Earnings Call: Q3 2017

Oct 25, 2017

Morning, and welcome to the Costa Mare Third Quarter 2017 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Gregory Zikos, CFO. Please go ahead, sir. Thank you, and good morning, ladies and gentlemen. During the Q3, the company delivered positive results. On the financing side, we entered into a debt financing agreement with a leading institution for the financing of the Maersk Kowloon. The vessel has a 5 year charter to Maersk. Regarding our commitments, all of our new bidding program is fully funded with remaining equity commitments amounting $22,000,000 during 2018. Regarding chartering, we chartered in total 15 ships during the quarter at substantially higher rates. We have no ship laid up. Finally, on the dividend and the dividend reinvestment plan currently in place, members of the founding family have decided to reinvest in full the 3rd quarter cash dividends. This is a 6th consecutive quarter that insiders have decided to reinvest their dividends in new shares. Moving now to the slide presentation. On Slide 3 you can see a summary of our recent chartering activity. The way the market has been moving is obvious. On average, the ships opening have been recharted at a 23% higher rate. On Slide 4, you can see the new financing for Maersk Kowloon, which has been acquired in the Q2 and commenced its 5 year charter to Maersk Line. The loan is being amortized during the tenure of the charter party. We also sold during the quarter 2 nearly 30 year old container vessels for demolition. The sale of those ships resulted in an accounting gain of approximately $1,500,000 Moving on to Slide 5, during the previous quarter we declared $0.10 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 3rd quarter cash dividend in new shares under our dividend reinvestment plan. On Slide 6, you can see the Q3 2017 results. During the Q3 of this year, the company generated revenues of 101,000,000 dollars and adjusted net income of $17,200,000 Based on the above, the 3rd quarter adjusted EPS amounts to $0.16 Our adjusted figures take into consideration the following non cash items, the accrued charter revenues, the gain or loss on sale of vessels, the gain or loss resulting from derivatives, the amortization of the prepaid lease rentals, which is a non cash charge and the non cash G and A expenses. 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, Costco, Humble Suit and Hapacloride. We currently have $1,300,000,000 in contracted revenues and the remaining time charter duration of about 3 years. On Slide 8, you can see the resilience of our business model. The bar show the revenues and adjusted net income since 2008. The dotted line is a Time Charter Index. Irrespective of market movements, the company has been consistently performing. Moving on to Slide 9. As of the end of this quarter we had cash on balance sheet of $234,000,000 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 a 5 year period, we have raised debt financing of close to $750,000,000 for new business. Based on the latest compliance certificates provided to our lenders, we have a leverage in the region of 51%. On the last slide, we're discussing the market. Charter rates moved up during the 1st 3 quarters of the year with the market softening since the beginning of Q4. The IATA fleet currently has moved up to 3.1%. The order book remains at a historically low level of around 14%. 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 you. We will now begin the question and answer session. Today's first question comes from Chris Wetherbee of Citigroup. Please go ahead. Good morning. This is Sarah Huang on for Chris. Yes. Hi, good morning. Hey, good morning. First question is, there were several vessels, I think around 10, approaching the end of charters in the next 2 months. Just wondering if you could comment on the renewal activity so far in Q4? Yes. Two points. First, as you have seen, we charted 15 ships since our latest announcement. So we have been relatively active. And today, although the number of idle ships has come up slightly above 3%, we have no ships laid up. So I cannot possibly predict the rates and the tenors for which those ships will be chartered. But I can tell you that we will try our best in order to maximize the potential of those assets. I'm afraid I cannot give you a precise answer about the chartering of those ships. But generally speaking, we start marketing the vessel sometime before its opening, meaning before this comes out of charter, either with the current charter or an extension or with new charters. I see. That's helpful. Just follow-up, do you have any updates on the 2 vessels that schedule for delivery in first half of twenty eighteen? Yes. You are referring to the 2 new buildings chartered to Hamburg Sud for several years. Those ships, based on the latest information we have, those ships will be delivered on schedule, meaning during the 1st and second quarter of 2018. So the 1st ship will be delivered during the Q1 of the coming year and the second during the Q2 as per the initial schedule with the shipyard. The ships are chartered to Hamburg Sud for 7 years. And just to remind you that those ships have been bought under our joint venture with York. And Costa Mare has a 49% stake in each of those vessels. Okay, that's helpful. If I may, can I so the order book for containership now I think it's 13.8%, but there are a lot of ships to be delivered in 2018 assuming no slippage? Can you give us some color on how you think about order book and the charter risk environment next year? Thank you. Yes. You're right that we have an order book today, which is slightly below 14%, which from a historical perspective is a very low number. However, there are delivers to take place within 2018. Different people come with different projections regarding what's going to be the net additions to the fleet. And this has to do with the assumptions you make regarding sleep pads and demolition of orderships. The order book today is heavily skewed towards the larger vessels. And there's more than 1,000,000 TEUs to be delivered next year. However, the precise numbers have to do. They are a function of the slippage and of the demolition. So I cannot possibly forecast that. However, from 2019 onwards, the order book is very thin. And apart from the 2 latest orders from liner company, which we saw, which are for large vessels, 20,000 TEUs, generally speaking, the new building market has not been very active, especially compared to the previous years. And our next question today comes from Gregory Lewis of Credit Suisse. Please go ahead. Hey, good afternoon. This is Joe Nelson on for Greg today. And thanks for taking my questions. Hi, Joe. So first one for me, the market looks to be off its bottom and we seem to be in the early stages of a recovery here. Are customers beginning to come to you with sort of longer terms on their charters, looking to extend where maybe a year ago it was a 6 month charter now, maybe it's a year on that a better rate? And then maybe a second part to that is, what do you think we need to see before we start to get to the what do you think we need to see before we start to get those real long term multi year charters starting to get fixed once again? Yes. The charter market has been moving up during the 1st 3 quarters of the year. From the beginning of October, which is something relatively usual in container shipping because there is some seasonality there. We have seen some softening in charter rates, especially after the week of the Chinese New Year. However, we're not sure I'm not sure whether this is a trend or whether this has to do with the seasonality of the business. Now as you may have seen, we've chartered our 211,000 TEU ships for about a year. And in the second quarter, we chartered 3 second half ships for 5 7 years. So I cannot say that today, there are long term or medium term fixtures like the ones we experienced in the past. However, there transactions which involve longer charter durations. Now what needs to be done or what do we need to see before liners committing for longer periods? This has to do with the Eastliner Company's strategy, positioning. It's also a function of demand growth. And liners, I guess, they need to feel comfortable about committing for long term charter chartered in tonnage. I cannot possibly predict when this will be happening. But we've seen some encouraging signs over the last quarters. And then second, and thinking about your fleet, the IMO does have a couple of new environmental regulations coming into effect, the ballast water treatment, sulfur caps. And some of your customers have been pretty vocal in their support of some of these rules. I mean, do you have a view on what, if any, potential capital outlays might be needed in say the next 2 years or so to position your fleet ahead of these new rules? Yes. First of all, regarding the water ballast treatment, this as per the later development, this is to be effective from 2020 onwards. And this was postponed, so it's like 2.5 years, I mean, until actual implementation. We have internally, we have looked at numbers about how much will be the CapEx required for that. But I think it's in shipping like trying to predict 2.5 years in advance what's going to be the situation, what's going to be the capital outlay required from 2020 onwards. I'm afraid this is going to be a very generic approach. So for the next 2.5 years, as far as we know, there is the water balance treatment is something that will not be applicable. However, we have run some numbers from 2020 onwards, but it's at relatively premature stage today. And just kind of thinking about it, when do you think you might have to make some decisions on timing your any potential upgrades? Is it maybe next year or 2019? It's it's impossible to know today to whom those ships will be chartered in 2020 is the first point. Then the second point, I guess, like a year in advance or like some quarters in advance, we will have a much better picture. But from our side, we will make sure that whatever cash requirements are there, we're going to be more than able to meet them. All right. Thank you very much for the time today, Nala. I'll turn it over. Today's next question comes from Ben Nolan of Stifel. Please go ahead. Yes. Thanks. Hey, Greg. So I wanted to follow-up a little bit on something that you're mentioning earlier with respect to looking for new opportunities. And obviously, you did the Maersk vessel and announced it in the Q2. Has there been much activity there among some of the liner companies looking at their existing fleets, trying to find assets that can be chartered out, taken off the books and held by someone like you and doing it on longer term charters? Or more of your conversations revolving around sort of new builds and new opportunities? Are more of your conversations revolving around sort of new builds or new opportunities? Today, the new bidding market is not very active with a couple of exceptions. Most of the discussions or the new transactions we look at mainly have to do with secondhand vessels, either a sale, a leaseback or buying from a 3rd party shipowner or buying through a financial institution and chartering out the ship to the liner company for a period. We have not engaged in any discussions regarding newbuildings today and the market is not very active in that front. Okay. But there are discussions for maybe existing equipment that sort of thing is more active I guess? Yes. Sale and leasebacks or sort of buying some distressed in brackets type of assets, which we can lease out or charter to liner companies. I think this is the vast majority of the business we're currently looking at. We are engaged in a lot of discussions. We're generally active. However, we need to make sure that this we're going to be entering into will also be making sense for our shareholders. The first thing we look at every transaction is first to cover our downside. And then the second step is to also make sure that there is some good return for the shareholders. Okay. So to that extent or thinking through it, obviously, you guys had been relatively active in buying vessels without contracts over the last few years just at distressed prices as well as a few sale leasebacks. But, are there given the improvement in asset values, do you think that there is still good value in buying vessels without contract or is it better at this point in the cycle to be doing things that have firm contracts and guaranteed return? I think you can still find deals that make sense, whether it is with the target average like the transactions we did in the beginning of the year with Maersk or buying ships with equity and with a short remaining time charter duration. As long as we feel comfortable with the quality of the asset and also with its chartering potential. We are looking at both cases. Of course, we know that we buy something without charter coverage. We need to make sure that the price we pay is something that we feel very comfortable with the charting potential of this vessel. Right. And then lastly for me, this is something that has come up in a few conversations that I've been having with various owners recently. It seems like some of the bigger owners like yourselves did a relatively good job or had better success in finding employment for vessels in the really trough parts of the market rather than a lot of the smaller operators who it seems like they had the preponderance of layups. And there's a sense that among people that I've talked to that it's increasingly harder for smaller container owners to really be viable throughout the cycle and that it makes more sense for bigger owners to sort of be that counterparty for the liners. Is that something that you guys feel as well? And are you seeing any difference in the level of competition out in the market? Yes, it's a couple of points. First of all, it's a capital intensive business. And as a ship owner, you need to maintain the vessel in such a way so that it can be charted out to a major liner counterpart. So part of what you say may have to do with the physical condition of the vessel and with the quality of maintenance. Also liner companies want to charter in vessels from ship owners. They know that they have the financial means to service their debt, to manage properly the vessels for the coming years. So although I don't have something specific in mind, I can tell you that generally, having access to capital and being well capitalized, it's something that definitely makes sense, especially in today's market environment. And our next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead. Yes. Hi, Greg. Thank you for the opportunity. Greg, I want to ask you about the competitive landscape and the use of the capital that you have in your balance sheet, I understand that asset prices have moved up the last 6 months. I'm wondering whether you encounter more competition from other ship owners when you look for new acquisitions or from liners and how overall is the landscape out there? I think that if you compare the competition we are seeing today with the competition that we experienced years ago. I think today, there are definitely less competitors as pure containers owners. As I was mentioning earlier, access to capital, whether it is equity or whether it is commercial bank debt or whether it is Chinese leasing in whatever form, it's something that's definitely important. And the competition is much less compared to what we saw in the past. This is the first point. The second point is that the Costa Marlin has been shipping for over 40 years. So there are very strong relationships with all of our clients, and we need to make sure that we cater to their needs. So there is competition today. However, the competition is much less from what was in the past, which is a healthy sign. So can you give us an idea of how many deals you have seen the last 6 months since the most recent capital raise? And what were the reasons that we haven't seen any deployment of this capital? And also, would you consider using part of this capital to buy back your stock? Yes. We have seen 1st of all, we have done some transactions since the beginning of the year. And 2 of those vessels were 2014 built. The other was 2,005 built, but sorry, 2012 built. But we've seen transactions that and we have done some deals now. We have participated in various bid processes for ships coming out from other ship owners or coming out from financial institutions. However, we were willing to bid for up to a specific price for the vessel, and we didn't want to take excessive residual value risk. We might have access to commercial backed debt, cash on balance sheet of north of €200,000,000 to use as equity. However, it doesn't mean that we're going to go and buy or commit to anything that it is out there without making sure that we feel comfortable about the quality of the counterparty and of the deal economics. So if you ask me, yes, we've seen a number of transactions involving more than, I would say, 15, 20 vessels over the last couple of quarters. But we have passed on most of them. It doesn't mean that and today, as we speak, we look at a lot of things. I think that there are definitely opportunities. Hopefully, over the next quarters, we're going to be able to discuss those in more detail. But we also have some internal risk assessment, and we need to make sure that don't take excessive risk, especially in today's market environment. Thank you, Greg. One last question. There are some articles out there about a potential comparison with 1 of the largest ship managers and ship owners in the container ship space and the creation of a joint venture, a chartering joint venture with Costamare. Is there something that you can comment about to give us some color? How important it is for you that you have a large fleet to secure profitable charters versus some shipowner that has a much smaller vessels? And how this cooperation can change your bargaining power versus your customers? Yes. I cannot say a lot at this stage also for linked reasons. The only thing I can say is that we are in discussions regarding putting together just a simple charter brokerage business. That's all. I cannot say more. And this is something that we can discuss, I guess, in the next quarterly results call. Could you give me a brief comment of the importance of having a large fleet versus ship owners that they have 2 or 3 or 5 vessels? And how different is the competition when you are trying to secure charters? I think that it's 2 things. What we are trying to what we are discussing with our German counterparts, I have to stick to that. It is a charter brokerage business where we're going to be combining the commercial charting activities of our fleet, and that's all. We feel it is something that generally makes sense. Costa Marin will not be involved. It's going to be affiliate parties being involved. Costa Marin will not be part of this agreement. So at this stage, I'm afraid I cannot say anything more. However, I have to stress that it is a simple, a plain charter broker at the business. That's all. Thank you very much, Greg. Okay. Thank you. And our next question comes from Mike Webber, Wells Fargo. Please go ahead. Hey, good morning, Greg. How are you? Hi, Mike. Good morning. Hi, thank you. Hey, good. Just a couple of questions. A lot of it's already been kind of parsed over. But I just wanted to comp maybe where we are this year relative to last year when rates got a bit tighter, a bit faster than everyone expected. It looks like the idle shipping capacity is it's up maybe quarter on quarter, but we're still off year on year. So things are naturally a bit tighter this year relative to last year. I'm just curious, how would you compare your rate expectations for the next 6 months relative to where we were last year? And do you think we're on the same kind of seasonal pattern, albeit maybe a bit amplified? Yes. Look, last year 2016, I think it was a very bad year for container shipping, especially for charter rates. If you look at the charter rates like Q2 or Q3 20 16 versus 2017, today, the market is much better. And charter rates have improved substantially during the 1st 9 months of this year. Now we have seen some softening beginning from October of 2017, which is something expected from our side. And it's got to do with seasonality, Chinese New Year. And traditionally, the 3rd and especially the Q4 of every year are the type of weakest quarters in container shipping. Now I cannot predict that where sort of rates are going to be heading moving forward. However, I can tell you that there are positive signs coming from demand growth, which has been exceptional up to now this year. The order book, apart from 2 big new building orders put by liner companies, has not been very active. And we haven't seen a lot of newbuilding ordering. There is up to now, at least, generally speaking, much more disciplined. Charter rates, although they are much below the mid title levels, they sort of have improved. And it remains to be seen whether they will continue. So and from 2019, we have a very thin order book. So there are some positive signs. However, it is a market. We have been experiencing a down market, generally speaking, for the last 6, 7 years at least. I cannot possibly predict. But I can tell you that as a company, we are we know what to do, and we have a plan under each scenario. If the market stays as it is, meaning the softening in the charter rates, this may provide with more opportunities. At the same time, we have ships coming out of charter over the next couple of quarters. And it's going to be a positive surprise to see the market moving where it was beginning of this year. Okay, thanks. Maybe just one more strategic question. If you think about the fact that you've got some real consolidation happening now among the liner complex as opposed to alliances and really kind of more capital discipline. And those larger lines, the cost of capital advantage there relative to their, at least their container ship leasing partners is going to be even wider and inverted. I'm just curious, when you think about the intermediate to long term with larger customers, do you think when you look at your fleet, you've got the smaller operating vessels that probably it's probably higher return business and you've got these large slugs of vessels on the container lines. Does that business make sense in terms of those longer those large slugs of large ships chartered into the lines 5, 6 years from now? Do you think if you look at the split of your business, do you think you are more of an operator in 5 years than you are maybe kind of a balance sheet provider to some of the container lines? Look, we have always been an operator, and we've also seen as just like Right. You're an operator now I'm just curious, does that split get a bit wider 5 years from now? Are you doing more of that shorter term business where you can really add value from an operating perspective as opposed to just kind of chunks of capital that's less attractive? No, I think that I cannot predict the future, but I can tell you that our strategy is to remain an operator, charter our ships to liner companies. Liner companies, they always need to charter in some ships and they cannot own 100% if they operate. However, it's not part of our strategy to sort of become a financing vehicle. We our goal is to continue buying, operating, financing those assets which are there out to line up openers. And we also take the residual value risk at the expiry of the charter party. This is what we have been doing. And I think this is what we will continue doing. I understand that the market, the liner company business, it's much more consolidated. At the same time, this has some positive implications because we have stronger clients who may be willing to do bigger business. But I don't think that this should change our business model. Okay. All right. Thanks for the time, Greg. Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like turn the conference back over to Mr. Zikos for any closing remarks. Okay. Thank you very much for your interest, Icos Amare and for dialing in today. We're looking forward to speaking again with you at the next quarterly results call. Thank you. And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.