Costamare Inc.

Thank you for standing by, ladies and gentlemen, and welcome to the Costomer Incorporated conference call on the second quarter 2020 financial results. With us, we have Mr. Gregory Zekos, Chief Financial Officer of the company. This time, all participants are in listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. I must advise you that this event is being recorded today, Tuesday, July 28, 2020. We'd 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'll pass the floor to your speaker today, Mr. Sikos, please go ahead, sir.

Thank you, Ed. Good morning, ladies and gentlemen. During the second quarter, the company delivered strong results. Liquidity stood at around $220 million, and as already announced, during the second quarter of the year, we concluded our refinancing program, resulting in a smooth repayment profile with no meaningful debt maturities until 2024. On the market side, Latest capacity has started decreasing, indicating improving market conditions. Demand continues to favor the larger and medium sizes, and especially ships above 8,000 TEUs. Market activity has picked up, and we have charted in total 24 ships during the quarter. After months of inactivity, the demolition market has reopened, and as part of our fleet renewal program, we have sold for demolition to 7,000 TEU ships, which we plan to replace with younger tonnage. Moving now to the slide presentation. On slide three, you can see the highlights. We do maintain a strong balance sheet with liquidity of about $220 million, leverage of approximately 40%, and no meaningful debt maturities until 2024. Adjusted net income for the quarter rose by approximately $5 million to $32 million. The adjusted EPS is $0.26, a 13% increase compared to Q2 2019. The net loss of 84 million is due to one-off non-cash losses of close to 110 million relating to asset disposals. Moving to slide four, our adjusted net income for the first half of the year rose by approximately 25 million to 64 million dollars. The adjusted EPS is 54 cents, a 54% increase compared to the first half of 2019. Net losses for the first half of the year amounted to 58 million, due to one-off non-cash losses of about $110 million relating again to asset disposals. Since the beginning of the year, we have raised more than $435 million in debt financing. Slide 5. We have continued our efficient fleet operation with comparative operating expenses of just over $4,900 per day per vessel. We have recently taken delivery of our first 13,000 TU containership out of a series of five sister vessels. The ship has commenced its 10-year charter with Yang Ming. The remaining four new buildings will also commence their respective 10-year charters upon their deliveries. Finally, as part of our fleet renewal program, we sold two 23-year-old sister vessels, and as already mentioned, we plan to replace them with younger donors. Moving to slide six. In a volatile charter environment, we have chartered in total 24 versions during the quarter. Although the contingency market has been negatively affected by the COVID outbreak, there are signs of improvement in charter rates and market activity over the past two months. The idle fleet has been decreasing, while the order book has dropped to 9% and is expected to remain low. Finally, we will pay our 39th consecutive quarterly dividend in August. Insiders have been participating in the DRIP and since inception have reinvested in total $90 million. On the next slide, this is slide 7, you can see the second quarter 2020 results. During the second quarter of this year, the company generated revenues of $112 million and adjusted net income of $32 million. Based on the above, the second quarter adjusted EPS increased by 13% from last year to $0.26. Our adjusted figures take into consideration the following non-cash items, the accrued charter revenues, accounting gains or losses from asset disposals, and other non-cash items. On slide 8, we are discussing our capital structure. Our leverage is comfortably below 50%. Net debt to 12-month trailing EBITDA is 3.3 times, and EBITDA over net interest expense is at 5.2 times, when our cabinets have a minimum requirement of 2.5 times 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, Costco, Yagbing, and Havagloid. We have 2.1 billion in contracted revenues, and the remaining times are the duration of about 3.5 years. On the last two slides, we were discussing the market. As shown on slide 10, charter rates are showing signs of improvement, mainly for the larger vessels. Box rates have risen by 25% over the past three months. On slide 11, the idle fleet has been reduced to slightly below 8%. The order book has fallen to 9% and it is expected to remain at low levels. As mentioned, our main priority is to cover our downside risk, while at the same time looking for opportunities in such a volatile market environment. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

Thank you. As a reminder, if you'd like to ask a question, please press star then 1 on your telephone keypad. and wait for your name to be announced. If you wish to cancel your request, please press star, then two. That'll be star, then one to ask a question. The first question comes from Chris Weatherby of Citi. Please go ahead.

Hi, this is Liam, Mark, or Chris. Thank you for taking my question. Hi, good morning. So, I just wanted to start off with the charter market. I know things have been pretty challenging there recently, but I just wondered if you could provide your thoughts on the outlook going forward and also your perspective on charter durations and if you think that they might shorten in the current environment. Thank you.

Yeah. Generally, over the last couple of months, we have seen charter rates picking up. And as I mentioned in my commentary, this is especially for ships of 8,000 TEUs and above, where the supply and demand dynamics are favorable. Of course, we are not at the 2019 or sort of the fourth quarter of 2019 charter levels, but definitely the market has been picking up. both in terms of activity as well as in terms of charter rates. The same applies for the Panamax, for the mini Panamax vessels. The feeder ships, they have not seen a lot of upside recently, leaving aside the smaller echo vessels, but generally for the larger sizes I see that the market has been slightly improving. Apart from like increased activity, Of course, there are definitely extension options in charter's favor. However, we have seen fixtures ranging for longer periods now compared to the fixtures we saw, let's say, in March, April. So I would say that generally there are positive signs in the charter market. Now, we cannot predict the market and we never do it. Container shipping is, I would say, 100% correlated to global GDP. So the more economies are opening up and people are likely resuming their daily activities, I think the better it's going to be for the global trade and consequently for container shipping.

Got it. And I guess there's an additional question. Obviously, I understand that the order book is at historically low levels and that new building activities are pretty minimal lately. But I'm just wondering, in your opinion, what is driving this? Is this more structural in nature, such as being related to the IMO regulations, or is it just based on the current macro environment?

It's a lot of things. First of all, yes, you are right. Like the order book today is close to 9%, which is probably the lowest figure we have experienced over the last years. It's a couple of things. First of all, liners or like ship owners, they don't want to commit today, especially where there's still some uncertainty in the market. Especially for charter owners like us, it would be difficult to commit without, especially for the larger vessels, without a fixed employment in place. Secondly, the capital markets, the debt capital markets, commercial bank debt, although it is there, it's much more scarce compared to the debt levels we saw in the past. And so until people feel more comfortable regarding where the market is heading, I think it's going to be difficult to see I would say increased activity in new building ordering soon. Which as you understand this is positive for the supply and demand dynamics and I would say that from 2022 onwards today's order book is very very thin. Overall, this is, I would say, a positive development. On top of that, I would have to add that we have also seen some increased activity in demolition. We know that the demolition market was closed because of the COVID outbreak during the second quarter of the year. Demolition activity has resumed. I cannot predict what's going to be the number of TEUs which, you know, will be scrapped during the year, but this is also a positive sign as well. Got it.

And just really quickly, one final question. I know you guys have preferred shares by that program. Can you just please update us on that program and how much you guys have repurchased to date and possibly the second quarter and then how much is still outstanding from that program?

We didn't do any, in total the program has been for like up to $50 million. We didn't make any purchases during the last month because the price of the preferred has moved up, I think today is $20, $21 and above. We did some purchases during the first quarter which like we announced in April, but since then we haven't done anything. I think the program is still open and opportunistically we're going to be accessing it, but at the level of $20, $21, I think we would wait. All right.

Thank you very much for taking my questions.

Thank you.

Our next question comes from Ben Nolan of Stifel. Please go ahead.

Well, thank you. Good morning, Greg. So I wanted to circle around on a couple things. First, with respect to the balance sheet and the debt specifically, subsequent to the refinancing, I just looked and there was the previous mid-20th half $713 million repayment schedule for 2020 and then $291 for 2021. Can you maybe update me on what the post-refinancing repayment schedule looks like for this year next?

Yes. For the second half of 2020, the repayment schedule is close to $77 million. And for 2021, the whole repayment schedule, including some small balloons, is now close to 135 million. And for 2022 is 129 million.

Nice. Perfect. Now that's helpful. The next thing I was going to ask is, really related to the new building market. And you talked a little bit about sort of the state of the world as it relates to sort of where we are at the moment. But I'm curious if there's been any uptick among the aligners for potentially looking to add new buildings or is it a little too early for that? And then also maybe if you could comment on sort of the competitive landscape for some of those new building orders that they're still a lot of capital chasing that kind of thing, or has it become a little bit more selective?

Look, we haven't seen any real new building activity recently, apart from a couple of small exceptions where previous options have been exercised for a couple of new buildings. from the other companies but apart from that we have not seen any real activity. Now of course as the market develops and this may change and as I said from 2022 onwards the order book is very very thin, it's like minimal. We haven't seen anything today. Now as a company generally we have been quite active in new billing transactions and this is something we would definitely look at. We've done a lot of new building deals in the past, so this is something that is definitely of interest to us, but I think today it is a bit premature to forecast when the new building market is going to return. This could be sooner or later. I think it's a matter of time, but today I don't think that we have any clear visibility.

Okay, helpful. And then I have two just little quick ones, if I could. The first is on the idle capacity. Obviously, it's coming down closer to 8%. It's definitely moving in the right direction. It looks like maybe you guys only have one, maybe one or two that are idle. Have you guys been able to deploy your ships without sort of, being hit by some of this downturn as much as everybody else, or could you maybe talk to sort of how you fared and expect to fare in the environment that we're in?

Yeah, we have a couple of ships today that don't have employment yet, but we are in the process of employing them. I would say that these are small ships, so I don't think that it would change the fundamentals of our P&L. for this quarter or like for the next quarter. Generally we have been active. We did in total 24 new chartering arrangements since the last quarterly results which I do consider to be a big figure. I said there are a couple of small shifts where we are now discussing employment and generally I wouldn't worry about those. I think up to now we have been shuttering our vessels, admittedly at levels which are lower compared to, as I said earlier, the last quarter of 2019 or like beginning of 2020, but still these are at above break-even levels. You saw our profitability this quarter like adjusted EPS of 26 cents, which is something that I would say makes sense. It's something respectable.

Yeah, I agree. And then last for me is the write-off. It's pretty big. Could you maybe just talk through – obviously, I guess it's forced by selling assets, but maybe as you look at your balance sheet as compared to the state of the market – First of all, is there, do you think, a need to maybe do further write-offs in the future, and B, is it simply selling ships that is a catalyst to cause that to happen, or is there another mechanism?

I think, look, the write-off, and I can be more specific, it comes from the two 7,000 EU vessels we sold, 23 years old, which we sold for scrap at the price of close to 10 million each. and they had a book value of close to 32 million. And then, because we have a third sister vessel, we also took an impairment there. There were commercial reasons why we thought that it would make sense to scrap those ships and then use the equity generated at, I would say, a healthy scrap price in order to replace those vessels with younger tonnage, and this is what we would expect to do. Because with this equity generated, you can buy ships a similar size, 10 or 12 or 15 years old, so let's say 8 or 10 years younger, with minimum type of incremental cash outflows. This was the logic behind that. This is pretty much it now. For the future, I cannot predict, but I think those ships, and they also had some due dry docking expenses, which we took into consideration. Looking at asset values today, we took the commercial decision to dispose of those ships and then use the equity for new acquisitions. This is pretty much it.

Okay. And so as you look at the balance of your fleet, there aren't any other that you can foresee as of now, there aren't any other big natural write-offs coming down towards you?

Look, I cannot predict. We have some other ships which are of similar age. As a company, generally, we have been used and we like managing all the donuts. We don't have an issue with that. However, it depends on market conditions. But I have to stress that having some accounting gains or losses in this instance doesn't mean that those assets have not been profitable and that they didn't have a positive cash on cash return over the last 10-15 years we had them in our fleet. Because Those accounting losses, of course, don't take into account the cash flow generated from those vessels. It is just a difference between the book value and the sale proceeds. That's all. Right. Okay. Sure. Okay.

Helpful. I appreciate it. Thanks, Harry.

Sure. Thank you. Again, if you have a question, please press star, then 1. Next question comes from Jay Mintzmeier, Value Investors Edge. Please go ahead.

Hi, good afternoon, Greg. Congrats on a stable quarter in a period of otherwise market uncertainty.

Good morning. Good morning, Jay.

Excellent. Yeah, so, you know, as I'm looking at your total fleet balance, I noticed that you scrapped the two vessels, Kolkata, and I was looking at the Cure, the third sister ship. You have a short-term charter on that. It was previously reported demolished, but it looks like you're employing it now. Is there any sort of update on that? Do you plan on demolishing that after the short-term charter, or do you think there's a market to keep her on the water?

Yeah. We sold the two vessels, just for the record, the Kokura and the Kawasaki, and then we have the third sister ship, the Kure, which is currently under charter. For this Kure, because this is a sister ship, we have taken an impairment. which has been factored in in the Q2 results. Now, what's going to happen with this vessel? It depends on market conditions, which are generally volatile. We may take the view that we may sell this vessel and the cast proceeds could be used for younger tonnage, or depending on market conditions, we may find deployment for the ship for the next six, nine months and then take the decision not to scrap it. those decisions are taken 100% based on market conditions rather than on consideration regarding accounting figures. So I'm afraid I cannot predict. It could be sold, but it could also be held. However, just to be consistent with the sale of the other two sister ships, we decided to take an impairment loss on the third ship as well. This is pretty much it.

Excellent. So no decision on that one yet. I know it initially came across the wire as all three of them being scrapped, so it's an interesting change there. Look, a little detail you disclosed on the Sealand, Washington, Michigan, Illinois, Calcutta, Kingston, the set of six there, you disclosed that those have a base rate, I think, of $16,000. There's like a 50-50 profit share and kind of a range of $12,000 to $25,000. What index is that? Is that like a Contex or a Harpex or is that actual liner profits? How is that determined?

It is a pre-agreed index with a charterer and this is based on a specific broker who comes up with the latest fixtures for those type of vessels. And we use that index. It is a specific broker with whom we both agree to sort of determine the charter rate for those specific vessels. This happens on a monthly basis.

All right, very interesting. We'll have to continue to follow that and see what happens. Final question, Greg. You have four more new builds coming in. I know the first one was just delivered here in July. Can you remind us, I know they're fully financed, but can you remind us what the remaining installment payments are for those five vessels?

They are fully financed on a pre- and post-delivery basis. The post-delivery, it is for a 10-year period because those ships have a 10-year charter. The remaining equity capex from our side, in the previous quarter, we had announced it was close to 31 million. Now, with the delivery of the first vessel, it's around, I would say, 24, 25 million. This is the remaining equity capex from our side for the total of the four remaining new buildings to be delivered. As you can see, it's pretty minimal.

Right, just 25 million of equity capex. What about on the financing side? How much more financing needs to be drawn down just so we can sort of model your balance sheet going forward?

The financing is going to be drawn over the next month up until the first half of 2021. It's not something that's going to be drawn tomorrow and there may be some changes in the schedule. I don't have the full figure in front of me right now. However, I have to be careful because we have not announced the acquisition price. By giving you the full number and then if someone divides by five and makes some adjustment, probably someone can come close to the acquisition price, which I'm afraid we have not announced. I'm afraid I have to stop here.

Thanks, Greg. I appreciate you trying. We'll follow up offline for some more of the housekeeping stuff. Appreciate you.

Sure. Thank you. Again, if there's any more questions at this time, please press star then 1. We have no other questions at this time, so we'll go back to Mr. Zekos for closing remarks. Thank you.

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

This concludes today's conference. You may now disconnect. Thank you.