed during the year. Those transactions were primarily focused on deals with long term charges attached. Incremental contracted revenues amount to $1,100,000,000 over an average charter period of 8 years. On Slide 8, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from first class shutters like Maersk, MSC, Eberkling, Yajan, Ming, Apas Lloyd and Cosmo. We currently have $2,300,000,000 in contracted revenues and the remaining current charter duration of about 3.8 years. And on the last slide, we are discussing the market. Regarding charter rates, there has been a further softening in the market during Q4, especially for the smaller sized vessels. The idle fleet still stands at a low level of 2.5%. The OZO Group remains at 13%. As already mentioned in the past, 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 The first question comes from Chris Wetherbee with Citi. Please go ahead. James on for Chris. Wanted to ask about essentially the transaction market. Given the rate outlook, it seems like given the rate environment and the rate outlook, it seems like a great good environment. But what would be your preference essentially for buying out existing JVs or acquiring older tonnage? Yes. Couple of things. We are generally indifferent for smaller and bigger ships as long as the numbers make sense and we can consider pretty much everything. And this is something you can also see from our fleet list. Now for the J and E vessels, we bought this the 6% at your home TUV5, 14,000 TEU vessels, which had a remaining time charter period up until 2026 and contracted revenues north of $360,000,000 And so the numbers made sense for us. In the JV with Europe, we also have some 5,000, 11000 TEUs, a new release delivered recently over the last couple of years, which have a charter period of close to 1 year. This is something we can consider as well, but mainly for younger vessels, we would prefer to have a time charter attached. Leaving those ships aside, you can see that we have also bought 2nd hand ships without employing them as long as we feel comfortable with the earnings potential of the asset. The next question comes from Ben Nolan with Stifel. Please go ahead. Hi, this is Frank Galanti on for Ben. Hi. Hi. So with kind of the weakness in the share price recently and a number of other shipping companies announcing share buyback programs. I wanted to get your thoughts on any interest in doing so and if there was any limitations on our share buyback program? Yes. A couple of things. First, the share buyback program, it is something that will be decided by the Board. So it's something that I can't decide now myself. But I can tell you some thoughts about it. First of all, we normally do buy assets, and we expect to generate cash flows and returns from those assets. Now it doesn't mean that we don't believe that our stock price, that the Costa Maricomoco stock is today undervalued and underpriced. And I think some of it most of it has to do with the more generic economic conditions rather than with the company fundamentals itself. This is something we may consider in the past. However, we also need to consider restrictions in the liquidity of the stock and the cash that we would have available in order to put this cash into work for new transactions. So it's those 2 things, which, of course, will be considered alongside the fact that the stock price today is undervalued and that a share buyback is something that might make sense. But I'm not prepared here to tell you exactly what the Board will be deciding on that. Okay. Yes. That's helpful. And then to kind of follow-up on capital constraints. In the press release, it was mentioned that you guys spent $900,000,000 last year. Do you have a kind of rough outline on how much additional CapEx room the company would have going forward without the need to raise additional equity? Yes. This €900,000,000 is the total value of the assets we bought, which were partly funded with debt and partly funded with equity, is the first point. The second point is that today, our equity CapEx commitments amount to $31,000,000 All the new buildings, the funding of the new buildings for the 5 Yankmin, the 2000 TEU ships has been in place, the debt. So I mean, the remaining CapEx we have today from an equity perspective, from our cash is $31,000,000 and that's all. There's nothing else. And we have cash on balance today north of $160,000,000 and the company is generating a positive like EBITDA. So bearing all those in mind, I don't think that we are in a position today where in order to grow, also considering our very good access to commercial bank debt that we will need to raise equity. Quite the contrary, we can grow today and turn it into new transactions without the need of equity based on the cash on balance sheet, based on the very limited CapEx commitments we have and based on the cash flow generation from the ships in the water. Thank you. The next question comes from Donald McLee with Berenberg. Please go ahead. Good morning. Hi, Donald. Good morning. So just going back to the scrubber installs from Q3, were those open loop or closed loop? And then as a follow-up to that, how do you anticipate the recent bans on open loop scrubbers in Singapore, China and the UAE impacting either your thought process or your discussions with customers on incremental scrubber installs and their overall IMO 2020 strategy? Yes. The scrubbers agreed for the 5 MSC vessels. They are closed loop scrubbers. Now the type of the scrubbers, which is also affecting the cost of buying and installing this equipment, it is a decision made by the charterer. And the charterer, because it's going to be receiving all the benefit from the fuel saving costs, Logically, we have to bear all the associated costs. So it is a charter decision. For MS, it is a closed loop scrubbers. We know that there are restrictions in the use of the open loop scrubbers in China, in Singapore. There were also some articles about Middle East restrictions recently. We know that, but it is a decision of the charterer mainly. And as well as the charterer pays for that equipment during the tenure of the employment of the vessel, we will cater to the needs of the charter. Right. But as those policies have changed, have you sensed any change in kind of what direction some of the customers are going to go in? We are in discussions with other charters as well for the installation of scrubbers. It has not been finalized yet. I think they know very well the restrictions that they have to do with the open loop scrubbers. At the same time, there is a price difference. We're currently in the process of the charters evaluating the costs of the scrubber types that will be used. But I don't think a final decision has been made for the rest of the fleet. We're discussing 5 more vessels in the water today about scrubber installation. And we have already, as I said, concluded with MSC for the 5 MSCs where closed loop scrubbers will be installed. Okay, great. That's helpful. Then just one more on the dividend. Could you comment on the level of participation in the DRIP from the founding family in Q4? I think Q3 was the Q1 where it wasn't full participation. So I was just wondering if that's changed back to kind of the status quo. I think that okay, in Q3, the participation might not have been full, but it has been for a substantial number of shares. Q4, I think it's going to be at least the same participation like Q3, if not bigger than that. I have to remind you, however, that this has led and the founders' support to the company has been in place since June 2016. So I mean like it's been in place for over 2 years. It's actually 2.5 years up to now. Thank you. So it will be quite substantial. Sure. Thank The next question comes from Max Yaras with Morgan Stanley. Please go ahead. Hi, yes. Thank you. I'd like to ask a couple of market questions. You mentioned earlier that larger ships are kind of creeping up in rates recently, while smaller ships haven't been doing as well. Just kind of what's explaining the divergence? And what's driving rates higher for the larger ships? Yes. So the largest ships, what we've seen recently over the last weeks or month and a half is that especially for large modern vessels, ships similar to the 11,000 TEUs we have, There are very few ships left in the spot market, and there is quite substantial demand from charters for those types of vessels, which logically is bringing charter rates up. The latest fixes we did for those ships were like $22,000 to $33,000 per day. I have to remind you that in 20 16, the rates for those vessels were $17,000 to $20,000 So and should the same supply demand dynamics continue, I think that the charter rates for those vessels should go up substantially. We have not seen the same dynamics today for the smaller vessels either for the traditional Panamax ships, either the 4,250 or the traditional longer Panamax vessels, the 5,000 TEU or for the 3,500 TEUs. For example, the traditional Panamax ships are now trading at below 10,000 whereas in the past, they were trading at 10,000 or north of that. It's all supply and demand. Okay. And then I'm wondering, could this partially be driven by liners securing other ships as they install scrubbers on their own? Or has that not really started yet? Or do you expect that to No. Look, for the larger vessels, you're right, there are a couple of additional considerations. First of all, it is expected that a lot of larger ships will be taken off hire for retrofitting for the scrubber installation. And this is going to create some additional demand assuming that the scrubber installation is going to pay may take between 3 to 5 weeks. So during that period, there is a number of larger vessels which are going to be fitted with scrubbers. During that period, there is going to be incremental demand for those ships or for larger vessels, which is going to lift the market up. So this is one consideration. Another consideration is that we have seen ships the major lanes slowing down or there is a tendency of slowing down. And the new regulations may provide liners with an additional incentive to show estimate even further. In that case, for the larger vessels, there will definitely be one more you can argue there's going to be more upside and more demand will be generated. So it is a couple of consideration for the larger ships especially, which I would say provide us with a lot of optimism for 2019. This concludes our question and answer session. I would now like to turn the conference back over to Mr. Zikos for any closing remarks. Thank you very much for dialing in and for being here with us today. We are looking forward to speaking to you again during the Q1 2019 conference press release. Thank you. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.