Costamare Inc. Q1 FY2020 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the First Quarter 2020 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. I must advise you that this conference call is being recorded today, Wednesday, April 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. Good morning, ladies and gentlemen. COVID-19 presents the largest shock to the global economy since the 2008, 2009 crisis. The supply of containerized goods has experienced episodes of disruption, and the industry must now contend with the consequences of reduced demand. Determining the timing and shape of the recovery is a challenge. Yet it is worth noting that the protective measures adopted across the world are intended to be temporary, and we believe that the restrictions in place are also creating a discrepancy in demand. In this environment, the safety of our research group and our employees remains our top priority. We have taken steps to protect our employees while ensuring uninterrupted service to our clients. For the first quarter, the company delivered profitable results. Liquidity increased to $268 million, we have contracted revenues of $2.1 billion, continued access to commercial bank debt, a smooth debt repayment schedule, and minimal CapEx requirements. During the quarter, we contracted a total of 12 ships, including 311,000 TEU vessels, which were chartered for periods ranging from one to three years. Finally, we recently declared our 30th dividend, as has been the case, but especially during today's unprecedented times, our top priority is to cover our downside. Building on that, we will continue to monitor the market and assess new initiatives to bolster our balance sheet and liquidity position while evaluating new opportunities in a volatile market environment. Moving now to the slide presentation, on slide three, you can see the highlights. Net income rose by approximately $35 million in Q1, compared to last year. The adjusted EPS is $0.27, reflecting a 40% increase from Q1 2019. We maintain a strong balance sheet with liquidity close to $270 million and leverage of approximately 40%, with all meaningful debt maturities over the next 12 months. Moving to slide four, we have concluded three separate financings with European financial institutions for a total amount of $165 million and maturities ranging from four to five years. Regarding operational performance during the previous quarter, we achieved utilization rates close to 100% and very cooperative operating expenses of below $5,100 per day per vessel. Slide five illustrates that during Q1 in a volatile charter environment, we have chartered 12 vessels, including the 311,000 TEU charter for periods ranging from one to three years. The containership market has been negatively affected by the COVID outbreaks. At the same time, the iron fleet shows scrubber retrofits and blank sailings by certain providers trending at 1.2%, while the order book has remained around 10% and is expected to remain low. We will pay our 38th consecutive quarterly dividend. Insiders have been participating in the drift and since inception have reinvested a total of $87 million. Moving to the next slide, you can see the first-quarter 2020 results. During the first quarter of this year, the company generated revenues of $121 million and adjusted income of $33 million. The adjusted EPS comes to $0.27, more than double on a year-to-year basis. Our adjusted figures take into consideration non-cash items, charter revenues, accounting gains or losses from master disposals, and other non-cash charges. On slide seven, we are discussing our capital structure. As mentioned, there are no substantial balloon payments due over the next 12 months. Our leverage remains comfortably below 50%. Net debt to 12-month trailing EBITDA is 3.4 times, and EBITDA as a result, our net interest is at 4.9 times when our financial covenants require a minimum coverage of at least 2.5 times. On slide eight, we're showing the contribution from our fleet. 99% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Costco, Yang Ming, and Hapag-Lloyd. We currently have $2.1 billion in contracted revenues and the remaining duration for these contracts is about 3.4 years. On the last two slides, we're discussing the market. As shown on slide nine, charter rates have fallen in the first quarter due to reduced demand. Initial blank sailings were followed by substantial capacity reductions in all major trades. Book rates have been under pressure for most of Q1; however, they have not fallen close to the levels seen a year ago. Slide 10 shows the idle fleet at 10.2%; however, the number of ships owned by certain providers that are available for charter is only 1.2% of the total capacity. The order book is slightly higher than 10% and is expected to remain at low levels. As mentioned, our main priority is to cover our downside risk while simultaneously seeking opportunities in such a volatile shipping 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 Chris Wetherbee of Citi. Please go ahead.

Good morning, James on for Chris. Just wanted to touch on the market and the current outlook, just understand your strategy for possibly managing the current environment. It looks like rates will probably be softer and you will be re-chartering below the existing levels. Just wanted to get a sense of how you might meet that, and if the environment shifts, should we really be thinking about utilization possibly falling off to a point where it's below the historical run rate in the high 90s?

Yes, first of all, utilization today, or like in the last quarter, was slightly below 100%, and generally we had utilization rates of between 98% to 99% plus every quarter now. We have ships coming off charter until the end of the year, and this is something normal. You've seen that in this quarter we started 12 ships, which today they are at levels that make sense. Now, what we have been doing is that, as mentioned, we do have a lot of liquidity slightly below $270 million with proactively refinanced debt maturing over the next 12 months. We normally refinance our facilities a year in advance. We have been very careful regarding our operating expenses. As you have noticed in this quarter, we've had average operating expenses of close to $5,100 per day per vessel. I have to stress here that our average sea parenthesis stands at close to $7,000 and we maintain excellent relationships with our charters. So, I agree that the utilization rate can fall. Although we cannot predict the future and we don't know yet what the recovery shape will be and what the type of recovery will be and the timing. However, based on where we stand today, I think that considering the circumstances, we feel comfortable about weathering the storm. We've been in coastal management in shipping for 45 years or more. It's not the first crisis we've faced. We came across the 2008, 2009 crisis when we didn’t breach any financial covenants during that period. Plus, in the past, we've weathered a number of shipping crises, so it's not the first time we've come across a challenge like this. However, I have to say that this is unique. This is something that was definitely unexpected. But I think that the company fundamentals are sound, so we are prepared for the next quarters.

Got it. And also, just wanted to touch on the impact that the Coronavirus has had on shipyards and dry docking. What do you think we should really be expecting for the amount of time it takes for dry docking in the current environment?

Look, for scrubber retrofits to start with, the delays had already begun even before the Coronavirus. There was a lot of demand for the installation of scrubbers and the shipyard capacity was insufficient to handle that demand. Now this situation has become worse, and there are delays. It could take two or three months, or even longer, to cover the installation of scrubbers. Regarding scheduled dry dockings, I cannot predict. Normally we would allow, depending on the size and circumstances, four to five weeks. This could take longer; I cannot say it could be five, six, or seven weeks. However, I don’t think that this incremental delay due to scheduled dry docking would change the fundamentals of our income statement going forward. We operate a fleet of approximately 65 vessels with contracted revenues of $2.1 billion. Therefore, I don’t believe that the impact from these dry dockings will be significant. Unfortunately, I cannot quantify this yet.

Got it. Thank you.

Thank you. [Operator Instructions] And our next question will come from Ben Nolan from Stifel Nicolaus. Please go ahead.

Hey, Greg. So, I'll start with some of your contracts, specifically on the 11,000 shares that you have contracted. Those are what I would think are pretty good rates, so I assume they were probably done a little earlier in time. But if I'm not mistaken, there are two more that come off contract sooner. Can you maybe compare or give some sort of an idea of where you think the market is for those kinds of shifts relative to the 38,000 or so that you were able to get in the first three?

Yes, the first three ships, you mentioned those 11 cases, were chartered for $38,000, two of them for one year and the third for $38,750 for a three-year period. Now, those others were completed during the first quarter. Not yesterday, but I guess during the quarter. We have two more sister ships, which are coming off charter in September and October. So, it's not something imminent; if they were coming out of charter now, it would be wise to charter them already, but they are coming off in September or October. There is still time for those ships. These are new buildings, built in 2017, very fuel-efficient vessels that have been in great demand. Unfortunately, I cannot predict what the rate will be for those vessels at the end of the third or fourth quarter. The rate is also a function of the charter period. So, we will have to take a view on whether we would like to go for a longer period at the right execution for a shorter period at a different rate. But I am afraid where the market is today, and bear in mind that there have been no recent deals for that size for these types of new buildings, so I cannot predict. The two ships were contracted at the end of March, so it’s just a month ago; it’s not like three or four months ago.

Right. Okay, that's helpful. Another thing is it looks like from the income statement that you guys have been buying back preferred shares. Could you quantify what you've done there and sort of what the thinking is around that?

Yes, we haven't done a match for a couple of reasons. First of all, we have been in a lockout period for the last couple of weeks because of the results, and we may be resuming from tomorrow. Secondly, because of the liquidity for those instruments. In ballpark figures, we have bought back preferred shares, in aggregate, the dollar value of close to $1.4 million, and we had profits of close to $600,000. The redemption of preferred shares has a face value of $2 million, so we spent $1.4 million and redeemed preferred stock worth $2 million.

And I suppose with those preferred, I think all four of them are still trading below par. Once you’re unlocked here, that's still something you're interested in doing?

Yes, depending on how they trade. But now they are trading between $18 to $20. We managed to buy some at prices of $14 to $16. We made a profit of $600,000 by paying $1.4 million, which you could argue is quite substantial as a percentage. Our value cannot be touched. As you've seen, we have cash on hand close to $70 million. I think this strategy makes sense; the only concern is liquidity because generally those instruments are thinly traded.

Sure. Okay, that's helpful. Lastly from me and then I'll turn it over. With respect to the five new buildings for Yang Ming to begin to deliver later this year, just curious if there is any interest or capacity by either yourself or Yang Ming or shipyards to slip those back a little bit. Is there any flexibility there just given the state of the market? Are shipyards experiencing issues with staffing up and everything else? Or is that something that is not a possibility?

No, nothing that I can report at this stage. I think the first couple of ships will be delivered with about a one-month delay. This is the latest schedule we have today, which is meaningful considering that each of the five new buildings has a 10-year charter. So, nothing to report regarding whether this delay could be applied to future deliveries. This is the latest schedule we have. For those five new buildings, they have been fully funded on a proposed delivery basis, and the remaining CapEx commitments for the total of the five ships from our side today is close to $31 million. This is why I mentioned in my commentary that we have minimal capital commitments, close to $6 million per vessel, which can easily be covered when the time comes.

All right, that's helpful. I appreciate it. Thanks.

Thank you.

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

Good afternoon, Greg. How are you?

Hi. Good morning. How are you?

Doing well. Good results. It's good to see steady cash flows even though the market backdrop is challenging. Great dialogue before as well about the 11K TEU ships. We'll look forward to the next ones. I did have a question about the 9.5K TEU ships that came off. I believe they were at $29,000 before. You mentioned the roll was three to six months and it was a confidential rate. Can you provide just a big picture guide of where that was? Was that slightly below or substantially below what it was before?

Yes, these are five ships in total. In total, the five 9.5 thousand TEU ships built in 2006. We have a chart for the first tube which came off charter, and we have retargeted them for a period of three to six months, as we mentioned. Now, regarding the charter rate, I am afraid that due to confidentiality reasons and based on discussions we've had with the charterers, I cannot go into more detail. However, in the future, when hopefully, the rest of the series will be chartered, we can provide more figures. But at this stage, I am not at liberty to disclose more than that.

Okay, understand; I figured I'd try. I figured some broad guidance would be helpful. But next question for you, with the Coronavirus shutdown of many ship docks, I know there has been some backup in demolition as well. I know you have several older ships that are coming due for surveys that you might have considered scrapping. There are nine 2000 builds and one 1995 build. Are you still planning to demolish any of those vessels this year, and is that possible in this environment?

Look, that decision will depend on market conditions. We don't plan on demolishing those vessels overnight. It will be a case-by-case decision considering the related CapEx for those vessels in order to continue trading. If we decide to sell for demolition, I believe the demolition market is down; it was completely locked due to the reasons we all know. I understand that it is slowly coming back; we will see when it finally opens. However, I cannot provide more details as we have not approached any shipwreckers for those vessels today. I don't know the current state when it comes to scrapping those vessels. If we decide to scrap them, there may be some delay; however, at some point, we will scrap them. The decision will come down to timing rather than if we will be able to scrap them.

Excellent, thank you very much, Greg. Keep up the good work.

This concludes our questions-and-answer session. I would like to turn the conference back over to Mr. Zikos for his closing remarks.

Thank you for being with us today. We look forward to speaking to you again in our Q2 2020 quarterly results. Thank you.

Thank you. This does conclude our conference for today. Thank you all for participating, and you may now disconnect.