Earnings Call: Q2 2017

Jul 26, 2017

Welcome to the Costamare, Inc. Conference Call on the Second Quarter and First 6 Months twenty seventeen 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 the conference call is being recorded today, Wednesday, July 26, 2017. We would like to remind you that this conference call contains forward looking statements. Please take a moment to read slide number 2 in the presentation, which contains the forward looking statements. And I will now pass the call over to Mr. Zikos. Please go ahead, sir. Thank you and good morning, ladies and gentlemen. During the Q2, the company delivered solid results. We recently accepted delivery of 3 secondhand vessels which have been chartered for periods ranging from 5 to 7 years. During the quarter we entered into debt financing arrangements for 2 of them and we are into discussions regarding the debt finance of the 3rd ship. As of today, all of our newbuilding program is fully funded with remaining equity commitments amounting to only $2,000,000 during 2018. On the chartering side, we have no ship laid up. We continue to charter our vessels having chartered in total 6 ships since the last quarter. Finally, on the dividend, as the dividend reinvestment plan currently in place, members of the founding family, as has been the case since the inception of the plan have decided to reinvest in full the Q2 cash dividends. As mentioned in the past, our goal is to strengthen the company to enhance long term shareholder value. In that respect, we are actively looking at new transactions selectively. Turning now to the slide presentation. On slide 3 you can see the vessel delivered during the quarter. As already mentioned 3 second half ships were delivered and the debt for the 2 of them has been arranged. We are currently in the process of arranging the debt for the 3rd ship as well. Also the last of a series of 5 11000 TEU new buildings were delivered. This vessel was bought under our JV with York and upon delivery she commenced her charter employment. On Slide 4, we discuss our recent common stock offering. The offering was upsized from initially 12 point 5,000,000 shares to 13,500,000. The net proceeds amounted to 92,000,000 dollars Insiders as has been the case in all of our common stock offerings participated by buying $10,000,000 worth of shares. On Slide 5, you can see a summary of the chartering arrangements which have taken place during the quarter. We chartered in total 6 vessels and today we have no shift laid up. Moving on to Slide 6, we are showing the dividend declarations. 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 2nd quarter cash dividends in new shares under our dividend investment plan. On Slide 7 you can see the Q2 2017 results versus the same period of last year. During the Q2 of this year, the company generated revenues of $105,000,000 and adjusted net income of about $21,000,000 For the same period of 2016, the revenues amounted to $119,000,000 and adjusted net income to 32,000,000 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 prepaid lease rentals which is a non cash charge, and the non cash G and A expenses. Based on the above, the Q2 adjusted EPS amounts to $0.21 On Slide 8, we show the revenue contribution for our fleet. Almost 100% of our contracted cash comes from 1st class charterers like Evergreen, MSC, Maersk, COSCO and Hamburg Sud. We currently have about $1,400,000,000 in contracted revenues and the remaining times have a duration of about 3.1 years. On Slide 9, 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. On Slide 10, you can see on the left hand side our remaining CapEx. Following the financing and delivery of the last 11,000 TEU vessel, the company has just above $2,000,000 of remaining CapEx due in 2018. On the right hand side, we also saw the recent acquisitions as part of our fleet renewal. As already mentioned, the 3 secondhand ships have been chartered for periods from 5 to 7 years to merge the line with contracted revenues in excess of 100,000,000 dollars On the last slide, we are briefly discussing the market. Charter rates moved up during the 1st months of the year and have softened over the last weeks. The idle fleet is at a low rate of about 2.5%. There have been no meaningful orders year to date, bringing the order book down to about 13%. Box sales have been stabilizing. 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 you. And our first question today comes from line of Gregory Lewis of Credit Suisse. Yes. Hi. Thank you. This is Joe Nelson on for Greg today. Thank you and good afternoon. Thanks for taking my questions. Hi, Joe. Just first one for me. You guys mentioned you have one vessel left to finance. It's got a long term charter. But just kind of more generally speaking, kind of post the capital injection a few months ago, are you starting to see the lending market maybe saw a little bit here now that you've got a combination of maybe a little bit of a better backdrop and kind of post that capital injection as we think about maybe new financings and refinancings going forward? Okay. For the 3rd vessel, the Maersk Colon, we just started for 5 years to Maersk. We are in discussions with a major European financial institution. We have an agreement on terms and we are now in the process of finalizing the documents, the loan documents. This is something we would expect to close over the next weeks, but it's not closed yet. Now generally, I would say that, of course, we did an equity offering end of May. And as you will notice, we have cash on balance sheet of about $240,000,000 Generally, however, I would say that the commercial bank debt market is open for containership owners with a track record and for deals that make sense especially on the back of charter coverage with a major liner company. So up to now I don't recall ever missing on an opportunity because the debt could not be secured. Also the first two ships, the 2014 wide beam vessels which have a 7 year charter each, they were funded as well, of course, providing our corporate guarantee, but on the back of the contracted cash flows from Maersk. Great. Thank you. And then maybe just kind of one maybe just more industry. I mean, idle fleet is down, charter rates are while it doesn't look like they're great, but they're certainly better than they were a year ago. Are you starting to see your customers look maybe towards having discussions again about chartering for more term? Or do we still need to see a little bit more improvement before those conversations start to happen again? Yes. First of all, from our point of view, we've seen term chartering for 5 7 years and this is what we did in the previous quarter. I would agree, however, that this is definitely not the norm today and that the market has not reached a stage where liner companies are generally willing to commit for long periods especially comparing to the charter periods we used to see in the past. Now if you look at charter rates, summer 2016, summer 2017, we are definitely in a much better market today. However, overall, the containership market is down. I mean, asset values and charter rates, if you look at them from a historical perspective, I think no one would disagree that we are now experiencing a down market for quite some time now. And we believe that in this market environment there are and that there will be definitely more opportunities. Thank you. And the next question comes from Chris Wetherbee with Citigroup. Hi, good morning. This is Prashant Rao on for Chris. Thanks for taking the questions. Good morning, Chris. Good morning. I wanted to pick up on the last question a little bit. So clearly, you guys have had strong execution. The market is fundamentals are getting a little better than what we expected entering the year. The new alliances are supporting some of the rates as well. I kind of wanted to get a sense then, I mean, the rest of the market though isn't as strong as you guys are. So when you look out in terms of the macro view, how do you think about that in terms of thinking about A, financial performance and what your capital commitments are over the next several quarters, timing of the turnaround? And then 2, more specifically, when do we start thinking about reassessing the dividend? Or is it too early to enter that discussion? I mean, is that something that given where we are today and your performance, we could think of as early as 2018 as we lap some of these CapEx commitments? Or would you need to see the market firm up even more to give you some assurance? Okay. Let me start with the second part of the question that has to do with the dividend. Now we are paying $0.10 per share per quarter and we have the DRIP in place and the founding family insiders have been fully utilizing the DRIP. Now the dividend, first of all, I have to say that it is subject to the Board's discretion and this is a decision taken by the Board. On top of that, I would say that and as the founders own more than 50% of the company, I think we are fully aligned to interests. And you know we definitely like dividends. However, the dividends the dividend growth should have on a proper way on a healthy basis, meaning that it should come out at the same time with incremental excessive contracted cash flows coming from new business. Otherwise just to raise the dividend which you know in theory we could do tomorrow morning but just to raise the dividend for the sake of raising it without this sort of cash flows being based on solid contracted revenues, I don't think that this would be the appropriate thing to do. Now regarding the first part of the question, where we are with our CapEx commitments and how we see the market. We've mentioned in our press release and also in the slide presentation that today we are pretty much covered regarding our CapEx commitments, which is nothing. It's close to $2,000,000 during 2018 and has to do with the 2,000, 3,500 TEU ships, which will be delivered and those are chartered to Hamburg Sud for 7 years each. So we have no CapEx commitments. We have cash on balance sheet in the region of $240,000,000 And we still see opportunities. Now charter rates moved up in the 1st 3, 4 months of the year. We have been witnessing some softening in the market thereafter. Still, we do believe that today asset values and charter rates are at historically low levels and we definitely see opportunities. However, we're not going to rush to enter into new transactions without making sure that the fundamentals are there and that these are transactions that they make sense. So we will continue executing hopefully, but we will also continue being selective. Okay. That makes sense. Thank you for that very detailed answer. Also wanted to touch on you mentioned that the commercial bank debt market is open for more established players and particularly of charter linked cash flows with established liner companies. We've seen the order book be fairly controlled. We've got all the pieces in place for a recovery in the containership market. But if the financing side is starting to open up again, do you think there's any risk that the order book could build back up even if it's long tails like building out to like 2019? Or is there some other factor that might constrain that? Are we seeing some sort of are we seeing more rational thinking by participants in the market? Or how should we be thinking about that given that that aspect of the market is improving? Yes. I think that first of all commercial bank debt as already mentioned is available today. Banks have a budget to meet and they are looking for transactions with established players, transactions that are solid and make sense. Now there is some discipline also in the lending area which is a healthy sign. And I think that there is no reason why this would not continue in the future. Also regarding new transactions and new bidding orders as you mentioned you also need the piece of equity which I think today there are very few players who have the means to put equity and also secure the debt at terms that make sense. Okay. That's very helpful. Thanks very much for the time. I'll turn it over. Thanks. Thank you. And the next question comes from Michael Webber with Wells Fargo. Hey, good morning, Greg. How are you? Hi, Mike. Good morning. Hi, good morning. A couple of quick ones. You've already parsed over this a little bit, but I was hoping you could kind of sketch out maybe a more defined kind of priority list in terms of use of equity proceeds and kind of using that cash balance. Are we more likely to see new builds or picking off existing secondhand assets at the lines? And to what degree do you expect York to be involved? Yes. The new building markets today as we speak, I think it's closed. Year to date there have been no meaningful orders neither from liner companies nor from pure containership owners on a speculative basis. So most of the deals that have been taking place and it's quite an active S and P market has to do with secondhand vessels. So for secondhand vessels, we will continue being active either ships that on which we can secure employment like what we did in the previous quarter or like we've done in the past secondhand vessels without charter which we can buy with equity and that we may start charting them opportunistically. And only when we have a fixed employment, lever the asset. Now respective with regards to size, age, etcetera, we have been and we will continue being quite flexible. But where the market is today, I would say that it's got to be more of 2nd hand ships simply because liner companies as well are not willing to commit for newbuilding projects. Yes, that makes sense. In terms of the blocks of ships you're looking at, are you looking at anything that's big enough where you would need to bring in the JV partner or are these 2 or 3 vessels ships that you can handle with the cash balance you've got? No, I mean, we could I think, as I said, we can be pretty flexible. First of all, we have the JV with York. We can be buying SIMSA together with our partners and this partnership up to now has been going extremely well. Great. Right. No, I know you guys have a lot of flexibility. I'm just curious as to specifically what you're looking at. Are you looking at anything that would be big enough that you would need to actually kind of tap off those additional resources? I don't think so today. I mean, of course, I can never predict the market and I cannot for the future. However, the way we are set up today with that cash on balance sheet, with our ability to access the commercial bank debt at quite good terms. I cannot foresee today the reason to raise fresh equity, if that's the question, common stock today and dilute our assets. No, not really. I can follow-up with the F-one. I was just trying to get a sense of the scale of the block to ships that you're looking at or investigating whether they were how large they were, but I can follow-up offline. Just one more and I'll turn it over. This is just higher level and it kind of gets into the new build question, but we've seen some a handful of press releases throughout the first half of the year, I think most recently with MOL announcing a design with, I believe it was Samsung for an LNG powered 20,000 TEU container ship. And it seems like we're not quite there yet, but the I'm trying to get a sense of how a third party vessel owner or asset provider thinks about that new technology. And I guess maybe if you look at 1, have you looked at anything in Ernst that would involve kind of LNG as a marine fuel? And maybe can you talk a bit about how you would look at the residual value risk associated with that first gen tech as opposed to say that's something secondhand in the conventional space? How much more worried would you be about stepping in and providing that kind of tonnage to somebody in like a 5 or 10 year basis? Yes. First of all, because you touched upon the residual value risk which normally the ship owner is taking, in all of our transactions, whether it's a new building or a secondhand ship, we first tried to cover our downside, which is the residual value risk now. We are aware of the discussion for such projects. I don't think that we are there yet. If in the future this is something that our clients will ask us to do, as long as we feel comfortable with the residual value and with the cash flows and everything, we would of course look at it. But I think it is a bit premature today, especially when there is no new building market at all. I would say that it's really premature. Okay. But we would be there, of course, if there is a need. We'll definitely look at it. That's fair. All right. I will turn it over. Thanks for the time, Greg. Okay. Thanks, Mike. Thank you. Thank And the next question comes from Ben Nolan with Stifel. Hi, good morning. This is actually Steven Titsworth on for Ben Nolan. Just one quick question. Hi. I know in the past you've talked previously about scrubber technologies given the new fuel emissions that are going to hit the market in the next couple of years or so. Can you provide just a little more color or update on your thinking behind whether to install emission scrubbers on your vessels or not? Okay. It's a couple of things. First of all, the regulations regarding the water ballast treatment, which have been there are discussions about postponing this for a couple of years, means that from 2017 to 2019. These are the discussions now. Now regarding the water ballast treatment, the cost that had to do with our fleet, this is something that we had budgeted. The fact that it is postponed for a couple of years from a pure cash flow perspective, you can argue that it is positive for the ship owners. On the other hand, if it's something that would slow down scrapping of older ships, of course, this is something that does not help as a whole because scrapping especially last year has been quite helpful in managing supply and demand imbalance. Have I covered you or not? Yes, the water ballast treatment makes sense. I was wondering about the fuel emissions for the low sulfur fuel regulations that are coming into the market? This is something, yes. This is something which is a factor which is going to be determining the cost and like whether the scrubbers are required will be the cost of this fuel and whether there is such a difference in the cost which you know would say you know justify installing the scrubbers and also whatever other technical implications the installation of those scrubbers involves. I think this is going to bridge down the road in 2020. So for us, it would be a bit premature to give you a concise answer from now. This is something we definitely are looking at, but it will depend on a number of factors and also mainly on the oil price. Okay. Assuming you want to go ahead and install the scrubbers on your vessels, how much time do you think you would need to give a shipyard in order to meet the regulations deadlines? I think, look, this is something we would say, if we were to do it, we would do it in advance. We wouldn't wait for the regulations to kick in, especially if it's something we have agreed with the charterer and then go to the shipyard. I guess, we would start the discussions and the negotiations, plus covering all the technical aspects quite some months in advance. Now whether this will be 3 or 5 months, I cannot tell you from now, but we will definitely be proactive. Okay. That works for me. That's all I have. Thank you for your time. Thank you. Thank you. And the next question comes from Brandon Oglenski with Barclays. Hey, this is Eric Morgan on for Brandon. Thanks for taking our question. Just wondering if you could comment on consolidation among the liners. Is there a way to kind of quantify or how would you describe how recent M and A and alliance ships are impacting rates relative to other factors? And I guess in light of Costco and OCL, would you say that this recent wave of consolidation is nearing an end or do you think there are more opportunities out there? Okay. The first part of the question consolidation in the liner sector it is something that has been going on for a couple of years now or even more. It's something that from the liner's perspective, I think it definitely makes sense. And now you have like the 3 alliances controlling close to 80%, 85% of the global trade. That was not the case if someone looked at the liner company landscape 4, 5 years ago. Now from our point of view, you can argue that there are less clients. However, we want to have and strong clients also from a credit perspective and also from a profitability perspective. So this is where the whole sector is heading. We are fine with that. And as long as this is helpful for our clients, I guess this is something that we would also welcome. Now you can argue that there is more bargaining power. However, what is the value of having more liner companies around if some of them cannot meet their debt service payments or they are charter hire obligations. So I think the consolidation as I said is something that makes sense. There are synergies to be achieved. And it's something that I say I think that was expected. It's not something that has quoted by surprise. Okay. And then maybe just one more on the market. Could you give us some insight on the demand side of the equation? A lot of the global trade data looks pretty strong right now. Just wondering how the liners are thinking about the outlook on trade? I think that from the demand point of view, demand has been okay. If you look at the major trades, for instance, Asia, Europe year to date, overall, you have a growth in the region of 5%. Asia, U. S, Transpacific, you are in the region of 8% plus. I mean, this is based on broader statistics. So demand, although we don't have the previous 3 times GDP multiple, it's still something that overall is fine. It is the supply of the vessels and it is the sort of the 1,500,000, 1,700,000 TEA used to scheduled to be delivered this next year that has been creating imbalance between supply and demand. We have an order book of around 13%. And this order book, I mean, as it stands today assuming no new orders, is very thin from 2019 onwards. However, there are a lot of big ships to be delivered or scheduled to be delivered without factoring in any slippage in 2017 and in 2018. Appreciate it. Okay. Thank you. And at this time, I would like to return the call to management for any closing comments. Thank you. Thank you very much for dialing today and for your interest in Costa Mare. We are looking forward to speaking with you again during our next quarterly results call. Thank you. Thank you. That does conclude our conference call for today. Thank you all for participating. You may now disconnect.