Costamare Inc. (CMRE) Q1 2016 Earnings Report, Transcript and Summary

Thank you for standing by ladies and gentlemen, and welcome to the Costamare, Incorporated Conference Call on the First Quarter of 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. [Operator Instructions] I must advise you that this conference is being recorded today Thursday, April 21, 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. Zikos. Please go ahead sir.

Thank you and good morning, ladies and gentlemen. During the first quarter, the company delivered solid results. In a challenging market environment, we keep employing our vessels having chartered the total nine ships opening during the first three months of the year. For the markets, charter and rates and asset values are at historically low levels as a result of weak demand. We believe that today’s environment provides attractive opportunities and the potential to increase our shareholders’ returns. Moving now to the slide presentation. On Slide 3, we are providing a summary of the recent developments. On April 1, we declared a dividend for the first quarter of the year. This is $0.29 per share and it is payable on May 4th. We have also declared dividends on our B, C and D series of preferred stock. In January, we extended the maturity of a credit facility for three years. This relates to a $42 million balloon, originally due in 2017, which has been extended till 2020. On Slide 4, we are providing a summary of the chartering arrangements which took place during the quarter. We have re-chartered in total 11 ships from the beginning of the year On Slide 5, you can see the first quarter 2016 results versus the same period of 2015. During the first quarter of this year, the company generated revenues of $120 million, EBITDA of $82 million and net income of $30 million. For the same period of last year, the revenues amounted to $121 million and the EBITDA and net income to $82 million and $23 million respectively. Consistently with our previous press releases, we feel that the EBITDA and net income figures need to be adjusted for the following non-cash items; the accrued charter revenues have a discrepancy between the revenues received, the revenues accounted for, based on a straight-line amortization schedule, the gains or losses resulting from derivatives, the amortization of prepaid lease rentals, which is a non-cash charge, and the non-cash G&A expenses. Based on the above, the first quarter EPS amounts to $0.45 and the first quarter EBITDA amounts to $85 million versus $0.38 and $86 million the year before. On the next Slide, we are showing the revenue contribution for our fleet. More than 99% of our contracted cash comes from first-class charterers like MSC, Evergreen, Maersk, Cosco, Hamburg Sud and Hapag-Llyod. We have close to $2 billion in contracted revenues and the remaining time charter duration of about 3.5 years. Slide 7, I think that Slide 7 speaks for itself. You can see the resilience of our business model. The bars are the revenues and the EBITDA since 2007 and the dotted line is a time charter index. As you can see, in a cyclical industry and in a speculative market movements the company has been consistently performing based on its long-term contracted cash flows with first-class charterers. On Slide 8, you can see our remaining CapEx commitments. As you will notice, these are rather minimal for a company with cash on balance sheet close to $135 million and debt free assets. Remaining CapEx commitments for the two 3,500 TEU ships are in total $3 million, and $15 million for the five 14,000 TEU vessels. Regarding the 11,000s, we have up to now paid all the pre-delivery installments of 50% and the remaining 50% is to be paid upon delivery. We are currently in discussions with commercial banks regarding the financing of the delivery installments of 50% for those ships. Apart from the above, there are no other unfunded commitments. Slide 9 deals with the ships coming out of charter for the remainder of 2016. As you can see, most of those vessels have been chartered in a low value environment which means that the re-chartering does not actually pose a significant risk. Most importantly if you go to the next slide, Slide 10 is an update of a similar slide we used in the past. It is a sensitivity analysis on the effect of re-chartering. As you can see, even if we assume a 50% or 70% discount on the new charter rates entered into during the year, vessels currently exists, the difference on a revenue basis is going to be between 4% to 6%. We have a 75% charter coverage for 2016. And moving to the last slide, on the last slide we are discussing the markets. As already mentioned, charter rates and asset values have been under pressure. The number of idle ships has come up to 7.4%. The order book stands at 90%. As we have mentioned in the past, we are well positioned to continue to grow in such an environment which provides more opportunities. This concludes our presentation and we can now take questions. Thank you. Operator?

Thank you. [Operator Instructions] And our first question today comes from Donald McLee of Wells Fargo. Please go ahead.

Good morning guys.

Yes, hi, Donald. Good morning.

My first question is around counterparty risk. It’s been a rising headwind with a couple of liners looking to amend charters amid restructuring negotiations. I believe the direct impact at Costamare is a bit limited so far, but could you talk about how you view the health of the group over the past couple of quarters and maybe also talk about the current level of counterparty risk compared to historical levels in 2011 and 2012?

Yes, first of all, let me tell you that I can always stick with our charterers and we have a pie chart in the presentation where you know you can see the full – our major charters, where the cash flow is coming from which are companies like Maersk, Cosco, Hamburg MSC, Evergreen, Hapag-Llyod, Hamburg Sud et cetera. Now we feel extremely comfortable with the credit quality of our charterers with whom we have been moving together for a lot of years and let me remind you that generally the time charter contract is a fixed rate contract which are legally binding for the time period of which is effected. Now, I cannot comment about other charterers or about what is going on in the market and I have to say that it’s our speculation because we don’t have the full and final figures yet. Now, what we see today is we see a lot of consolidation in the industry, especially between lining companies and from our point of view, this is good news, because we definitely want to have healthy and profitable charterers and I think those arrangements whether it is consolidation or whether it is slot sharing arrangements. I think they are steps towards a positive or towards right direction.

Thanks, that’s helpful. My next question is around your order book. Can you provide an update around the financing and employment for the unchartered newbuilds scheduled to deliver over the next couple of quarters?

Yes, we have – you are referring to the five 11,000 TEU ships?

Correct.

Where Costamare has on average 40% of those, the rest 60% is owned by our partner York Capital. So practically, we have two out of the five ships. So for the Costamare part, we talk about two vessels. Now, up to now, we have paid all the pre-delivery installments which are 50% of the contract price and the remaining installment is to be - also of the last installment is to be paid upon deliver which is the delivery installment. For that, we are in advance discussions with various lenders regarding providing us with 50% loan to value financing and in order to make sure that there will be no additional cash outflow from our point of view. Now, the deliveries will start over the coming months and we are in discussions with banks for that. Now, for the chartering of those vessels, I can tell you that for those ships we have been telling over time, we are in discussions with the charterers. I think, we will have a much better picture when all the discussions regarding alliances and then the rearrangement starts are taking place that will be crystallized. And those – I have to say that the opening of the Panama Canal which is rather imminent. It’s something that we believe it will definitely help the employment of larger ships including ours or including our 11,000 TEU vessels which are ships that we will be able to navigate through the Panama Canal.

Thanks, that’s helpful. One quick follow-up around time charter rates. For the 9,000 TEU class, I think rates are down 34% year-over-year. Has there been a similar decline for the larger ships, the 11,000 TEU class?

I think the market today is not very, very liquid. So – and because we are in discussions regarding the chartering of those vessels you will allow me to refrain from throwing any numbers which maybe misconstrued or misunderstood from various people.

Fair enough. And then just my last question is that, how should we interpret the recent extension on your credit facility from 2017 to 2020? Is that any indication around you thinking that the charter option might be exercised?

Look, this charter option will be kicking in, in two years time or so. So, we don’t have any picture on that, but I think, you can view it as an example of the great relationship we are enjoying with our lenders. So, this extension of the balloon is not subject to the vessel being employed for the period 2017 to 2020. This is respective of whether the current charterer is going to exercise this extension option.

All right. Great, that’s all my questions. Thanks for taking the time.

Thank you.

And our next question comes from Ben Nolan of Stifel. Please go ahead.

Thanks, yes, I was actually going to follow-on maybe a little bit on that last question with respect to the Alpha credit facility. Obviously, you guys from time-to-time do have maturities on your existing facilities and the intention is certainly to refinance those and spread it out over a longer amortization period. I was curious how much more of that or how many other of those types of situations there are upcoming and what your current – subsequent to this with your current debt repayment profile looks like and then do you think it might be actually be in terms of what you think your actual repayment of debt on an annualized basis would be going forward?

Yes, look, it’s – we have announced this extension for the Alpha facility. But I can tell you that we are in advance discussions regarding extension of further facilities as well. Those have not yet been announced simply because they have not been yet closed - documented and closed. So, you will allow us some more time, hopefully, less than a quarter in order to get back to you on those and then, I think we will have a better picture of the debt repayment profile going forward. But the intention is that for ships that have charter, and you know for ships that the cash flows are there, in case it makes sense we will have and we currently have discussions with banks. Regarding a potential refinancing of those loans and we are generally proactive. So we talk about maturities of 2018 or 2019.

Okay, so, and as it stands right now without having refinanced, can you remind me what your repayment obligations are now for 2016 and 2017?

Yes, it’s close to $200 million per year with this – the capital repayments.

Okay, perfect. And then my last question has to do with some of the renewals that you do, which are pretty impressive given how challenging the market is and how much idle capacity there is, but a number of the ships are already 25 years old, I am just trying to think through how you guys perceive the – or make the decision as to whether or not to continue to renew older vessels like that rather than scrapping them and I suspect it has to do with when a special survey date is. So at these levels, is it fair to assume as you approach the next special survey on some of these 20, 25 year old ships if rates don’t get better that it just doesn’t make sense to keep them in the fleet?

Look, it’s a couple of things. First of all, let me start by saying what we used to say in the past that we feel extremely comfortable with managing, downing and chartering older too much – and sometimes the best returns are coming from older vessels. So, you are right that now we have – like the – in the first quarter of 2016, we have been totally chartered like nine vessels and some of them, as you can see our 1991 builds, or sort of 2000 builds or 1995 builds and so those vessels we have found employment which in today’s environment stands out pretty well. Now the decision on whether to scrap a vessel, that’s not necessarily have to do with the next special survey due, it has to do with the physical condition of the vessel and with whether we feel that has – those ships can still generate cash flows. If that’s the case, of course also factoring in the next dry docking where we may continue managing those vessels and in terms of owning those vessels and to the past, we will own vessels which were like 35 or 37 years old, fully depreciated, they were still yielding positive returns. So, we don’t have a problem with dates as long as the ship can still be stay worthy and as long as we feel that there are still some returns to be made. And I think the re-chartering of the first quarter proves that, so that ships in 1991, 3000 to use they maybe getting they maybe getting charter rates not far away from whether like the younger owners is getting today. Let me tell you in a good market, I mean, all the ships will find employment. In a bad market, again, if the physical condition is there– of the vessel is that is still older ships still can make money.

Okay, now that’s helpful. I appreciate it. Thanks and nice quarter guys.

Sure, thank you.

And our next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Hi, this is Sherif on for Fotis. Just a quick industry question to start, rates are sitting at all time lows and idle capacities continued to rise. So what do you attribute to that besides the delivery of newbuilds? Are there any specific routes that have been particularly weak or is it a general slowdown with bubble trade? And do you see any difference in the way liners redeploy vessels across them for routes?

I think that, generally, I would say that, I mean, first of all, as we mentioned the number of idle fleet is close to 7.4% of the total fleet. And close to two-thirds of this – of those vessels that are laid up are being owned by non-operated owners, means by ship owners like us. And the charter rates together with asset values, I can tell you that today are at historically low levels, especially there are some specific asset classes that have – definitely I mean underpeformed, especially the Panamax vessels or the post-Panamax ships. Now, regarding the trade, we have a picture for the first two months of the year, I mean, up until February which maybe a bit distorted because this year, in 2016 the Chinese New Year came up a bit earlier, but I can tell you that generally the demand is I would say, anemic and if you factor in together a supply which is well above today’s demand this is what is – what’s creating today’s supply/demand imbalance and this is why you see books rates and charter rates being at very low levels.

Okay, thanks for that. You also mentioned in the press release that the current challenging environment provides a check of opportunities, can you elaborate on what deals you are seeing out there and what stops you guys from making any acquisitions this quarter?

Yes, I mean, today we are mainly referring to second-hand ships. There have been no newbuilding orders for there first months of this year and probably this is not something that will be changing soon. But for second-hand vessels, there are some specific asset classes where with or without charter, you can buy ships at rock-bottom prices where if you operate those vessels for a couple of years, you can make your money and then it’s all upsize and let’s not forget that container ships have a useful life of 30 years and we have proved that 1991 build ships can still get $6,000 to $7,000 per day in today’s environment. So, in the second-hand market, we definitely believe that there maybe transactions and I am not only referring to the so-called distressed deals coming out of financial institutions, but generally there maybe some acquisition candidates which may make sense to look at them.

Okay, thanks. Just one more. If the market stays weak for any period of time, some of your vessels will have to rollover at lower rates. So what kind of alternatives you have to boost your liquidity? You have some debt free assets and you are still paying a heavy debt repayment twice the level of your depreciation, so how much cash can you release from that and are there any discussions with your lenders to extend your loans?

Yes, it’s two things. First of all, regarding the re-chartering of the ships coming out of chartering in 2016 are – for the remaining nine months of 2016 starting from the end of the first quarter, we have a slide, we have two slides, slide nine, slide ten which show that from that re-chartering the net effect on our 2016 total revenues is not going to be substantial. Now, regarding the market, it is where it is, we will not provide any forecast, but, as you said, we have debt free assets which we maybe leveraging and at the same time, as we did in the previous quarter, we maybe extending some debt maturities. So, I think we do have some tools in our tool kit, should the market continue being like that for the future. Now I have to say however that the backbone of the fleet has been chartered out for a longer period. So we have no big ships coming out of charter neither in 2016 nor in 2017. The first is coming out of charter bigger size at the 9,500 TEU Cosco vessels coming out of charter in 2018 and then the newbuildings which will start being delivered from now the 14,000 TEU ships they have a ten year charter, and for essence with the 9,000 TEU ships we have chartered to Evergreen and to MSC are going to be coming out of charter between 2020 and 2023. So, on a weighted average TEU basis, we have a remaining time charter duration of close to 3.5 years.

Okay, that’s very helpful. Thank you for taking my call.

And our next question comes from Amit Mehrotra of Deutsche Bank. Please go ahead.

Operator, thank you. Thanks for taking my question. Good morning gentlemen, afternoon. There is obviously, a lot going on with respect to the lining companies. Costamare is not directly impacted by what’s going on in Korea, that much I think I know, but from some higher level standpoint, Greg, it would just be helpful if you can comment on how these things usually play out. I understand these contracts are legally binding like you said, generally speaking, but there are also longstanding relationships which I guess ideally everyone wants to be – wants to maintain. So, in that context, can you just give us some understanding as to who has more leverage in these types of negotiations and what are some of the main things that you think as owners that you sort of are trying to balance in your mind as you discuss these items with lining companies? And again, I am not – I am talking more generally and not really about any particular situation. Just trying to get a little bit of a better understanding on how you think about.

Okay, first of all, I have to reiterate what I said at the beginning of the call that, we feel extremely comfortable with the credit worthiness and the quality of our charterers and that – all the chartered payments as far as we are concerned are current. So, this is the first point. Now, this is generic question, so I am afraid that we have to provide you with a very generic answer as well.

Yes.

I think that these are legally binding contracts and let’s not forget that the ship owner is controlling, managing and owning the assets. And the asset is what it is providing – it is a means that is providing the necessary cash flows, both for the ship owner and for the lining company. So, I mean, in my mind, the ship owner is a kind of secured creditor. However, I don’t have a lot of experience on this, so I am afraid that there is something I wouldn’t like to discuss in more details simply because, whatever we say is going to with a speculation and I don’t think that any one that has a clear picture about what’s happening and how will those situations be resolved.

Okay, that's fair. Let me just ask you, maybe another question where you have a little better insight with respect to the new alliance that's brewing or that's announced and some of your customers are obviously involved in that and just trying to understand what type of implications you think that could have on ships and new structures or consolidation and maybe the impact of the idle fleet potentially and charter rates, any sort of deduction you can get from what this alliance means from actual fundamental business standpoint for the owners?

Yes, look, the latest we have all had have to do with the new alliance or the new proposed alliance between CMH and Cosco, Evergreen and WCN and on the other hand with – there has been some headlines regarding the Hapag-Llyod and UASC cooperating or sort of merging and you know the one becoming to hold of the other. But, that you know is that of the headlines in the news, how sort of those things will evolve, we don’t; yet. I have to say that especially in today’s environment those alliances definitely make sense. We talk about our lion share, the liner companies and from our point of view, we definitely want the liner companies to be profitable and to be healthy. And I think, this is the way forward in today’s market environment. So, we feel that these are positive steps. We like that sort of in the short or medium-term that the non-proprietor ships make all up, partly because of those alliances, but at the end of the day, it’s all supply and demand. And you know, container shipping is about at least a long-term business, a long-term, we definitely want to have profitable and healthy and strong clients. So, I mean, I feel that these are steps towards the right direction.

Great. Okay, very clear. One last quick one from me, and Greg, you talked about sort of having tools in your toolkit and for us analysts, it might be just a little bit easier if you can provide some quantitative measure around what you think actually your liquidity is? And what I mean is not just your cash on the balance sheet obviously, I also mean the ability for you to extract additional liquidity from some various different tools in your toolkit. Is there some magnitude of number that you can just help us out with, so we can sort of understand what your toolkit actually comprises of?

I have to be generic because if there was something that you know, we would have done up to know, we would have this closing, but I mean, but generally, apart from the cash balance on the balance sheet and the positive EBITDA and let’s not forget that we have close to 60 ships in the water today. We have debt free assets and we also have assets which have relatively low leverage. On a corporate level, I can tell you that we will be providing compliance certificates to our lenders and we would expect our leverage to be in the region of 55% to 57% based on the compliance certificates we are going to be providing with our commercial bankers. So, there are some assets which are debt free. There are some assets that have low leverage. There is positive EBITDA and there is also cash flow – sorry, cash on our balance sheet. Now, if you are sort of asking for a number, I could give you a range. I don’t think that it would be difficult to range between $50 million to $100 million somewhere that from sort of debt free assets and from solid financing, at least. Now, and this leaves a size, whatever discussions we may have in the future for extension of loans and of course, and if I say also I mean, other toolkits which also the other tools which is within today’s environment probably, they are not optimal. But definitely, there are a lot of solutions, in case the company finds acquisition targets, we’ve never missed on a transaction because we couldn’t raise debt or because we couldn’t get the liquidity required. And so that, I am not being misunderstood. We do not contemplate any equity offering in today’s environment. So, I just want to make it clear that, especially today, this is not in our agenda.

Got it. Well, that's very helpful. Thank you so much for answering my questions. I appreciate it.

Thank you.

And our next question comes from Gregory Lewis of Credit Suisse. Please go ahead.

Great. Thank you and good morning. This is Joe Nelson on for Greg.

Hi, how are doing?

Good, how are you? Just kind of following up on an earlier question, given the announcement earlier this week that that it looks like most of the major liner alliances are going to be shaking up and I know you guys have spoken today you are in advanced discussions on some of these non-contracted newbuilds. Has this shakeup impacted those negotiations at all? And to what extent you can speak to that?

It has, it definitely has, because until after its liner – until after its liner company knows, in which alliance it will be operating, it’s going to be difficult to commit for tonnage for the medium or long-term, because – simply because they don’t know what needs exactly they will have. So we feel that over the next couple of months, probably we will have a better picture which is something that would also help our plans going forward with chartering those vessels.

Okay, great, and then maybe another question some – another question kind of somewhat related. We are about two months away from the Panama Canal, the new locks opening and there really hasn't been much in the way of kind of announcements as far as new services taking advantage and in this particularly relates, it looks like you guys have the five un-contracted vessels or sort of that new post-Panamax class. I mean, amongst your customers, how are they thinking about it in relation to their own capacity and utilization? Is this something where people are going to be taking a little bit more of a wait and see approach, or should we expect to start seeing some more announcements over the next couple of weeks about new service lines, sort of maybe upgrading their capacity to some more post-Panamax class vessels?

First of all, I think that this situation should normally be addressed directly to the lining companies who have their own – I mean, and these companies has its own specific circumstances, planning and network and trade routes. I wouldn’t like to say something which maybe applicable to some lining companies and not to some others. But what I can tell you thus far as we are concerned that the opening of the Panama Canal will definitely assist in the trading of some specific asset classes – sort of asset classes, especially for the post-Panamax vessels and we feel that the Panamax ships which I mean, up to now they have definitely underperformed are going to be obviously hit because to some extent they will be redundant for the purpose they were built - they were built – they were purpose-built vessels in order to navigate through the Panama Canal. Of course, they may find employment in other trade routes. However, the opening of the canal, I don’t think it provides us with a bright future.

Okay, great. That's it for me.

Thank you.

[Operator Instructions] Showing no further questions, I would like to turn the conference back over to Mr. Zikos for any closing remarks.

Yes, thank you. Thank you very much for today being here with us. We are looking forward to speaking to you again in the next quarterly results conference call. Thank you.

And thank you sir. That does conclude our conference for today. Thank you all for participating. You may now disconnect.