Earnings Call: Q1 2018

May 2, 2018

You for standing by, ladies and gentlemen, and welcome to the Costamari Inc. Conference Call on the First 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 you that this conference is being recorded today, Wednesday, May 2, 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. 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 Q1 of the year, the market continued with a positive momentum across the board with larger vessels capturing most of the upswing. During the same period, the company delivered profitable results. On April 27, we accepted delivery of the containership vessel Polar Brazil, which is the second of the 2, 3,500 TEU newbuildings, ordered together with our partners York. Upon delivery, the vessel commenced a 7 year time charter to Maersk Line. In April, we acquired a 2,008 built 1300 TEU system container ships, Mitsykar and Trader. These acquisitions were funded with available cash. On the chartering side, we chartered in total 16 ships since last quarter, and today we have no ship laid out. Finally, on the dividends, we declared our 30th consecutive quarterly dividends is going public. Intellus have decided as has been the case since June 2016 to reinvest in full their cash dividends in new shares. Moving now to the slide presentation. On slide 3, you can see the highlights of our Q1. Our adjusted earnings per share for Q1 was $0.12 We have no vessels laid up and we have entered into new or extended time charters for 16 of our ships in the beginning of the year. We recently acquired 2 second half ships of 1300 TEU Ships with Equity. Last week, we took delivery of our last 2,500 TEU newbuilding, which concluded our current newbuilding program. The vessel was bought under our JV with York and upon delivery she commenced her charter employment with Maersk. We do maintain a strong balance sheet with net debt to book equity starting at 65%. Factoring in market values based on our compliance certificates delivered to our lenders, we have a leverage ratio in the region of 45%. We have no off balance sheet financing and we currently have no further capital commitments. On the market, charter rates have increased substantially across the board since the beginning of the year with larger vessels capturing most of the upside. The increased containership demand has resulted in a percentage of idle fleet dropping at 1.4%. On Slide 4, you can see a summary of our recent chartering activity. All ships are employed and you can see that the majority of the vessels have been recharged at higher rates. On Slide 5, you can see the details on the refinancing of our original $1,000,000,000 facility, which has resulted in increased liquidity of $65,000,000 over the next 3 years. We also extended the balloon payment of circa $13,000,000 in one of our facilities for 1 more year. During the previous quarter, we declared $0.10 cash dividend per share on our common equity, a dividend for all four classes of our preferred stock. Insiders have decided to invest all their 1st quarter cash dividends in new shares under our dividend reinvestment plan. On Slide 6, you can see the Q1 2018 results. During the Q1 of this year, the company generated revenues of around 93,000,000 and adjusted net income of around 13,000,000. Dollars Based on the above, the Q1 adjusted EPS amounts to $0.12 Our adjusted figures take into consideration the following non cash items, the accrued charter revenues, accounting gains or losses from asset disposals, such breakage costs and prepaid lease rentals and other non cash charges. On Slide 7, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from 1st class charters like Evergreen, MSC Merced, Postman, Apat Lloyd. We have $1,200,000,000 of contracted revenues and the remaining time charter duration of about 3 years. Moving on to Slide 8, as of the end of this quarter, we had cash on balance sheet of around 250,000,000 dollars We are conservatively managing our balance sheet having brought down net debt from $1,700,000,000 in 20.13 to less than $1,000,000,000 as of today which represents a net debt to equity ratio of 65%. During a 5 year period we have raised debt funding of close to $750,000,000 for new business. And on the last slide, we're discussing the market. Charter rates have moved up substantially since the end of 2017. The idle fleet, as already mentioned, currently is at a low level of 1.4%. The order book remains at historically low levels of less than 13%. As already mentioned, we are actively looking for new transactions in this market environment. This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now. Thank And our first question will come from Chris Wetherbee of Citigroup. Please go ahead. Hi, guys. This is James on for Chris. Yes. Hi, good morning. Good morning. First question I wanted to ask was actually around the 2 smaller vessels you acquired, the Michigan and the trade. Was that more an indication of sort of value you saw in the market or basically wanted to position yourself to get more exposure to improving rate? Those two ships these are 2,000 TEU, 2,008 built vessels which have been bought with equity during the last quarter and now the vessels go through dry docking. We bought them because considering the physical condition of the vessels and the specs, we found that it made sense to buy those ships. Now it doesn't mean that we have a preference for smaller vessels versus larger tonnage. As you can see from our fleet list, we are quite flexible. We have ships up to 40,000 TEUs. It's just that opportunistically we said that the values of those ships considering the earnings potential is something that made sense. And you said that you basically saw it was because of the condition that they're in. What can you elaborate on that a little bit more? I think it is the specs of the vessels. And considering what is the earnings potential and the remaining useful life of those assets and what are the charter rates expected to be received on those ships. And considering the price, we felt that it is something definitely that made sense. I cannot go into more detail now, but hopefully in the next quarter we're going to be able to provide you with more information regarding the chartering of those ships. And then could you also just give us a sense of how many more sorts of transactions like this you could possibly see available and whether this is something that we might see an uptick of in the future or if this was more of something that was sort of one off and opportunistic? No. I think there are a lot of deals to look at either secondhand ships without charter like those 2 or secondhand ships with a medium to long term charter, which is something we look at as well. And I also have to mention that the new building market is much more active now compared to the market status a couple of years ago. So we are actively looking at transactions in all those three sectors, meaning secondhand ships with or without long term charter and also newbuildings. All right. Thank you. Sure. Thank you. Our next question will come from Noah Parquette of JPMorgan. Please go ahead. Great. Thank you. I just wanted to ask, you have a few shifts around 20 years or approaching 20 years. Can you talk a little bit about your strategy? Do you think you can still extract value from some of these older ships before you scrap them? Or what are you thinking there? Yes. I mean, first of all, I have to state that the container ships, they have a useful life of 30 years. And also in the past, we were managing ships older than 30 years old. Also, if you look at our recent chartering activity, you will see a 1997 built ship where it was like 21 years old now, the Maersk and Kaposi 7,500 TEUs, which have been charter for around 16,000 for a year. So as long as we feel comfortable with the technical characteristics and also the seaworthiness of the vessel. And as long as the asset is properly maintained, if there's a market out there, which today for some vessels definitely there is, like this example I gave you, we see no reason why to scrap those vessels. And as a manager, we do have experience in managing all the ships. And a lot of times the best returns may come out of re chartering and also deleveraging older assets. Okay, great. And just one last one is, it's been a bit since the alliances have shaken out and we've seen some operation now for some time. Can you tell us if you've seen any sort of, I guess, increase in efficiency of how the ships are utilized or maybe more percentage of loaded containers. Is there anything that's going on there that has kind of increased shadow supply? Thanks. Look, regarding efficiencies and load rates, I don't want to enter into a discussion with numbers because it may vary from trade route to trade route and from liner to liner. So I don't want to give a generic answer which may be misguided. However, if you want to talk about the trade growth, I can tell you that since the beginning of the year of this year of 2018, trade growth has been quite promising and has been quite strong. But load factors, etcetera, I think, is something that is what we firstly address to the liner companies. Okay. That's all I have. Thank you. Thank you. Our next question will come from Ben Nolan of Stifel. Please go ahead. Thanks. Hey, Greg. So coming back to what you were talking about a little bit on the first question, there's been a bit of noise out there that you guys are involved in a rather sizable new building order with a liner company. And that may or may not be true, but the my question really revolves around how you are thinking about the capital needed for such transactions. Where do things, I guess, stand with respect to the York joint venture? Would you expect any new business of that type to be done with them or not? And then ultimately, how are you thinking through capital that's available for bigger things like that? First of all, regarding those rumors you are referring to, we have also read the related articles and I cannot comment on those. The second point is that we are looking at things And our joint venture with York has an investment period which expires in mid-twenty 20. And there is still appetite. Now we look both at new buildings, as I mentioned earlier, with charter and also at 2nd hand ships with or without charter. We have cash on balance sheet. We have cash on balance sheet north of 200,000,000 dollars We have a low leverage. So however you look at it, book values or sort of market values of vessels, etcetera, we have a leverage in the region of 50% or less. We have 6 ships which are debt free. We have positive cash flow from operation. You know that we are paying our debt very prudently. So there is cash available and tied with York or also on a standalone basis if York does not wish to participate in some transactions. We will be actively secondhand or newbuilding. Of course, the first priority is to cover our downside and make sure that the downside risk is something manageable. But we feel that these circumstances make sense if someone wants to continue investing in containerships. Okay. That's helpful. And I guess we'll just cross that bridge when we come to it, I suppose. But and then I wanted to follow on something that Noah was asking about, your employment of older assets. And I think that's obviously been a hallmark of the company being able to stretch the useful life of things pretty well. But I was curious, especially on some of these ships that are north of 20 or north of 25 years old that you are continuing to be able to get contracts on. What sort of maintenance costs? Obviously, there's special surveys and that kind of thing. How much does it cost to keep those vessels in the market? And just thinking through what sort of returns you need to be able to generate or cash flows you need to be able to generate in order to cover the presumably higher costs associated with the older assets? Yes. This depends on the specific asset size, whether it's a smaller or a larger vessel. But I can tell you that on average, if you go to our income statement and then divide operating expenses by the ownership days, you will see that we have OpEx in the region of $5,500 per day or slightly less for a fleet, which is not like a 3 or 5 year old. So I mean, the delta is not something which the delta in the operating expenses. It's not something that is prohibiting us from employing those ships on a profitable basis. We've never chartered ships at below breakeven levels and there's no reason to do it. It doesn't make any sense at all. However, as you mentioned, we have experience in managing all the ships. It's something that the company has traditionally also been doing and we've been in shipping for over 40 years. So if you have a 21 year old vessel, separating 500 TEUs, which today gets 16,000 from a top class charterer for like a year or so, we see absolutely no reason why not continue employing that vessel. And I can tell you that whatever slight difference in the OpEx does not make this chartering less profitable or sort of non profitable at all, especially those ships whose debt has been always been paid back. The debt obligations are sort of very light. You have much more flexibility there regarding tenure and charter hire. So we will continue employing all the vessels without, of course, meaning that we're not going to be looking at new buildings or at the Yagedornets. However, we feel that having a mix of ships does make sense. Right. Okay. All right. Well, that's helpful. Thanks, Greg. Thank you. Thanks, Ben. And our next question will come from Michael Webber of Wells Fargo Securities. Please go ahead. Hey, good morning, Greg. How are you? Yes. Hi, Mike. Good morning. Hey, good morning. I wanted to follow-up on Ben's question key ships. I'm just curious, you mentioned you hadn't chartered anything below breakeven. And I think operational breakeven, sure, but when you look at it on a pure cash breakeven basis, some of the recent charters across the market on post Panamax tonnage have been pretty close to the cash breakeven. And so I'm just curious, when you think about that within the context of new deal and another string of large assets, Has your math and your risk tolerance around residual value risk changed at all from, say, today kind of relative to where you were when you maybe started the York JV? Are you less willing to take on residual value risk just given some of the evidence that you've seen on charter opportunities for open post Panamax tonnage? Look, no, I mean our tolerance levels and our risk appetite has not changed. So I mean again the priority is to manage our downside risk. However, let me say that today's new bidding price as compared to the new bidding prices we witnessed back in 2,005, 2006, 2007, 2008, 2009, 2008, 2009, whatever, it's much lower. So by default, you have a better deal. And you start from a lower CapEx point with something that makes the deal more solid, which is something that has to do with the market. Leaving that aside, our sort of risk appetite levels have not changed. They do remain the same. But it definitely makes sense to do this now compared to deals that were affected back in 2,007. Yes. I guess the question is less around appetite and maybe versus pace, right? So if your answer that your cost basis on these ships has come down, so the required rate of return required rate needed to get to your return hurdle is lighter. And then I guess do you need more term now than maybe you did 2 or 3 years ago? I mean, I guess if nothing has changed in those parameters, I guess my question would be why when we're seeing we saw a pretty healthy stretch where there was little to no employment for large tonnage out of when we're out of the peak season and then even this year, I mean, at least year over year, the tonnage the charter rates available for post Panamax tonnage, even though they're up, it's still well below the expected rate associated with those vessels, I'm assuming, for even those the return calculations at the time of purchase. So I'm just curious, what else has changed within your math? And if nothing, why? No. In our math, I cannot say that look, our risk tolerance levels and our expected returns have not changed. We are doing exactly the same math on new business we were doing years ago. If the deal doesn't make sense, we will simply not do it. We don't have a reason to grow for the sake of growing. So again, we're going to be looking at the quality of the charter. We're going to be looking at the passage price. We're going to be looking at the specs of the vessel, at the charter hire and also at the tenure of the charter party in order to see whether the risk assumed on our equity makes sense or not. Those sort of fundamental things and the way we look at numbers have not changed. I can tell you that. Okay. All right. Maybe just moving on the I've asked you this I think I've asked you this before, but we've got some accounting changes coming down the pike in a few years. It should impact at least some of the public counterparties that you have in terms of how they recognize their operating leases for the vessels. You think your biggest counterparty is private. So it doesn't look like it's going to be it's going to directly impact the majority of your book. But like Maris and some others would be exposed to the reclassification of some of their operating leases. I'm curious, have you noticed any change in behavior from them around different there are certain end arounds, certain structures that are available that could alleviate that burden either kind of JVs, COA structures. We've seen this I think we're starting to see that development a bit in LNG. I'm just curious, has that even has that started to come up with that subset of counterparty that you've got yet? Or is it still always up? No, that's a good question. No, as of now, we haven't noticed any change regarding the appetite of liner companies to charter in for a longer period versus a shorter one due to changes in accounting. And during 2017, we charted 3 ships to a major liner company, the 2 of them for 7 years, which go up until 2024 and the third one for 3 years, which goes up until 2022, which is after the implementation of those new accounting standards. So I don't think that those new accounting rules have changed the chartering tenure. So we have not noticed anything. Now I cannot predict the future. But up to now if someone wants to charter for a longer period, then they may well charter. And also, I need to say that I'm not sure whether those new accounting rules apply globally. So I'm not sure what Yes, they do. But it doesn't mean they can't still do it. It just means that it's going to be recognized in their balance sheet, so they just have to think about it a bit more. Yes. For Asian companies, which may be reporting other some specific Asian country accounting rules, I'm not sure whether they apply or not. I know that they apply under IFRS. They may be applying under U. S. GAAP, but I'm not sure whether they apply in every single accounting jurisdiction globally. But even if that's the case, we haven't noted anything up until now. And I gave you some examples of long term charters concluded in 2017. Yes. Okay. Yes. And again, like the bulk of your book is not going to be impacted by that. I guess the last question, I know I've asked you this before, but we've seen a couple of other lines now step in with some dual fuel options for long term tonnage. It kind of relates to how you think about residual value risk, especially with the greenhouse targets that we've now set in the maritime space for 2,050. Have you are you guys have you done any more work around getting comfortable with dual fuel options in terms of owning LNG power done essentially for any of your customers or is it still spotty within the major lines, I want to look at that? Look, we have looked at 1st of all, regarding the new regulations kicking in, in 2020, regarding low sulfur emissions, we have looked at various options and sort of and I can tell you that as the situation stands today, we would not opt for a scrubbers related type of solution, which we don't think that it is that it makes sense neither from a financial point of view nor from a pure environmental point of view. And also if most people do not install scrubbers like it is the case as of today, you may find yourself on the wrong side in case you decide to install them by yourself. So we don't feel that this is something that today makes sense. Now we are evaluating various options. I don't think that today I can get into more detail. But the scrubbers, it's something that we don't feel it makes sense from any point of view. Yes. I mean, I would assume you're burning a healthy amount of NGL to begin with. It was more around the kind of the long term CapEx cycle and whether people are actually pushing for LNG tower tonnage. I know CMA has, I don't think MSP has not, but there it seems like there are a couple more lines that are popping up that are looking at it. And I'm just curious whether or not that's something that you've been asked to kind of investigate, whether you've got any more comfortable with it? No. Up to now, we have not been asked. And those mainly relate to new buildings for larger vessels. It's not something that sort of as of today, we have been asked. However, we are following the situation and the things that's sort of moving forward. But I cannot say something specifically on that at this point. Okay, great. I will stop there and turn it over to Andrew. Thanks. Thank you, Mike. Our next question will come from Donald McLee of Berenberg. Please go ahead. Hey, Greg. It looks like a number of your charter extensions were relatively short term nature despite being a center at higher rates. Could you just comment on how far along you think we are in the sector recovery and that might be influencing your chartering strategy? The new chartering agreements we had they were for periods ranging from some weeks to a year plus. Overall, if you look at the market, the average charter tenure, the Q1 of 2018 versus, let's say, 20 16 or sort of like beginning of 2017 has become longer. At some point where the market is today, we may not also want to commit for historically low levels for a much longer period. But the bottom line is that both charter rates have been moving up substantially since last year and also that the charter have been becoming longer. So I mean, we can discuss I mean we haven't discussed specifically some vessels because from a market perspective I think that this is the situation today which is positive news for containership owners. Okay. That's fine. I can follow-up online specifically about a vessel. Going back to your earlier comments about the earnings potential for the 2 feeders and just given your liquidity, how do you think about a potential larger scale strategic transaction in the feeder space specifically? Did you look at the Sinacor Vroom deal? And is that something that you might consider? Look we look at everything whether it's smaller ships or larger vessels with or without charter. Now for smaller ships to have a long term charter, of course, the numbers need to make sense and the numbers need to work. So I don't know all the details of the transaction you are referring to. But as far as we are concerned going forward, if there are any large deals with other small or with bigger vessels, we would definitely look at it. And this is what we have been doing. And as mentioned earlier, we are generally active. Okay. That makes sense. And then the last one just on the BlueNet chartering JV, it's been up and running for about 3 months now. Can you comment on any tangible impact that you've seen so far? No. This is mainly a brokerage platform, which is managing our ships together with vessels from other ship owners. So and this started operations beginning of this year. As you mentioned, it is a relatively short period and it's nothing more than a chartering brokerage type of activity. So I don't think that there is anything tangible or sort of noteworthy for me to mention at this stage. All right. That's all my questions. Thanks for taking the time. Thanks, Our next question will come from Fotis Giannakoulis of Morgan Stanley. Please go ahead. Hi, this is Max Yaras on for Fotis. Thank you for taking the question. Yes, hi. Hi, Mike. Good morning. Good morning. Yes, can you give us some additional color on the refinancing? Maybe what's the interest cost on that? And then how do you compare your cost capital or estimate your cost of capital relative to your peers? Yes. First of all, regarding the refinancing, this refers to an old facility which was signed in 2,008 of originally €1,000,000,000 The loan outstanding as of the end of 2017, of fiscal 2017 was €300,000,000 dollars And during the quarter, we decided and we fully refinanced this facility of 300,000,000 on a bilateral basis. This facility was amortizing down to 0. So now we have agreed with a lender a balloon of $88,000,000 Based on the new repayment profile and the balloon now that is in place, the facility is maturing in June 2021. During this 3 year period, I would say that we have an incremental liquidity benefit of close to $65,000,000 Now the cost of that facility is along the lines of the facility that was refinanced. I'm not at liberty to sort of give the sort of exact margin number, but I can tell you that our cost of debt and our ability to access commercial bank debt today, I think it is something that is relatively competitive. Okay, that helps. And then maybe you could talk about the market a bit. I mean, what is your kind of projection for market tightening or loosening in 2018 or 2019? Where do you see demand going in the next coming months? We normally don't predict the market especially for a year and a half up until 2019 because for containership it is a very, very long period. I can tell you that up to now we have seen the market tightening in terms of charter rates, in terms of ships availability and in terms of ship laid out being now less than 2%, which is a very low figure. And we believe that the market may continue strengthening over the next months as well. However, I cannot go after that and I don't want to predict the market. But I can tell you that today overall from a both a trade growth perspective, ships availability, charter rates, momentum and charter duration, I think these are all positive factors. And let's not forget that we have an order book which stands below 13%, which is again a historically low number for newbuildings in container shipping. At the peak of the market, I have to remind you that at some point we had an order book of 60%. Now at 12% to 13% order book, which is very thin from 2020 onwards, I think that the fundamentals, the positive fundamentals are there. And why do you think the larger ships are just getting higher rates or seeing rate growth faster than the smaller ships? I mean is it a trade thing or certain routes are growing faster than others? Look, this is what we saw during the Q1 of this year. And I can give you an example that an 8,500 TEU ship, which in 2016 was yielding, I would say, dollars 8,000 per day. It has been chartered and sort of now it's getting $20,000 plus for a period of 6 to 12 months. So I think that it's all about supply and demand, and there's a lot of demand for those vessels and limited supply. So generally, the larger vessels have over the last months have outperformed the rest of the market without meaning that the market has not tightened across the board. But I mean most of the gains have come from the larger ships. All right. Thank you. That's all for me. Thank you. Thanks a lot. Ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Mr. Zikos for any closing remarks. Thank you very much for dialing in today in our Q1 results call. We are looking forward to speaking with you again at our Q2 results conference. Thank you very much. Bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.