Earnings Call: Q3 2018

Oct 25, 2018

You for standing by, ladies and gentlemen, and welcome to the Costa Mare Conference Call on the Third Quarter 2018 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 that this conference is being recorded today, Thursday, October 25, 2018. 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, 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 Q3, the company delivered profitable results. Seasonality combined with concerns about demand growth and trade tensions have resulted in a softer market both in terms of charter rates and asset prices. We have however chartered in total 25 ships during the quarter. This includes the agreement to install scrubbers on 5 post Panamos container vessels subject to an increase in the current charter hire and a further extension of the original charter tenure for 3 years. We recently acquired with equity 2 1996 built 8,000 TEU Seesare Containerships which we charter to Maersk for a fixed period of 2.5 years. We are currently in discussions regarding the debt financing of those ships. Finally, on the financing side, we have concluded with a leading financial institution on a pre and post delivery basis. The debt finance for the 5,000 TEU newbuildings tied to Yang Ming for 10 years. The vessels are expected to be delivered between the Q2 of 2020 and the Q2 of 2021. Moving now to the Slide presentation, on Slide 3 you can see the highlights of our Q3. Our adjusted EPS for Q3 was $0.09 Over the last quarter, we have chartered in total 25 vessels. We maintain a strong balance sheet with a 40% leverage. Regarding the market the idle fleet is 2.6% and the order book stands at less than 13%. On Slides 45 you can see a summary of our recent chartering activity. At the top of the page you can see the 5 MSC ships whose charter was extended till 20262027 as a result of the scrubber installation. Moving on to Slide 6, you can see the sales for scrub of 2 older vessels as well as our dividend payments. On Slide 7, you can see the Q3 2018 results. During the Q3 of this year, the company generated revenues of 91,000,000 dollars and adjusted net income of $10,000,000 Based on the above, the 3rd quarter adjusted EPS amounts to 0 point 0 $9 Our adjusted figures take into consideration the following non cash items, the accruals other revenues, accounting gains and losses from asset disposals, prepaid lease rentals and other non cash charges. On Slide 8, we are showing the revenue contribution for our fleet. 99% of our contracted cash comes from 1st class charterers like Maersk, MSC, Evergreen, Yang Ming, Cosmo and Hapag Lloyd. We currently have $2,000,000,000 in contracted revenues and the remaining time charter duration of about 3.9 years. As you can see on Slide 9, as of the end of this quarter we had cash of $155,000,000 We are conservative managing our balance sheet having brought down net debt from $1,700,000,000 in 20.13 to $900,000,000 as of today, which represents a net debt to equity ratio of about 7% to 1%. Over the past 6 years, we have raised that funding of close to $800,000,000 for new business. Our estimated leverage calculated as per our refinancing agreements is in the region of 40%. And on the last slide we are discussing the market. Regarding charter rates there has been a softening in the market. The idle fleet stands at the level of 2.6%. The order book remains at low levels of less than 15%. 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 And your first question comes from the line of Noah Paquette with JPMorgan. Please go ahead. Great. Thanks. I just wanted to ask following up on the ships that you're putting scrubbers on. Do you have any more discussions ongoing with other charters for a similar situation? And then with the Yangming vessels will those have scrubbers as well? Yes, hi Noah. Look there are currently ongoing discussions with other charterers for ships in the water with long term charters. And also there are discussions with Yanming as well. So as long as there is a long term charter and the deal makes sense for both parties on a commercial basis, of course, we are willing to cater to our clients' needs. Okay. And then with the existing arrangements, let me just make sure I understand it correctly. Are you guys footing the CapEx and then you're getting repaid or is the charter funding part of it or how exactly does that work? Yes, the way it works is the following. Those ships they have an original time charter expiration, some of them in 2023 and some of them in 2024. Upon the scrub installation which is expected to be by the end of 2019, The charter will be paying an additional charter hire, but the original redelivery date which is 202320 24. From now we have already agreed an extension for 3 more years which goes to 2026 2027 at a new rate, which also includes some calculations regarding the scrubber amortization. So the whole scrubber investment will be amortized over the extended charter period. Is this clear? Yes, no, I got it. That's great. Thanks. And then I wanted to ask, one of the arguments or kind of the bullish arguments on containers in 2020 is that the higher fuel costs may cause the fleet to slow down. Do you guys see room for that to happen now? I mean, how are vessel speeds, how have they been on the ballast and leaving? Thanks. Well, generally vessel speeds, I mean, compared to the past, they have come down now. It is one scenario that slow steaming will be increased further. But I cannot predict from now. I mean, these sort of regulations kick in 1st of January 2020, but those will be in place for quite some time going forward. So I cannot predict what the situation is going to look like. But I agree with you that one possible scenario is that ships may slow down further, which regarding the supply and demand dynamics, this is something positive for the ship owners, correct. Okay, that's all I had. Thank you. Thanks. Next question comes from the line of Fotis Giannakoulis with Morgan Stanley. Please go ahead. Yes. Hi, guys, and congratulations on this charter extension. I want to clarify, Greg, whether the extension rate is higher than the current rate of $43,000 $42,000 respectively, Because these vessels were chartered at a much higher were originally chartered at a much higher rate environment and I was wondering if the extension is better? Yes. Those ships today, you are right, they are getting $42,000 $43,000 And to this amount an incremental charter hire payment will be paid as soon as the scrubbers are installed. And then for the extension, I'm afraid I cannot go into more detail for commercial reasons. I can tell you that we feel that the extension period together with the new pre agreed rate make commercial sense both for the charters and also for us. But I'm afraid I cannot go into more detail, but it is definitely a charter rate which makes sense for both parties. And it is I guess a we wish situation for both the charter and Cosamare. Thank you, Greg. Can you also describe how is the deal flow that you see out there right now to make acquisitions? Obviously, the market since early summer has softened. I wonder whether you see more deals available. What type of deals do you see? Is it secondhand acquisitions or potential larger deals with long term contracts? And what kind of competition do you see right now compared to earlier this year? Yes. First of all, there is activity, there is also activity in the new building market and we recently had some newbuilding projects, especially for smaller and feeder vessels. Also, as you rightly mentioned, the market has softened recently and this applies both to charter rates and to asset value. So there is activity. There are deals for secondhand ships with or without charter also for older vessels. And as an example, we've done recently 2 old ships, 1996 bridge, however, with back to back with a 2.5 year charter to Maersk. So there is activity and the competition, first of all, compare this competition to the competition we used to see back in 2007, 2008, there's a huge difference. But today there is definitely much less competition. There is not a lot of players in the container ship sector that have the financial means to fund either new buildings or secondhand ships with long term charters. So there is competition, but it it's definitely limited compared to the competition we used to see some years ago. And can you explain to us why is this softening taking place the last couple of months? Is this something that worries you? Is it the seasonality? Is it the concerns about some slowdown in the trade or the impact of the tariffs? How do you see the market developing the next year or year and a half? Yes, I think first of all, the situation there, I think it's pretty much a mixed bag, I mean more or less all the factors you mentioned. There's definitely seasonality and the last two quarters of the year traditionally, they are not the strongest quarters for container shipping. At the same time, you look at the supply and demand dynamics and some specific trades, for instance, Asia to Europe, this trade, which is the biggest one, and this is the trade where all the largest ships are being employed. The demand there is not as strong as was expected. At the same time, ships are being delivered throughout the year. So it is at this point in time supply and demand. It is seasonality and also trade tensions that generally do not have the sentiment in container shipping. However, I have to say that in transpacific, up to now we have seen a positive trend which in demand which is also reflected in box rates. You can argue that part of it is because of front loading because before the new tariffs kick in from the beginning of 2019. But up to now, we see trade growth in the Trans Pacific to be quite healthy. And I have to ask something here. Regarding our vessels, I have to say that we have 5, 11,000 TEU ships and those ships, they are most commonly used in the transpacific trade. We feel quite comfortable for those vessels. We recently charted a couple of those at 28,000 per day for a short period. We could go for a longer period, but because we feel comfortable about the supply demand dynamics going forward and especially for those vessels and how many ships like those are currently in the market, we decided to go a shorter period. So although we don't focus the market, I have to say, however, that we don't feel negative regarding the potential of those vessels and the supply and demand dynamics over the coming quarters. Thank you, Greg. One last question about your growth strategy, whether you are in a growth mode right now? And what is your acquisition capacity? I see in your balance sheet, you have $112,000,000 of liquid cash, Although you've rarely dropped below $100,000,000 other sources of potential capital that you have in mine? Is this an environment that you are looking to grow? And how do you view your cost of capital relative to the industry, both in access for to commercial debt and other sources of funding? Yes, so first of all, we had cash flow balances of $155,000,000 $154,000,000 to be exact. And take away the restricted cash, which is ballpark figures $30,000,000 So I mean, it's not of 120,000,000 our liquid cash capacity today. We have access to commercial bank debt and we've shown it by funding the new buildings. We raised debt for 12 years, 2 years pre 10 years post delivery And we are in the process of financing the older ships as well. So our growth strategy, I mean, we are not going to be growing for the sake of growing in order to create volume. The deals need to make sense and in this environment especially over the last couple of months that we've seen asset values dropping. We may be more active depending of course on the transactions that we see in front of us. Now our cost of capital and any competitive advantage there yet generally we tend to have a competitive cost of capital base. Take for instance the commercial bank debt, the fact that we never had to restructure, we never breached any financial covenant over the last 40 years or so. We never breached any covenant since the company went public and even after the Lima crisis and the fact that we never gave any trouble to our lenders. So this track record definitely helps in securing debt at terms that make sense. And also I have to stress here that Commercial Bank day to day is available for shipping and also for container shipping. It may be true that the banks have become more selective which is a healthy signal, but bank debt is available today for clients that the banks consider to be the top tier clients in the sector. The next question comes from the line of Ben Nolan with Stifel. Please go ahead. Yes. Hi. This is Frank Galanti on for Ben. Hi, Frank. Hi. So the vessels that come off contracts in the next 2 years or so, have you guys considered installing scrubbers on them to make them more competitive for a long term charter? Normally, we would install scrubbers when we have an agreement with a charterer. So if a ship is, let's say, relatively smaller without a long term employment, It will be a bit awkward to have an agreement with the charterer to install scrubbers of those vessels. In container shipping, contrary to some other shipping sectors, the fuel expense is a pass through cost to the charterer. So whatever type of investment we decide to do regarding scrubbers, I think this needs to be on the basis of a commercial agreement with a charterer who will be taking all the benefit of the scrubber installation. So the long story short, if it is a ship coming out of charter over the next months and without a long term or a medium term employment and without an agreement with the charter regarding the payback period of this investment, we wouldn't be installing scrubbers. Okay. That makes sense. And then kind of a balance sheet question. So you have a couple of preferreds that are going to become callable soon. Just wanted to see how you guys are thinking about those and how they fit within the capital structure versus debt or growth CapEx in the next say year or so? Yes. First of all, our CapEx commitments to start from that are pretty manageable because as you've seen, we have funded the Yangmink vessels at quite attractive terms. So there are no CapEx commitments without the debt funding already in place. Now you're right that a couple of the preferreds are callable or sort of will be callable over the next year or so. We are considering all the options. Of course, one of them is to call them, but then it's going to be also a decision of where do we allocate our capital and whether it makes sense to call the whole like type of instrument or part of it and at what point in time. But we do have the flexibility and this is something to consider especially next year when the second preferred is becoming subject to core. Next question comes from the line of Chris Wetherbee with Citi. Please go ahead. Hi. This is Liam on for Chris. Thank you for taking my question. So I just wanted to follow-up on some of the questions that you've already received on scrubbers. So just really quickly, I know that you aren't providing a lot of details on how that would on the rates. But I'm just wondering if overall, generally speaking, do you think that installing scrubbers will meaningfully impact the returns you expect to get on those vessels and just the kind of the unit economics of those post Panamax vessels? Look the fact that we have extended today in 2018 the charter contract on a forward basis from 2024 to 2027 at the charter rate, which we feel makes sense. I think it's a positive thing, definitely. Now from the scrubbers, we don't make money out of the installation of the scrubbers. This is something that we are doing after the charterers request. But the fact that we can find an agreement with the charter where we are sort of extending the charter cover. And we are also receiving some type of incremental cash from day 1 after the scrubber installation. I think it's definitely a positive. Those ships, they are 2013 built. So at the expiry of the 2013 2014 build, so originally the time charter was expiring when they will become 10 old. And now it will be expiring when those are becoming 13 years old. So we definitely consider this to be a positive. However, the same applies for our client. Got it. Thank you. And also just generally speaking, when you're thinking about charter renewals, I know you have quite a few vessels with charters expiring either by the end of this year or sometime in next year. So when you're thinking about that and taking into account the overall macro environment and how it impacts the container market. Are you when you're engaging in discussions with the charterers, how are kind of like trade recent trade discussions kind of impacting those your discussions with charterers? Is that coming into play? I think that more simply, if it is a low charter environment like the one we are experiencing today, Most probably we would decide to go for a shorter period, like a shorter period could be in 6 to 9 months or sort of up to a year. And then then sort of we discuss, for example, for the 11,000 TEU ships which are new buildings delivered a couple of years earlier versus for the Cape Agreements, as you saw we charted for 28,000 for a short period. Although we had offers there was interest from liners to go for a longer period. We decided that based on like where the market is today and feeling confident about the earnings potential of those vessels, We felt that it was that the proper thing to do was to charter for a shorter period and then revisit. At the same time, when you are repaying your loans and you have low leverage like the leverage we have in those vessels, you have more flexibility in order to decide and determine your chartering strategy. All right. Thank you very much for taking my question. Thank you. Next question comes from the line of Donald McLee with Berenberg Capital Markets. Please go ahead. Hey guys, just to stick with the scrubbers for a bit. Could you talk maybe about the The cost it depends on the type of scrubber. But I would say for a large containership vessel, it could be up to 6,000,000 dollars the total cost, but it depends. So now the installation, it depends again, but it could be like 4 to 6 weeks, but it depends. I mean, and then you have to look at sort of each case individually. So the cost, it is the cost of buying this equipment of installing, There may be some daily some additional daily operating expenses. It is the cost of funding and it is also the drydodging cost or the off hire during the installation period. Okay. And then just in terms of the time line, I'm assuming it's before 2020, but if I I'm not sure how much clarity you gave around if that CapEx going to sit with you guys or it's going to be kind of amortized through the charter. But if I had to model that CapEx directly on your cash flow statement, how should I look to unwind that over through 2020 or is it ahead of that? Look, if you want to adopt a generic approach about how to amortize scrubbers, I think the proper thing to do would be to amortize it over the entire charter period. This would be the proper thing to do. Okay. And then so switching gears to the S and P purchase, could you talk a bit about what you thought was attractive? Those assets are, I believe, 20 plus years old and then they have charters that will expire into a post IMO 2020 world. So maybe what's your long term strategy is for those vessels and what prompted what was the rationale behind the purchase? Yes, so those ships they are 1996 built, so today they are 22 years old. They have 2.5 year charters. So there will be upon the charter expiry, there will be 25 years old actually. We have chartered them to Maersk, which is a 1st class a charterer and we looked at the fiscal condition of the vessel, our expected cash outflows for the operating expenses, the charter higher and the potential of financing. We are in discussions regarding the funding of those vessels overall and without factoring in any further chartering activity of those vessels, so I mean taking a more conservative scenario, we feel that the economics made sense. Now in the past we had ships of Costa Mare trading up until the age of 30 or like 25 years old. I cannot claim that this is what we count on those vessels. So, but so conservatively, we have taken we have looked at the numbers factoring only this 30 month charter period. Okay. And did you guys give any are you able to give any color around what the CapEx was for those vessels? I'm afraid not, but when we're going to be in the next quarterly results call, we may be announcing the financing of those vessels. So I guess you may be getting an idea about the sort of actual CapEx. But I can tell you that although there are older vessels and there is a misconception, older vessels can provide very good returns and can also be financeable as long as there is a proper technical management and also a credit worthy charter. Okay. One more just on where you guys sit and how's your view changed on counterparty risk from the liners over the past 12 months? There's been a bunch of a couple of headwinds that have emerged, rising fuel cost for the liner as all the tariffs overhang. So how comfortable are you guys there? Look, we have a slide with a pie chart showing the composition of our charters, where the contracted cash flows of $2,000,000,000 come from. And with all those names, we feel very comfortable regarding their credit quality today. Thank you, Tom. Next question comes from the line of Michael Webber with Wells Fargo Securities. Please go ahead. Hey, good morning guys. This is Saum on for Mike. Hi, Saum. Hey. So you guys talked a little bit about the fleet. And when I look at the there's a couple of tranches of vessels in your fleet that's at the age and tenant profile of the MSC vessels that are going to be installing those scrubbers. Do we expect that this is the type of deal for other vessels in your fleet? And have you noticed or foresee a tipping point where other charters might start engaging more aggressively to get those installations completed? Hinrichs:] Yes, we are currently in discussions with other charters as well for scrub installation and those discussions have to do with the cost of this investment and how this investment cost is going to be allocated between the charterer and the owner during the charter tenure. So there are discussions as we speak. And I think that should we find a solution which makes sense for both parties going to be a win win situation both for the charterer and for the owner. Great. And then you touched on this a little bit, but can you talk a little bit more about the timing mechanics of the actual installations and whether or not those are going to be incorporated into existing dry dock schedules or if they're going to need to come into new dry docks? Like what does the timing look like for that? This depends on the vessels and also on the specific drydocking schedule of each vessel individually. For those ships that we're discussing, we would expect to have the scrubbers installed, of course, prior to the 1st January 2020 and most probably during the 3rd Q4 of 2019. Okay, great. And then just taking a quick step back, I guess looking at demand dynamics across vessel sizes, how like what is your perspective on looking at your future fleet and replenishing some of your older smaller vessels? Do you see that the need to maintain that fleet for those specific trades or how are you looking at your fleet going forward in the next couple of years? Look, we don't have any like I mean if you look at our fleet list, you will see that we have pretty much all the sizes from like 1300 TEUs including 14,000 TEUs. These are the ships we have together with your capital. So like we are pretty flexible. We focus we mainly focus on how much we buy a vessel, what it is what's the fiscal condition, earnings capacity, funding potential. And we first try to cover our downside risk. And then of course, we also want to make sure that there will be also some upside for our shareholders. But we don't analyze each vessel type with each type of trade, etcetera. A view for some ships, especially, I mean, as you've seen all the new building transactions we've done, these are mainly for larger vessels. So we tend to focus on larger new building deals. Without many however that even numbers make sense that we wouldn't be doing new buildings. So we are pretty much flexible as long as we feel comfortable with the asset and its earnings potential. And I would like to pass back to Mr. Zikos for closing remarks. Thank you for dialing in today and for your interest in Cosamare. We are looking forward to speaking with you again at our Q4 results conference call. Thank you. Thank you. That does conclude our conference call for today. Thank you all for participating. You may now