Costamare Inc. (CMRE) Q4 2016 Earnings Report, Transcript and Summary

Thank you for standing by ladies and gentlemen, and welcome to the Costamare, Inc. Conference Call on the Fourth 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, Friday, January 27, 2017. 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 fourth 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 financing arrangements, we have refinanced a loan facility which was originally expiring in 2018. Under the new agreement, the balloon payment of $30 million due in 2018 has been extended to be amortized over a three year period until 2021. As mentioned in the past, our goal is to strengthen the company and enhance long term shareholder value. At the same time, we are actively looking at new transactions in a distressed asset value environment. Regarding the dividend and 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 fourth quarter cash dividends. Now moving to the slide presentation. On Slide 3, we're providing a summary of the chartering arrangements, which have taken since September. We chartered in total eight ships over the last months. On Slide 4, we saw the scrapping of the 2003-built 5,000 TEU vessels Romanos for $6.6 million. Moreover, we showed the refinancing we recently completed of an existing credit facility, which was due in 2018. The new facility of $32 million is amortized over the next five years and matures at the end of 2021. On the next slide, in November we issued 72 million worth of common shares. The founding family participated in the offering by processing $10 million worth of the new issuance. Moreover in January we declared the $0.10 cash dividend per share on our common equity. As already mentioned, the founding family has decided to invest all the second, third, and fourth quarter cash dividends in new shares under our dividend reinvestment plan, i.e. in addition to the latest common offering participation. Moving to Slide 6. On Slide 6 you can see the fourth quarter 2016 results versus the same period of last year. During the fourth quarter of this year, the company generated revenues of $110 million and adjusted net income of $23 million. For the same period of last year, the revenues amounted to $122 million and the adjusted net income to $33 million. 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 fourth quarter adjusted EPS amounts to $0.28 versus $0.44 the year before. On Slide 7, we are showing the revenue contribution for our fleet. More than 99% of our cash comes from charters like Evergreen, MSC, Maersk, Cosco and Hapag Lloyd. We have $1.5 billion in contracted revenues and a weighted average remaining time charter duration of about 3.2 years. On the next slide, on Slide 8, you can see the resilience of our business model. The bars are the revenues and adjusted net income since 2007 and the dotted line is the time charter index. As you can see in a cyclical industry and irrespective of market movements, the company has been consistently performing based on this long-term contracted cash flow. Slide 9, shows the smoothening impact on our debt repayment profile of the recent refinancing including the $32 million new credit facility which refinanced an existing loan originally due in 2018. As you will see there are now no debt maturities in 2017 and we have reduced our 2018 balloons by approximately $400 million. On Slide 10, you can see our remaining CapEx commitments. These are rather low for a company with cash on balance sheet of about $210 million. Our remaining CapEx is less than $25 million without assuming any debt finance on the fifth 11,000 TEU new building. We are in discussion with our balance for the financing of that ship. Assuming a 50% leverage on this vessel, our remaining CapEx commitments would be in total less than $3 million. Slide 11 deals with a potential effect of the re-chartering for the next 12 months. As you can see, even if we assumed 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 finally on the last slide, we are discussing the market. Charter rates and asset values continue to be under pressure, where as box rates have been experiencing a positive trend. The number of idle ships has come up to 6.9%. The order book has decreased to 15.7%. 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 you first question comes from the line of Stephen Pittsworth of Stifel. Please go ahead.

Hi yes. Thank you for taking my questions. Just have a few. First one is that we’ve noticed that box rates specifically coming out of Shanghai going to L.A. Shanghai going to Europe there above $2000 per day, pretty much have been staying at that level for a while now. Do you see that as an uptick in volume growth or is that more just liner efficacies right now?

I think we’ve seen a positive trend in box rates staring more or less from the second half of 2016. And you are right this is something that we know is still there, the latest GRI’s, the general rates increases by the land companies seem to have a sticking power. Now there is a soft element of seasonality there. This is because we are right before Chinese New Year and you can argue that there are some additional shipments right before the closure of factors in China. However, leaving that aside, I can say that there’s a positive trend on box rate. Whether this would persist after Chinese New Year, this means the second week of February, it remains to be seen, but generally the case up to now has been that there is a positive trend in the month end, at the same there a supply management between liner companies, which has helped a lot box rates.

Do you see this leading to potentially higher ship demand, assuming the trend continues?

Well, if the trend continues in theory, if there is more demand, in theory you can argue that the liner companies would need more ships. However, when this would happen, I’m afraid, I wouldn’t like to provide any forecast now. Let me say, however, that witnessing a positive trend in box rates it is definitely good news for all parties involved. Now what’s going to be the time gap between an up ticking box rate and charter rates, I’m afraid that I don’t want to provide any forecast right now, but it generally is a positive trend.

Okay, perfect. And then my next question deals with the newbuilds you have that have been delivered this year, we noticed there is still no contracts on those, have you made any progress with that?

You are referring to the 11,000 TEUs because all the 14,000 TEUs have been delivered and they have a 10 year charter, all five of them.

Yes, correct.

Now for the 11,000 TEUs only one of them has been delivered. This was delivered during 2016. The remaining 4,000 they are to be delivered within the first half of 2017. Now, there’s couple of points there. I think we mentioned it also in the press release and in the presentation. The funding for four out the five new buildings has been place or there is no CapEx commitment there. We put all over equity in the delivery installments in the CPR is to be paid by committed debt. For the fifth line, we are in discussions with the lender in order to again arrange a 50% leverage so there is going to be no equity cash outflow from our side and Costamare has on average 40% on those five newbuildings. So practically we have like two ships. Now regarding the chartering, we don’t want to put ourselves under pressure to charter the ships today, especially before the Chinese New Year where traditionally the market is softer. We take medium to long term approach. We are very comfortable regarding the potential of those ships. Under our loan agreements there is no obligation. There is no cabinet to have the vessels charter during the tenure of the loan, as long as of course we pay the debt service. So, we don’t feel under pressure there. Of course we want to charter the vessels. We are in discussions, in active discussion with a lot of charters. However, at the same time we want to make sure that we enter into a charter agreement that makes sense both for ourselves. So the long story short we are going to take our time. We are very comfortable with those ships. We are in discussions with charters and when there is a conclusion of a transaction, we will definitely let you know.

Okay, perfect. And then my last question just deals with, we have seen a little bit of resurgence in Panamax vessels, just giving how cheap there are, do you think this trend towards, perhaps using more Panamax vessels will continue in the future?

Look, in our case I can tell you what we did and then I guess from there it is going to be evident what we feel about Panamax ships. As you saw we have sold the Romanos this 5,000 TEU Panamax ship, built in 2015, and in 2003 it is like 14 years old and we sold it for scrap. We’ve seen that there may be some increased buying interest in Panamax vessels for scrap or no close to scrap. If we had to invest our funds today in a ship, I think we would most probably stay away from the Panamax vessels. Regarding how we - based on how we view their medium or long term chartering venture. I think there are many more opportunities rather than focusing on Panamax vessels. Now, I’m not saying that in the future you never know. Those transactions may turn out to be excellent deals, but the way we see the market, the way we see what they make up of the fleet today that is idle there is an overhang of country Panamax ships. I think most probably we would stay away from Panamax vessels today and our latest transaction, the disposal of Romanos I think supports it.

Okay. That does it for me. Thank you for answers, appreciate it.

Thank you very much.

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

Yes, hi Greg.

Hi Fortis.

I want to ask about the overall market and we have seen a trend for consolidation among the liner operators, how does this impact the overall containership market and particularly the charter owners both near term and longer term. Look, there is consolidation and I guess this is because market conditions dictate that. The less players in the liner market, I think the more efficiency there is. And the reason for that consolidation is to make the market players that are still in the game stronger. And I think this is a positive sign because from our side we want to have strong and healthy clients rather than having like 15 liner companies and some of them they may not be able to serve as their obligations. So from that point of view this is a positive sign and we have also seen box rates picking up over the last six, eight months. Now, you cannot use that short-term because there is a different because of the supply management now of vessels is in the hands of pure players. Short term, more vessels will be delivered to the ship owners and there may be less demand for new owners to be chartered in, which is something we appreciate. However, I would say that medium-to-long term and container shipping is about long term, this is a positive trend because we need to share the clients and those who will now survive will enjoy the benefits of a better market in the future. So, medium-to-long term we definitely believe that this is a move in the right direction.

Okay, thank you Greg. Can you also comment about the newbuilding market, second-hand values are up, where is the decline to newbuildings given the very large idle capacity that is out there? First of all these idle vessels, are they real, are they going to be able to come back to the market or these are all going to be scrapped, we shouldn’t consider them a part of a fleet? And second, what will make asset values for second-hand vessels become more - come more at parity with newbuilding prices? Is there a market for more new buildings, big part of your growth in the past has been signing long-term contracts for newbuilding vessels?

Yes. First of all regarding the ships that are being laid out today. I believe today is close to 7% of the fleet in the water, which is a big figure and that number, it includes close to 100 Panamax which is an overhang, which is the main problem all, is an evidence is one of the main problems of container shipping today in excess of 100 Panamax ships that are there. Now those ships are not scrapped, those ships are there for employment. We have had a record scrapping in 2016, which was about 650,000 TEUs. Those ships were not scrapped and the reasons that they have not been scrapped until now, it may have to do the financing arrangements in place where the loan outstanding exceeds the scrap value of today’s asset values. They may be accounting losses at the ship owners or banks may not want to take vessels. From our side, I think we did the right thing, we had the Panamax ship which we took an accounting loss and we repaid loan outstanding over and above what was the demolition price because we felt this is the right thing to do. Regrettably, this is not what everybody does. No, those ships may or may not be scrapped, but it is there for employment and it is what is driving the whole markets down now. Regarding newbuildings, today you can argue that there is no building markets for containers. Liner companies are not willing to commit into new projects, they are forming alliances. For the time being, I don't think they need additional donors, quite the opposite. There are a lot of TEUs especially larger vessels to be delivered within 2017, so apart from some minor exceptions the newbuilding market today for containers is not a reason. No asset values for the second-hand ships, they are at very low prices. You can get the brokers valuations that the ships in some of the classes above 10, 12 years old. If you don't have chartered employment they can be valued close to scrap or slightly higher than scrap. What is going to [indiscernible] is going to be charter rate. Charter rates and vessel values that are highly correlated. And regarding the newbuildings, the newbuilding market - the newbuildings, the market is not very legal. Probably this is why you don't see a lot of changes in the newbuilding prices. But the pricing there may not be that important today simply because this market is closed. And for this market to open there needs to be an additional requirements for donors, which I cannot say how this is going to happen within, I would say the next couple of quarters at least. If not longer than that.

Greg, just to follow-up on my previous question about consolidation. This consolidation has been limited so far on our liner operators. We haven't seen any consolidation among charter owners or any sizeable deals among charter owners. Given the fact that you recently raised capital and your balance sheet is relatively stronger than most of your public and private peers, are there any discussions, is this something that - a trend that it might flow from the liner industry to the charter owners of the next wave.

Look, the charter owners market is much more [indiscernible] compared to the liner companies, which is correct. On the other hand although there may not have been this level of consolidation we have seen the line of business you can see that there are very few players left who have the ability to enter into new business to do any second-hand transactions, medium-to-long-term charters to buy ships, there are very few players left. So, there may not be consolidation, however a big part of the charter owners market is not able to do any new deals. Now from our side we are looking at transactions actively, very actively no newbuildings because there is no market, but they are second-hand ships from our resources. I think it will be a bit premature now to go into more detail of sort of what we look at, but as you mentioned we have cash in our balance sheet and the main reason for this equity offering was growth and I guess that today's environment teaches both. We have the joint venture with Europe. So, we are actively looking at new business hopefully. We will be able to come with some news during our next quarterly results or as soon as there is something in place.

And one last clarification question, you initiated the dividend reinvestment plan last summer has the family participated in this quarter in this dividend reinvestment plan and also can you remind us what is the ownership of the family and if you have any guidance of the family's intention on participating in this plan in the future?

Yes. As soon as we put this plan in place the family has been fully participating. So since this plan was instituted, the family has not received any cent in cash dividends. All the cash dividends have been used in getting new shares. The same applies for the last quarter for the fourth quarter where the family has fully participated in the drip [ph]. This is the intention going forward, however as you can imagine I cannot commit from now, but if you see what we have done since we have put the drip together, I think this shows great support of the family to this company. Now after the latest equity offering, which we concluded in November the founding family’s participation today is in the region of 60% and I have to remind you that in the latest equity offering the family also bought $10 million worth of shares and has never showed a single share since the company went public in November 2010. On the contrary has participated in all common equity offerings and has been fully investing its cash dividends in the institution of the drip.

Thank you very much Greg.

Thank you.

Our next question comes from John Gandolfo of Clarksons Platou. Please go ahead.

Hi thanks guys for taking my question. Just a quick follow-up on the 4Q, the vessel driven 4Q for the JV, I’m wondering what the status is on that in terms of - has been chartered out as it are currently either laid-off?

Sorry you are referring to the 11,000 TEU newbuildings?

Yes.

Yes, this was delivered in September of last year. The vessel is currently laid up close to the CPM, correct. Yes go ahead.

I was going to say, now that you’ve laid out that vessels are there any cost savings, actually taking delivery of the ship and idling it?

Well we made sure that the cost that has to do with laying up the vessels are being minimized I cannot go into more detail because this also involves the third parties, but the lay of course are really minimal. It’s not what [indiscernible].

Okay. And just a follow-up, last thing on that, do you look for similar situation as the remaining newbuilds deliver on the 11,000 TEUs until they are actually chartered out?

Look, they will be delivered within the first half of this year. I don't want to predict now when they will be chartered for what rate and for what period. We can charter the ship today, however the rate together with 10 or may not be what we have in mind, so it may be worth waiting a bit. It’s not only for the newbuildings, if we start anything [indiscernible] we make sure that the lay off course has been minimized and we follow the same principle with those newbuildings, should something be laid up in the future, but as I mentioned earlier, our goal is to charter the vessels. We feel extremely comfortable with our chartering professional moving forward. And then we shouldn't be forgetting that those ships, those assets have 25 to 30 [indiscernible] so whether there is going to be a good investment or not it is not something that should be judged within a month after the ships delivery. Container shipping is about longer term, we are patient, and we have been patient, solet’s see what’s going to be the final return on those transactions.

Got it. Thank you very much for your time.

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

Thank you. Thank you very much for dialing in today and for your interest in Costamare. We're looking forward to speaking to you again during our next quarterly results call. Thank you.

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