Costamare Inc. (CMRE) Q3 2021 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the Third Quarter 2021 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, October 27, 2021. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide #2 of the presentation, which contains the forward-looking statements. I will now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.

Thank you, and good morning, ladies and gentlemen. The container market rebound that began in the second half of last year is continuing, drawing strength from favorable supply and demand dynamics. The availability of container ships in the market has been stretched thin due to high cargo volumes and strong tonnage demand that has been exacerbated by port congestion and overall shortage of equipment. All our containership chartered during the quarter have been fixed at increasingly high levels of hire. On the dry bulk side, we took delivery of 20 traditional vessels, bringing the number of dry bulk vessels that have been delivered to us to 34. The remaining three ships are expected to be delivered by year-end. All our dry bulk vessels are employed in the spot market, yielding very healthy returns. Contracted revenues have reached $3.3 billion and the average time charter duration for our containership fleet stands at more than four years. We have nine containerships coming off charter by the end of next year and 37 dry bulk vessels operating in the spot market, favorably positioning our company should the current strong market conditions continue. Moving now to the slide presentation. On Slide 3, you can see the highlights of a very profitable third quarter. Net income for the quarter is $107 million and the EPS is $0.87, an increase of over 500% year-over-year. Adjusted net income is $81 million, up more than 200% compared to the third quarter of last year and adjusted EPS is $0.66. We have now taken delivery of 34 out of the 37 dry bulk vessels and the three remaining ships are expected to be delivered by year-end. We have also selectively sold some of our old containerships at attractive levels, working capital gains of $36 million. On Slide 4, you can see our liquidity and new financing other interest. We have concluded another hunting license financing of $150 million that give us additional firepower. All our containerships and dry bulk processes have the funding in place, and our remaining capital commitments are minor relative to our cash position. We do maintain a strong balance sheet with liquidity of about $560 million, market value base leverage of 32% and no meaningful debt maturities until 2025. On Slide 5, we discuss our new chartering arrangements. We have entered into our extended the targets of five vessels at much higher levels. On average, the new charters were fixed at a rate of 2.3x higher, with a much longer average duration. Our most recent fixture, the Glen Canyon, is a forward fixture commencing in Q2 2022, and was done at $62,500 per day for 3.5 years. Moving to Slide 6. On Slide 6, you can see the chartering of our dry vessels. We have chartered in total 18 ships at healthy levels. You can see a sample of some of the fixtures, which have been concluded during the quarter. Moving to Slide 7. The contingency containership market has continued to outperform on the back of positive supply and demand fundamentals. The added fleet was 0.6% in October, indicating a fully employed market. Dry bulk market has risk levels not seen since 2008, our demand for commodities continues and supply constraints remain to drive the market. We have also paid our 43rd dividend in August, and we will pay our 44th consecutive dividend in November. Slide 8. On this slide, you can see the third quarter 2021 results. The company generated revenues of $216 million and adjusted net income of $81.5 million. Basically above, the third quarter adjusted EPS is $0.66, up 200% year-over-year. The added figures take into consideration the following non-cash items: the accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other non-cash charges and changes in the fair value of equity securities. On Slide 9, you can see our capital structure. Our leverage is comfortably at 32% based on current market values. As you can see from the slide, our market value adjusted asset is equal to $7.6 billion. Slide 10, on this slide, you see the revenue contribution for our containership fleet and our contracted revenues. The revenues come from top charterers like Maersk, MSC, Evergreen, Cosco, Yang Ming, ZIM and Hapag-Lloyd. We have $3.3 billion in contracted revenues and a remaining weighted time charter duration of about 4.2 years. On the next slide, we discuss the containership market that remained tight supply. Charter rates continue to significantly improve across all vessel sizes, up over 900% since the end of June 2020. Box rates have increased by over 210% on a yearly basis. And while there was a slight dip during the Chinese Golden Week, rates continue to remain at healthy levels. Moving on to Slide 12. The idle fleet is at 0.6% or full commercial utilization from a high of 12%, one year ago. The order book has risen to 23% as new ordering has accelerated over the past quarters. It will be noted, however, that it takes as long as two years to build a new vessel and the majority of newbuilding vessels that have been ordered will not be delivered until 2023 and beyond. On the last slide, we discuss the dry bulk market. As shown on Slide 13, charter rates have significantly improved since Q3 2020 and have remained at healthy levels. Although asset values have been trending upwards since late 2020, they have lagged the increase in charter rates. On the last slide, you can see that the expectation is for demand growth to continue to exceed supply growth at least through the end of 2022. At the same time, the order book remains at historical low levels, especially for the sizes that we have invested in and fee growth is expected to decline over the next several years, which creates a favorable factor for the market. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

[Operator Instructions]. And your first question today comes from Chris Wetherbee at Citi. Please go ahead.

Hi guys, this is Eli [ph] sitting in for Chris. Thanks for taking the question. I just want to start off with the current rates. Are you guys shifting to a short-term view to capitalize on the higher rates now? Are you guys still playing in the long-term market in terms of duration?

You are referring to the containership vessels, I guess? Or to the dry bulk?

On the containership side, yes.

On the containership side, they will go along to the extent we can obviously, for the highest rate available in the market. Assuming that the numbers work, we're going to opt the longest period available. Hence, the example of the Glen Canyon, the 5,600 TEU vessel, which we chartered for a period of 36 or 39 to 42 months starting from Q2 2022 at $62,500. I think at that level of rates we would prepare to go for the longest available duration.

Got it. That makes sense. And we see that you have a longer duration most likely for some of your larger ships, but are you seeing duration increase for the smaller ships as well?

Yes, we have seen a trend that generally, the duration of chartered parties has been increasing. Now for the larger vessels, we don't have a lot of recent fixtures, simply because most of them are fixed for period, so there are no ships available in the market. However, generally speaking, yes, we see a trend in such a good market environment, that average time charter durations become longer and longer. And this definitely applies for the smaller ships as well up to feeders or like the smaller vessels 1,000 TEU or 92,000 TEUs, yes. Also in that segment, because we also have some ships of that size, we normally hope to go for the longest period available, of course, assuming that the numbers make sense.

That makes sense. And then let's turn to the newbuilds. We know that the trend of ESG focus in terms of newbuilds and fuel use is something that is being thought about right now in terms of what ships people are turning to order. Are you guys focusing on more fuel efficiency in terms of your newbuilds or holding off newbuilds in order to wait for some of the technology to evolve?

No. Look, we do focus on fuel efficiency, and this is one of our priorities. At the same time, regarding newbuildings, if it is a newbuilding order which will be placed on a back-to-back basis, with a long-term charter, of course, the specifications is something that needs to be agreed upon with the charter as well. So this is our priority. At the same time, we will also cater to the needs of the charterer.

Got it. Thank you. And then one more generalized market question. We see the congestion out of China is increasing due to some of their power constraints. How are those conversations going with your customers? And what is your view on the Chinese congestion right now?

Look, I think it's common knowledge that the condition is quite extensive, especially in the West Coast of the U.S. And I think there have been a lot of efforts in order to ease that congestion, which we haven't seen yet. This is not something I can't predict how it's going to go over the next months. But this is definitely something that liner companies as well as the states, take attention of and they want to ease, but I'm not sure whether this is something that can be easily fixed within weeks or within months. I'm afraid I cannot predict how long it's going to last. But we definitely have seen a lot of effort.

Of course, of course. And then I guess just a follow-up there. How has the interaction communication with your customers changed from this quarter to last quarter, given the increase in congestion across the board at the higher rates?

No. Look, our customers are the liner companies. We have been fixing vessels based on supply and demand dynamics. Now congestion, it is one of the factors that it is affecting the supply of the ships. The demand is there, and we know that there is substantial demand as we speak, again, especially on the Trans-Pacific trade. So I mean, we still have the same type of communication we used to have. I don't think something has changed. It is just that the market fundamentals are that we are in a very tight market today. This is pretty much it. Liner companies, they are still chartering in vessels. They have also been buying ships for themselves. So I think it is the same line of communication. Nothing has changed.

Thanks. Greg I appreciated. Congrats on the quarter.

Thank you. Thanks a lot.

Ladies and gentlemen, our next question comes from Ben Nolan with Stifel. Please go ahead.

Thanks. So I got a couple for you, Greg. I'll start with the dry bulk side. You have this new hunting license, but you haven't acquired any additional dry bulk vessels since June or so. How are you thinking about the market, the asset prices and the attractiveness of adding to that fleet here? Are you kind of waiting for things to normalize a bit?

Look, we put this hunting license in place. I mean we have announced this now, but this is something we were discussing with the lender for quite some time. So this is $450 million for dry bulk vessels. We have it in place, however, we will use it only when we think that the asset prices make sense. So I cannot predict how the dry bulk market is going to evolve or like what's going to be the price for a 10- or 15-year old Panamax or Supramax. But we have it in place, and I think it's good to have it in place because when we felt that market conditions amplified it, we committed to 37 vessels within like a couple of months. So this is one additional tool, but it doesn't mean that because we have it, we will have to utilize it. We're going to look at prices, we're going to look at earnings and how we think these two are going to play out. I'm afraid I cannot predict the market. All I can say is that should we feel that the numbers make sense, we have the equity, we have assets to commercial bank debt with this facility plus in any case, we have access to commercial bank debt. And if it makes sense, we cannot proceed, but I'm afraid I cannot be more specific. I cannot predict what the situation will be over the next months of quarters.

Yes. I'm not asking you to predict it, I'm just saying do you think that right now, asset prices are attractive enough for you guys to buy? Or are they too expensive for you to buy?

Look, since we started our acquisitions in May, asset prices have moved up. And however, there may still be some opportunities. But definitely, today, asset values for the 5- or 10-year old dry bulk vessels we have been buying at those sizes, handysize and Supramax and Kamsarmax. Definitely, prices have moved up since we bought those ships. So it's not exactly the same environment. But it doesn't mean that there may not be some opportunities in the future.

Okay. My next question, you still have a pretty decent position. It's not life altering for the company, but pretty decent position in the equity. Can you maybe talk through a little bit about sort of what the strategy is there? And if that's -- if you view that as a long-term position or not?

Yes. You're right, we have 1.2 million shares of ZIM, which based on the latest price, if I recall correctly, it should be slightly above $60 million. So this is something we are currently evaluating. We received the latest dividend that was paid. So this kind of we are sort of evaluating. We are not in a high to act. We take our time. So it depends on our view about the market, the liner companies markets going forward over the next couple of quarters. But you're right, this is a sizable amount. I mean, still $60 million as equity, this is something that cannot be ignored. So there, we take our time, and we are evaluating internally. I'm afraid I cannot say much more at this point. You saw in our latest results that the sales were still there.

Yes. And then lastly, something that we've heard some about is the potential for especially smaller like handysize vessels being used to carry containers or more often freight that would have ordinarily gone into containers. I'm curious for your vessels and your customers that are primarily using them in the spot market. Are you seeing any of that? Are people trying to find ways to put containers on those ships? Or are you carrying things that ordinarily would be not in a dry bulk ship?

Yes, you're right. Look, first of all, in our ships, I can tell you that we are using as those ships are supposed to be used and not for containers. Now of course, we've heard a lot of discussions about using dry bulk vessels in order to carry containers. This is not something we have done internally. Now I cannot exclude that this is something that some ship owners sort of they may have commissioned some studies. Still, I don't think that this is something that is going to change the supply and demand dynamics for containerships at all. So I'm afraid that have much more to say with that. I can tell you that from our side, this is not something that we have done. In any case, our average ship is like 50-50 2,000 deadweights. We don't have any capes. So I don't know. But I agree with you. There have been a lot of discussions. There also has been some press about those issues. But I don't think that fundamentals, at least for containers today where the market is.

Perfect. Well, and I'm going to slip one more in. You've got three more dry bulk ships to take delivery of that probably are not going to take a whole lot of capital after that, there are no newbuildings that you guys have, you're really sort of going to period of time we're outside of just a little bit of maintenance CapEx, there should be quite a lot of free cash flow, especially signing the types of contracts that you've been signing. How are you thinking about sort of the highest and best use let's say, over the course of 2022 from where you sit today, again, I appreciate that you can't predict the market or whatever. But where would you envision the cash flow going as it comes in?

You're right. Yes. Because you see the containership charter rates, you see the rates today, although they offer much shorter nature in the dry bulk fleet. And our CapEx commitments for the remaining three vessels to be delivered for the remaining three dry bulk vessels to be delivered. And we also have one more containership to be delivered in secondhand ship. In total, our equity commitments, because the funding is already in place. It's the region of like $11 million to $12 million. So this is pretty minimal of the company. So the question is what's going to be happening with the excessive cash flows. First of all, this is a good topic to discuss. Now the capital allocations we may be looking at additional dry bulk vessels, assuming, as mentioned earlier, that I mean, we still feel that the prices make sense. I wouldn't exclude, again, subject to the numbers to look at newbuildings for containerships or for secondhand transactions in containerships. I mean, again, assuming that we find something we feel makes sense. And it also makes sense from a price perspective and from a chartering perspective. Then I mean other ways to use our cash is, obviously, it's a debt repayment, although the leverage is relatively low. In the future, we could discuss share buybacks. We could discuss dividend increases. We discussed redeeming some of the preferred, which are as you know, a more expensive source of capital, although they are at the same time very flexible. So we do have alternatives. All those are being discussed and agreed upon at both levels. So this is not something that I can commit now. And most of those issues, although they have been discussed, there is no conclusion yet how we're going to proceed. We still have some ships, some containerships coming off charter. These are 6,500 TEU vessels coming off charter at the end of 2022, although I understand that it's more than a year from now, still, if we have long-term contracted cash flows of those vessels this is something that we're going to consider as well. So I'm afraid I cannot give you a clear answer. We do have alternatives. This is a good topic of discussion to have. Let's see how asset prices go both for newbuilding containers and for second-hand vessels in both sectors we are now in. I think we'll see. But I can tell you that generally, we are active as we speak, we look at a lot of things in both sectors.

Okay perfect. I appreciate the time.

Thank you. Thanks a lot.

[Operator Instructions] Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Gregory Zikos for any closing remarks.

Thank you for dialing in today. We're looking forward to speaking with you again at our next quarterly results call. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines.