Costamare Inc. (CMRE) Q4 2014 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Conference Call on the Fourth Quarter 2014 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. [Operator Instructions]. I must advise you that this conference is being recorded today, Thursday, February 5, 2015. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide #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 fourth quarter of the year, the company continued to deliver positive results. In December, we concluded, with a leading Chinese financial institution, the financing of the five 14,000 TEU newbuildings chartered to Evergreen with delivery in 2016. The deal was on a sale and leaseback basis and finances our pre-delivery instalments to the shipyard, releasing additional equity for further transactions. Recently, we acquired the 2004-built 2,586 TEU containership Lakonia for a price of $8.2 million. The vessel has been chartered to Evergreen for a period of approximately two years. While still growing and planning to grow further during 2015, in line with our commitment to provide our shareholders with sustainable and increasing returns, Management will recommend to the Board of Directors a dividend increase beginning with the first quarter 2015 and raising the quarterly dividend from $0.28 to $0.29 per common share. We continue to execute successfully on our growth strategy. Our cash on balance sheet, coupled with debt free assets, low leverage, and positive cash flow from operations, allow us to continue to grow selectively and on healthy grounds. Moving now to the slide presentation. On Slide 3, we are providing a summary of our recent transactions mentioned earlier. These are the financing of our five 14,000 TEU vessels on order, which was done on rather competitive terms, and the acquisition of a smaller vessel, which has been fixed for two years. During the quarter, we declared the dividend on our common stock, the 17th consecutive dividend since our listing, and total dividends on both classes of our preferred shares. Finally, we plan to raise a dividend on the common by $0.04 per year effective from the first quarter of 2015. On Slide 4, you can see the fourth quarter 2014 results versus the same period of 2013. During the fourth quarter of last year the company generated revenues of $120 million, EBITDA of $81 million, and net income of $28 million. For the same period of 2013, the revenues amounted to $112 million, and the EBITDA and net income to $71 million and $26 million respectively. Consistent with our previous press releases we feel that EBITDA and net income figures need to be adjusted for the following non-cash and to one-time items. First, the accrued charter revenues and the resulting discrepancy between the revenues received and revenues accounted for, based on a straight-line amortization schedule. Secondly, the gains or losses resulting from derivative instruments. And lastly, the amortization of prepaid lease rentals which is a no-cost charge resulting from a sale and leaseback transaction for three of our vessels. Adjusting for the above, the fourth quarter adjusted EPS amounts to $0.41 and the fourth quarter adjusted EBITDA to $83 million. Overall the company generated strong results during the quarter based on solid fundamentals. On Slide 5, we are showing the revenue contribution for our fleet. More than 90% of our contracted cost comes from Maersk, MSC, Evergreen, and Cosco. Today we have $2.3 billion in contracted revenues and the remaining time charter duration of about four-and-a-half years. Slide 6 is dealing with the theoretical re-chartering risk that company would face in 2015. Based on our budget assumptions, before ships coming out of charter during the year are re-chartered at 70% rate, being equal to a 30% discount. The cost effect is minimal. Above 2% of the 12-months EBITDA which goes up to 4% for a 50% discount. It is evident from the above that the company does not face any meaningful re-chartering risk. Hence the dividend we offer today is very attractive based on its quality and sustainability. On Slide 7, we discuss our balance sheet. Liquidity as of the end of the year stands at $177 million. At the same time, we have unencumbered vessels and a moderate fleet leverage. The loan portfolio is around 85% shares at a weighted average rate of less than 4%, which adds to the visibility of our cash flow. We consider the company should be in a competitive position with a comparatively stronger balance sheet, which together with our joint venture with York Capital will allow us to continue making attractive acquisitions. And moving to the last slide. On the last slide, we are discussing the market. Charter rates have been rising, especially during the last month, and the chartering market has been quite active pre-Chinese New Year. The number of idle ships is at an all-time low. Oil and fuel cost do not affect containership owners negatively, while the opposite I would say. The order book is at around 18% of the current fleet in the water. As already mentioned, we feel we are well-positioned to capitalize on market movements either by chartering ships in higher market or by acquiring assets in a low asset value environment. This concludes our presentation. And now, we can take questions. Thank you. Operator, we can take questions now.

Thank you, sir. [Operator Instructions]. And your first question comes from the line of Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Yes, hello, and congratulations for the good quarter.

Yes. Hi, Fotis, good morning.

Greg, I want to ask you about the dividend increase. You raised your dividend exactly a year ago and this is a new dividend increase. How have you thought about it? And what led you to increase the dividend at this point? Is there a strategy of increasing your dividend every year? Was it some transactions that you concluded? Can you help us think a little bit more about the dividend growth going forward?

Sure. It's a couple of things. First of all, we have sort of accepted delivery of all the newbuildings we have ordered back in 2010 and 2011. We have closed the funding for the five 14,000 TEU ships, which are to be delivered next year. And it's only four newbuildings which have not yet been charter and for those we have not yet arranged financing. But we don't have any significant unfunded liabilities, bearing in mind the size of the company and our financial standing. At the same time, we are committed to providing our shareholders and as you know this is something that we have been repeating over the last years, to provide our shareholders with first of all sustainable, and secondly, increasing returns. And we now feel that by raising the dividend, the quarterly dividend by sort of $0.01 per quarter, it's something that it is first of all providing additional returns for our shareholders. And secondly, it is not something that in any way affects us and affect our ability to grow. So $0.04 per year incremental dividend is close to $3 million, when we have cash on balance sheet of north of $170 million and we have low leverage, positive cash flow. So as I mentioned in my comment, i.e. we are like in a growth mode and we definitely intent to grow more during 2015. At the same time, a dividend increase of this size, it's something that is rewarding our shareholders without affecting our growth plan.

I understand that your first focus from what you said is to expand your fleet at the times that the assets values are low rather than to return so much cash to shareholders. But given the fact that next year you take delivery over your newbuilding vessels, most of them are already charter long-term, shall we expect a similar dividend increase or you might even consider a larger dividend increase, given the earnings growth that you projected next year?

I think you can understand that I cannot commit now. Normally, the dividend is growing, commensurate with the growth of the cash flows and those newbuildings will have a substantial effect in our cash flow from operation. So the dividend increase it is something we sort of always have in mind. However, the margin due to that increase it's impossible to tell now because we don't know the market conditions that will prevail in 2016 onwards. But definitely a growing dividend and hopefully a growth of north of $0.01 per quarter; it is something we would definitely like to do should market conditions allow us.

And just shift to the market conditions and perhaps not going to 2016 that is far away to discuss. But currently we've seen your slide on Page 8 that charter rates are moving higher. Can you explain why this has happened and how has asset prices reacted? Have they also come up, and if they have, asset prices have come up together with charter rates, do they -- does this affect your plans of making more acquisition this year?

Yes, I mean charter rates have come up and also they have come up substantially also during the last month. Now there is certainly demand and there is increased activity for chartering prior to Chinese New Year, which is not what someone would normally expect. At the same time let's not forget that there is some acquisition which still takes place in the West Coast and in a couple of other places, which is definitely boosting the demand fulfillment. Now to what extent the charterers will keep gliding up until -- for the next couple of weeks up until the Chinese New Year and thereafter I cannot tell but part of the increase has to do with the congestion this is a fact. Now regarding asset values, generally asset values have also peaked but not for sort of every single type of assets and different sizes have seen a different performance. I think it's obvious that the panamax type vessels have been like -- have had a very good performance. If someone mentions that there were sort of using close to $7,000 per day, a year-ago or so, and now we've seen the latest fixtures in the region offers have been $1,000 per day or higher. However, I'm not sure whether this is something that we can take for granted or sort of asset sales because specific market conditions, especially the congestion that allows for that also supported by lower fuel oil prices. Now on the other hand, newbuildings I don't think we've seen a substantial increase in like newbuilding prices. Overall, as far as we're concerned, if we see a continuing case rising market we're going to have as company some upside from the re-chartering, and from re-chartering of all of our vessels coming out of charter. If like price per dollar tend to stay at historically low levels, as a company we will continue growing with a high pace capitalizing on the opportunities. So I'm not sure what is best for us. But in any case I think we are positioned in a way so that we cannot take advantage of market conditions irrespective of what they are.

And given the order book that has declined and charter rates have been trending higher the last couple of months, since your vessels are contracted on average for five, six years, can you re-charter vessels or extend the existing charters even before the charters expire or if the relevant -- if the market goes up in the near-term?

First of all, we have four newbuildings for 11,000 TEU which are going to be coming to the water beginning of 2016 and also have not been chartered yet. Hence this is definitely an upside in a market like that. Now, we have on average, I think it's close to 4.3 years of remaining time charter duration. But it's not unusual sometimes you may start discussing with the charter a continuation of charter party prior to the expiry of the current one. So this is not unusual and it will seem that this is the right approach we will definitely follow.

One last question and I'll hand it over. You mentioned about the impact of fuel cost, reduction of oil prices to the industry. Can you elaborate on that how does the lower prices affect both expenses and demand? And also because Greece is on the news again and there are some concerns, can you remind us if you have any exposure to Greek banks and the Greek economic system?

Yes, now, first of all, regarding our connection with the Greek state, we are residing in Greece. But apart from that we don't have any Greek clients. We don't rely on any subsidies from the Greek state, which sounds very peculiar, and we don't rely on the Greek banking system. So to that extent you can argue that our day-to-day business is immune from what is happening in this environment. Now, regarding the fuel cost, and some vessels there may be their own perceptions that a lower fuel cost is not a good thing for containership owners, which is definitely not the case. This is something that it is lower in our expenses. So I mean we consider it as a positive both from an operating expenses point of view and also regarding the incremental demand. So lower fuel cost is something that does not negatively affect us while the opposite and this is a fact.

[Operator Instructions]. The next question comes from Mark Suarez of Euro Pacific Capital. Please go ahead.

Just to go back on and I think you I touched on this, on -- if you just take a micro level, the past I would say three months or so especially December and January we've actually seen Panamax rates accelerate quite significantly. We talked about scrapping, accelerated scrapping, last year, well at the same time post-panamax period rates, the long-term charter rates, year-over-year have actually turned stable. I'm wondering what is driving that economy between those two class segments and do you feel that the panamax pricing acceleration is sustainable. I think you talked about congestion at one point but do you think this is sort of a new trend going over the next 12-months?

Yes, I'm afraid I cannot predict whether, for instance the Panamax rates today, whether they are sustainable or not for the next 12-months. Part of the incremental, means for Panamax we've discussed to do with fee congestion. Part of it may have to do with the lower fuel costs and less sort of eco-friendly ships may be under more demand now. But let's not forget that historically also in the past or years ago Panamax ships were like earning 25,000 or 30,000 per day. So the fact that we have reached 11,000 of 15,000 it's definitely an improvement from the 7,000 per day worth of ships if not a breakeven regarding that service. But still it is relatively low rate with some OpEx and more broad view of the market.

Okay, great. And I just I got into the conference a little late I don't if you've mentioned it but do you have any updates with regards to the 9,000 TEUs of newbuildings that are willing to come and they're expected to come in. Have you closer to fixing them for charter rates or do have any updates on that?

These are actually 11,000 TEU vessels the reason you're mentioning 9,000 is that initially we had an order for 9,000 TEUs which we'll upgrade it later. So it's four 11,000 TEUs coming into the water from the beginning of 2016. We are not in a hurry to charter them. There is a lot of interest from charters. We take our time. It is a market that is generally rising. Those contracts today are well in the mining, bringing mines where those vessels were contracted and so how much it goes to disposal then today. So we take our time. We still have like a year or so and we don't plan to rush on fixing those vessels.

Okay, and then just to go back on the cost side on -- if you look at your daily vessel operating expenses, I think you came a little under than what I was expecting and you touched on bunker fuel and other bunker you have some indirect impacts on that line. I'm wondering how should we think about daily vessel operating expense inflation in 2015 and do you think this current run rate is, will be a good run rate going forward.

Okay. Well now that it's for 2014, if you take our sort of operating expenses excluding management fees and divide by the numbers of ownership days we come at around $6,000 per day average, average running expenses. And our sort of average shifted like it has like 5,500 TEUs and above. I think this is one of the most competitive daily operating expenses you can find and let's not forget that we're planning the Greek flagging around 25 ships of our fleet -- the Greek flag with Greek crew that it is paid in euros. And those vessels have substantially higher operating expenses compared to vessels flying other flags. So factoring this in the equation I think our running expenses are probably one of the most competitive in this industry. Now there have been some positive type of fluctuation in the euro/dollar exchange rate. Regarding 2015, going forward what we will be doing is that we're going to be sending you a new budget for the full fleet. So bear with us and you will see whether this is sort of the $6,000 per day is a good run rate or not. But from our side obviously we are trying to lower the operating expenses as much as we can although we know we're still flying the Greek flag at a substantial part of our fleet.

Got you. That's helpful. Well thanks for your time again guys.

The next question will come from Shawn Collins of Bank of America. Please go ahead.

Hey, Greg, in December I see you lined up a leading Chinese institution for financing of five of your best vessels. Just curious what your experience was in the financing markets in general and the financing markets receptivity to the container shipping sector as a whole?

Yes, this is the second sail in this transaction; we are doing with the same financial institution. The particularity of this one is that it was financing on a pre-delivery basis meaning that financing our commitments to the shipyard for the next couple of years and then lining up and financing on a post-delivery basis for 12 more years. So this is a long-term cycle for our financing. This is what's done on a bilateral basis. So it was only one financial institution participating, this was not syndicated and this was not a collective. I think there was an appetite for solid transactions like that with strong sponsor meaning ship owner and also with a strong charterer. So it took us sometime to close the recommendation was quite complex. But I think overall it is a transaction which is beneficial for our shareholders and releases equity for new deals. So overall I think we are very much satisfied with our relationship with Asian financial institutions.

Okay, great, that's helpful. Thanks, Greg. And then just second question, just kind of big picture, with the price of crude oil down 50% over the last three to six months, have you observed any change in your charter customer's behavior or any sense that they look at the world any differently or may behave differently in the future?

Yes. Well the question we normally get is whether this low steaming is it something that has been affected because of lower fuel costs or whether charters of liner companies have an incentive of sailing partner, which is not something we have not seen up to now. So liner companies I think I mean from our experience from the ships the vessels that we see and operate we have not seen yet an increase in the sailing speed, which I think is overall a positive thing for the whole industry because it doesn't put additional capacity in the market. Apart from that fleet summary, as I said it is, there is no change there, we don't see anything different.

Okay, great. That's helpful, I appreciate it. Okay Greg, well that's all from me. Thank you very much for the time and the insight.

[Operator Instructions]. And at this time, I show no additional questions in the queue. I would like to turn the conference back over to Mr. Zikos for his closing remarks.

Thank you all for being here with us today. We are looking forward to speaking with you again at our next conference call. Thank you very much. Operator, we are done. Thank you.

Thank you, sir. Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.