Costamare Inc. (CMRE) Q3 2016 Earnings Report, Transcript and Summary

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. [Operator Instructions]. 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. Zikos. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. During the third quarter, the company delivered solid results. On the chartering side, we continue to employ our vessels having chartered in total eight ships opening during the last three months. Regarding our new building program, we have now accepted delivery of four, five 14,000 TEU vessels which have commenced their 10-year charter. We have also accepted the delivery of one 11,000 TEU ship both together with our JV partners and we have deferred the delivery of the remaining four for the first quarter of 2017. As mentioned in our latest press release of this month, our goal is strengthen the company and enhance long-term shareholder value. As committed shareholders, the founding family currently holding above 65% of the company have reinvested in full their cash dividends since the inception of the dividend reinvestment plan. Moving now to the Slide presentation. On Slide 3 we're providing a summary of the chartering arrangements which took place during the quarter. As already mentioned, we have chartered total eight ships over the last three months. On Slide 4, we are providing an update of our new building program. Excluding the latest deliveries, we have now accepted delivery of full five 14,000 TEU vessels which have started 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 four for the first quarter of 2017. All of our new operating program is fully funded with the exception of one 11,000 TEU shifts which will be delivered in about five months. On Slide 5, we show the refinancings we completed over the last quarter deferring total balloons of $360 million for a three-year period from 2018 to 2021. As already mentioned the founding family have decided to invest all the second and third quarter cash dividends in new shares and our grid programs. On Slide 6, you can see the third quarter 2016 results versus the same period of last year. During the third quarter of this year, the company generated revenues of $118 million, adjusted EBITDA of $80 million, and transaction net income of $28 million. For the same period of last year, the revenues amounted to $124 million and the adjusted EBITDA and net income to $89 million and $35 million respectively. Our adjusted figures take into consideration the following non-cash items, the accrued chartered 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 a non-cash G&A expenses. Based on the above, the third 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 productive cash, cash from first-class charters like MSC, Evergreen, Maersk, Cosco and Hapag Lloyd. We have $1.6 billion 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 lines are 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 without charters. On Slide 9, you can see our remaining CapEx commitments. As you will notice, these are rather low for a company with cash and balance sheet of about $150 million. Our remaining CapEx is less than $25 million without any debt finance for the fifth 11,000 TEU new buildings. 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 million. 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 and 2017 and we have reduced our 2018 balloons by $360 million. Slide 11 deals with the potential effect of the rechartering for the next 12 months. As you can see even if we assume a 40% discount on new charter rates entered into during the next year versus current fixtures, the difference in the revenue basis would be less than 4%. And in the last slide we are discussing the market charter rates and asset values are under pressure, the number of idle ships has come up to 6.5%, the order books down to 16.5%. As we have mentioned in the past, we are well-positioned to continue to grow in certain environment which provides for opportunities. This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now.

Thank you. [Operator Instructions]. And your first question comes from Gregory Lewis of Credit Suisse.

Good afternoon.

Yes, hi good morning.

Greg, could you talk a little bit more about the decision to push out the new builds in sort of what opportunities you have seen 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 is not opportunities to put those on contracts?

Yes, first of all, we have decided to push back the delivery of those four ships and those will be delivered from February until the end of March of 2017. The reason has obviously has to do with market position today and we feel that we will have more flexibility regarding their chartering especially after Chinese New Year which is the first 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 they're 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 has happened with Hanjin and the turmoil that that's created in the shipping markets. There has definitely been some talk about potentially some other line or companies facing similar challenges. At this point are you as Costamare seen 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 all the contractor cost and where it's coming from, all the payments are current. So I don't have anything to mention in that respect.

Okay, anyway great news. That's good thing. Anyway guys, thank you very much for the time.

Sure, thank you.

The next question is from Fotis Giannakoulis at Morgan Stanley.

Yes hello Greg and thank you.

Good morning.

Greg, you have managed to stay highly profitable in a very challenging environment but we know 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'll have to refer you to Slide 11, where this shows the effect of re-chartering. These are older ships coming out of charter over the next 12 months starting from September 30 and you will see that if those ships are re-chartered at a discount compared to today's rate and those ships to-date are 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 cyclical industry of course, it is affected by market conditions but we shouldn't forget that we also have a wide average time charter duration of a couple of years more, sorry of 3.4 years as of today. Now regarding the company liquidating 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 deal was initiated received no cost 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.

Shall we assume that given the fact that you have three-and-half-year charters that for the next three-and-a-half years, we shouldn't worry about the profitability go to 2020 with profitable company when if the market stays the same?

If the market stay look you will have to make a lot of assumptions regarding the chartering market conditions et cetera, going forward. So I cannot possibly forecast now what the company's profitability will be in 2020. I think it would be a very difficult task for everybody in shipping Costamare and container shipping. But I can tell you that proactively we have done I think everything we could in order to first have our downside, this is our first priority; and secondly, position ourselves so that we can opportunistically buy assts in such a depressed market environment.

All right. 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 -- any structural risk in the industry that can affect the demand even further going forward?

I think first of all today we talk about excess supply, I mean the demand is not great however global demand year-to-date also for the first eight months of 2016 is based on container trade ethics is up 3.5%. So I'm not saying that overall demand is great but the problem in container shipping has mainly to do with oversupply and with an order book well close to 75% of today's order book consist of ships of 5,000 TEUs and above. Also in some specific trade rules, 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 and so our 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 demolished and picking up entities expected based on broker's estimate that the demolition for the year at [indiscernible] 600,000 TEUs or even higher than that. With all positive signs and we haven't seen a sort of any new building orders or in substantial new building ordering since the beginning of this year. So all these are positive -- 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 families willing to forego its dividend, asset prices have declined significantly particularly in the smaller vessels below 6,000, 7,000 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 Hanjin 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 risk do you see in buying any of these vessels?

First of all, we are generally active and it's only a matter of pricing regarding asset acquisitions especially in today's environment. On the question where we would avoid some specific asset classes, I would say that it, I don't think that we would be buying today any Panamax vessels, the traditional or 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 physical condition of the vessels. But I would agree with you that today's environment also factoring in any potential distress in record sales coming out from financial institutions definitely provides for opportunities.

[Operator Instructions]. I will 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.