Costamare Inc. (CMRE) Q3 2019 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 2019 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, October 24, 2019. 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 of the year the company delivered profitable results. As was the case in the previous quarter, net income and earnings per share more than doubled boosted by increased charter rates and the addition of new ships. Charter rates for the larger containerships continue to improve and there is limited supply available for the Post-Panamax sizes. Over the quarter, we chartered in total 14 vessels benefiting from a rising rate environment. We have 18 Post-Panamax ships coming off charter over the next year, which positions us favorably should market momentum continue. Turning now to the slide presentation. On slide 3, you can see the highlights. Voyage Revenues increased by 36% and net income by approximately 160% in Q3 2019 compared to the same quarter of last year. The adjusted EPS is $0.26. Over the past quarter, we have concluded the refinancing of two 9,000 TEU containerships. We do maintain a strong balance sheet with approximately 42% leverage and no off-balance sheet financing. We will pay our 36th consecutive quarterly dividend in November. Insiders have been participating in the DRIP since inception 2016 having reinvested $77 million up to now. Moving to the next slide. During the quarter, we chartered in total 14 vessels. Regarding the market charter rates for the larger vessels have continued their upward momentum. The idle fleet adjusted for vessels undergoing scrubber retrofits stands at about 2%. The order book has further declined to 10% of the existing fleet. On slide 5, you can see a summary of our recent chartering activity. What is worth mentioning here is the increase in the charter rates for the larger vessels compared to last one. As already mentioned, over the next year we have 18 containerships above 5,500 TEUs, which are due for re-chartering which provides us with significant upside should momentum continue. On slide 6, you can see the third quarter 2019 results. During the third quarter of this year the company generated revenues of $124 million and adjusted net income of about $31 million. Based on the above, the third quarter adjusted EPS nearly tripled to $0.26 from last year's third quarter EPS to $0.09. Our adjusted figures take into consideration the following non-cash items. The accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other non-cash charges. On slide 7, we are briefly discussing our capital structure. As already mentioned there are no balloon payments due over the next 12 months. Our leverage sits comfortably below 50%. Net debt-to-EBITDA on an annualized basis is below four times and EBITDA over net interest is at about 3.7 times when our covenants have a minimum of 2.5 times. On slide 8, we are showing the revenue contribution for our fleet. 99% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Costco, Yang Ming, and Hapag-Lloyd. We have $2.3 billion in contracted revenues and the remaining time-chartered duration of about 3.7 years. On the last slide, we're discussing the market. Charter rates moved up during the first three quarters of the year by an average of 34%. The idle fleet is shown at 3.9% adjusting, however, for the vessels undergoing scrubber installation it drops to about 2%. The order book has steadily decreased to 10%. As already mentioned, we are actively looking for new transactions in this market environment. 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 the line of Ben Nolan of Stifel. Please go ahead.

Good morning Greg. Nice quarter by the way. The -- I have a handful of questions. #1 is you did a little bit of re-contracting on some vessels that at least I had been assuming you're at the end of their current contracts 1991-built type ships I was assuming they were going to be going. But is it simply a function of a better market and so there are charters that are willing to pay a good price on those? Is there a function of -- maybe scrap values are a little low now so it makes it easier decision to keep them in the fleet? What's kind of the thinking about holding on to those older equipment?

Well, mainly it's got to do with the physical condition of the vessel and with supply and demand like we have been known for. Also managing older or not and we're not afraid of like older ships. So, as long as the physical condition of the vessel is fine and we have been managing those vessels for years. And at the same time, there is a demand for those ships which makes it -- was a -- keep maintaining those vessels. We are going to continue chartering those ships. And sometimes the best returns come from all the vessels, especially if you manage to buy them close to scrap price and then continue like a 15 or 70-year-old vessel and then continue chartering and re-chartering fleet for like five, seven, 10 years whatever. So, it's mainly supply and demand coupled with the physical condition of the vessel which will be found to be satisfactory. Now, scrap prices they have come off a bit, but they are at around $400 per ton. So, historically speaking, although they have come up the $450 or $480, they're not at historically low prices.

Right. Does that -- and sort of tying this in here, you guys have been maybe a little bit at least it appears to be you haven't been buying as much in the way of secondhand vessels or a little bit older assets in the last I don't know a year or so. And certainly there weren't any this quarter. Is that a function of it that you're kind of just biding your time to wait for a better buyer's market? Or you just haven't nothing has sort of ticked the boxes? Or is there -- is it a conscious effort? Or maybe talk through your secondhand acquisition strategy here?

We have inspected a lot of ships also like older vessels like -- also smaller ships 2500 3500 it didn't happen because the price. Also considering maintenance cost and potential dry-docking costs in the short term, didn't make that particular asset attractive. So we have inspected a lot of ships and we have passed on those. It's not that we don't have appetite there for older donors. It does that what we saw in the market didn't meet our criteria. In the future of course this may happen. Now you're right that over the next couple of quarters we haven't bought a number of second-hand ships unlike like the previous year or the year before but it's just a matter of circumstances and what has been available on the market and at what price. Because the price of the vessel is not only let's say $5 million, $7 million, $10 million. If there is a dry-docking view over the next year or less it's got to be parked in the numbers. There may be some initial delivery costs depending on the physical condition of the vessel. So taking all those into account and also factoring in the earnings capacity of the vessel, so what we saw now didn't make much sense. So this is the only reason.

Okay. And then lastly for me and I'll turn it over. I'm curious what the -- where the appetite is among the liners for doing new long-term deals on new orders? And more specifically or maybe in conjunction with that one of the things that at least I've heard a lot of ship owners talk a little bit about is being uncertain. What kind of engine is to put in their ships? Do they want LNG or they want not. And obviously, on a long-term contract it's going to be up to whoever the liner is but is that part of the consideration? Are you guys looking to do -- if you were to do it would you be willing to have LNG as a primary fuel? Or is it just a time where you'd rather not do any new buildings just because you don't know what the ultimate propulsion system is going to look like?

No look whether we're going to be entering into a new building transaction is backed a long term charter, especially if it refers to bigger ships. So it's got to do with the numbers. It's got to do at what price we buy, what is the financing we can assume what's going to be our equity requirements and what is our expected equity return factoring in the charter rate. So there are a lot of companies who have recently put their orders for like a large vessels 23,000 TEUs with high scrubbers. Others that -- those ships are going to be LNG fueled. We are pretty much open to everything. For us the main consideration apart from the quality of the charterer is mainly our -- sort of our equity requirements and what's going to be the return on that equity for our shareholders. Apart from that we are pretty much open, the same way we are open for like large new buildings with a 10- or 20-year charter. As for like 70-year-old vessel both close to cap value. So in that respect we are pretty flexible I would say.

Okay. And would you say that there's a decent appetite currently in the market for those new building contracts from the liner?

I think there is yes. We have recently witnessed a couple of landing companies putting order for like large vessels. There is also rumors that there are more liner companies thinking about putting orders for large ships as well. This is what we read. But recently there have been a couple of orders from major liner companies for like ships 20,000 TEUs and above correct.

Okay. Perfect. All right. That does it for me. I’ll turn it over. Thanks Greg.

Okay. Thank you, Ben.

Our next question comes from the line of Chris Wetherbee of Citigroup. Please go ahead.

Yeah. Hey, thanks for taking the question. Let me ask a little a couple of capacity questions if I could about sort of the market in general? Just kind of getting a sense of there's been a decent amount of blank sailing. Do you have a sense of how much capacity has been pulled out of the market through blank sailings, and sort of what you think the duration of that might be? Does that just get us over the hump until we get through to the New Year? Or is there a sort of plan that you hear from liners extended beyond that? I just want to get a sense of your views on the blank sailings?

Yeah. The blank sailing this is something we've seen relatively recently and it's also a function of the slack period in container shipping, which is traditionally the fourth quarter the year. So at this point, I cannot possibly predict whether this is going to continue and like for -- like what amount of time. However, I have to mention that the blank sailings it has also to do with the fact that the larger vessels like 9,000 11,000 TEUs have not been available and there is a very tight market. So in some cases, we've seen line of companies opting for two smaller vessels simply because there are no larger vessels available in the market today. But I cannot possibly sort of forecast what capacity this could take off-market over the next quarter.

Okay. Okay. All right. No. That's helpful. I appreciate that color. And then maybe another question taking it from a bit of a different angle and maybe this has to do a little bit with some of the larger vessels not being available, but there's clearly been scrubber installations going on as we move through 3Q and into 4Q. How long do you think that lasts? Does it sort of -- what's the tail into 2020 that you would expect to see some capacity out of the market as they go through these extended dry dockings for scrubber installation in the container market?

Yes. I mean, what we see now in the market is that generally speaking a scrubber installation the whole process takes longer than originally anticipated. And we also have ships which are in the process of having scrubbers installed. And generally it takes more weeks than initially thought. So based on broker's consensus, this is something that it's going to have an effect for the whole of 2020. I cannot tell you like whether this going to be for the first or second quarter or third, but judging from the situation today, I can tell that for the whole 2020 this is something that is going to be taking capacity off the market, especially for the larger vessels for scrubber installation. It's not like that those scrubbers can be installed within three to four weeks as initially thought. It takes much longer than that. Also the capacity in the shipyards especially in Asia is rather constrained. So there are a lot of delays there.

Okay. No that's helpful. That's good color. And then I guess, my last question just, sort of, conceptually there's been the thought that the fuel dynamic post IMO 2020 is going to be a burden shared between the customers and then maybe the liner companies if the customers aren't willing to pay. I guess I wanted to get a sense if you think that there's any risk at the charter level. So at your level as you're chartering out ships to liner companies that there could be some -- I don't know if it's a second derivative type impact, if fuel isn't as successfully passed through to the customers as a lot of people are trying to suggest it will be. So in other words, if the liner companies end of having to absorb some more of the impact from increased fuel cost, is there any, sort of, ripple effect or trickle down effect on capacity carriers like yourself?

Look a couple of points. First of all, the fuel expense it is a pass-through cost to the liner, which we all know. But I have to stress that this is the case because sometimes there's some misunderstanding that certain owners also have some risk regarding the fuel expense itself. Now, regarding our customers and we have a pie chart with like where our contracted assets is coming from the liner companies we have been dealing with, we feel very comfortable regarding the credit position today. Of course there are concerns generally about the liner industry's ability to pass on the fuel expense. So part of this incremental expense to the shippers, which I cannot possibly answer right now. But generally I have to say that we feel extremely comfortable with the credit quality of our business partners meaning the liner companies.

Okay. That was the angle I was thinking about on the credit side. So, that make sense. Okay, thanks for the time. I appreciate it.

Thank you.

Our next question comes from the line of J. Mintzmyer of Value Investor's Edge. Please go ahead.

Good afternoon Greg. First of all fantastic results on this quarter. It's really good to watch your earnings continue to go up. Very nice charters on those two 11,000 TEU ships. First off, is there any interest in the other ones? I see there's three more that come off in March and one of them is also with ZIM.

Yes, you're right there are like three sister ships 11,000 figures coming off charter over the next couple of quarters. This is something we have in mind. Generally there is interest. And we are in discussions regarding potential chartering on those vessels. But on the other hand it's a bit premature. Now we have October those come off within the next two quarters. So it may be a bit premature now, but we definitely consider this more as an upside assuming that the market fundamentals stay where they are today and not a downside definitely not.

Excellent. Makes sense. And then can you confirm those 5 by 11,000s they don't have scrubbers correct? Is there any discussion on adding scrubbers to those?

They don't have scrubbers. Those are ships that have been delivered to us in 2017. These are new buildings, high-spec vessels. They don't have scrubbers. And they're chartering up to now has been for up to one year. So with a year charter, it's very difficult to have scrubbers installed and the cost to be borne by the charter amortized over this short-term period.

Yes, definitely. Definitely makes sense. You'd want to see a longer-term charter on those before committing to that installation. You made a really good timing transaction with buying those York vessels the 14,000s. York also owns the ownership in the 11,000s, which as we're seeing are very lucrative assets. Is there any interest from York to sell either rest of those 11,000s? Or do you think they're going to be in with the long-term?

I think there is no rush. Those are young ships as I said 2017 delivery. We have an excellent relationship with York. And we had a very good discussion regarding the acquisition of the 14,000 TEU ships, which was end of 2018. The thing is that of course we know the vessels. We are managing those ships. We have a 40% ownership on average in those five ships. So there may be discussions with York in the future. But I think I cannot make any forecast right now regarding the outcome of those discussions. But I mean generally this is something that in the future may be on the table in our discussions with York.

Definitely makes sense. Thanks, Greg. Last question on the fleet. I know I'm asking a lot here. We have some 95,000 ships coming up in April and May and they're at about 29,000. That used to be way above market, but now it looks like that's pretty much the current market. Has there been any discussions to extend those potentially with some sort of scrubber deal or is that kind of a wait and see on those?

Not yet. You're right that the market is slightly below 30,000 now for those vessels. No, we don't have any sort of discussion right now. And as a result there are no discussions for scrubbers either. But we feel that the timing of the opening of those vessels for chartering as well as the -- for the 11,000 generally it looks like a good timing.

Excellent, excellent. Every time I turn around Costamare is looking better. The last final question. I know it's a question a lot of investors are wondering. Earnings are going up, balance sheet is getting better. Everything is looking better. What does it take to get that dividend to raise a little bit maybe say $0.12, $0.13?

Okay. The dividend yield up until now does like north of 6%, which I consume to be a healthy like dividend yield based on the -- our track record, our credentials and our performance since 2010 plus all the sort of potential for upside from our ships coming off charter. We like dividends. I have to remind you that Insiders own north of 55% of the company and there are no other shipping interest outside of Costamare. But those sort of increased dividends should normally come together with increased contracted cash flows from long-term business. It wouldn't be an issue for us at all to raise the dividend now by some cents per quarter. This will be easy but whether this would be the wise decision from an economical point of view or not this seems to be discussed. So it is a board decision, but my personal opinion would be that this should grow at the same time with the growth of the contracted cash flows.

All right. Definitely make sense. I appreciate the balanced approach. And keep up the good work. Thanks.

Our next question is a follow-up from Chris Wetherbee of Citigroup. Please go ahead.

Thanks for the follow-up question. I wanted to ask a specific model question. Just looking at D&A. Depreciation and amortization expense was a good step down from 2Q. I wanted to get a sense of maybe what drove that relatively lower line item for the quarter? Looks like maybe one of your amortization expenses went to 0. So I just want to understand what that was? And then is this the right run rate to use going forward somewhere in these line?

Yes. You are referring to the line item amortization of prepaid lease rent that's correct which now is zero. This is included in the depreciation expense line. So that's all now. I mean, we cannot tell you separately a depreciation schedule, but the number that was there in the previous quarter. It is included in our depreciation expense. This is pretty much it. But the number was pretty low. It was close to $2.5 million per quarter. It wasn't a big number.

So that moved from $28 million down to $25 million but also includes that other number. Is that the right way to think about it going forward?

Correct, correct.

Okay. Perfect. Thank you very much.

This concludes today's question-and-answer session. I would like to turn the conference back over to Mr. Zikos for his closing remarks.

Thank you very much for your interest in Costamare and for dialing in today. We are looking forward to speaking with you again during our Q4 and year-end results call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.