Apr 25, 2013
Executives
Gregory Zikos – Chief Financial Officer
Analysts
Fotis Giannakoulis – Morgan Stanley Keith Mori – Barclays Capital Chris Combe – J.P. Morgan Mark Suarez – Euro Pacific Capital
Operator
Thank you for standing by ladies and gentlemen, and welcome to the Costamare Conference Call on the First Quarter 2013 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, April the 25, 2013.
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.
Gregory Zikos
Thank you and good morning ladies and gentlemen. During the first quarter of the year, the company delivered positive results.
In accordance with our new building program we took delivery of the first two 9,000 TEU new build containership vessels. Both vessels commenced their 10-year charters with MSC.
This addition, along with the remaining eight vessels currently on order and scheduled for delivery within the next 10 months, will contribute in excess of $1.3 billion of contracted revenues throughout the duration of their charters. Taking advantage of attractive demolition rates, we sold the 1984-built, 3,584 TEU containership MSC Austria for approximately $7.9 million.
The sale resulted in a book gain of approximately $4.0 million. On the chartering side, the Company has no ships laid up.
We recently entered into an agreement to charter the 1996-built, 1,504 TEU containership Prosper to COSCO, for a period of approximately one year at a competitive daily rate of $7,350. In a challenging market we have minimized our re-chartering risk.
The charters for the vessels opening in 2013 and 2014 account for approximately 4% and 3% of our 2013 and 2014 contracted revenues, respectively. Finally, on April 10, 2013, we declared a dividend for the first quarter of $0.27 per share.
Consistent with our dividend policy, we continue to offer an attractive dividend, which we consider to be sustainable based on the size of our contracted cash flows, the quality of our charterers and the prudent amortization of our debt. We believe that going forward a containership market under pressure provides us with the opportunity to expand opportunistically in a low rate and asset values environment.
And now let’s move to the presentation slides. On slide 3, we are providing a summary of our recent transactions.
As already mentioned, we took delivery of the first two 9,000 TEU new build containership vessels chartered for 10 years with MSC. We expect total contracted revenue of $7.3 billion and increment that will be down $120 million on a fully diluted basis.
The company has no laid up ships and thus far we never had any laid up vessels. Apart from fixing the 1996-built, 1,504 TEU ship COSCO, at a competitive rate we exercised our option to extend the charter of the 1995-built Zagora with MSC for a further period of two years.
Finally, we declared a dividend for the first quarter 2013 payable at May 8, our tenth consecutive quarterly dividend since the company shares started trading on the New York Stock Exchange. Moving on to the next slide.
On this slide you can see the first quarter 2013 results versus same period of 2012. During the first quarter 2013, the company generated revenues of $91.5 million, EBITDA $64 million and net income of $24.7 million.
For the same period of 2012, the revenues amounted to $100 million and net recognized income to $66.5 million and $24.5 million respectively. Consistent with our previous resolutions we still got – for the following items.
First the accrued charter revenues and the resulting discrepancy between revenue received on a cash basis, revenues accounted for based on straight line amortization schedule. Secondly, the gains and losses resulting from derivatives and thirdly the accounting gains and losses resulting from market disposals.
Adjusting for the above, the first quarter EPS amounts to $0.29 versus $0.41 for the same period of last year and the first quarter EBITDA to $61.2 million versus $67 million for the same period of last year. Please note however that the difference in EPS is also attributed to the different share count after the two following openings within 2012.
Overall the company generated strong results during the quarter based on total revenues. Moving on to the next slide, on slide 5 we are showing the revenue contribution for our fleets.
The revenues accounting from first-class charters. More than 90% of our contracted cost, COSCO, Maersk, MSC have been at COSCO.
As you can see on the right hand side, we currently have charters with all of the top six charterers, but we have operated in the past with most of the large companies which are in the top 20 list. Moving on to the next slide, slide 6 provides information on our cash flows, charter coverage, but also on the significant building growth of the company.
We have $2.8 billion in contracted revenues, while the TEU-weighted average remaining time charter duration for the fleet is 5.1 years. Now as the new buildings we start shipping the water that will generate significant revenues as we estimated revenues of approximately $152 million with EBITDA of approximately $120 million upon delivery of four vessels, up 39% to 47% from 2012 full year revenues and EBITDA respectively.
This is also reflected in the company’s cash flow per share where even if we consumed a 40% discount on the rechartering of the vessel shipping in 2013 and 2014. There is significant build in growth in the cash flow per share as seen in the bottom right chart.
Moving on to slide 7, slide 7 is dealing with re-chartering risk the company would face in 2013. The long story short here, based on our assumptions, the company as of today has 2013 cash EBITDA of $300 million before ships coming out of charter during the year at three charters at the same rate.
You can’t see the cost sensitivity for a 70% rate being equal to a 30% discount on our 2013 re-chartering. The cash effect is less than $4 million which goes up to $7 million for a 60% discount.
So again at this level the cash EBITDA effect is pretty manageable. It won’t go on that further and that ships coming out of employment during the year and prior to 1995 built prior to 1995 are sold for demolition assuming a scrap price of $400 per ton cash proceeds of $24 million more than offset the cash flow pool.
We think that in order to assess the company’s real re-chartering risk, – this is what you are servicing a company’s debt obligations, the cash available for distribution is what is paying the dividend and allows for growth. Based on the above, we do believe that the dividend we offer today is very attractive based on its quality and sustainability.
Moving on to the next slide, on slide 8, we discuss our balance sheet. Our debt repayment schedule is smooth evenly spread in the coming years.
It’s not back loaded and surely no refinancing risks. The distributable cash flow on a post debt service basis is not artificially enhanced.
The loan portfolio is hedged at a weighted average rate of 4.1% which is adding to the cash flow visibility. Liquidity as of the end of the quarter stands at $231 million in cash and cash equivalents.
At the same time, we have unencumbered vessels and a moderate leverage. We continue to company to be in a competitive position with a comparatively stronger balance sheet which will allow us to make attractive acquisitions in a depressed market.
And moving on to the last slide, on slide 9, we have this current market. On the supply side, many companies manage at least to slow pinning and better idling.
Currently the idle fleet stands at 5% having been – slightly due to over the past couple of weeks as some ships have been reactivated or sold for scrap. At the same time, we felt weakness in very few orders and the order book today stands at manageable 20%.
The order book is getting on from 2015 onwards. Asset values, both new build and secondhand vessels remain at very low levels.
Charter rate especially for the smaller sizes up to 5000 TEU remains rest. We have however improvement on the post Panamax ships.
A volatile market as such is what well-capitalized companies you have an opportunity to grow rather than as a challenge. As already mentioned, we think that we are in a position to act to get the superior returns in such a volatile environment.
Thank you very much. This concludes our presentation and we can now take questions.
Operator?
Operator
(Operator Instructions) And your first question comes from the line of Fotis Giannakoulis from Morgan Stanley. Please go ahead.
Fotis Giannakoulis – Morgan Stanley
Yes, hi Greg.
Gregory Zikos
Hi, Fortis. Good morning.
Fotis Giannakoulis – Morgan Stanley
I would like to ask you about your potential acquisition targets. I remember a few months ago, you acquired the vessel from a bank with a 100% financing and at the same time you signed in some strategic alliance with this bank to provide you with potential opportunities.
It seems then we have seen your acquisition activity to be quite modest and I want to ask if you have seen any transactions from this bank or any other lenders? And how is the behavior of the lenders right now compared to three months ago towards the owners that they have loans as they are underwater?
Gregory Zikos
See couple of things here. First of all, it’s not that bank only or any source of a potential transaction.
Yes, we – vessel we’d say 100% financing although it was ratably small build. But I guess two months ago, we bought a charter fleet based on the 6,500 TEU at $22.5 million with equity.
So, now, what is the detraction with lenders? This always remains a potential source of transactions.
Now I cannot possibly comment on sort of transactions that may have taken place from other companies. But I can tell you that this is a market we follow closely and yes, we think that we will be in a position to act – should something meaningful come out of financial institutions.
Fotis Giannakoulis – Morgan Stanley
Let me follow-up on that and we saw Navios acquired some container ships. I don’t want to give the comment on this transaction, but this was sounded as something new in the market especially about the behavior of the banks.
Do you see these kinds of creative structures coming to your desk right now? Is there any change compared to a few months ago?
Gregory Zikos
Look, the fact that we see some movement is definitely positive. On the other hand, let me remind you that, as far as I understand, this was about a mix of vessels not only container ships.
And its lender may have its own priority or its own timeframe. I think that this is a market we are following quite largely.
But don’t think that I can comment more on the transaction.
Fotis Giannakoulis – Morgan Stanley
Thank you for this.
Gregory Zikos
Sure.
Fotis Giannakoulis – Morgan Stanley
Can you also give us your outlook about the supply and demand and we have an order book which seems pretty low rate now compared to historical, but at the same time, demand is much lower than what historical has been. And there is still 5% idle capacity.
When do you expect that this idle capacity will go away? Or, more importantly, when do you expect that the oversupply will end and rates will be able to move higher?
Gregory Zikos
First of all, regarding the supply the – I think it is just below 20%. But there is quite heavy order book for the remaining of 2013 and for 2014.
So, additions of supply will be shipping the water could be in the range of 7% or 7.5%. Someone has to make some assessment regarding this although we would expect a lot of vessels to slip in our – average deliveries to slip in the following years or from scrap including something that we’ve seen some excessive leverage of scrap in the first quarter of the year and we would expect this to continue.
Now, in the greater amount – but what we see over the next couple of quarters, we see a heavy order book and the demand is at levels which may not be enough to absorb the excessive supply now, slowly it may be helping, scrapping maybe helping, – it could be – but we wouldn’t expect the market especially for the smaller charters to be much more improved from where it is today and for the smaller sizes today the market is at a depressed level. Now, the number of idle ships based on the 5%, normally this is something that we would expect to go down for two reasons, excessive scrapping as discussed, last, in light of the upcoming peak season, some big vessels which are now idle could be reactivated especially a couple of above 7000 TEU ships.
We would expect them to find deployment from the charterers sooner rather than later. Still, even the number of idle vessels goes down to 4% or 4.5% we feel that the next couple of quarters, we might be seeing the same market which is today especially for the smaller vessels.
The casket effect is pushing down some particular asset classes and especially the Panamax vessels, which maybe too big to sort of trade into Asia or maybe too small to continue trading in the more soft rates. So there are some particular asset classes that might continue being under pressure.
Fotis Giannakoulis – Morgan Stanley
And shall I assume that we think your acquisition targets, the Panamax class; the 4000 TEU to 5000 TEU is excluded? And also if you buy any vessels, will you be looking also to cover that employment?
Gregory Zikos
It’s all about numbers. It’s all about – it’s not about sizes, but, bear in mind that the Panamax is the dry boat vessel that is – more than that we would expect this to continue to be the case.
Then, unless the numbers are tremendously attractive, this is not something we might be considering. But, it’s all about numbers where 100% returns given.
So, unless we see the real parts of each transaction we cannot exclude and now we see that the new building prices have been becoming quite attractive, especially for the bigger vessels. And, we have also seen ships that could be bought on a charter free basis like we did in the past, like if you buy a 6.5 ten year old ship at close to $20 million from a historical perspective, we consider this to be a good transaction especially if you are in a position where you can attach a charter party to this vessel in the region of $1500 per day or about this gives you a level of EBITDA of 14%, 15% or even higher.
So, although you buy the vessel charter free, if you buy that low levels, there is definitely a lot of upside and this is something we will definitely be looking at. Again, we have been looking at smaller vessels and we have also been looking for older – where if you buy something – a ship that, let’s not forget that those assets have a useful life.
If you buy 12 or 14 year old vessel close to scrap prices, bearing in mind that you have 10 or 15 more years to operate that asset, again from a pure returns perspective, we consider this to be a good transaction. So this is something we could be doing again as we did in the past.
Fotis Giannakoulis – Morgan Stanley
I want to start from your last comment that containership vessel they have a thirty year useful life and compare it with your debt amortization. Right now your debt amortization is almost twice the amount of your depreciation and if my calculations are correct, within the next five six years your company will be debt free.
I just want to ask what is your target capital structure and how do you intend to address the fact that you are going to have almost no debt in five, six years?
Gregory Zikos
Look, as we said, the depreciation expense more or less in our net income is close to $18 million per year I would say, and if you look at our debt repayment schedule, you will see that every year we repaid debt in the region of $180 million $190 million and above. So it’s like 2 times or 2.5 times our depreciation expense and we know that someone might argue that this is quite conservative debt repayment schedule.
We like amortizing the debt as the charter passes are being rolled over, meaning that our net balance with three, five, or seven year charters. The debt is being amortized more or less during the charter tenure.
This is a policy we have and this is what we think makes our dividend sustainable and high quality, because the company does not hide any repayment risks. And someone who argue that we have actually great equity for the shareholders as in 2018 or the ships are in the water today, all sort of 95% of the fleet will be close to debt free or the scrap value of those vessels assuming $400 per ton is going to be above any balance payments during 2018.
So, this is creating equity and this is also creating the opportunity to releverage the ships. And use these additional cash for new acquisitions.
Fotis Giannakoulis – Morgan Stanley
And my last question is probably my favorite question about dividend and I want to ask you what it would take for you to move your dividend higher? We understand that the dividend is not going down, but what it would take to go up?
And the second part of my question is what it would make you to raise any additional equity and if there are any thoughts for new equity issuances?
Gregory Zikos
Well, for the dividend, the answer what would it take, it is a Board decision and we give suggestion to the Board, but practically, what we expect is that addition incremental cash distributed to the shareholders should be coming from new transactions that are delivering those cash. So there has been growth in the company, I would show.
Eight more new build is to be delivered and there is firepower to enter into new transactions and we are working towards that goal. So it’s simply more cash coming from transactions and at any given point, if we feel that the market is at low levels and that cash can be used for acquisitions, we might take a different view compared to a market where we feel that at the value share over and above historical levels and not justified by the earning potential of the assets.
And then we might think that the best use of our cash will be to return a substantial portion of it to the shareholders. So it has also got to do with the timing.
But, the long story short, new transactions are something that would move the needle and would sort of create the potential for additional dividend. But let’s not forget that dividend at this grade – dividend of 7% bearing in mind how sustainable that is.
We do find it to be quite an attractive proposition. Now, regarding any new equity offerings, we have cash on balance sheet $230 million as of the end of March we have five debt free assets.
We have low leverage and we are amortizing our debt prudently. So unless we exhaust our cash available, I don’t think it would make sense to raise any equity we would consider the people first and it wouldn’t make sense.
And we would be diluting ourselves in a market where asset values are at their lows.
Fotis Giannakoulis – Morgan Stanley
Thank you very much, Greg.
Gregory Zikos
Sure, thank you Fortis.
Operator
Thank you. Your next question comes from the line of Brandon Oglenski of Barclays.
Please go ahead.
Keith Mori – Barclays Capital
Hi, Gregory. This is Keith Mori from Barclays Brandon is not available right now.
Gregory Zikos
Hi, good morning Keith.
Keith Mori – Barclays Capital
Good morning. Just going back to your last point, the market seems to be relatively at a bottom.
What some of the catalysts that gets you excited to start acquiring some new assets, I mean, you must be seeing some pretty attractive deals across your desk right now?
Gregory Zikos
Look, we traditionally we are expecting a lot of – over the last quarters. We didn’t do as many deals as the vessels we have inspected.
But there may be opportunities both in the new building sector. If someone can find the right charter those who never put another on speculation.
And also they like 12, 15 year old vessel range where you may see older vessels, but where the returns can make sense, now it’s not that we don’t like younger ones meaning three, five or seven year old. But buy something above market and charter it at above market rates for a short period, it may not be a good transaction from a risk point of view, because if I would say two year period, the market is not there.
We would be at risk with our equity and we would be assuming a lot of residuary. So, on those numbers, we are not prepared to do above market transactions for the younger too much.
Keith Mori – Barclays Capital
Okay, that helps. I think just getting your view on the outlook for the container ship market in general supply side in particular, the order book is coming down over this next two years, do you think where the inflection point is, maybe the end of this year, is it maybe the end of next year, what’s your kind of outlook on that?
Gregory Zikos
Well, I am afraid I cannot provide with our precise projection and look (inaudible) so far foreseen the future, where it’s a business of managing our risk, managing our downside and at the same time creating some optionality. Now I am not sure I can tell you where the market is going to be in two years time, I mean, we know some facts today, but it’s very well at the market and it raises a lot of parameters for that come into play.
But I can tell you that this is a market or this is a sector that has been down for the last four, four and a half years. If you look historically at the cycle and the patterns, we don’t expect to see a down market for eight or nine years.
So bearing in mind that the order book is very full from 2015 onwards, we believe that it’s not the matter of if the market will turn, but rather wait. And I am afraid I cannot say that is going to be the end of 2014 or 2015.
But from our side, we make the best we can in order to have cash on the site and make sure that our debt service requirements, dividend and operating expenses are fully covered from our contracted cash.
Keith Mori – Barclays Capital
Okay, and then I guess one just on the specific quarter. We saw interest expense kind of sequentially rise slightly but still significantly below – stayed fairly prior year.
How should we really think about interest expense going forward with the new builds coming on? Should we expect sequentially for that arise from this level or lot of the hedges incurred?
Gregory Zikos
I think, it should be more or less at the same levels, I mean, there could be some additional interest expense. As we accept deliveries of new buildings, and we are sort of going for the delivery payment, interest expenses should be going up.
But I don’t think that you are going to see a material change from where it is today.
Keith Mori – Barclays Capital
Okay, that’s helpful. I’ll pass it on.
Thank you, Greg.
Gregory Zikos
Sure, thank you.
Operator
Thank you. Your next question comes from Chris Combe from J.P.
Morgan. Please go ahead.
Chris Combe – J.P. Morgan
Hi, good afternoon. I just had a follow-on on the market outlook.
Maersk recently has commented that they could see a lower proportional reliance on chartering capacity in the future as part of the average operating fleet. I was just wondering if you think that’s purely a reflection of where we are at in the cycle, but if not, it could just drive shorter duration charters in the future for larger vessels.
Gregory Zikos
Yes, look, each player has its own structure and network of operations. So, I think the – what the CEO of Maersk have mentioned is that generally he is more positive on container shipping going forward compared to what the used were a year or two years ago.
Now, we see lot of companies seeking to charter in bigger vessels and there is a lot of – there is much more demand to bigger vessels as opposed to smaller assets, because it’s all about economies of scale. At the same time, we’ve seen average time charter durations becoming longer which is a positive sign for the whole industry meaning that line of companies want to commit to an average longer periods chartering in vessels.
However, I have to repeat myself that over the next couple of quarters, especially for smaller vessels, we don’t see why would the market become much better from where it is today. Bearing in mind that there is a heavy order book coming over the next quarters and we don’t expect demand to improve substantially from today’s levels and today’s levels – where we are today as demand is definitely not there in order to absorb today’s supply levels.
Chris Combe – J.P. Morgan
Okay, that’s clear and then with respect to the order book, can you give us a bit more detail with respect to filler reschedule by quarter this year?
Gregory Zikos
Look, for the whole of 2013, and this is a progress consensus, the delivery – the sort of incremental supply maybe in the range of 7% to 7.5%. I think that will be now close to 300,000 TEUs more or less have been delivered and it’s an additional of 1.2 billion to be delivered.
We are also making some basic assumptions regarding – sort of new building deliveries. Now for 2014, again the consensus is that the additional capacity which is in the market will be in the range of 7%.
But then from 2015 onwards, based on the order book as it comes today, capacity growth is going to be 3% it’s going to be actually close to 2% to 2.1%. So the order book is very same from 2014, 2015 onwards.
Chris Combe – J.P. Morgan
And for Costamare specifically over the next ten months, have you published the actual quarterly or the dates anticipating to delivery for the vessels?
Gregory Zikos
It’s I think, this is something we have published and we have put out the sort of schedule of the expected deliveries and now – they have a small margin and some flexibility. So, whatever the delivery date is it can be plus or minus 30 or 60 days?
But this is something we have passed this yet. In any case, we can say it to you, if you want.
Chris Combe – J.P. Morgan
All right and the last one, OpEx was a touch better than we expected this year. Is it unreasonable to expect below 7000 average a day for the year overall?
Gregory Zikos
I think that, look, on average for the whole fleet the sort of average daily OpEx is close to – I would say close to 7000 mark now. In our case, we have 25 vessels lined with.
So a substantial part of our OpEx is denominated in euro. So some fluctuation in the euro/dollar exchange rate maybe beneficial or may burden our operating expenses.
But the 7000 is more or less in line with what we have in mind. But some fluctuations because of Greek crew operate in euros in our vessel flag the Greek flag and those are 25 vessels today.
It’s substantial part of our fleet. So some fluctuation.
Chris Combe – J.P. Morgan
Okay, thank you.
Operator
Thank you. Please continue to standby, your conference will resume shortly.
Thank you. The conference is back in progress and your next question today comes from the line of Mark Suarez from Euro Pacific Capital.
Please go ahead.
Mark Suarez – Euro Pacific Capital
Good morning everyone. Just to go back on some of the demolitions you have done – I know you recently sold MSC Austria for $7.9 million.
Is the idea here to continue to replace those older ships with a low earnings potential when opportunities arise and should we be modeling for more this year?
Gregory Zikos
Look, it is I mean, over the last year, I think we have been scrapping all the donuts and but ships that had time charter attached. So if you take advantage of relatively high scrap prices above $400 per ton and you buy charter free a 150-year old vessel which is low say five or ten years younger than the vessel you are disposing of, without actually any incremental equity got outflow.
You are sort of renewing the fleet at minimal cost and we think this is a good strategy we have been doing well and we see no – why not to continue now to the extent that the vessels are in a seawater condition. And the charter feels comfortable with the money management and it has been the case.
We don’t see – why not to renew the fleet at quite attractive price levels.
Mark Suarez – Euro Pacific Capital
Gotcha. And just to go back on one of the comments you made in terms of the supply and demand for this year.
We have seen a lot of reports that scrapping has really accelerated; I think you commented in the beginning of the conference here. We are seeing some of those numbers outpaced the same numbers we saw last year.
But do you see any sort of potential – to be surprised by the market terribly for affecting part of the charter so you still – there is still meaningful improvement before we see that happening?
Gregory Zikos
Look, scrapping even with the – we don’t invest in scrap above 300,000 or 400,000 TEUs this year. I think the highest number or the highest projection I had is closely 200,000 TEUs max for the full year.
Even taking this into account and bearing in mind sort of the supply growth is going to be in the region or 7% or 7.5% and if we factor in today’s demand levels, still for the next quarters, there could be some supply demand that will balance with the supply not being absorbed by demand levels.
Mark Suarez – Euro Pacific Capital
Okay. And just lastly on the operating expense, I think somebody commented that it’s actually been outperforming vis-à-vis your budget in some of the numbers we have seen over the last four quarters and I suspect that you’ve been before in there.
So do you foresee that to continue that trend – I mean, I just want to get a better sense to the puts and takes, but it seems to me like you seem to be performing very well in that area?
Gregory Zikos
I think that overall, as an operator, we are trying to minimize the operating expenses for the whole fleet and if you look at our average daily operating expenses taking into account the average vessel of Costamare, which is 5,500 TEU ship and not 2500 TEU ship. We’ve been quite competitive, but as I said, there are some euro/dollar fluctuations there maybe – but we may have to have vessels at above budget levels.
But up to now, we try to perform as expected or probably better than that.
Mark Suarez – Euro Pacific Capital
Gotcha, that’s all I have for now. Thank you.
Gregory Zikos
Thank you.
Operator
Thank you. (Operator Instructions) It appears we have no further questions at this time sir, please continue.
Gregory Zikos
Yes, thank you very much for dialing in and for being here with us today. The company has continued to deliver positive results in an average market environment.
And we hope that in the near future we will be in a position to acknowledging the transactions. Thank you.
Operator
Thank you. That does conclude our conference for today.
Thank you all for participating. You may now disconnect.