Costamare Inc. (CMRE) Q2 2017 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the Second Quarter and First Six Months 2017 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the Company. [Operator Instructions] I must advise you that the conference call is being recorded today Wednesday, July 26, 2017. We'd like to remind you that this conference call contains forward looking statements. Please take a moment to read Slide 2 in 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 second quarter, the Company delivered solid results. We recently accepted delivery of three secondhand vessels with seven charters for periods ranging from five to seven years. During the quarter, we entered into debt financing arrangements for two of them and we are into discussions regarding the debt finance leadership. As of today, all of our newbuilding program is fully funded with remaining equity commitments amounting to only $2 million during 2018. On the chartering side, we have no ships laid up. We continue to charter our vessels having chartered in total six ships since the last quarter. Finally, on the dividend as 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 second quarter cash dividends. As mentioned in the past, our goal is to strengthen the company and enhance long-term shareholder value. In that respect, we are actively looking at new transactions selectively. Turning now to the slides presentation. On Slide 3 you can see the vessels delivered during the quarter. As already mentioned, three secondhand ships were delivered and the debt for the two of them has been arranged. We are currently in the process of arranging the debt for the third ship as well. Also, the last of a series of five 11,000 TEU newbuildings were delivered. This vessel was bought under our JV with York as upon delivery to commence the charter employment. On Slide 4 we discussed our recent common stock ordering. The ordering was upsized from initially 12.5 million shares to 13.5 million. The net proceeds amounted to 92 million. Insiders as has been the case in all of commercial operating participated by buying $10 million worth of shares. On Slide 5 you can see a summary of the chartering arrangements which have taken place during the quarter. We are targeting total six vessels and today we have no ships laid out. Moving on to Slide 6 we are showing the dividend declarations, we declared $0.10 cash dividend per share on our common equity and dividend for all three classes of our preferred stock. As already mentioned, the shareholders have decided to invest all their second quarter cash dividends in new shares under our Dividend Reinvestment Plan. On Slide 7, you can see the second quarter 2017 results versus the same period of last year. During the second quarter of this year, the company generated revenues of $105 million and adjusted net income of about $21 million. For the same period of 2016, the revenues amounted to $119 million and adjusted net income to $32 million. Our adjusted figures take into consideration the following non-cash items; the accrued charter revenues; the gain or loss on sale of vessels; the gain or loss 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 second quarter adjusted EPS amounts to $0.21. On Slide 8, we saw the revenue contribution for our fleet. Almost 100% of our productive cash comes from first-class charters like Evergreen, MSC, Maersk, Cosco, and Hamburg Sud. We currently have about $1.4 billion in contracted revenues and the remaining time charter duration of about 3.1 years. On Slide 9, you can see the resilience of our business model. The bar-show the revenues and adjusted net incomes since 2008, the dotted line is the time charter index. Irrespective of market movements, the company has been consistently performing. On Slide 10, you can see on the left hand side our remaining CapEx. Following the financing with [agreement] of their last 11,000 TEU vessel, the company has just about $2 million of remaining CapEx during 2018. On the right-hand side, we also show the recent acquisition as part of our fleet renewal. As already mentioned, the three secondhand ships have been chartered for periods from five to seven years to Maersk's line with contracted revenues in excess of $100 million. On the last slide we are briefly discussing the market. Charter rates moved up during the first months of the year and have softened over the last weeks. The ideal fleet is at low rate of about 2.5%. We have been no meaningful orders year-to-date bringing the order book down to about 13%. Box sales have been stabilizing. As already mentioned, we are actively looking for new transaction in this market environment. This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now.

[Operator Instructions] And our first question today comes from the line of Gregory Lewis of Credit Suisse.

This is Joe Nelson on for Greg today. Thank you and good afternoon thanks for taking my questions. Just first one from me, you guys mentioned you have one vessel left to finance, it's got a long-term charter, but just kind of more generally speaking you know, kind of post the capital injection a few months ago, are you starting to see the lending market maybe you saw a little bit here now that you’ve got a combination of maybe a little bit of a better backdrop and kind of post that capital injection as we think about maybe new financing and refinancing going forward.

For the third vessel, the Maersk Kowloon we did chartered for five years to Maersk. We are in discussion with a European - with a major European financial institution. We have an agreement on terms and we are now in the process of finalizing the loan documents. This is something we would expect to close over the next weeks, but it's not closed yet. Now generally I would say that of course you know we did an equity offering end of May and as you will note we have cash and balance of about $240 million. Generally however, I would say that the commercial bank debt market is open for container ship owners with a track record and for deals that make sense especially on the back of chartered coverage with a major line of company. So up to now, I don't recall ever missing on an opportunity because the debt could not be secured. Also the first two ships, the 2014 widening vessels which have a seven year charter age, they were part of it as well, of course, providing our total guarantee, but on the back of the contracted cash flow from Maersk.

And then maybe just kind of one more industry, I mean, ideal fleet is down, charter rates are - doesn’t look like they’re great, but they’re certainly better than they were a year ago. Are you starting to see your customers look maybe towards having discussions again about chartering for more term or do we still need to see a little bit more improvement before those conversations start to happen again?

Yes, first of all from my point of view, we've seen them chartering for five and seven years, what we did in the previous quarter. I would agree however that this is definitely not the norm today, and that the market has not reached a stage where line of companies are generally willing to commit for long periods especially comparing to the charter periods we used to see in the past. Now, if you look at charter rates, summer 2016, summer 2017, we’re definitely in a much better market today. However, overall, the container ship market is down. I mean, as it values in charter rates, if you look at them from a historical perspective, I think no one would disagree that we are now experiencing down market for quite some time now. And we believe that in this market environment that will be definitely more opportunistic.

And the next question comes from Chris Wetherbee with Citigroup.

This is Prashant Rao on for Chris. Thanks for taking the questions. I wanted to pick up on the last question a little bit. So, clearly, you guys had strong execution. Fundamentals are getting a little better than what we expected entering the year, and then new alliances are supporting some of the rates as well. I kind of wonder to get a sense then, I mean, the rest of the market though isn't strong as you guys are. So when you look out in terms of the macro view, how do you think about that in terms of thinking about, A, financial performance and what your capital commitments are over the next several quarters, timing of the turnaround. And then two, more specifically, when do we start thinking about reassessing the dividend, or is it too early then to that discussion? I mean, is that something that given where we are today and your performance, we could think of as early as 2018 as we wrap some of these CapEx commitments, or would you need to see the market from up even more to give you some assurance?

Let me start with the second part of the question that has to do with dividend. Now, we're paying $0.10 per share per quarter. And we have the drip in place and the founding family insiders have been fully utilizing the drip. Now, the dividend, first of all, I have to say that it is subject to the Board's discretion, and this is a decision taken by the Board. On top of it, I would say that as the founders own more than 50% of the company, I think we are fully aligned into this and definitely like dividends. However, the dividends, the dividend growth should have on a broader way, on charter basis meaning that it has come out at the same time with incremental excessive contracted cash flows coming from new business. Otherwise, just today's dividend, which you know if you could do tomorrow morning, but just to raise the dividend for the sake of raising it without this sort of cash flows being based on solely contracted revenues, I don't think that these would be the proper thing to do. Now regarding the first part of the question, where we are with our CapEx commitments and how we see the market. We've mentioned in our press release and also in the slide presentation that today we are pretty much covered regarding our CapEx commitments which is nothing, it's close to 2 million during 2018 and has to do 2,500 TEU ships which will be delivered and those are chartered to compensate for seven years each. So we have no CapEx commitments. We have cash on balance sheet in the region of $240 million. And we still see opportunities now charter rates moved up in the first three, four months of the year. We have been witnessing some softening in the market thereafter. Still we do believe that today asset values and charter rates are at historically low levels. And we are definitely see opportunity however we’re not going to rush to enter into new transactions without making sure that fundamentals are there and that these are transactions that they make sense. So we will continue executing hopefully but we will also continue being selected.

Also wanted to touch on - you mentioned that the commercial bank debt market is opened for more established players particularly of chartered linked cash flows of established liner companies. We've seen the order book been fairly controlled, we've got all the pieces in place for a recovery in the containership market. But if the financing side is trying to open up again, do you think there's any risk that the order book will build back up even if it's long tailed like building out to like 2019 or is there some other factor that might constrain that. Are we seeing more rational thinking by participants in the market or how should we be thinking about that given that - that aspect of the market is improving?

Yes, I think that first of all commercial bank debt as already mentioned is available today. Banks have a budget to meet and they are looking for transactions with established players transactions that are slowly are going to make sense. Now there is some discipline also in the landing area which is a healthy sign. And I think that there is no reason why this would not continue in the future. Also regarding new transactions newbuilding orders as you mentioned, you also need this - of equity which I think today there are very few players who have the means to put equity and also secure the debt at terms that make sense.

And the next question comes from Michael Webber with Wells Fargo.

Couple of quick ones, you've already passed over this a little bit, but I was hoping if you could kind of sketch out maybe a more defined priority list in terms of use of equity proceeds and kind of using that cash balance. Are we more likely to see newbuilds or picking off existing secondhand assets at the lines and to what degree do you expect York to be involved?

The newbuilding market today as we speak I think it's closed. Year-to-date there have been no meaningful orders neither from liner companies nor from few containership owners only speak at the basis. So most of the - that have been taking place and it's quite an active S&P market how to do with secondhand vessel. So for secondhand vessels we know we will continue being active either ships that on which we can secure employment like what we did in the previous quarter or like we have done in the past secondhand vessels without charter which we can buy with equity. And that you know we may start chartering them opportunistically and the only way we have a fixed employment we could then lever the asset now respective with regards to size, age et cetera we have dream and we will continue being quite flexible. But where the market is today, I would say that it’s got to be more of secondhand ships simply because line of companies, as well are not willing to commit for newbuilding project.

In terms of the blocks of ships you're looking at, are you looking anything that’s big enough or if you need to bring in the JV partner or these two or three vessel ships so you can handle with the cash balance you've got?

As I said, we can be pretty flexible. First of all, we have the JV with York, we can be buying ships together with our partners, and this partnership up to now has been going excellent.

And then you have a lot of flexibility. I’m just curious as to specifically what you're looking at. Are you looking at anything that would be big enough that you would need to actually kind of tap up additional recourses?

I don’t think so today, but of course I can never predict the market. I'm not talking about the future. However, the way we’re set up today, we’ve got cost on balance sheet with our ability to ask the commercial bank that - as quite good terms. I cannot foresee today the reason today is fresh equity without a question. Common stock today, and dilute…

Just trying to get a sense of the scale or the block of ships that you're looking at or investigating there, how large they were, but I can follow up offline. Just one more and I'll turn it over. This is just higher level. Trying to get into the newbuild question, but we’re seeing some - a handful of press releases throughout the first half of the year. I think most recently with NOL, asset and design, which leave a sense on for an LMG tower 20,000 TEU containership. It seems like we're not quite there yet, but the - I’m trying to get a sense as how a third-party vessel owner or asset provider thinks about that new technology. And I guess maybe if you look at, one, have you looked at anything in earnings that would involve kind of LNGs and marine fuel. And maybe can you talk a bit about how you would look at the residual value risk that’s associated with that 1st Jan tax, as opposed to say not something secondhand in the conventional space. How much of more you would need stepping in and providing that kind of tonnage to somebody in like a five or ten year basis?

First of all, because you touched upon the residual value which normally the ship owner is taking, in all of our transactions whether it is newbuilding or a secondhand ship, we first try to cover our downside which is the residual value is. Now we are aware of their discussion for such projects. I don’t think that we’re there yet. If in the future, this is something that our clients will ask us to do. As long as, we feel comfortable with the residual value risk and with cash flows and everything, we would of course look at it. But I think it is a bit premature today especially when there is no newbuilding market at all. I would say that it's really premature. But we would be there of course if there is a need. We would definitely look at it.

[Operator Instructions] And the next question comes from Ben Nolan with Stifel.

Hi, good morning. This is actually Stephen Pittsworth on for Ben Nolan. Just one quick question. I know in the past, you've talked previously about scrubber technologies given the new fuel emissions that are going to hit the market in the next couple of years or so. Can you provide just a little more color update on your thinking behind whether to install emission scrubbers on your vessels or not?

It's a couple of things, first of all, the regulation regarding the water balance treatment which have been - there are discussions about postponing these for a couple of years, means that from 2017 to 2019. These are the discussions now. Now regarding the water balance treatment, the cause that how to do with our fleet, this is something that we haven't budgeted the fact that it is postponed for a couple of years from a pure cash flow perspective, you deny we added this project for the ship owners. On the other hand if it's something that we know would slowdown scrapping of all the ships of course this is something that doesn’t help the sector as a whole. Because scrapping especially last year has been quite helpful in managing supply and demand in balance. Have I covered your question?

The water ballast treatment makes sense I was wondering about the fuel emissions for the low sulfur issue regulations are coming into market.

Yes, this is something with a factor which is going to be determined the cost and like whether the scrubbers are required - the cost of things fuel and whether there is such a difference in the cost which would justify installing the scrubbers and also whatever are the technical implications in relation of those drivers involves. I think it’s going to raise it down their role in 2020 so for us it would be a bit premature to give you a concise answer from now. This is something we definitely are looking at but it will depend on a number of factors and also mainly on the oil price.

Assuming you want to go ahead and install the scrubbers in your vessels, how much time do you think you would need to give a shipyard in order to meet the regulations deadlines?

I think look this is something - if we were to do it we would do it in advance, we wouldn’t wait for regulations to kick in especially if it’s something with the charter and then go to the shipyard. I guess we would start the discussions and the negotiations plus all the technical aspects quite amount in advance now whether this would be three or five months, I cannot tell you from now but we would definitely be proactive.

And the next question comes from Brandon Oglenski with Barclays.

This is Eric Morgan on from Brandon, thanks for taking our question. Just wondering if you could comment on consolidation among the liner's. Is there a way to kind quantify or how do you describe how recent M&A line ships are impacting rates relative to other factors. And I guess in light of Cosco, OCL would you say that this recent wave of consolidation is nearing an end or do you think they're more opportunities out there?

The first part of the question consolidation in the liner sector it is something that have been going on for couple of years now or even more. It's something that from the liner perspective I think it definitely make sense. And now you have like - if there are three alliances controlling close to 80% to 85% of the global trade, that was not the case if someone looks at the liner company landscape four, five ago. Now from my point of view, you can know either there are less lines. However we want to have shares and strong credit lines also from a credit perspective and also from a profitability perspective. So this is where the whole sector is heading, we are fine with that. And as long as this is helpful for our clients, I guess this is something that we would also welcome. Now you can argue that there is more bargaining power, however what's the value of having more liner companies around if some of them cannot meet debt service payments or charter hirer obligations. So I think the consolidation as we said it’s something that makes there are synergies to be achieved and it's something that I say I think that it was expected it's not something that has caught us by surprise.

And then maybe just one more on the market. Could you give us some insight on demand side of the equation? A lot of the global trade data looks pretty strong right now. Just wondering how the liners are thinking about the outlook on trade.

I think that from the demand point of view, demand has been okay. If you look at the major trade, for instance, Asia-Europe year-to-date, overall, you have a growth in the region of 5%. Asia-U.S. Transpacific, you're in the region of 8%. I mean, this is based on broker's statistic. So demand, although we don't have the preview three times GDP multiple, it’s still something that overall is fine. It is the supply of the vessels and it is sort of the 1.5 million to 1.7 million TEUs scheduled to be delivered this next year. That has been great and in balance between supply and demand. We have an order book of around 13%, and this order book, as it stands today assuming no new orders, is very thin from 2019 onwards. However, there are a lot of big ships to be delivered or scheduled to be delivered without factoring in any slipups I would say in 2017 and in 2018.

Thank you. And at this time, I would like to return the call to management for any closing comments.

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