Earnings Call: Q3 2016

Oct 25, 2016

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the Third Quarter 2016 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, Tuesday, October 25, 2016. 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. Zico. Please go ahead, sir. You and good morning, ladies and gentlemen. During the Q3, the company delivered solid results. On the chartering side, we continue to employ our vessels, having chartered in total 8 ships opening during the last 3 months. Regarding our newbuilding program, we have now accepted delivery of all 5 14,000 TEU vessels, which have commenced their 10 year charter. We have also accepted delivery of 111,000 TEU ship, both together with our JV partners, and we have deferred the delivery of the remaining 4 for the Q1 of 2017. As mentioned in our latest press release of this month, our goal is to strengthen the company and enhance long term shareholder value. As committed shareholders, the founding family currently controlling above 65% of the company have reinvested in full via cash dividends since the inception of the dividend reinvestment plan. Moving now to the slide presentation. On slide 3, we are providing a summary of the chartering arrangements which took place during the quarter. As already mentioned, we have chartered the total 8 ships over the last 3 months. On Slide 4, we are providing an update of our newbuilding program. Including the latest deliveries, we have now accepted delivery of all 5 14,000 TEU vessels, which have started their 10 year charters with Evergreen. With regards to our 11,000 TEU ships we received the first one in September and agreed to defer the delivery of the remaining 4 for the Q1 of 2017. All of our new bidding program is fully funded with the exception of 111,000 TEU ship which will be delivered in about 5 months. On slide 5, we show the refinancings we completed over the last quarter deferring total balloons of €360,000,000 for a 3 year period from 2018 to 2021. As already mentioned, the founding family has decided to invest all the second and third quarter cash dividends in new shares under our DRIP program. On Slide 6, you can see the Q3 2016 results versus the same period of last year. During the Q3 of this year, the company generated revenues of $118,000,000 adjusted EBITDA of $80,000,000 and adjusted net income of $28,000,000 For the same period of last year, the revenues amounted to $124,000,000 and the adjusted EBITDA and net income to $89,000,000 $35,000,000 respectively. Our adjusted figures take into consideration the following non cash items, the accrued charter revenues, the gain or loss on sale of vessels, the gains or losses 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 3rd quarter adjusted EPS amounts to $0.37 versus $0.46 the year before. On Slide 7, we are showing the revenue contribution for our fleet. More than 99% of our contracted cash comes from 1st class charters like MSC, Evergreen, Merced, Costco and Hubbell Jute. We have 1,600,000,000 dollars in contracted revenues and the remaining time charter duration of about 3.4 years. I think slide 8 speaks for itself. You can see the resilience of our business model. The bars are the revenues at EBITDA since 2007 and the dotted line is the Time Charter Index. As you can see in a cyclical industry like shipping and irrespective of market movements, the company has been performing based on its long term contracted cash flow with top charters. On Slide 9, you can see our remaining CapEx commitments. As you will notice these are rather low for a company with cash on balance sheet of above 150,000,000 dollars Our remaining CapEx is less than $25,000,000 without any debt finance for the 5th 11000 TEU newbuilding. We plan to initiate the financing process for that vessel closer to its delivery in March 2017. Assuming 50% financing for that ship, our remaining CapEx would be just €3,000,000 Slide 10 shows the smoothening impact on our debt repayment profile of the recent refinancing. As you will see, there are now no debt maturities in 2016 2017, and we have reduced our 2018 balloons by $360,000,000 Slide 11 deals with the potential effect of the re chartering for the next 12 months. As you can see, even if we assume the 40% discount on new charter rates entered into during the next year versus current fixtures, the difference on a revenue basis would be less than 4%. And on the last slide, we're discussing the market. Charter rates and asset values are under pressure. The number of idle ships has come up to 6.5%. The order book stands at 16.5%. As we have mentioned in the past, we are well positioned to continue to grow in such an environment, which provides for opportunities. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now. Thank Your first question comes from Gregory Lewis at Credit Suisse. Good afternoon. Yes. Hi. Good morning. Hi. Craig, could you talk a little bit more about the decision to push out the new builds and sort of what opportunities you're seeing for those? And could we continue to see more delivery delays on those vessels if the market sort of doesn't or should I say if there's not opportunities to put those on contracts? Yes. First of all, we have decided to push back the delivery of those 4 ships. And those will be delivered from February until the end of March of 20 17. The reason has obviously has to do with market conditions today. And we feel that we will have more flexibility regarding their chartering, especially after Chinese New Year, which is the 1st week of February. There is interest. As mentioned in the past, we tend to take a long term view on all of our projects including this one. And we feel comfortable regarding the chartering potential of those ships. But based on today's market conditions, we felt that it is appropriate to push their deliveries for the next quarter of 2017. Okay. Okay, great. And then just given what's happened with Hengen and the turmoil that that's created in the shipping markets, there's definitely been some talk about potentially some other liner companies facing similar challenges. At this point, are we are you is Costa Mare seeing any of their customers late on payments? Yes. I can tell you that as far as we are concerned we have not experienced any delays in the payments, in the charter hire payments from our clients. And on Slide 7, we have a pie chart with our contracted cash and where this is coming from. All the payments are current. So I don't have anything to mention in that respect. Okay. That's great news. That's a good thing. Anyway, hey, guys, thank you very much for the time. Thank you. The next question is from Fotis Giannakoulis at Morgan Stanley. Yes. Hello, Greg, and thank you. Greg, you have managed to stay highly profitable in a very challenging environment, but we all see that the market is very difficult. And when the contracts expire, there might the profitability probably will be eroding. I want to understand, based on your risk management analysis, if the market remains as it is today, how long can the company go through the current market without having liquidity issues? Okay. First of all, a couple of things. Regarding profitability, I would have to refer you to slide 11, where this shows the effect of re chartering. These are all the ships coming out of charter over the next 12 months starting from September 30. And you will see that if those ships are rechartered at a discount compared to today's rate and those ships today are sort of also yielding a low rate based on today's market environment, what's going to be the effect? And as you can see on a revenue percentage, the effect is not going to be substantial, quite the opposite. So and the rest of the ships that don't come out of charter over the next 12 months, All the payments from our charters are current. We feel extremely comfortable with the credit quality of our charters. So the profitability, it is a cyclical industry. Of course, it is affected by market conditions. But we shouldn't forget that we also have a weighted average time charter duration of a couple of years more sorry of 3.4 years as of today. Now regarding the company's liquidity, as we announced at the beginning of this month, we have proactively refinanced our debt, especially a couple of big balloons which were due in 2018. So we have smoothened our debt repayment schedule which definitely helps our liquidity. And at the same time, we have adjusted the dividend based on today's market conditions. And we shouldn't forget that the founding family, which owns 65% of the company, has up to now at least since the DRIP was initiated, received no cash and have invested all the cash dividends in new shares. So based on all that, I think that the company has more than enough liquidity in order to weather the storm over the next couple of years or more than that. So, Sal, we assume that given the fact that you have 3.5 year charters that for the 3.5 years, we shouldn't worry about the profitability, go to 2020 with a profitable company even if the market stays the same? If the market stay look, you will have to make a lot of assumptions regarding re chartering market conditions, etcetera, going forward. So I cannot possibly forecast now what the company's profitability will be in 2020. I think it will be a very difficult task for everybody in shipping, Livasai and Costa Amare and container shipping. But I can tell you that proactively we have done I think everything we could in order to first cover our downside. This is our first priority. And secondly, position ourselves so that we can opportunistically buy assets in such a depressed market environment. Greg, regarding the market, we have seen very weak demand growth rates, if I'm not mistaken, around 2%, the demand is growing this year. This is significantly lower than what we saw in the past. Can you give us an explanation of why demand has declined? And if you think that there is any risk of a structural any structural risk in the industry that can affect the demand even further going forward? I think, 1st of all, today, we talk about excess supply. I mean, the demand is not great. However, global demand year to date or sort of for the 1st 8 months of 2016, this is based on container trade statistics, is up 3.5%. So I'm not saying that the overall demand is great, but the problem in container shipping has mainly to do with oversupply. And with an order book where close to 75% of today's order book consists of ships of 5,000 TEUs and above. Also in some specific trade routes, let's take for instance as sort of Asia Europe, I agree that the demand is relatively weak at sort of 1.5%. But demand growth is there. Intra Asia growth is in the region of 7%. So U. S. Imports are generally up by 3.7%. So I'm not sure it mainly has to do with demand, but it's an excessive supply type of problem. Now today we have an order book which is below 70%. We have demolition picking up and it is expected based on progress estimates that the demolition for the year is going to reach 600,000 TEUs or even higher than that, which are all positive signs. And we haven't seen sort of any newbuilding orders or any substantial newbuilding ordering since the beginning of this year. So all these are positive signs towards managing the supply and demand more efficiently. And one last question for me. Given the fact that you have a good cash position right now and the family is willing to forgo its dividend. Asset prices have declined significantly, particularly in the smaller vessels below 6, 7000 TEU. Is there any interest for you to buy any of these vessels, any particular asset class that you would completely avoid? And also, I understand with the hands in bankruptcy, a lot of vessels will come out for sale. Is this something that is happening right now that you see it? And is this something that would be of interest? Or what kind of risks do you see in buying any of these vessels? First of all, we are generally active. And it's all a matter of pricing regarding asset acquisitions, especially in today's environment. On the question whether we would avoid some specific asset classes, I would say that it's I don't think that we would be buying today any Panamax versus the traditional old Panamax type of ships, which are becoming obsolete. And if you look at the composition of our fleet that you will see that we have not over invested in the Panamax vessels, quite the opposite. Apart from that, we are pretty much open depending on price and of course on the fiscal condition of the vessel. But I would agree with you that today's environment also factoring in any potential distress in bracket sales coming out from financial institution definitely provides for opportunities. Thank you very much, Greg. Sure. Thank you. I'll now turn the floor back to Mr. Zikos for his closing remarks. Thank you very much for being here with us today. We are looking forward to talking to you again during the next conference results call. Thank you. Thank you. That does conclude our conference call for today. Thank you all for participating. You may now disconnect.