Earnings Call: Q4 2017

Jan 24, 2018

To the Costamari Inc. Conference Call on the 4th Quarter 2017 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, January 24, 2017. 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. 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. 2018 started with a positive momentum across the board. So far, larger vessels have captured most of the upswing and hopefully, this will give a further boost to the smaller sizes as well. During the last quarter of the year, the company delivered profitable results. On January 23, we accepted delivery of the contingency vessel Polar Argentina, which is the first of the 23,800 TEU newbuildings together with our partner Sior Capital. Upon delivery, the vessel commenced its 7 year time charter to Hamburg Sud. The acquisition has been financed with cash from operations and debt provided by a leading Asian financial institution. In November, we acquired a 2,005 built, 2,500 TEU co tenancy vessel, CMA CGM Le Droit. The acquisition was 100% financed with cash from operations. On the chartering side, we chartered in total 16 ships since last quarter, and today we have no ship laid up. Finally, on the dividends, we declared our consecutive 29th dividends is going public. Insiders 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 a summary of our recent chartering activity. All ships are employed, and you can see the rate at which the 11,000 TEU ships have been chartered. Since the beginning of the year, larger ships have captured most of the upside. On Slide 4, you can see the details on the delivery of the 1300 TEU new building as well as on the acquisition of the 2nd hand ship. Moving on to Slide 5. During the previous quarter, we declared $0.01 cash dividend per share on our common equity and dividends for all three classes of our preferred stock. As already mentioned, insiders have decided to invest all their 4th quarter cash dividends in new shares under our dividend reinvestment plan. On Slide 6, you can see the Q4 2017 results. During the Q4 of this year, the company generated revenues of $101,000,000 and adjusted net income of €18,400,000 Based on the above, the 4th quarter adjusted EPS amounts to 0 point 17 dollars Our adjusted figures take into consideration the following noncash items: the accrued charter revenues, accounting gains or losses from asset disposals and impairments, prepaid lease rentals and other non cash charters. On Slide 7, we are showing the revenue contribution for our fleet. 99% of our contracted cash comes from 1st class charters like Evergreen, MSC Maersk, Cosco and Hapag Lloyd. We have EUR 1,200,000,000 in contracted revenues and the remaining times had a duration of about 3 years. Moving on to Slide 8. At the end of this quarter, we had cash on balance sheet of €219,000,000 We are conservatively managing our balance sheet, having brought down net debt from €1,700,000,000 in 20.13 to €1,000,000,000 as of today. During the 5 year period, we have also raised debt funding of close to EUR 750,000,000 for new business. Based on the expected compliance certificates to be provided to our lenders, we have a leverage in the region of 50%. And on the last slide, we're discussing the market. Charter rates have moved up substantially during 2017. The Agner fleet currently is at a low level of 1.8%. 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 question now. Thank you. And the first question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead. Yes. Hi, Greg. Congratulations on the profitable quarter. You mentioned in your last comment that you're looking for more opportunities. Can you identify where these opportunities are? We saw that you bought another secondhand vessel. So I was wondering if the market now with the improvement that we have seen is becoming open for new building acquisitions like the ones that you have done in large scale before? Yes. Look, in the previous calls, we had mentioned that the newbuilding market has not been very active. However, I have to say that over the last months, we've seen more activity in the newbuilding market. And we feel that going forward, there will be a lot of opportunities there. Now as company, we've done a lot of newbuildings and we have arranged pre- and post delivery financing with top class charterers. So this is definitely a source for new transactions. At the same time, the second hand market is also active. We bought this second hand chip, the CMA CGM, led to add its 2,005 100 TEUs with equity. It has a charter up until March of 2018. We felt that this is a good acquisition, a good opportunity. And there are definitely deals to be done in the secondhand market either with or without a medium or long term charter. So overall, I would say that we are positive for opportunities going forward. And these new building And these new building opportunities that they might present in the near future, how do they compare with your previous deals in terms of length of charters that you that they will be offered and you will be willing to accept? And also, how do you view your cost of capital vis a vis other participants, other competitors. I'm talking about both other charter owners or even the Chinese leasing houses that they have been active in other sectors in the shipping space? Yes. First of all, for the new buildings, I think there is possibility that the deals might be with a back to back charter, which could be for 5, H, 10 or even for a longer period of charter coverage. Traditionally, we have been doing newbuildings with long term charter coverage. This comes with vessels. They have a 7 year time charter. In the past, the 14,000 TEU ships we've done, they had a 10 year time charter. So there is nothing concrete to date. But generally speaking, I think that there could be opportunities with a medium- to long term time charter attached. Now regarding cost of capital and taxes to financing, in the past, we've used for new buildings, traditional bank debt and we have also used Chinese leasing for free and post delivery financing. We feel pharmacy compliance certificates with 50% leverage that we do have quite a competitive cost of capital and definitely we have access to commercial bank debt at very competitive terms. Now I cannot I'm not allowed to give you specific figures, but I think that our cost base in funding is extremely competitive today, especially when in some transactions we are also in a position to provide our corporate guarantee. Can you comment also about the competition? How this cost of capital compares with other charter owners? And do you see that the leasing houses can be participants or competitors in any of these potential transactions? Yes. I feel that, first of all, deals, I mean, I cannot provide you with specific figures. Again, I don't know the details of what everybody has been doing. But I can tell you that our view is by looking at numbers and on market information that regarding commercial parent debt or Chinese leasing that sort of we are quite competitive today. And this is a competitive advantage that we are willing to pass on to the charterer, which is our client. Now regarding Chinese lessors, they have been participating in the market. We have also used Chinese leasing. So I think that this should be considered also as a funding source, especially in cases where traditional commercial banks are no longer willing to provide pre- and post delivery financing for long termers, meaning 2 year pre delivery financing at 8 or 10 plus years post delivery. So this gap to sort of to a big extent has been covered by Chinese leasing companies, which also are selective. But I think that this is a financing source, which adds to our capabilities in raising commercial bank debt. Thank you, Greg. One last question. We have seen market getting much better this year, but we have seen even a more impressive decline in idle capacity. Charter rates seem that they have improved, but they have not improved as they have not gone as high as this below 2% idle capacity would indicate. What is your outlook for this year and the next couple of years? How do you view the supply and demand developing and illustrating at the charter rates? Yes. Couple of points. First of all, we cannot forecast the market, but I can tell you that let's start from the demand. The demand we see up to now and especially the demand we experienced in 2017 has been extremely positive. And we are also seeing very positive demand trends now since the beginning of 2018. Now the number of idle ships has come down at below 2%, and this is a very low number. This is very encouraging, taking into account that historically, the number of idle ships has been growing prior to Chinese New Year, whereas now we see idle capacity going down in January. And this is definitely very, very promising. Now charter rates have moved up and especially if some compares 2017 to 2016, we see a huge difference across the board. But I have to say that the year to date, we've seen more upside in the larger vessels, especially in the modern 10000, 11000 TEU ships, although the whole market has moved up. I cannot predict where charter rates will be going, but I can tell you that there are positive signs year to date. Thank you very much, Greg. And our next question today comes from Chris Wetherbee of Citigroup. Please go ahead. Yes. Hey, thanks. Good afternoon, guys. Wanted to ask about sort of chartering activity. In the relative near term, so you did a lot of work in 4Q and early 1Q to extend a bunch of ships, I guess. As we think out, well, I guess maybe two questions. First, you're in a lot of 45 to 90 day charters. How much duration or is there any duration in the market? How much of a discount would you have needed to have taken to put those ships out a little longer? And then maybe how do you think about sort of the environment in 45 to 90 days? And will you be able to sort of charter these into what you think might be a strengthening environment? Yes. First of all, we also had ships like the COSCO vessels, which are 9,500 TEUs, which we have charged out for 6 months. So I think, okay, there were some charges for 45 days to 90 days. But I think that overall, the charter length, if someone takes a big picture, the charter length overall has been improving in the market, which is a positive sign. Now it depends on the specifics of each vessel or the characteristics of the trade where sort of each vessel is trading, which are also factors in the charter length and of course, in the charter rate that like we're going to be receiving. But as you can see for the 11,000 TEU ships, which have been chartered at substantially higher rates compared to the previous fixtures, We have fixed them for a year at a much higher rate. So it depends on the vessel and it depends on the trade and to the fiscal condition of the asset. So I don't have a specific answer because we will have to go ship by ship. But overall, I would say that the market looks stronger and on average, charter periods have been are now becoming longer compared to shorter in the past. Okay. So that's helpful. And then I wanted to talk about the impairment for a minute. I don't know if you've identified the ships or how you think about maybe potential sales as you move through 2018 to sales of vessels and sort of where you might be more interested in potentially monetizing some of these assets as they roll off of charter over the course of this year? Yes. Those impairments that would take we took in total $18,000,000 of impairments. And if you look at sort of historically from our financial statements, for a ship of 70 plus vessels, the total impairment we've taken is like $20,000,000 $25,000,000 or sort of something like that, which is a very low number for us. So on balance sheet of north of $2,000,000,000 Now for those vessels, this is an accounting treatment, I would say on a very conservative basis. The fact that we took an accounting impairment does not mean that those vessels will not continue trading as long as the physical condition allows it and there is a market. So we consider it as an accounting measure, which again has been taken based on conservative considerations. And we don't think that this reflects the value potential of those ships. Now some of those ships may be scrapped in the future and now scrap prices are sort of relatively high. But the fact that we took those impairments does not indicate anything about the potential of those ships. Okay. But I mean, are sales still likely in terms of 2018? I mean, are you looking to potentially monetize into a slightly stronger market? Or how are you thinking about that now? Yes. Look, we have been traditionally renewing our fleet. So we feel that based on the scrap prices, which are now high, we can sell a ship where we feel that the potential of that asset is not great. And with that equity from the scrap proceeds, we can buy a 5 or 7 years younger vessel with good specifics and characteristics there. Of course, we're going to be doing this and this is what we may be doing. But I mean, we will have to look at it on a case by case basis. In the past, we've done a lot of times and when you have scrap prices at close to $4.80 or $500 per ton, this is definitely a good opportunity to do it and we are looking into it. But it depends on what we will find to replace. If not, and you will consider replacement values too high and those ships are still operating, we could keep some of those. So I would say that overall we are quite flexible. But of course we know that it makes sense to renew the fleet when the scrap prices are high. Okay. Thanks for the time. Appreciate it. Thank you. Today's next question comes from Ben Nolan with Stifel. Please go ahead. Yes. Hey, Greg. So this relates, I think, to something that you had mentioned or sort of part of your answer to Chris' question. When looking through the time charter market, you did renew or have short term renewals on some of those Costco vessels, which are almost 10,000 TE vessels. Although at the same time, we've seen, including some of your own vessels, 11,000 vessels, numbers that are almost twice as high in terms of the charter rate. Is that a function of the age or is there a substantial premium in today's market for much more modern fuel efficient assets? Is that how we should think of Yes. Those yes, I mean those 11,000 TEUs, they were delivered last year. They are new buildings. And the rates, they are at around and of course, it depends on the charter and also on the tenure. But the $28,000 per day shows a much stronger market for those ships. The cost per vessels, there were ships which were ordered in 2,003, delivered in 2,006, and they came off a 12 year charter in 2018. And I still believe that the $16,000 today for those vessels, bringing in mind where the market is, it's a rate that makes sense. So of course, there is some difference because have 2017 vessels and 2006 vessels built. But it doesn't mean that in a healthy market that all the vessels will not be commanding higher charter rates as well. So we felt that for the time being, having a direct continuation of those ships for 6 months, not for a longer period at 16,000. It is something that made sense. And then we'll see. Okay. So and then along those same lines, is it would you characterize the appetite for longer term charters maybe almost exclusively or at least very, very heavily weighted for the more modern ships relative to older equipment? Yes. But I mean, you can always come up with a longer time charter with a fixture for a sort of older vessel. But as a rule of thumb, today, I would say yes. I have to remind you that some 2014 wide beam ships we bought beginning of 2017, they were chartered for 7 years Or sort of 2013 vessel, it was chartered for 5 years. So I don't think that this is a specific rule. So we've seen 5 or 7 year charters for ship that could be 3 or 5 years old. Okay. So and then just sort of looking forward strategically, obviously, we have the emission the sulfur emission regulations coming into play in less than 2 years from now. As you pointed out, there's already a very big delta between what a more modern and more efficient ship can earn versus what an older ship can earn. Ideally, that would grow even wider should fuel prices inflate as a function of low sulfur regulations. How do you see that all playing out? And is that assumption correct, 1st of all, in your view? And then what are you doing sort of strategically in preparation for that? Look, this is something we know that will be happening from 2020. We are looking into it, but there are also a lot of considerations. It is the CapEx required per vessel, which could be a substantial amount of money. And we need to know how those upgrades will be paid back. So I'm not sure what's going to be the gas oil prices or the low sulfur prices in 2020 and what's going to be the difference to the fuel expenses for the fuel used today. So this is something we are considering. I don't have an answer on that yet, but this is something we're currently working on. But we need to make sure that if someone make that investment, this investment will make sense and that this will be paid back because these are money coming from our shareholders. So I mean, this is something we definitely have to look into it quite carefully. Now in a good market, all the ships are being employed. All the ships are receiving a healthy rate. So I'm not sure that I would say that after 2020, if ships are not equipped with the scrubbers, they will not be commanding charter rates that will make sense. I'm not sure about it at all. So I would have to be a bit more careful and we are evaluating the situation and we will be reverting on that. But we don't want to take any decisions, which will make us enter into capital expenditures without making sure that those assets would be paid back. Right. And I agree with that, especially as it relates to the scrubbers. I guess I was thinking more a little along the lines of how you think through sort of your balance of older equipment versus newer equipment? Look, most of the ships that are of older age today in our fleet, most of them have been bought in a low asset value environment. So the breakeven levels there are already below. The problem would be if we had a large fleet of Panamax ships, 15, 20 Panamaxes delivered in 2007 or 2,008, This will be the problem. Now ships bought a couple of years ago, 2,500 TEUs or 17 100 TEUs at very low prices. I do consider them more of an upside rather than as a problem. Okay. And that's helpful. I'll turn it over. Thanks, Craig. Thank you. And our next question today comes from Gregory Lewis of Credit Suisse. Please go ahead. Yes. Thank you and good afternoon. Hi. Good morning. Hi, Gregory. As we look at the idle container container fleet capacity, I mean it's less than 2% and we're in typically a seasonally softer part of the year. I guess I'm curious, as we look back at previous times, are you surprised given how low the idle container fleet is that rates haven't moved higher? I think that based on that assumption that you're correct, we have a low number of idle ships in January, which is the seasonal week month of like container shipping. And the charter rates have moved up, but not that high much up. However, in theory, someone would expect that charter rates will continue going up, probably at the faster pace right after Chinese New Year, which is what history has been showing us up to now. And this is what normally someone should expect. Now I cannot say that this is what will be happening, but there is definitely a lot of potential there, especially because charter rates have not moved up to the extent we all expected based on iron fleet at 2% or below 2%. Okay. And just knowing that you're much more plugged into the market and what is going on in vessel availability, as we move into the spring, are there a lot of vessels in the current fleet that are under contract that are rolling off? Or is that I mean, is there any way to estimate that to see if, yes, we're going to see an acceleration in demand for ships, but we're also going to see a lot of roll off of vessels. Do you have any feel for that? Yes. There are some indicators and some of them are being published by brokers availability over the next 3 to 6 months as you rightly said that ships coming off. And I would say that general speed availability now is not at high numbers. It's quite low regarding ships coming off charter over the next 3 to 6 months. So based on that indicator, I think that this reinforces the sort of argument that generally speaking someone would expect the market to move up after Chinese New Year. But again, that's a market. This is what the signs now are telling us, but of course, you can never predict. Okay. All right, gentlemen. Thank you very much for the time. Thank you. And our next question comes from Donald McLee of Verevar Capital Markets. Please go ahead. Hey, guys. There were a lot of questions around contract structure and charter negotiations earlier. And I was just wondering at a high level, how have those negotiations changed with liners relative to the past couple of years as that group is consolidated? I think you're right as the liner companies have consolidated and what we have been telling in the past and we still believe that it is that for the whole market, this is a healthy sign because the stronger aligner companies are, the better it is for the whole sector, including ourselves. Now still liner companies need to have part of their fleet chartered in and part of their fleet owned. So there are discussions with liner companies as we have been doing here in the past when a ship is coming off charter, whether this is going to be a direct continuation with the current charter or whether we're going to be marketing these assets in the open market. There are still discussions and there is still a need for doughnuts and we have a market which is again moving based on supply and demand. And you see where the charter market is in 2017 versus where it was in 2016. So you can argue that the more consolidation, the more marketing power line of companies have. At the same time, it's good to have healthy and strong clients. And the bottom line is that this is still a market based on supply and demand fundamentals. Got it. And then one more question, just looking at the order book. There were a large number of outstanding 2017 deliveries that were undelivered as of December. Could you comment on what you've seen in terms of slippage in the overall order book and how that might impact the pace of fleet growth in 2018 2019? Yes. There were some ships, especially larger vessels, I think those are the ones you're referring to, that they were pushed back in 2018 versus an originally scheduled 2017 delivery. This also had to do with the formation of Alliance and some M and A activity. Now brokers, again, factor in a minimum slippage for 2018. I don't want to sort of give out numbers, but I think that always and it is a matter of reality that some new buildings will be delivered, but could be delivered in 2019 versus 2018. Now the Q1 of 2018, we have a very heavy order book to be delivered, especially larger vessels, ships also that were pushed back from 2017 in this year. So I think it is logical to assume a minimum slippage rate closed for 2018 close to the one we saw in 2017. All right, great. That's helpful. And all my other questions were addressed. So I'll turn it over here. Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Zikos for any closing remarks. Thank you very much for dialing in today and for your interest in Costamare. We are looking forward to speaking with you again in the next quarterly results call. Thank you. And thank you, sir. That does conclude our conference for today. Thank you all for participating. You may now disconnect your