Costamare Inc.

Thank you for standing by, ladies and gentlemen, and welcome to the Costomer, Inc. conference call on the third quarter 2023 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 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, November 1st, 2023. 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. Zicos. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. During the third quarter of the year, the company generated net income of about 53 million. As of quarter end, liquidity was close to 1 billion. In the container ship sector, larger ships continue to enjoy a tight market, while smaller vessels experience deteriorating conditions. Overall, the market outlook looks uncertain due to the large order book and the insufficient demolition. On the dry bulk side, as part of our strategy to renew the fleet and increase its average size, we acquired two Cape size and one Ultramax vessel, and at the same time we disposed of two older Supramax ships. Our own dry bulk vessels continue to trade on a sport basis, while the trading platform has grown to a fleet of 59 vessels. Having invested 200 million in the dry bulk operating platform, we are long term committed to the sector, whose fundamentals we view positively. Regarding Neptune Maritime Leasing, the platform has been steadily growing on a prudent basis, having concluded easing transactions for 17 ships in total, which are complemented by a healthy pipeline extending over the coming quarters. Finally, during the quarter, we continued our share repurchase program and we bought $10 million worth of common shares, highlighting our strong belief that the share price is heavily undervalued, considering both the company's performance and prospects. Moving now to the slide presentation. On slide 3, you can see our third quarter results. Net income for the quarter was roughly 53 million or 45 cents per share. Adjusted net income was around 54 million or 46 cents per share. Our liquidity stands at roughly $1 billion. Slide 4, you can see an update on our share repurchase program. Since our Q2 index released, we purchased approximately 900,000 common shares for $10 million worth. In addition, we continue to have a long uninterrupted dividend track record boosted by strong sponsor support. Slide 5. Regarding CBI, we have chartered in 59 period vessels with the majority of the fleet being on index-linked chartering agreements. On our leasing platform, we have already invested around $74 million. Since inception, NML has financed 17 vessels through sale and leaseback transactions and has a very healthy pipeline. Turning to slide 6, we have acquired two CapeSize and one Ultramax dry-bark vessel, while we have agreed to sell two Supramax dry-bark ships. In addition, we have concluded the sale of a 2000-bit container ship, along with the sale of our 49% equity interest on another 1998-bit container ship vessel. Slide 7. During the quarter, we have financed the acquisition of two dry part versions to an existing HADIC license facility, while we have roughly available $144 million for the financing of vessel acquisitions. We continue to charter all our dry part versions to the spot markets, having entered into more than 50 chartering agreements since our last annual release. On the contingency side, our revenue dates are essentially 100% fixed for this year, 87% for 2024, and 73% for 2025. while our contracted revenues are $2.7 billion, with a TEU-weighted remaining time duration of 3.7 years. Slide 8. Our liquidity stands at roughly $1 billion. This liquidity gives us the ability to look for opportunities to grow the company on a prudent basis. Slide 9. Charter rates in the contingency market have softened mainly for the smaller sizes, remaining though at above pre-COVID levels. The idle capacity remains at low levels of 1.7%. On slide 10, you can see the recent dry bulk market trends in the spot and forward markets. Charter rates have strengthened since Q2, although remaining volatile. The audiobook is at 8.1% of the total fleet. With that, we can conclude our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

Thank you very much. As a reminder, if you would like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star two. That's star one to ask a question. Pardon me. And your first question comes from the line of Chris Weatherby from Citigroup. Please go ahead.

Hey, thanks, guys. Thanks for taking the question. You know, I guess maybe I wanted to start on the container side and just get maybe a general sense of your view of, you know, I guess demand in the market for any term. So I guess I'm just trying to get the sense of, you know, we understand the weakness that's out there and obviously the capacity that is – entering the market as you think about the opportunities for employment. Can you sort of talk us through what you're seeing in the market and what your thoughts are on activity in the recharging side?

Yeah. We've seen that, I mean, in general, if you compare tenor of previous fixtures a year ago and now, I think on average you can say that we have shorter-term fixtures for the container ships. and the charter rates have been going down, which is something expected. And to some extent, you can argue that it's healthy because you cannot have a market going up every single year after COVID. So, for example, the Panamax vessel is now, for a year, the traditional Panamax is now at around between $17,000 to $19,000 per day. Prior to that, it was between $20,000 to $22,000. And also the fixes we've seen now, they are for a year or so. In the past, we could see fixes at higher levels for longer periods. Especially for the smaller vessels, you can see the trend that the tenor of the charter party agreements, they tend to become shorter and shorter. Having said that, however, still I think we need to note that the market is holding up relatively well and much better than people thought. six months ago. Although we can see a downward trend, still the charter rate levels, they are very healthy levels. So they are very healthy and we can see that especially for the larger ships, market rates are still quite profitable. So we do have a large order book that needs to be absorbed. It's highly questionable whether demand is going to be there in order to digest all the food. And at the same time, the demolition levels are quite low. So going forward, I think where the market will be heading, I don't think that the supply and demand dynamics we experienced during COVID-19 are going to be there. Quite the opposite, I would say. We do see a downward trend, which is something expected. At the same time, this means more opportunities when sort of asset prices together with charter levels and also new building prices come at, let's say, more logical levels. This is a time when we as Costa Mara would be ready to enter the market again. As you know, we didn't put any bidding orders at the peak of the market over the last years. So we do expect for the market to find its average rate levels, and then this may become more interesting.

Okay. Okay, that's helpful. I appreciate that, Kala. On the dry bulk platform, if you could give us a sense of maybe how you think fourth quarter or maybe early first half looks in terms of vessels you plan to charter in. Obviously, this is a little bit of a difficult one for us to model, wanting to get a sense of how you're thinking about capacity in that so we can get a better sense of how revenue and profitability could look either at the very least in the next quarter, but maybe a little bit further beyond that.

Yes, you're right about it. This is a very difficult business to model, I would say, because it's volatile and because it's chartering in vessels, entering into boyar charters, entering into vessel relays, cargo relays, and we also have an FFA book in order to complement our exposure. First of all, on the modeling side, we can have an offline discussion, then we can discuss how this can be more streamlined and how we can assist each other. Now, the company has grown quite substantially since it started at the beginning of the year. It's 59 ships chartered in. We're going to grow depending on market conditions. We have put the whole infrastructure in place. This company runs with zero debt. It's 100 percent equity funded because it's levered by itself. And we don't need to grow this, but if we take the view that the market conditions justify growing further, we will push the accelerator. In general, to have a healthy operator, this operator needs also to have size, and I don't think that we have yet reached the desired size levels. But the timing, it will also be dictated by market conditions. So overall, we are long-term committed to that business. Our goal is to grow this further, and we will. But the timing, I'm afraid we need to have a better view of market, and we're going to be evaluating on a quarter-by-quarter basis.

Okay. All right. No, I appreciate it. We can take some of this stuff offline and get into a little bit more detail. Thanks for the time. Appreciate it. Sure. Thank you.

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

Thank you. Hi, Greg. Good afternoon. Hi. Good afternoon. Morning. Thank you. Yeah. Morning. I just wanted to follow up on, on, on Chris's question, just about the dry bulk platform. And it sounds like you were maybe in your response here just now, it was kind of talking about maybe the CBI portion of it. Yeah. I wanted to just ask, obviously you have the nearly billion of liquidity. You have the 2.7 billion backlog. You did, or you continue to build out the fleet, the own fleet with the latest case and the ultra max. I wanted to ask, how do you, How do you see that going forward? Are you looking to continue building it out from here, you know, the actual asset ownership side? And is it a case that you would be focused on further, or is it just simply you're looking to renew, you know, bringing in some bigger ships and selling some of the older, smaller ones? How do we think about the fleet expansion from here?

Sure. What, like, our strategy now is, first of all, to promote, to grow the dry-bulk-owned platform. And what we have been doing, we have been selling smaller and, on average, older ships. The last ones we sold, they were 2006 built. And we have been buying larger vessels, Capes and one Ultramax, younger vessels, let's say 2011 built. So going forward, of course, assuming that this makes sense, that the numbers work out well. Our strategy would be to increase the average size of the dry park home fleet first and also break down the average age. It's those two things and we have started with buying those capes and selling the smaller vessels. Going forward, assuming that we find transactions that make sense, this is what we're going to be doing. So the goal ideally would be to in a reasonable amount of time to dispose of the smaller handis and replace them with younger and larger ships as mostly Ultramax and Capes. Of course, again, I have to put the garbage here depending on market conditions and depending on asset prices.

Got it. Thanks for that. And just in sort of thinking about that and how you look to build out the own fleet, How do you see that business working with the trading platform? I think I may have asked you this in the past, but are they complementing each other at the moment, or are they still kind of completely separate businesses?

First, I mean, they are, you know, being run by different management teams with something that makes sense. So there are two standalone businesses, all both under the Costa Mare Inc. umbrella, who is the shareholder. At the same time, you can argue that they complement each other a lot. But they are being run by different people, different management teams. In the first business, we are 100% owners. In the CBI, in the platform, We are charterers. We also do relays. We do cargo relays. We have an FFA book. It's a different business, but they definitely complement each other. Now, what's going to be happening in the future, I cannot predict. Again, it depends on market conditions, but for the time being, I think it works out relatively well. So we leave it as it is, and there are a lot of synergies and complements, correct?

Got it. Okay. And then maybe just one final one. And I know you mentioned in the release, you've committed the 200 million to CBI. You know, if I recall, the business was loss making in the first half, just the trading side of it. You mentioned that rates of quarter, we've obviously seen this, you know, quarter state average in the fourth quarter relative to what we've seen this year. Just in general, any color you can give on how the platform performed in the third quarter and maybe how it's sort of looking here in the fourth?

Yeah, look, the platform, the first six months, there have been a lot of initial setup costs, and it is a company that started operating from zero, reaching 60 investors within a short amount of time in order to put all the systems in place, hire people, and have the whole infrastructure supporting the business. So it's something normal to be sort of losing money the first six months, and we didn't expect to enter into this business within the first month or like a year to be highly profitable. So I think this is more or less the case in all similar platforms. Now, going forward, regarding Q3, we're going to be releasing the numbers with our 6K filings pretty soon. For year-end, I don't know how the platform is going to be performing, but I can tell you that this is not a short-term or even a medium-term deal here. We talk about a long-term commitment to the sector, which is complementing, as we mentioned, the dry-bulk-owned fleet. So we're not going to be taking a short-sighted view that it is doing well the first half of the year or that After the company was set up the first year or like the first six months, it has not been highly profitable. We take a long-term view and I think this is how it should be viewed because we need to have a minimum size. We need to have a minimum size of the book in terms of cargo book as well. And based on that, we're going to be trading. so the long-term view this is sort of this remains to be seen but the company has been very well capitalized we are supporting it and we will continue supporting it and as mentioned earlier it has no debt so it's all equity in order to make sure that it's going to be operating freely of any debt restrictions

Perfect. Okay, thanks, Greg. Very helpful. I'll turn it over. Thanks.

The next question comes from Ben Nolan with Stiefel. Please go ahead.

Thanks. So just to follow up on the CBI stuff, just as I'm trying to get my head around what causes things to move, Greg, maybe if you could, in September and in the first part of October, we saw a real increase sharp turn up and the cape size rates have subsequently come down. Can you maybe frame in what that kind of a move does to the profitability, if anything, or just trying to see where the sensitivities are with respect to rate movements and profitability?

Look, it's difficult to say. I mean, there's also some commercial restrictions here. We have an FFA book on CAPEs, and we also have front-haul voyages on CAPEs as well. So since we charter in and then we enter into a voyage charters. So regarding the volatility in CAPEs, we do try to take advantage of it, both with the FFA book and with the positioning of the vessels, and it's 37 of those. I'm afraid I cannot get into more detail on that, because it's like telling you how, like, we run our CAPES business during Q4, which it's difficult for me to explain now in an open call. But I can tell you that the first, like, priority is to monitor down-site. and then opportunistically capitalized on this CAPES volatility, especially the last two to three weeks. Charter rates in the CAPES market has been very volatile, and the same applies for the FFAs, and we try to take advantage of it. The Panamax market at the same time is much more stable, so it doesn't offer a lot of volatility-driven opportunities. But I'm afraid I cannot get into more detail on that. It's like revealing what we do and what our long or short position on CAPES and on Panamax is now, which it's difficult for me to enter into.

Okay. Well, and I appreciate the commercial sensitivities around that. Maybe just from a broader perspective as we're thinking about how, you know, again, what the drivers for profitability are, is it fair to assume that, there'll be long periods of time where there aren't any major shifts in profitability and then small episodes of substantial upside. Is that how we should think about, you know, what the revenue and profitability, you know, format would look like?

Yeah, look, if you're referring to CBI, because this is the most what I do, you know, sort of business portfolios, I can tell you that based on the backlog of our container contracted revenues, 2.7 billion contracted revenues at sort of very healthy rates. Based on the low break-even cost of the dry bulk-owned vessels, which we bought at a very good time, and they have a very low leverage. And based on the predictability and profitability, although at lower levels of like the neptune maritime leasing, which is a very stable business, I think any sort of short-term volatility in terms of profitability at the CPI level can be very easily absorbed by the whole company. Otherwise, we wouldn't be doing this. So, I mean, in a nutshell, I think we can digest any short-term downturn of the market, which is something that is part of the business. You cannot avoid it. However, the upside... It's very substantial. So the downside, based on the rest of the business we hold, it's something manageable. So otherwise, we wouldn't enter into that business if we didn't have the contingency backlog, etc. And there is a lot of upside. So this is how we look at it. At the same time, this is a business that is complementing our tribal-owned vessels, which makes sense for us. So it is... A calculated risk, if I can say that, based on the backlog of the contracted revenues, low leverage at the Costa Mare Inc. level, high liquidity, attractive long-term charters in the container ship sector, very stable business, leasing business. So, I mean, this is how we view it.

Understood. I was just speaking on a CBI level on a standalone basis, just trying to think through what a normal path to profitability looks like, just sort of stable-ish at kind of modest levels, and then every once in a while you see big moves.

That's how you frame it. You can have bigger moves. which does not translate into cash in the mark-to-market of the FFAs, like unrealized losses or gains, which, however, do not have a cash impact, but it is profitability in brackets affecting EPS, there may be moves there. From the pure operation of the business, charter in, charter out, enter into FOIA charters, et cetera, and settlements of FFAs, leaving aside the unrealized exposure. For the whole size of Costa Rica, this is not something that could change the fundamentals of our profitability.

Sure. Yeah, no, and I appreciate that. The last question for me is... Just on the buybacks, obviously, see the common buybacks. And curious, you know, I mean, first of all, it's been exclusive to the common and not to the preferred. So I know it can be either. Curious how you're thinking about that. And in terms of the common buybacks, I mean, is this – the $10 million that this is sort of what you think is a good run rate per quarter?

Yeah. Look, I cannot predict the future. I cannot tell you, like, whether we're going to be doing any more buybacks into four or if we do what's going to be the size of it, et cetera. It depends. But we put back a common, as you rightly said, and not, like, preferred because we think that the common is definitely – undervalued, however you look at it in terms of NAV, in terms of profitability, however you look at it. We did some buybacks of Preferred in the past when it was trading at $15, $16. Now it's trading at par or likely slightly above par. We have $150 million there to buy back. But we have been focusing on the common up to now. which does make sense. However, I cannot predict what we're going to be doing the next quarters. We put back in total $60 million worth of common shares. We have a program for 30 more, but this program can be easily extended. We'll see. We take it quarter by quarter.

Got it. All right. I appreciate it. Thank you. Thank you. Thank you, Ben.

The next question comes from Clement Mullins with Value Investor's Edge. Please go ahead.

Good morning. Thank you for taking my questions. I wanted to start by asking about the change in reporting. You previously provided a breakdown on a segment-by-segment basis, which was really helpful, but the aforementioned breakdown was not provided for this quarter. Should we expect this change to be permanent?

The breakdown we had in the previous quarter was of no use at all because in any case, you can find the numbers in the 6K filing. So I'm afraid I will have to refer you to the 6K filing where you're going to be able to see the breakdown. It didn't provide with any value. It just made the press release longer. This is the reason we took it out.

Right. Makes sense. Chris, Ben, and Omar already asked about CVI, but could you provide some additional insight on how your own dry bulk vessels perform during the quarter? For example, the TCE you realized on that side of the fleet?

Look, the profitability of the dry bulk vessel is going to be, again, part of our 6K filing. We have a mixed number of ships. We have a couple of capes. We have Panamaxes. I think Overall, based on the fleet we have, it has performed fine, it has performed well, but I don't want to go into more detail what was the TC of the hand, XYZ, and then what was the rating of every vessel, etc. Most of the vessels, or like all of them actually, with very few exceptions, they are trading on the spot market, so we do follow the index.

Makes sense. Thanks for the caller. That's all from me. Thank you for taking my questions.

Thank you. Thank you. This concludes our question and answer session. I would now like to pass the floor to Mr. Zikos for his closing remarks.

Thank you very much for dialing in in today's call. We are looking forward to speaking with you again in the next quarterly results call. Thank you.

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