Costamare Inc.

Thank you for standing by, ladies and gentlemen, and welcome to the Customary Inc. Conference Call on the Third Quarter 2020 Financial Results. We have with us Mr. Gregory Zekos, 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, at which time, if you wish to ask a question, please press star then 1. Again, that's star then 1 on your telephone keypad. and wait for your name to be announced. I must advise you that this conference is being recorded today, Wednesday, October 28, 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, Ed. Good morning, ladies and gentlemen. During the third quarter, the company continued its profitability. As part of our free-to-earn program, we sold for demolition two buses with an average age of 23 years, and we agreed to acquire three larger circumstances, on average 11 years younger. The new acquisition would be initially funded with equity. Meanwhile, our new building program is progressing on schedule, and we have now accepted delivery of 3 out of 5 13,000 P.U. passengers, which have commenced their 10-year charters. On the market, the inactive container ship fleet continues to swing to levels below 2% on the back of healthy demand for container shipping. Charter rates have been rising, and we have chartered in total 18 ships during the quarter. We have 14 ships coming off charter over the next six months. which positions us favorably should market momentum continue. With liquidity of about 200 million, no meaningful debt maturities over the next three years, and minimal CapEx commitments, we are well positioned for acquisition opportunities increasing shareholder value and returns. Moving now to the slide presentation. On slide three, we are presenting a company snapshot. More than 45 years in the shipping industry, uninterrupted dividend payments is going public, strong sponsor support, never had to restructure our debt, smooth debt-dependent profile, fully allied interest, no related party acquisitions, steady management and ownership, and high growth potential with no legacy debt restrictions. Moving to the next slide, here you can see the resilience of our business model, steady revenues and income in a highly volatile shifting environment. On slide five, you can see the highlights. Adjustment income for the quarter is 27 million, and the adjusted EPS is 22 cents. Our adjustment income for the first nine months of this year is 91 million, and the EPS is 76 cents. We do maintain a strong balance sheet with liquidity of about 210 million, leverage of approximately 42%, and no meaningful debt maturities until 2024. Moving to the next slide, As part of our fleet renewal program, we continue the sale of all the donuts. Over the past quarter, we sold two container ships with an average age of 23 years and replaced them with three younger vessels with an average age of 12 years. The three new vessels will be initially funded with equity. We have accepted delivery of two 13,000 kg container ships out of a series of five sister vessels. The ships have commenced their 20-year service with landing lines. Slide 7. We have charted in total 13 verses during the quarter. The charter market has been rising on the back of positive supply and demand fundamentals. The idle fleet has dropped to 1.8% and the order group is at 8% and it is expected to remain low. We have 14 verses coming off charter over the next six months, which positions us favorably should market momentum continue. Finally, we will pay our 40th consecutive quarterly dividend in November. Insiders have been participating in the drift and this exception has in total invented 92 million. In the next slide, you can see the third quarter 2020 results. During this quarter, the company generated revenues of 108 million and adjusted net income of 27 million. The third quarter adjusted EPS is 22 cents. Our adjusted figures take into consideration the following non-cash items. account financial losses from massive disposals, prepaid lease rentals, and other non-cast charges. On slide nine, we're discussing our capital structure. Our leverage is comfortably below 45%. Net debt to 12-month trailing EBITDA is 3.3 times, and EBITDA net interest is at 4.5, so it is at five times when our governance have a minimum requirement of 2.5 times coverage. On slide 10, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cost comes from first-touch charters like Maersk, MSC, Evergreen, Costco, Yangming, and Hapagloid. We have 2.1 billion contracted revenues and the remaining time charted duration of about 3.5 years. Slide 11 shows the contractor revenue by vessel size. As you can see, more than 90% of our contracted revenues come from vessels which are above 7,000 euros. On the last two slides, we're discussing the market. As shown on slide 12, charter rates have significantly improved since Q2 2020 across all vessel sizes, but especially for the larger vessels. Box rates have increased by more than 70% on a yearly basis. Slide 13. The iron fleet has been reduced to 1.8% from 7.9% almost three months ago. The order book has fallen to 8% and is expected to remain at low levels. Today, the order book is very thin from 2022 onwards. Our main priority is to cover our downside risk while at the same time looking for opportunities in a favorable 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 would 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 2. And again, that is star then 1 to ask a question. One moment while we get our roster assembled. Our first question will come from Chris Weatherby of Citi. Please go ahead.

Hey, guys. Good morning. James on for Chris. Wanted to first touch on some of the, so I guess the incremental here. Revenue declined sequentially, but OpEx was actually up sequentially, which given the charting environment, a little bit surprising. So recognizing that there probably was some voyage expense in the OpEx side, just want to know if there is any sort of catch-up OpEx in there that might have been deferred from 2Q and that you actually incurred in 3Q. And then also, On the revenue side, just kind of wanted to get an understanding of what you were thinking about maybe going into the fourth quarter from third quarter. Should we expect revenue to increase sequentially from here? Just a vessel count was relatively flat, but yet the TCE rate was down. So just trying to understand the puts and takes there.

Yeah, first of all, regarding the OPEX, you are right, they are slightly higher this quarter. On average, for the whole trip, it's close to $5,500 per day. In the previous quarter, it was close to $5,000 per day, or slightly below that. The reason, as you mentioned, has to do with some sort of incremental crew expenses. It has to do with the creation of crew cam or power ships. This is something we expected, and I think that going forward, over the next quarters, this is something that will be normalized. So for this quarter, you can treat it as probably a type of item. Now, moving forward for the next quarter and regarding your revenues, this was the second part of the equation. As we mentioned, we have ships coming off chart over the next six months, close to 14 And the market for those vessels today, especially for the larger ships, it is higher compared to the charter they are receiving today. So generally, in a rising chartering environment, and if we assume that the situation will remain the same for Q4 and for the first quarter of 2020, we would normally expect revenues coming from those vessels to generally increase. If you look at our latest pictures, we charted, for instance, 2,000, 6,500 TU vessels for close to, for 17 to 19 months, like $21,000 per day. We charted the 9,500 2006 built vessels for about $30,000 per day. And these rates are much higher from the latest pictures. So should this trend continue, I think there's generally upside. Now, regarding the revenues of this quarter, in this quarter you see revenues of some shifts that have been charted during the first and second quarter of this year in a market environment where charter rates did not pick up. Charter rates started picking up after June, July of this year. into the first quarter or like April, May of this year, they are at levels lower compared to the pre-COVID levels.

Got it. And so just one quick follow-up on the expense side. How much was the incremental crew expense? I don't think I caught that.

Just to be clear. On average, if you look at the previous quarter and the quarter before, our ships are running on average for the whole fleet close to $5,000 per day. This quarter, we were close to $5,400 per day or so. So I would expect that this is something that will be normalized over the next couple of quarters. So we should be in the region of $5,000, $5,100 per day on average for the whole fleet. Got it.

And then just... Looking ahead into the fourth quarter and the first quarter, it seems like you have some ships coming due or vessels coming due for rechartering. Is there, like, the market is, how would you think about the current rate relative to those and what you're likely to get in terms of a premium? And then I'll hand it over.

Yeah, like, look, we have a, I will give you a specific example. We have 29,500 EU ships opening over the next six months, the Costco vessels. Today they are now getting a rate of below $20,000. Sister ships have been recently chartered in this quarter at around $31,000 per day. So, I mean, you can see the difference. I cannot predict where the market will be next quarter or in two quarters time, but I can tell you that today the market for those grasses, it's much higher compared to the latest filters. Also, the Panamax vessels we have, the traditional Panamax vessels today, they are airing for 9 to 12 months. We have seen rates up to like $17,000, $18,000 per day for a standard 4,250 TV vessel. We have Panamax vessels chartered during the first quarter of this year and are now getting slightly below $8,000 per day. Those vessels are going to be opening over the next six to nine months. You can see the difference in the charter rates, assuming that we don't go back to the COVID-level type of market, where the Panama City residents were getting below $8,000 per day. I think the difference in the upside should continue. It's quite important.

Got it. And do you think you would be able to...

we entered or recharging those panamex vessels in q4 q1 or is it probably closer to the um expiration date look uh today those vessels uh uh today i can tell you that the ships above 3 500 years uh most of them are being sold out and there are a and all the ships opening are like there's a lot of demand for tonnage from liner companies. I cannot predict the market. I will not do that and I cannot tell you where the market will be in two quarters time. However, assuming the same dynamic, we are in a much better market environment today compared to where we were in the first quarter. the first quarter of this year. Initially, I have to remind you that during the first quarter of this year, there were predictions that the container trades would go down by 10 to 12% based on the latest brokerage and analyst estimates. These are not our estimates, but these are analyst estimates. Container trade is going to decrease by close to 4% for the whole year on a TEU basis, which is a much smaller contraction compared to the one initially anticipated. So in container shipping, we have seen up to now a much better market, both with regards to box rates and to charter rates, compared to the market people thought at the beginning of the year, and there's a dynamic in the supply and demand fundamentals. They seem to be quite positive.

Thank you.

Okay, thanks a lot. Thank you, James.

Our next question will come from Dan Nolan with Stifel. Please go ahead.

Hi, Greg. Good afternoon. I want to dig in a little bit on sort of what you're seeing in the market. We've all seen the rates a lot higher, and it seems like they're pressing higher every day and utilization is lower, and that's not really a mystery to anybody. The one thing that I think would be a little bit more telling is if you were starting to see contract tenors lengthen in your discussions, which obviously would mean that the liners are increasingly confident in the outlook for continued strength and demand. Are you beginning to see that at all, or are contract tenors stretching out from, you know, 12 months to 24 months or 36 months or anything of that sort?

Yes, yes, yes, we've seen that. And you can also see that in our latest features. For instance, the yoga, the one I referred to earlier, It was getting $11,500 per day. And now this is a 6,500-billion ship, 2,000 bills. This is a 20-year-old vessel. And this now was fixed at $21,250 per day for a period of 17 to 19 months for a 2,000-year-old vessel. The previous fix was for a shorter period. So there is a trend. This is just an example. There is a trend. Also, I can tell you that the POSCO vessels we chartered, they have been chartered for longer than a year. We have seen, for instance, the traditional Panamax vessels getting between $7,000 to $8,000 for periods of six to nine months. Now, we have seen tenors of 12 months or north of that. And one last example I will give you is that we have an 11,000 kg vessel which like we have extended the charter for two years. Initially we had the charter up until 2023 and during the quarter we have extended for two more years up until 2025. This is the Cape Artemisio and the rate for the third year period is $36,650. So generally, I would say yes, that there is a tendency for longer periods, and also a tendency for shorter extension options awarded to the charterers. So from that respect, I would say that the market is tightening, and it's common to see longer periods with shorter extension options when the charterers have been moving up.

Sure. Yeah. Although, again, if there was In anticipation of the liners that maybe this is just seasonal or something, then maybe they would be a little bit less apt to go long tonnage. Changing topics a little bit, as you mentioned, there hasn't been much. The order book is low. There's been virtually no ordering of size all year. There's been some rumors, including some of which you guys have been involved in, that maybe that's picking up a little bit. First of all, you know, are you in the market, you know, in terms of rights to be ordering ships? But secondly, has there been any change in the return profile? I know, you know, publicly one of your biggest competitors has said they're not really looking for new buildings at the moment, but has that had any impact or the availability of capital or whatever had any impact on sort of the types of returns or the rate of return that you might be able to get on new builds?

Yeah, on the new buildings, a couple of things. First of all, yes, the half is our market, which is about some potential new building projects, which are all the projects which generally were put on the side because of the COVID situation. But these are just discussions. But I would say that generally we have all seen that the liner companies and shipowners have shown a lot of discipline and new bidding ordering over the last three quarters, which is something positive for the whole sector. Now, as far as we are concerned, we have been traditionally doing both second-hand deals and new bidding transactions. We have two more new biddings to be delivered to us within the next couple of quarters, and this is part of our business. In any case, as far as we are concerned, Our strategy, it is the same. First of all, we do try to cover our downside risk to make sure that the fundamentals of the DLOs are solid, that the residual value risk assumed by us, it is something that it is within our risk tolerance levels. And of course, in the end, there needs to be some upside and some sort of return on our equity. This has not changed as far as we are concerned. The fact that it has changed is that there is a lot of discipline, that we have a very low order book, which today, especially, it is very thin for like 2022, and it takes almost two years to bridge the containers, if better. However, our strategy of looking both at secondhand ships and at new buildings with the same risk profile like in the past has not changed.

It is exactly the same. Just to follow up quickly with that, almost everything that you've done in the last few years has been on a standalone basis, not part of your joint venture. To the extent that we're looking forward, is that what we should expect? Effectively, you're sort of incrementally adding solely on the part of CoSmart.

Look, the last hybrid transaction we did, you're right, the five 13,000 EU ships with Yanming, yes, they were on a standalone basis. However, we do have an excellent relationship with York. We still continue. And this is a matter and a subject of discussion. So, York has been our partner. We've done a lot of this together with York. For instance, we did with York in the past the 514,000 T.U. vessels. We have gone to 3,800 T.U. new buildings, chartered and merged. So, it depends on the circumstances. This is something that could be done with York. However, if York does not want to participate, of course, we do have the means to do it on a Costa Mare standalone basis. I think this is an additional option there is in the table, but it doesn't mean that we may not do the deal 100% at the Costa Mare level like we did in the past.

Okay, and then last, just for my modeling purposes, can you maybe walk through what the remaining capex is for the fourth quarter and then the first half of 2022 for the new building?

Yeah, we still have to accept delivery of two 13,000 TU new buildings, which will be delivered the latest within the second quarter of next year. The remaining equity CAPEX commitment, because those ships are fully funded from a debt perspective, the remaining equity CAPEX commitment for Costa Mare is close to $12 million. So this is a very low figure, and this is why we mentioned that we have minimal CAPEX commitments.

What is it all in, though? Sorry, including debt, just...

Look, we have not disclosed the, you know, acquisition price for those vessels, and this is the reason you seem a bit skeptical. So this is why I'm mainly discussing our sort of equity capital commitments of $12 million for the two remaining new buildings. So it's like $6 million per vessel, which is nothing for the size of the company and for our cash balance. Okay.

Okay. Sounds good. Thanks, Greg. Thank you. Thanks, Greg.

Again, if you'd like to ask a question, it is star then 1, star then 1 to ask a question. At this time, I'm showing no further questions, so this will conclude our Q&A session. I would like to hand the conference over to Mr. Zekas for closing remarks.

Thank you very much for dialing in today and for your interest in Costa Mare. We are looking forward to speaking with you again during the fourth quarter 2020 results call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.