Earnings Call: Q2 2018

Jul 25, 2018

Inc. Conference Call on the Second Quarter 2018 Financial Results. We have with us Mr. Gregori 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 I must advise you that this conference is being recorded today, Wednesday, July 25, 2018. 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. Thank you. I will now pass the floor to your speaker today, Mr. Zikos. Please go ahead. Thank you and good morning, ladies and gentlemen. During the Q2, the company delivered profitable results. As already announced, we entered with Yang Ming into a 10 year charter agreement for 5, 13,000 TEU new buildings to be delivered between the Q2 of 2020 and the Q2 of 2021. Last week, we concluded with a leading European financial institution, the debt financing of the 2 recently acquired 5000 TEU wide beam vessels. We have accelerated delivery of the 3rd ship, which commenced its 7 year charter to Maersk. As it is common during this period of the year, the market has softened over the last weeks and the falling demand for tonnage has pushed up the idler fleet. We have chartered however 27 ships during the quarter, including our recent acquisitions. Finally, on the dividends, we declared our 31st consecutive quarterly dividend since going public. Insiders have decided, as has been the case since June 2016, to reinvest in full their cash dividends in new shares. And moving now to the slide presentation. On Slide 3, you can see the highlights of the Q2. Our adjusted EPS for Q2 was $0.10 Over the last quarter, we have chartered 27 vessels, including our recent acquisitions. We maintain a strong balance sheet with close to 40% leverage. Regarding the market, the idle fleet is as already mentioned 1.4% of the total fleet and the order book less than 12%. On slide 45, you can see a summary of our recent chartering activity. What is worth mentioning here is the recent chartering of our 11,000 TEU ship Cape Sunyo for a rate of above $30,000 per day. Moving on to Slide 6, you can see our dividend payments as well as the sale for scrap of 2 older vessels. Slide 7 shows the Q2 2018 results. During the Q2 of year, the company generated revenues of $91,000,000 and adjusted net income of $10,500,000 Based on the above, the 2nd quarter adjusted EPS amounts to $0.10 Our adjusted figures exclude the following noncash items via crude charter revenues, accounting gains or 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 first class charters like Maersk, MSC, Evergreen, Glen Mink, Cosco and Hapag Lloyd. We currently have €1,800,000,000 in contracted revenues and the remaining time charter duration of about 3.7 years. As you can see on Slide 9, as of the end of this quarter, we had cash of $160,000,000 We are conservatively 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 68%. Over the last 5.5 years, we have raised debt funding of close to €760,000,000 for new business. On the last slide, we're discussing the market. Regarding charter rates, there has been some softening in the market, which is not uncommon for this time of the year. The idle fleet still stands at a low level. The other group remains at historically low levels of less than 12%. As already mentioned in the past, we are actively looking for new transaction in this market environment. This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now. Thank you very much, The first question is from Chris Wetherbee of Citi. Please go ahead. Hi, this is Liam on for Chris. Thank you for taking my question. Yes. Hi, good morning. So of the 27 vessels you entered into new charters for during the quarter, it seems that a few of them saw some pretty significant increases in rates. Should we see this as kind of like indicative of a potential like turn in the market or higher? And do you think that you'll be able to continue to see the same level of rate increases going forward on new charters? Look, most of the vessels they have been chartered at higher levels and as mentioned during the presentation for instance the 11,000 TEU ship, the Cape Sunyo, it was getting on average 18,000 and now it's getting above 30,000. So compared to last year or sort of the beginning of last year, the market is definitely at like a much better stage, especially for the larger vessels. Now I cannot predict where the market will be heading. And as mentioned, we have seen some softening in the charter rates over the last weeks, which partly has to do with this time of the year, partly it is attributed to seasonality. But overall, I think that if you look over like the last 12, 18 months, charter rates have moved substantially up. So since most of the ships we have, especially the smaller vessels, they have been fixed like for 9, 12 months or for generally shorter periods. I think that for those ships, we are now seeing some upside. Got it. And I guess focusing on like the timeframe, I guess, particularly for those small vessels, as rates kind of improve, are you going to continue to look for new 9 to 12 month charters? Or are you going to kind of consider taking longer term charters? I'm just thinking about your charters. It depends on the rate. If we feel that the rate is such so that it can justify a medium or long term commitment and assuming that there is a market there for a medium term charter, we'll do it. We are pretty flexible. Otherwise, we may keep chartering for like 6, 9 to 12 months and especially for ships that have been bought in a low asset value environment as are most of our secondhand vessels, those that you know we have been buying over the last 2 to 3 years. I think there is generally more upside rather than downside. But regarding the tenure, it is a function of the charterer, a function of the charterer's appetite for like medium or long term commitment and the charter rate will be offered. Got it. And just one final question. As you guys kind of think about capital allocation going forward, I know you guys placed the new building orders and have purchased a couple of vessels recently. So I'm just thinking about going forward, how do you see your focus in terms of capital allocation? I guess we are pretty much flexible. First of all, our main priority is to cover our downside in every single transaction, whether it's like a new building, secondhand vessel with or without charter. So as you've seen, we've done like newbuildings with a 10 year charter back to back upon delivery. We've done secondhand ships, 2013 built with like a 7 year charter. And in the past or like recently, we have also done secondhand vessels that are charter free. As long as the numbers work and as long as we feel comfortable with our residual value risk, We are pretty much flexible. We're going to do everything as long as it has to do with container shipping. And if you look at our fleet list, you will see that we start like from 1300 TEU ship up to 14,000 TEU new buildings. So what matters is the numbers and whether we feel that, first of all, the risk associated with every transaction is within our tolerance levels. And secondly, of course, there needs to be some upside for our shareholders. Got it. Thank you very much for taking my questions. Thank you. Thanks. Thank you very much. The next question is from Fotis Giannakoulis of Morgan Stanley. Please go ahead. Yes. Hi, Greg. And our thoughts are in that is going through a very difficult time right now. Jumping to business, I want to ask you about if you have seen any impact from this trade frictions and the tariff discussion and if you have any views of how the industry will be impacted by this potential U. S. Tariffs on Chinese goods? And how your company and other companies in the industry are prepared for such a scenario? Yes. First of all, I think today it's a bit early to forecast or to judge what's going to be the effects going forward because there are various discussions regarding whether there will be some tariffs imposed on like what value of goods etcetera. So this is like it's something that has not been crystallized yet. So it's not something that I'm prepared to forecast what's going to be the effect, if any, on the Transpacific or generally on the trade. So at the same time, I need to mention that we have seen some liner companies cutting their schedules, especially from the Transpacific. But we need to remember that this part of the year, it is the slack season for container shipping. So there are also some seasonality factors. Admittedly, it's not only seasonality, but I think it's too early to judge what's going to be the impact on the time specific. Now from our side, we have ships that are chartered under long term contracts. And we have especially smaller ships that may be on the spot market 6, 9 months charters. So we continue doing the same business and the same strategy as before and I'm not in a position now to judge what's going to be the effect over the next 3, 6 or 9 months. I think that it's the benefit of no one to have any new trade barriers, but it remains to be seen how this is going to play out. Can you also comment how is your company protected or prepared for any scenario that might affect trade? Look, it's I think very simply, we have low leverage. We are repaying our debt prudently. We are trying to buy low and charter at the low charter rate so that this is a deal which is beneficial for both the liner company, our customer and ourselves. We have net debt as you may have seen of $900,000,000 as of the end of this quarter, and we are repaying north of €200,000,000 of capital every year. So I mean, we are deleveraging very rapidly. And I think that we are one of the very few companies that during the post Lehman crisis, we didn't even breach a single financial covenant. So I don't think that we have not been tested in previous crisis. In case there's going to be one now, which it may not be the case at all. Also, we feel very comfortable with the quality of our charters and also with our contracted cash flows. And we make sure that always we have cash on the site in order to service our obligations first and then opportunistically do some new transactions. I think this is what we have been doing and that we will continue doing irrespective of any potential trade barriers. Thank you, Greg. I want to jump on these new deals that you announced recently, the 5 new buildings and the 2 modern vessels with Maersk. First of all, these are among the very few transactions that we have seen with very long term contracts after a very long time, especially for new buildings. Can you give us a little bit of a background of how did you get these deals and what was the competition for these transactions? Why Yang Ming needs these vessels? And if how do you view Yanming if this is a new name in your portfolio? And also if you can comment about the returns of these deals, how they compare with the previous transactions that they were giving double digit EBITDA yields? Yes, first of all regarding the Yanming new buildings, with Yanming we did have a relation in the past. We had ships that are targeted to them. But I agree that this is the 1st new building transactions transaction we have with this company. We are very happy with the expansion of this relationship with a young wing. And this was a simple competitive bid process where also other ship owners participated providing a bid for the vessels. And apparently, Costa Mare won 5 ships and 5 other ships were won by another ship owner. But this was a competitive bid process that took place some months ago. Now regarding the returns and the numbers, I'm not at liberty to discuss those publicly. But I can say that the returns more or less reflected previous new buildings transaction new building transactions we've done in the past. We are now in the process of arranging the financing for those ships on a pre and post delivery basis. And hopefully during the next quarterly results call, we will be in a position to announce the closing of this funding. Now apart from the Yanling transaction, there were 2 2013 wide beam vessels, which we bought and on a back to back from a 3rd party and we charge it on a back to back basis to Maersk. This mirrors another transaction we did with Maersk in 20 17 for the Quiparesia and for the Leonidio similar vessels again for 7 years. There are not a lot of long term, medium to long term commitments, charter commitments in the market today for secondhand ships. And we are very happy that we concluded this deal with Maersk, is one of our main clients today. So those two transactions today, we talk about contracted revenues of close to $650,000,000 in aggregate for both deals. And I think that these are deals that the why you managed to have the more competitive bid for these long term charters? Was it a matter of cost of capital or financing? Did you know what type of financing you would be able to get when you were bidding for this vessel. And give us, if you can, some idea about the cost of construction of the new buildings. I see on Clarksons that the prices for 13,000 TEU to 14,000 TEU new building has jumped from $108,000,000 to $112,000,000 I'm just trying to see if this value that we see on Clarksons they are close to what you are buying these vessels and what was the competitive edge that you had? Yes. First of all, I don't have information about what sort of other ship owners offered. But I can tell you that we tried to put together a competitive bid that had to do with the new bidding price, that had to do with the charter rate. Into the charter rate offering, we have factored in our cost of funding, and we try to be competitive there. So I mean, it's not only the charter rate, it is the whole package we just provided to the liner company. It apparently, this is something that made sense for Yanomink and we are very happy with that. Now regarding the newbuilding prices, I'm afraid again I cannot reveal the price, but I think the $110,000,000 or something, I think we had more competitive price compared to those figures. And can you also comment about the potential of new transactions and where do you view the opportunities going forward? We saw a very spectacular rally for the smaller ships. How shall we view the fact that you chartered so many vessels during this quarter? Is this more of a defensive approach or just an opportunity that it was too good to take it? And also where do you see that among the different classes, they are better returns going forward. In the past, you have been avoid you have said that you will avoid the traditional Panamax vessels. Has this view changed given the recent improvements in rates for Panamax? Yes. First of all, as mentioned earlier, we look at pretty much everything whether it is secondhand or it is newbuildings and we are actively looking at new transactions both new buildings and second hand vessels. Now regarding the Panamax ships as you can also see in our fleet list, we have very few traditional Panamaxes in our fleet. These are ships that we bought years ago with a long term charter. And the 2 ships now we have chartered for 7 years to merge. These are like 5,000 wide beam ships. So these are not these are definitely not the traditional Panamax vessels. I agree that charter rates for the Panamax ships for the traditional 4,250 TEUs, they have moved up from like from 2016 up until now or like beginning of this year. Still, we feel that we could make a better use of our funds if we invested in other ship types compared to the traditional Panamax vessels, which today they are getting close to $13,000 per day, let's say. But still we don't view a lot of upside on this specific asset class. So I think that most probably you will not see us entering into any secondhand Panamax type transactions. And one last question about the February topic of the year and the IMO 2020. If you've seen the approach of the liners changing at all the last few months, we've been hearing in other sectors a lot of companies willing to install scrubbers. How do you view that the containership industry overall will address these new regulations and what will be the impact also on speed of the fleet and also the profitability of the industry overall? Look, generally the scrubbers when there is a long term charter, it's normal and it makes sense to enter into an open discussion with the charterer. Regarding the scrub, the cost of installing the scrubbers and this is something that should be discussed with the charterer. For smaller secondhand ships, older vessels, it's more a wait and see type of approach from us for the time being. We are now evaluating the situation. I cannot tell you today we are prepared to start installing scrubbers in the whole of the fleet. It doesn't make sense. But for long term charters, we are in discussion with the current charter or with future charters that have an interest in the vessel, how to allocate the cost of the scrubbers. I think this is pretty much it. But for 2nd hand ships or like for older vessels, we're not in a position now to start installing scrubbers, especially when we don't have a clear view about the payback period and mainly whether there will be any payback at all. And can you comment from the perspective of the liner operators, how do they view the new regulations? Are they going to install scrubber in a large part of the fleet? Do you have an estimate if it's going to be 10%, 20%, 30% of the fleet? Or if they will go with new low sulfur fuel? And what would be the impact on the average speed of the global fleet these new regulations? I think I don't have a concrete number sector right now. And I think this equation that should be mainly addressed to the liners. But I think different liners companies have come out publicly with a different approach. Some have said that most probably they will not be installing scrubbers. Others have been more positive on the scrubber potential. So I don't think that today there is a common view to be followed by sort of all the sector participants. So each liner company has its own circumstances and like concerns and may follow a different path. Some of them have publicly mentioned that they will not be installing scrubbers, others have hinted that may be doing the opposite. So I'm afraid there is not a clear answer here. Thank you very much, Greg. Thank you. Thanks, Walter. Thank you very much. Our next question is from Michael Webber of Wells Fargo Securities. Please go ahead. Hey, good morning, Greg. How are you? Yes. Hi, Mike. Good morning. Hi. Just want to I think there are probably a handful of questions left. But just digging back into, I guess, both the newbuild deal and then maybe the scrubbers. Maybe starting on scrubbers, just because you just left off. Forgive me if you mentioned this during your prepared remarks, but the new builds that you're providing to Yang Ming, are those going to be scrubber ready? And was that something that was specified in the tender? Or was that left open to the ship owners to make their best estimates on? No, this is something that was specified in the tender and there is an agreement with the charterer regarding the use or probably not the use of scrubbers. I mean, I cannot go into more details, but I can tell you for sure that there has been an agreement with the charterer regarding the potential use of scrubbers in the future. All right. So it would be safe for us to consider those newbuild scrubber ready at least? Yes, you can say that. But as I said, this is a common decision within that I mean, this was a discussion that took place during the bidding process with the charterer. And there is a very specific timeframe within which to sort of decide whether to install scrubbers or not. Okay. Now I guess within that conversation and others you've had, are you noticing within the container lines? Are they in your customer base? Are they starting to have a are they starting to get a bit more specific around their views, where maybe 6 months ago, it was left wider open? I guess, are more people on in your customer base starting to make up their minds now? And then maybe if you can think about some of your recent conversations, have you had any recent conversations with liners where they just weren't sure about what they were going to do? I think that for long term charters, liners are investigating the possibility of installing scrubbers subject to agreeing on the cost. There are discussions. So there are definitely many more discussions for long term charters compared to discussions we had on the start of like 6 months ago or a year ago, obviously. So there are discussions, but I cannot say that this is an easy decision. There is some interest, but I'm not sure in how many cases this interest will finally lead us to installing scrubbers or not. I cannot tell. But the discussions Got you. And that type of math is going to be different for your smaller ships that are going to be on shorter term deployment? Correct. Have you got has that started to permeate the way maybe the way you think about the residual value risk? You've got that some molder ships in the smaller size in your smaller scale tonnage that are pretty flexible that I think provide a lot of utility to container lines. They don't it doesn't drive a lot of your cash flow, but I think it's nice for your customers. I'm just curious, have you guys internally with those ships knowing that if you put scrubbers on them, you're probably going to have to pay for it. Is that something that you guys have made your mind up about yet? And just how you think about it specifically for the Panamaxes and below? No. For those ships, unless we have a very clear picture and conviction that I mean there's going to be a payback period for those scrubbers. No one would start investing in something without having an investment plan. And the payback, unless it is clear, I don't think any shipowner would be willing to put money for something that not sure whether this will be paid back or not and over what period of time. Especially for ships that have a 6 or or like 9 month time charter, it's going to be difficult. So for those ships, I think we are considering our options. But our situation is today we wait and see. We're not ready to proceed the installment guidance for those ships. So for smaller container ships, I mean, just more likely we see people wait after 2020 to see how spread shaped. Correct. At that point, you'd go in. Okay. That makes sense. Just one more on the deal on adding the term tonnage. I know you guys have left some of the specifics out, but with the revenue guidance being kind of back into a rate, and there's obviously a fair amount of sensitivity in terms of price, but can you give us a vague sense of an EBITDA multiple you think we could apply to that tonnage? If I think about if I think to a rate of a little over between $35.36 a day, if those vessels are priced like the data stream that Fotis was referencing, that implies a multiple that's in the low to mid double digits. If they're priced more like 10,000 TE vessels, kind of at or below 100, and that's something around 10.5x, which seems a bit more palatable. I'm just curious, within that with that kind of context can you help us out with discerning exactly how much you paid for these ships? Look, I cannot comment on any figures neither on the charter rate nor on the acquisition price, but I can tell you that the economics of those transactions are very similar to the economics of previous new building transactions we've done. But I cannot I'm afraid I cannot discuss. So where would you ballpark the payback period on this shift? I mean you've got I mean getting color on exactly how much you paid for a pretty big investment, I think, is pretty reasonable, right? So without getting too specific for getting in giving any kind of trade secrets, like some ballpark number around either payback period or even a range of EBITDA multiples that's probably big enough to drive a buzz through would be helpful at this point. Are we talking about an EBITDA multiple that's north of 11 times? Look, regarding the capital commitment, okay, to start with, I think in our 6 ks, we will have some disclosure because it is required and you will see it then. Now regarding the again EBITDA multiple, you will have a different EBITDA multiple for a 10 year deal compared to a 5 or 7 year deal. So I'm afraid I cannot provide an EBITDA multiple. There have been but if you see the capital commitments for those 5 vessels and also knowing that the economics are pretty similar to previous newbuilding transactions we have for a similar tenure of like 10 years, I think it's going to be pretty obvious what's going to be the EBITDA multiple or what is the range of the time charter rate. But I'm afraid I cannot enter into more discussions here on the numbers. Yes. No, but what I guess what I'm saying is when I apply that historical math, I get to an EBITDA multiple that's pretty high. That implies a pretty healthy amount of residual value risk, which is why I was hoping you could give a bit of a range. So and again, because that pricing is fuzzy, but I can wait until the filing comes out where we get some actual pricing detail, but it's helpful for owners of your stock to know what you're paying for big slug this time. I understand. No, no. I fully understand. And I wish I was at liberty to discuss more because I truly believe that these are very good transactions and accretive transactions for our shareholders. And because they are done in a low asset value environment, I consider them to be good transactions both for the liner company and for ourselves. So there will be some disclosure in our 6 ks and we can take it from there. I think this is the wisest way forward. Okay. Thanks, guys. Thank you. Thank you very much. Our next question is from Donald McLee of Berenberg. Please go ahead. Good morning, Greg. Yes. Hi, Donald. Good morning. So a lot of the questions have already been addressed, but I just wanted one follow-up on the Cape Sanuio charter. Could you provide more color on the negotiating process there? Was there an opportunity for more term or was that duration dictated by the charter? I think the ship it was getting around 80,000 and this was extended with the same charter for a period of 7 to 9 months at above 30,000 it is close to 30,700 or so. The reason is that the charterer apparently committed the vessel. This is a 2017 new build within Beijing in Philippines. And the market for those type of vessels has moved up substantially compared to where the market was in 2017 beginning of like mid-twenty 17. So especially those type of assets have moved up a lot now. We didn't fix for a longer period because we feel quite comfortable with the earnings potential of the vessel. At this point, we decided to extend the ship for 7 to 9 months and then we'll see. But the 30,000 plus charter hire is more than enough in order to service the ship's debt obligations and provide us with an equity return. Got it. And then just looking at some of the sister ships, the Acretis and the Acordea, is there similar level of interest for re chartering discussions there? Yes, there is some interest. And the second ship, the second sister ship, it opens up in October. We are in discussions with potential charterers for period and for charter hire. We'll see. But the market today definitely is not very like used to be in the region of 18,000. It's a much healthier market environment for those ships today. All right, perfect. That's all my questions. Thanks. I'll turn it over. Thanks. Thank you very much. Sir, it would appear that there have no further questions from the queue at moment. Do you have some closing comments? Okay. Thank you very much for dialing me today and for your interest in Costamare. We are looking forward to speaking with you again during our next quarterly results call. Thank you. Thank you very much, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating and you may now disconnect your line.