Costamare Inc. (CMRE) Q4 2019 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 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 call is being recorded today, Wednesday, January 29, 2020. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read slide number two 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 and the year, net income and earnings per share increased substantially, boosted by higher charter rates and the addition of new ships. As part of our Fleet Renewal Program, we acquired during the quarter four Panamax vessels with an average age of about 11 years, and disposal of equal number of ships with an average age of 27 years. During the year, larger vessels enjoyed the rising charter market, and today there is limited supply available in the Post-Panamax sizes. We have 18 Post-Panamax ships coming off charter over the next 12 months, which positions us favorably should market momentum continue. Moving to the slides presentation, on slide three, you can see the highlights. Net income rose by approximately 80% in Q4 '19 compared to last year. The adjusted EPS is $0.22. Over the past year, net income was close to $100 million posting a 47% increase compared to 2018. The adjusted EPS for 2019 is $0.91. Moving to the next slide, over the past quarter we sold four small size containerships with an average age of 27 years, and replaced them with four large-sized Panamax vessels with an average age of 11 years. The four Panamaxes has been acquired with equity, and we're currently in advanced discussion with a leading European bank for their financing. Slide five; we do maintain a strong balance sheet with approximately 41% leverage and no balance sheet financing. We also concluded four separate financings with leading European and U.S. financial institutions for four 11,000 TEU containerships owned with York Capital. We raised about $265 million in total from these new financings. Regarding operational performance, during the previous quarter, we achieved utilization rates of close to 100% and very competitive operating expenses. Moving to slide six, last containerships continue to benefit from a tight supply market. Over the next year, 18 of our vessels larger than 5,000 TEUs are coming off charter, which positions us favorably should market momentum continue. The idle fleet adjusted for vessels undergoing scrubber retrofits stands at low 1.5%, while the order book has remained at levels close to 10%. We would be paying out [57th] [ph] consecutive quarterly dividend in February. Insiders have been participating in the DRIP, and since inception in 2016 have reinvested in total $82 million. Slide seven; in this slide you can see the fourth quarter 2019 figures. During the last quarter of this year, the company generated revenues of $124 million, and adjusted net income of $38 million. Based on the above, the fourth quarter adjusted EPS nearly tripled to $0.32 from last year's fourth quarter EPS of $0.12. 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 eight, we're discussing our capital structure. As already mentioned, there are no substantial balloon payments due over the next 12 months. Our leverage sits comfortably below 50%. Net debt-to-adjusted EBITDA for 2019 was 3.7 times, and EBITDA with net interest of four times when our covenants have a minimum requirement of 2.5 times coverage. On slide nine, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Costco, Yang Ming, and Hapag-Lloyd. We have to-date $2.2 billion in contracted revenues and the remaining time-chartered duration of about 3.5 years. On the last two slides, we're discussing the market. As shown on slide 10, charter rates for larger ships have been rising faster during 2019, compared to those of smaller vessels. The order book of slightly higher than 10% is at low leverage with very thin delivery schedule from 2022 onwards. On the last slide, the idle fleet is showing a 6.1%, adjusted however for the vessels undergoing scrubber installations, it drops to 1.5%. Books rates are rising since the end of last year. 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.

Yes. Hi, Greg, how are you doing? Thanks for taking my questions.

Hi, Ben. Good morning.

Yes, I have a couple, my first one is, you called it out in the release and your prepared remarks there the 10 or 11 or so vessels that are larger 8,000 plus TEU that are coming off contracts in the next few months. I'm curious with -- the plan is to put those on maybe on one-year contracts, or if there is a good market for three or five-year contracts, and then specifically within that, is there a wide gap between a one-year contract rate versus a three or five-year contract rates in terms of the pricing?

Yes. Well, the first part of the question, yes, we would also consider a longer term as opposed to one-year charter, like it could be three to four years, or even longer, five years, assuming that the charter rate makes sense, and also assuming that we feel comfortable with the counterparty risk. Now, the second part of the question, whether there's a wide gap between the one-year time charter rate versus a three or four year charter rate, there is a gap, but depending on the specific asset I don't think that this is so wide. So, this is something we're considering as well assuming that we feel it makes sense to lock-in contract with revenues for longer periods. This is definitely something we're discussing, but I mean the gap I don't think that is as wide as sort of this has been in the past, leave aside the fact that some years ago there was no three to five-year market for larger vessels, now we have also seen that precedence of deals, where liners have been committing for a three to five-year deal for like more than a tonnage.

Right, okay. That's helpful, and then my next question relates to four vessels that you acquired. First of all, could you -- maybe I didn't see it less than how much you paid for this, but also, I think it was interesting that it looks like there all four of them are narrow beam Panamaxes, which I think has been pretty widely discriminated against. I'm curious what your thinking is with respect to that specific asset class, and especially as it relates maybe to selling much smaller ships, you think these are going to fill the place of those smaller ships in terms of their market position?

Yes, for confidentiality reasons, it's difficult for me to sort of revision now the sort of exact acquisition price, all the ships were sort of bought together and [block] [ph] in one deal. Now, those four ships, these are the 4,250 TEU containerships, built two of them in 2009 and two of them in 2010, the market for those ships today is between I will say 13,500 to 14,000 or so. So -- and for a year, so and we do consider that the market rate, today's market rate together with the potential earning capacity of those vessels. Compared to the purchase price, it definitely makes sense, and we shouldn't forget that those assets they have a 30-year useful life, and as Costamare we do have a lot of experience, and I think this is one of our strengths in operating all the tonnage. So, I mean we do take a long-term view regarding the capacity of those vessels, and they are sort of earnings potential. In the past, for similar prices, for similar acquisition prices, those ships a couple of years ago, they were getting between $10,000 to $11,000 per day. So, it is definitely a better charter market for those vessels. At prices, we have not moved a lot compared to levels which were a couple of years ago.

Okay. And with respect to sort of replacing them with the older tonnage, is that sort of the idea? Do you think that they're sort of being slotted into the same market position or…

No. I mean, look, we generally renew our fleet. We sold four vessels. On average, they have an age of 26.5 years. So, those ships, they have sort of earned their money a couple of times already. So I mean, they were I think the right candidates, say, for scraping. Also taking into consideration, today's scrap prices, which on a relative basis, they're sort of high, close to $200 or plus per ton. We would have bought those four Panamax ships in any case, whether we scrap those for like older vessels or not, but it coincided timing-wise. So, there could be a difference of a couple of quarters. It coincided, but generally we are renewing our fleet, and the sort of equity released from the sale of those vessels, of the older ships together with new debt, which we have agreed for Panamax vessels, I think it makes sense because without the huge equity cash outflow, we are using the fleet with like a ship, say, 70 years younger on average and larger vessels as well.

Right, okay. And then, lastly for me, I'll turn it over, just as it sort of relates to your customer demand for scrubbers, I know obviously you've sort of taken the approach that if the customers will compensate you for it, and that you would do it, but are customers now -- is there been any increased sort of a renewal of customers saying, "Okay, well, let's go ahead and do it," or is that not really a discussion that you're having?

No, we're discussing it with liners. We are in constant discussions with them. We have up to now agreed to install scrubbers in 15 of our vessels. These are the five new buildings, which are currently under the construction phase, charter to Yang Ming for 10 years, and we have already agreed to install scrubbers in four ships charter, in five ships charter or MSC and five ships charter Evergreen, these are -- those 10 ships are already in the water. We are in discussion with liners regarding installation of scrubbers, which is going to be a package together with a charter agreement. It is something that materializes. Of course we're going to be announcing it, but yes, there is a lot of interest from liner companies regarding the scrubber installation to-date.

Great, all right, I appreciate it. I'll turn it over. Thank you.

Okay, Ben. Thank you.

Our next question today comes from Omar Nokta of Clarksons Platou Securities. Please go ahead.

Yes, thank you. Hey, guys. Maybe just to -- hey, Greg, just maybe to one of Ben's questions, you know, regarding the purchases of the Panamax vessels, you know, you've been continuing a trend or a theme of selling your sub 3,000 TEU ships. Forgetting wide beam or narrow beam, is this simply you're looking to exit sort of that sub 3,000 segment and just going larger, or is it just simply you're selling them as a function of their age, as you said they were 27 years old?

No, for those four particular vessels with disposal, they have an age of 27 years old, so we dispose them in today's like, scrubber prices, and the ships, as I said they got -- already done their money or sort of the sort of equity investments a lot of times. So, it does that I think they were the right candidates for scrapping. It doesn't mean that we are exiting this sort of a feeder vessel or like the smaller sizes. In the past, depending -- sorry, in the future, depending on prizes, we're looking at a pretty much everything as long as it is a containership vessel. Now, we tend to have another -- I mean, our sort of average ship size today is about 7,000 TEU. So, we tend to prefer all the tonnage -- bigger tonnage, but generally, if it's something that makes sense, it's even -- if it is a smaller feeder ship, we are going to look at it. So, it's not that we are exiting this segment. As those four specific vessels I think they have reached an age that the scrapping made sense from a commercial point of view.

Okay, thanks. Thanks for that color. And then, also just wanted to talk about, obviously, you put in the release the $265 million refinancing on the four 11,000 TEU ships. At first blush, that seems very attractive, you probably have your own evaluations, but it seems at least to be above a 70% loan to value, which I think is quite compelling, considering the ships aren't on long-term contracts. Maybe could you perhaps just give, you know, explain a little bit about how you're able to achieve that type of financing especially without the long-term contract?

Yes. Look, those are four ships 2017 bills, and we have refinanced them with new facilities. We've done four bilateral deals actually. So, it's not a syndicate. With a tenor of five years for each facility and the terms are sort of pretty much similar. Now, based on our calculations, the leverage is not 70% or like to 75%, but it is lower, based on the valuations we received and based on the valuation also banned from their own sources have obtained. So, and in some reasons, we have the pre-agreed loan amount to be drawn of $65 million without the need to provide the evaluation a couple of days before drawing. So, it was a pre-agreed amount, but generally I would say that they leverage, it's definitely below 70% for those type of vessel to-date. These are high-spec ships, 2017 built, and I think there sort of a value is higher than like what I guess you have in mind for a 70% to 75% leverage.

Okay, thank you. And then, maybe just you sort of touched on this also in your remarks and also with Ben's question, those four ships in particular, like you said, they're high-spec, what's a charter appetite look like for those? Are those vessels you think you could secure three-year contracts in today's market?

Yes. First of all, those ships today, two of them -- it chartered with specific charter, they're getting today close to $43,000 per day. So just judging from that, I think the value of those assets, it is quite substantial. Now, the second part of the question is yes, we think that we could definitely charter those ships today for a period of three to five years, or even longer. Of course, subject to terms, but I think there is definitely a lot of returns today for like a medium or long-term charter contract for those specific five assets, its five ships actually. We have refinanced the four, and we are currently looking into the fifth one. So, it is five sister vessels.

Okay.

All those ships are opening, as we mentioned, within 2020. And we definitely believe that the time for opening of those vessels is something that makes sense from our point of view. It is quite beneficial.

Yes. Okay, very good, Greg. Thanks so much for the color. That's it for me.

Thank you.

And our next question today comes from Chris Wetherbee of Citi. Please go ahead.

Good morning; James on for Chris. I wanted to touch on scrubber capacity in Chinese New Year. Given Chinese New Year is underway, how much of a reduction of scrubber installation capacity have you seen as -- have any ships essentially entered the market, trying to understand essentially if there were charters that decided to have a scrubber installation, what's the level of capacity to essentially have it installed within before the end of the year?

Okay, because -- the line was not very clear, so the question is whether there is capacity today for new scrub installation, or also whether there are delays, I mean, what was the question?

Just near-term, how much of a reduction scrubber installation capacity have you seen from Chinese New Year, and then longer term how much?

We haven't seen anything today. Look, generally, it has been reported that there have been delays in the shipyards for the scrubber retrofit process. So, which on average now could take between, I would say, 55 to 60 days, or something although initially people had hoped for a much shorter period. So, I mean there are some delays experienced for a lot of ship owners and liner companies. Leaving that aside, which is something that we know, we have not seen any specific delay or sort of any specific capacity reduction because of the Chinese New Year, which is something that we sort of already knew, and it was accounted, for now the fact that the Chinese New Year facilities may be extended for one more week, as it has been reported, and what's going to be the effect of that it remains to be seen. I cannot make any comment now. This is [EBITDA] [ph] premature, but up to now, in the sort of this week it has been already factored in the calculations regarding this scrubber capacity. Nothing has changed.

Then longer term, understanding that there have been delays, is there any possibility of actually being able to place an order for a scrubber retrofit and having completing this year if you actually ordered today?

Yes, I think if you made an order today, it's two things, first of all, you need to make the order of the equipment, and then secondly, you need to arrange for the retrofitting process with the shipyard. So, if you put an order today I think and depending on the shipyards that you're going to choose, I think yes, there is a capacity in order to have the scrubbers installed within this year. Now, it depends on the specific vessel, asset size, and CPR, and also the cost that maybe sort of incurred, but I would say that for 2020 installation within this year I would say that yes, there is capacity. We haven't seen something to the contrary.

Got it. And then, in your slides, you had called out slow steaming, I wanted to understand if you had would actually seen any slowdown in your fleet particularly?

Any slowdown -- sorry, in what?

In your fleet.

No, I think we are progressing, we have -- okay, the five new buildings where the scrubbers are to be installed, they are progressing normally, and for the rest 10 of the vessels, there maybe some slight delays, but nothing that it's going to change that dramatically the scrubber economics, I would say. So, there could be some delays of weeks or so, but it's not going to be like delays of like a quarter or sort of something like that.

Got it. And then, I think just wanting to touch on slow steam levels, slow steaming you're seeing in the market, have you actually seen a reduction in speeds on your vessels?

Yes, there have been reports that generally slow steaming. It's something that has been taking place. I cannot quantify exactly, because it depends on the vessels, on the trade routes, and also on the particularities of it's charterer, but generally the slow steaming can -- if someone takes it - if you over the last a year or 18 months, this is something that we have been witnessing, which generally, especially for the larger vessels, it is something that does help the supply and demand economics, for sure. I cannot forecast whether the slow steaming is going to continue and at what levels. However, assuming that, and knowing that the fuel expenses they have been heading north. I think slow steaming it is something that definitely makes sense.

Got it. Thank you.

Sure. Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Zikos for any final remarks.

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

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