Costamare Inc.

Thank you for standing by, ladies and gentlemen. And welcome to the Costa Mera Incorporated conference call on the third quarter 2022 financial results. We have with us Mr. Gregory Zico, 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 one on your telephone keypad. and wait for your name to be announced. I must advise you that this conference is being recorded today, Wednesday, November 2nd, 2022. We would like to remind you that this conference call contains four looking statements. Please take a moment to read slide number two of the presentation, which contains the four looking statements. And I will now pass the floor to your speaker today, Mr. Zicos. Please go ahead.

Thank you, and good morning, ladies and gentlemen. During the third quarter, revenues reached approximately $290 million, and adjusted net income reached $107 million, compared to $216 million and $82 million for the same period last year. As of quarter end, cash balances and short-term investments stood at around $745 million, and total liquidity, including interim credit lines, was above 890 million. Focusing on increasing visibility and our contracted cash flow base, we have recently charted with a leading liner company a total of 11 container ships, with existing charters originally expiring between 2023 and 2025. Seven of those vessels were charted for a period ranging from four to five years, starting from 2025 onwards, and the remaining ships were charted for a period ranging from two to three years, with forward starts in 2023 The new charters increase our contracted revenues by about 420 million and result in incremental charter coverage of about 4.5 years. Regarding the container market, cargo volumes have been softening across several trade lanes, with energy costs and inflation impacting consumer spending. Fixing activity has been at low levels, and the majority of new fixtures are for short-term employment. Charter rates have been under pressure, although they do remain at profitable levels. On the dry bulk market, rates for our best sizes remain profitable, especially for owners who entered the market the year before. We feel comfortable with the long-term supply and demand dynamics of the sector, and we view any potential shortening of asset values as a compelling buying opportunity. On the back of our increased liquidity and containers at the coverage, we are focused on new investment opportunities in the shipping sector that have the potential to provide enhanced returns at acceptable risk levels. Moving now to the slide presentation. On slide 3, you can see our third quarter results, which was the best Q3 since our listing. For the quarter, net income was $180 million, or $0.89 per share. Adjusted net income was $0.88 per share. And our liquidity is up by almost $340 million year-over-year to roughly $900 million. Slide 4. As already mentioned, during the quarter, we forward-fixed 11 containerships for an incremental average period of 4.6 years. that adds approximately 420 million in contracted revenues. The new charters begin between 2023 and 2025 for the latest. Our revenue days are 100% fixed for 2022, over 96% fixed for 2023, and 84% fixed for 2024. We do continue to charter all our dry bulk purchases in the sport market, chartering 24 ships since our last earnings release. On slide 5, you can see an update on our refinancing arrangements. We refinanced two 26-year-old vessels during Q3 for four years through a $46 million facility. Our corporate leverage remains below 30%, and we continue to maintain a strong balance sheet. Finally, in October, we concluded the sale of three contenderships for a combined capital gain of around $106 million, expected to be realized in Q4 of this year. Slide 6. The container ship trade market has been under pressure over the past months. The dry bulk market has also weakened but remains at healthy levels, especially for smaller size vessels which we operate. The order book is at historically low levels. Finally, we continue to have a long uninterrupted dividend track record boosted by strong sponsor support. Slide 7. Our liquidity has increased significantly both year-over-year and quarter-over-quarter. This liquidity gives us the ability to look for opportunities to grow without risking our balance sheet and provides us with a strong cushion. Moving to the next slide, slide eight. You can see our contingency fleet has a current backlog of $3.5 billion, with a duration of 4.4 years. As already mentioned, we are fully fixed for 22, and we are more than 96% and 84% fixed for 2023 and 2024, respectively. These fixed revenues come from a diversified list of first-class charters, such as Maersk, MSC, Evergreen, Zim, Costco, Yangming, and Hapaclorid. Slide 9. You can see the third quarter 2022 snapshot. We had an average of 170 investments, and our adjusted net income was $107 million, or $0.88 per share. The adjusted figures take into consideration the following items, accrued charter revenues, accounting gains and losses from massive disposals and other non-recurring or non-cast items. Moving to slide 10. Over the past few months, there have been a limited number of fixtures, and the ones that have been concluded were for shorter periods and at lower rates. However, such rates remain firm in a historical context. The commercial contingency fleet remains essentially employed with a very low idle capacity of about 1.8%, while vessel availability remains low. Moving to the last slide, slide 11, you can see the recent dry mud market trends where rates have been volatile but do remain at profitable levels, especially for owners like us who entered the market last year. The order book is around 7%, a historically low figure, which translates into modest growth. With that, we conclude 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 one 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's star one to ask a question. The first question today comes from Chris Weatherby with Citigroup. Please go ahead.

Hey, thanks, good morning. This is Eli for Chris. You know, guys, maybe we could just start with the bull market and try to get a better understanding what the rate environment looks like specifically there. So you don't have a lot of replacement grain. You have more storage on the ships. That would theoretically be putting pressure downwards on the TPE rates you guys are able to get. So it looks like that remained a little stronger than we thought. So maybe you can just help us understand what that could look like during the 4Q and then through the winter and how that would change into 2023. Sorry, I didn't...

hear you properly. Is this like the equation of how to do with the debt levels or sort of the charter rates? I completely missed it.

Charter rates on the bulk side, yeah. So how should we be thinking about that?

Okay. Well, charter rates, okay. Recently, I mean, the last couple of days, we have seen a softening in the market, and it's been volatile. For the bulkers now, I think they're trading at around $15,000, $16,000 per day, the Candice and the Supra Max. This is where the market has recently been. We do have all our ships spot. In the future this might change. I don't know, depending on the view we take. But considering our low cash break-even levels, and the fact that we're generally positive on the fundamentals of the dry bulk market. For the time being, we follow this strategy. Now, I cannot forecast, and we never provide forecast where we think the market will be heading the next quarter, also Q2 or like a Q1 of next year. But I can tell you that considering the low order book and being generally bullish on the dry bulk sector, These are the views we have today.

When you look at the macro environment, maybe more specifically, understanding I'm not looking for a forecast on the rate side, but what are some of the pressures coming in 4Q that could impact the rate side? Do you have a little replacement grain coming out of Russia and just lower demand in some of the other places like in China for soybeans? The imports are down. So just curious what some of those puts and takes are there.

Yeah, well, it's a couple of things. You rightly pointed out Russia. It is China, which is the biggest player in dry bulk. It is COVID disruptions. It is inflation, which generally does not help. And also congestion easing does not help either. In the past, I have to tell you that there were some sort of Part of the upside in the hand had to do with the elevated levels and the little availability in the containers. And congestion was a determining factor there. However, at the same time, as I already mentioned, we have a very low order book. And we do feel that in that sector, compared to the containers, for instance, The supply and demand dynamics are overall more positive. Now, to conclude, it is Russia, as you mentioned, it is China, it is congestion easing, and it is also inflation. At the same time, if there is some stimulus packages or sort of some growth, for instance, in the construction industry in China, this is going to be a huge boost for the, you know, and this could also be the case. So it's a lot of factors. It's not only one or two, I'm afraid.

Understood.

Thank you.

The next question comes from Omar Natka with Jeffrey. Please go ahead.

Thank you. Hi, Greg. I just wanted to... Just wanted to continue on that kind of the topic on dry bulk. And I wanted to ask you, how are you thinking about deploying capital right now? You guys are obviously very aggressive last year. Expanding into dry bulk looked like it was well-timed. We have seen dry bulk values easing here over the past several months, but also containers are coming down pretty aggressively. What do you think about the S&P market here? And do you look to buy container shifts after having taken a step back over the past couple of years? Or do you still look to commit more into the dry bulk market?

Yeah, for the containers, let's take them one by one. For the containers, you're right, we have seen the market softening in terms of charter rates and also in terms of box rates. However, we don't feel asset values have come to a level, either new buildings or second-hand vessels, where an investment today would make sense. Probably in the future, in the containers, there will be opportunities, but this is not something we see today. And it may take some time until the box rates and, you know, charter rates find their way to asset values. Now, for the dry park versus, yes, last year, I think the timing of our acquisition with the benefit of the hindsight, I think it was good. Those sort of acquisitions that do make sense, and those shifts were tremendous. acquired with low leverage, they have low cash break-even levels. So today they are profitable and they have been profitable since buying them. Now, also for the dry bulk vessels, for the dry vessels, we have not seen asset values at levels close to those of the summer of last year where we made our acquisitions. So based on that, I think the proper thing to do is to sit and wait. We don't have to grow. We are close to 120 vessels today. Like in the past, whatever acquisition we do, it's going to be on the merits and not for the sake of growing. So asset values in the tribal sector, we still consider them to be relatively high, or we haven't seen something that does make sense. So in that respect, we continue to sit and wait. The same applies for the containers for the new buildings. We didn't put any new buildings over the last couple of years, as you mentioned. The main reason was that new building prices were extremely high and we would be ordering at the peak of the market with something we try to avoid. So we have those vessels now, containers and dry park vessels. They are all profitable. We fix forward as many containers as we can. And we receive the yield on the dry park vessels the acquisition of which I think, considering where the market is, was well-timed.

Yeah, thanks, Greg, for that color. Maybe just on the new building, you know, prices have been very high. So I want to just maybe get your sense in talking with the shipyards. Is there any sense that values are going to start to come off a bit now that steel prices have been correcting, or are they still fairly firm at these high levels?

Well, for the time being, what we've seen, the prices are high. And there are still new building orders being put, especially by liners. So in this environment, of course, there could also be some exceptions and opportunities like we haven't seen. So in this environment, if you look at it from a historical perspective, still it is a very high asset value environment. environment which in that we don't want to put any orders even if we have charter or not still this is something we would avoid ordering at a you know big price or sort of close to big prices yeah okay got it and then just final one and you get this question uh every quarter basically and it's you know how do you think about the company going forward

you've got the dry bulk, you've got the containers together. Do you like that diversity within the same platform? Or do you ultimately think about just a split at some point down the line?

Look, for the time being, there are no immediate plans to have a spin-off or sort of have a separate company where we would have a dry bulk platform and also a containership platform. The containers, they provide us today with the contracted cash flows, which are close to 3.5 billion. We have a solid charter coverage over the next years. The dry park versions at the same time, they are more opportunistic, but we have started from a low-cost base. So we don't see any reason today to have a spin-off. Of course, in the future, circumstances might change and, you know, it might make sense. But today, there is no There are no immediate plans to have the dry bulk vessel span off under a different entity.

Okay, got it. Thanks, Greg. I'll hand it over.

The next question comes from Benjamin Nolan with Speedful.

Please go ahead. Hi, good morning. This is Michaela Rogers on for Ben today. Thank you for taking your questions. Our first one, we just kind of wanted to get some color on how you're thinking about maintenance capex for vessels moving forward, you know, with the container market softening. Would you expect to maybe retire assets once they come off contract or any insight into kind of how you're thinking about the future?

Yeah, look, today we don't have any scrap candidates. We have some older ships in our fleet. We have some ships, 1996 built. But as we mentioned, those ships have a medium to long-term charter. And we have recently refinanced them. Although they are 26 years old, we have refinanced them for four years forward. So those are not scrap candidates, because they do have charter. Nothing we are targeting to scrap today. In the future, of course, It's a matter of timing and of market conditions. We wouldn't have a problem to scrap a vessel if you can use this equity in order to renew the fleet or like the funds released from the scrapping, they could be used in some accretive investments. But today there are no plans for scrapping based on our fleet portfolio, both for the containers and obviously for the partners as well.

Thank you. That's very helpful. And just one quick one. Given some of the preferreds are trading below or close to par, would you consider using some liquidity to call in the future or any color around what you guys are thinking there?

Yeah, it's a question of, it's more about the generic capital allocation. We have a buyback program for the preferred of $150 million. which we have not utilized. We have utilized part of our buyback program for common shares. And some of the preferred, they are callable as well, because five years have lapsed since they were offered. So it's a matter of where we think we're going to be allocating our excessive liquidity, whether it's going to be buying back stock, as we did common stock, I mean, like we did in the past, or some preferred, or sort of some other type of investments. These are discussed at the board levels. These are all options which each one of them makes sense. However, I'm not in a position today to tell you exactly what will happen. There are discussions. We know the preferred. We know the buyback of the stock. We're like, we think it's trading at below NAV. So we'll see. It's good to have those options, but nothing has been determined today as we speak.

Thank you very much. Appreciate the time.

Thank you.

As a reminder, if you have a question, please press star then one to join the queue. The next question comes from Clement Mullins with Value Investors Edge. Please go ahead.

Good morning. Thank you for taking my questions. Following up on share repurchases, alongside Q2 results, you disclosed you had repurchased 60 million worth of shares, but no additional buybacks have been pursued since then. Was there a driver behind this decision? And looking ahead, how should we think about your appetite for additional share repurchases given the discount to any of your trading apps?

Yeah, we bought 60 million of common stock back. We have a program of $150 million for the common, so it's $90 million more available under this program. And we also have a program for the preferred. So I cannot predict or sort of I cannot tell you what we're going to be doing because it's something we're discussing internally. Of course, we have the option to buy back more shares, especially considering where the stock is trading today or sort of where the stock has been trading today. over the last weeks. At the same time, we have the option for the preferred as well. So this is something that we are considering, but I'm afraid I cannot tell you that we have decided to buy back so much common stock or so much preferred at this price under those conditions within the next quarter or so. These are discussed at both levels, so I don't have anything more to say on that question right now.

I understand. Thanks for the call. That's all from me. Thank you for taking my questions.

Okay. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Zicos for any closing remarks.

Thank you for dialing in today and for your interest in Costa Mare. We look forward to speaking with you again in our next quarterly results call. Thank you.

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