U.S. markets open in 27 minutes

Edited Transcript of CMRE earnings conference call or presentation 29-Jan-20 1:30pm GMT

Q4 2019 Costamare Inc Earnings Call

MONACO Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Costamare Inc earnings conference call or presentation Wednesday, January 29, 2020 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gregory G. Zikos

Costamare Inc. - CFO & Director

================================================================================

Conference Call Participants

================================================================================

* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* James Yoon

Citigroup Inc, Research Division - Former High Yield and Leveraged Loans Research Associate

* Omar Mostafa Nokta

Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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. (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 #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.

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [2]

--------------------------------------------------------------------------------

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 4 Panamax vessels with an average age of about 11 years and disposed of an 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 position us favorably should the market momentum continue.

Moving to the slides presentation. On Slide 3, you can see the highlights. Net income rose by approximately 80% in Q4 '19 compared to last year. The adjusted EPS is $0.32. Over the past year, net income was close to $100 million, posting a 47% increased -- increase compared to 2018. The adjusted EPS for 2019 is $0.91.

Moving to the next slide. Over the past quarter, we sold 4 small-sized containerships with an average age of 27 years and replaced them with 4 large-sized Panamax vessels with an average age of 11 years. The 4 Panamax' have been acquired with equity, and we are currently in advanced discussion with a leading European bank for their financing.

Slide 5. We do maintain a strong balance sheet with approximately 41% leverage and no balance sheet financing. We also concluded 4 separate financings with leading European and U.S. financial institutions for 4 11,000 TEU containerships co-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 6. Large 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 position us favorably should the market momentum continue. The idle fleet, adjusted for vessels undergoing scrubber retrofits, stands at a low 1.5%, while the order book has remained at levels close to 10%. We would be paying our 37th consecutive quarterly dividend in February. Insiders have been participating in the DRIP and since inception in 2016, have reinvested in total, $82 million.

Slide 7. 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 noncash items: accrued charter revenues; accounting gains or losses from asset disposals; prepaid lease rentals; and other noncash charges.

On Slide 8, we're discussing our capital structure. As already mentioned, there are no substantial balloon payments due over the next 12 months. Our leverage is comfortably below 50%. Net debt to adjusted EBITDA for 2019 was 3.7x and EBITDA over net interest at 4x, when our covenants have a minimum requirement of 2.5x coverage.

On Slide 9, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Cosco, Yang Ming and Hapag-Lloyd. We have today $2.2 billion in contracted revenues at the remaining time charter duration of about 3.5 years.

On the last 2 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 levels with very thin delivery schedule from 2022 onwards.

On the last slide, the idle fleet is showing us 6.1%. Adjusted, however, for the vessels undergoing scrubber installations, it drops to 1.5%. Box 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.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question comes from the line of Ben Nolan of Stifel.

--------------------------------------------------------------------------------

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

--------------------------------------------------------------------------------

My -- I have a couple. My first one is, and you called it out in the release in your prepared remarks there, the 10 or 11 or so vessels that are larger, 8,000 plus TEU that are coming off contract in the next few months. I'm curious with the -- if the plan is to put those on -- maybe on 1-year contracts or if there is a good market for 3- or 5-year contracts. And then specifically, within that, is there a wide gap between the contract -- a 1-year contract rate versus a 3- or 5-year contract rate in terms of the pricing?

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [3]

--------------------------------------------------------------------------------

Yes. On the first part of the question, yes, we would also consider a longer term as opposed to a 1-year charter, like it could be 3 to 4 years, or even longer, 5 years, assuming that the charter rate makes sense and also assuming that we feel comfortable with the counterparty risk. Now to -- now the second part of the question, whether there is a wide gap between the 1-year time charter rate versus the 3- or 4-year charter rate, there is a gap, but depending on the specific asset, I don't think that this is as wide.

So this is something we're considering as well. Assuming that we feel it makes sense to lock in contracted revenues for a longer period, this is definitely something we're discussing. But I mean the gap, I don't think that this is as wide as sort of this has been in the past, even as in fact, in the past, that some years ago, there was no 3- to 5-year market for larger vessels. Now we have also seen a precedence of deals where liners have been committing for a 3- to 5-year deal for like more than the tonnage.

--------------------------------------------------------------------------------

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

--------------------------------------------------------------------------------

Right. Okay. That's helpful. And then my next question relates to the 4 vessels that you acquired. First of all, could you maybe, I didn't see it, let us know how much you paid for this. But also I thought it was interesting that it looks like they're -- all 4 of them are narrow-beam Panamax', 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. Do you think these are going to fill the place of those smaller ships in terms of their market positions?

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [5]

--------------------------------------------------------------------------------

Yes. For like for confidentiality reasons, it's difficult for me to sort of reveal now the sort of exact acquisition price. All the ships were sort of bought together in block in one deal. Now those 4 ships, these are the 4,250 TEU containerships, built 2 of them in 2009 and 2 of them in 2010. The market for those ships today is between, I would say, $13,500 to $15,000 or 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 their 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's definitely a better charter market for those vessels at prices which have not moved a lot compared to levels we saw a couple of years ago.

--------------------------------------------------------------------------------

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [7]

--------------------------------------------------------------------------------

No. I mean look, we generally renew our fleet. We sold 4 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 for scrapping, also taking into consideration today's scrap prices, which on a relative basis, they are sort of high, close to $400 or plus per ton. We would have bought those 4 Panamax ships, in any case, whether we scrap those for like older vessels or not. But it coincided, time-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 the 4 Panamax vessels, I think it makes sense because without a huge equity cash outflow, we are renewing the fleet with like ships 17 years younger on average and larger vessels as well.

--------------------------------------------------------------------------------

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [8]

--------------------------------------------------------------------------------

Right. Okay. And then lastly for me, and I'll turn it over. Is it -- 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 -- has there been any increased sort of renewal of customers saying, okay, well, let's go ahead and do it? Or is that not really a discussion that you are having?

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [9]

--------------------------------------------------------------------------------

No, we're discussing 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 5 new buildings, which are currently under the construction phase, a charter to Yang Ming for 10 years. And we have already agreed to install scrubbers in 4 ship charters -- in 5 ship charters to MSC and 5 ship charters to Evergreen. These are -- those 10 ships are already in the water. We are in discussion with the liners regarding installation of scrubbers, which is going to be packaged together with the charter agreement. Is this 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.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [11]

--------------------------------------------------------------------------------

Maybe just to -- Greg, just maybe to one of Ben's questions regarding the purchases of the Panamax vessels. It's -- you've been continuing a trend or a theme of selling your sub-3,000 TEU ships for getting 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.

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [12]

--------------------------------------------------------------------------------

No. For those 4 particular vessels we disposed of, they have an age of 27 years old. So we disposed of them in today's like scrap prices, and the ships, as I said, they have already turned their money or sort of the sort of equity investment a lot of times. So it's just 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 on -- sorry, in the future, we -- depending on prices, we're looking at 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 above 7,000 TEUs. So we tend to prefer orders on a bigger tonnage. But generally, if it's something that makes sense and even if it is a smaller feeder ship, we're going to look at it. So it's not that we are exiting this segment as those 4 specific vessels, I think they have reached an age that scrapping made sense from a commercial point of view.

--------------------------------------------------------------------------------

Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [13]

--------------------------------------------------------------------------------

Okay. And then also I just wanted to talk about, obviously, you put in the release, the $265 million refinancing on the 4 11,000 TEU ships. At first blush, it seems very attractive. You probably have your own valuations, 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 -- explain a little bit about how you're able to achieve that type of financing, especially without the long-term contract.

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [14]

--------------------------------------------------------------------------------

Yes. Look, those are 4 ships, 20 -- 2017-built. And we have refinanced them with new facilities. We've done 4 bilateral deals actually. So it's not a syndicate, with a tenor of 5 years for each facility, and the terms are sort of pretty much similar. Now based on our calculation, the leverage is not 70% or like the 75%. But it is lower based on the valuations we received and based on the valuation also banks from their own sources have obtained. So -- and in some reasons, we had a pre-agreed loan amount to be drawn of $65 million without the need to provide a valuation a couple of days before drawing. So it was a pre-agreed amount. But generally, I would say that the leverage, it's definitely below 70% for those type of vessels today. These are high-spec ships, 2017-built. And I think it is -- their sort of value is higher than like what I guess you have in mind for a 70% to 75% leverage.

--------------------------------------------------------------------------------

Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [15]

--------------------------------------------------------------------------------

Okay. And then maybe just -- you sort of touched on this also in your remarks and also with Ben's question. Those 4 ships, in particular, they're, like you said, they're high-spec. What's the charter appetite look like for those? Are those vessels you think you could secure through your contracts in today's market?

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [16]

--------------------------------------------------------------------------------

Yes. First of all, those ships today, 2 of them, the ones that are chartered with a specific charter, they're getting today close to $43,000 per day. So just judging from that, I think the value for -- of those assets, it is quite substantial. Now the second part of the question, yes, we think that we could definitely charter those ships today for a period of 3 to 5 years or even longer, of course, subject to terms. But I think there is definitely a lot of interest today for like a medium- or long-term charter contract for those specific 5 assets. It's 5 ships, actually. We have refinanced the 4, and we are currently looking into the 5th one. So it is 5 ships or vessels. All those ships are opening, as we mentioned, within 2020. So -- and we definitely believe that the time of opening of those vessels, it's something that makes sense from our point of view. It is quite beneficial.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

And your next question today comes from Chris Wetherbee of Citi.

--------------------------------------------------------------------------------

James Yoon, Citigroup Inc, Research Division - Former High Yield and Leveraged Loans Research Associate [18]

--------------------------------------------------------------------------------

James on for Chris. I wanted to touch on scrubber capacity in Chinese New Year, given Chinese New Year's 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.

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [19]

--------------------------------------------------------------------------------

Okay. Because the line was not very clear. So the question is whether there's capacity today for new scrubber installation, also whether there are delays. I mean what was the question?

--------------------------------------------------------------------------------

James Yoon, Citigroup Inc, Research Division - Former High Yield and Leveraged Loans Research Associate [20]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [21]

--------------------------------------------------------------------------------

We haven't seen anything today. Look, generally, it has been reported that there have been delays in the shipyard 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 from like a lot of shipowners 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 festivities, which is something that we sort of already knew and sort of -- and it was accounted for.

Now the fact that the Chinese New Year festivities may be extended for 1 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 a bit EBITDA-premature. But up to now, the sort of this week, it has been already factored in the calculations. Regarding the scrubber capacity, nothing has changed.

--------------------------------------------------------------------------------

James Yoon, Citigroup Inc, Research Division - Former High Yield and Leveraged Loans Research Associate [22]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [23]

--------------------------------------------------------------------------------

Yes. I think if you made an order today, it's 2 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 shipyard 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 the shipyard 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.

--------------------------------------------------------------------------------

James Yoon, Citigroup Inc, Research Division - Former High Yield and Leveraged Loans Research Associate [24]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [25]

--------------------------------------------------------------------------------

Any slowdown, sorry, in what?

--------------------------------------------------------------------------------

James Yoon, Citigroup Inc, Research Division - Former High Yield and Leveraged Loans Research Associate [26]

--------------------------------------------------------------------------------

In your fleet?

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [27]

--------------------------------------------------------------------------------

No. It's -- I think we are progressing. We have -- okay, the 5 new buildings where the scrubbers are to be installed, they are progressing normally. And for the rest 10 other vessels, there may be some slight delays, but nothing that is going to change dramatically the scrubber economics, I would say. So there could be some delays of like weeks or so but it's not what's going to be like delays of like a quarter or so or sort of something like that.

--------------------------------------------------------------------------------

James Yoon, Citigroup Inc, Research Division - Former High Yield and Leveraged Loans Research Associate [28]

--------------------------------------------------------------------------------

Got it. And then I think I just wanted to touch on slow speed levels, slow steaming you're seeing in the market. Have you actually seen a reduction in speeds on your vessel?

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [29]

--------------------------------------------------------------------------------

Yes, there have been reports that there's generally slow steaming. It's something that has been taking place. I cannot quantify exactly because it depends on the vessel, on the trade routes and also on the particularities of its charterer. But generally, the slow steaming can -- if someone takes a view over the last 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 at what levels. However, assuming that the -- knowing that the fuel expenses, they have been heading north, I think slow steaming, it is something that definitely makes sense.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gregory G. Zikos, Costamare Inc. - CFO & Director [31]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

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