Costamare Inc. (CMRE) Q1 2023 Earnings Report, Transcript and Summary

Thank you for standing by ladies and gentlemen and welcome to the Costamare Inc. Conference Call on the First Quarter 2023 Financial Results. We have with us Mr. Gregory Zikos, 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. [Operator Instructions] I must advise you that this conference is being recorded today Monday, May 15, 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. Zikos. Please go ahead sir.

Thank you and good morning ladies and gentlemen. During the first quarter of the year, the company generated net income of $142 million. As of the quarter end liquidity was about $1 billion. In the containership market charter rates are on a rising trend with high demand across the board, while fixture periods are increasing in duration. The order book, however, remains the principal threat to the market. We have covered nearly 100% of our containership open days for 2023 and we have proactively arranged long-term employment on a forward basis for a number of containerships coming off charter between 2023 and 2025, having secured for our fleet contracted revenues of $3.1 billion and a TEU weighted duration of four years. On the dry bulk side, our owned dry bulk vessels continue to trade in the spot market while the trading platform has been growing with a fleet of about 50 ships already fixed under period charters. Having agreed to invest up to $200 million, our goal is to grow the dry bulk operating platform business on a prudent basis and thus realize healthy returns for our shareholders. Finally, during the quarter we became the leading investor in Neptune Maritime Leasing, a growth-oriented maritime leasing platform, having agreed to invest up to $200 million. Considering current asset values, we believe the Neptune Leasing investment is a favorable employment of the Company’s increased liquidity. This new venture is synergetic to the existing ship owning platform and is expected to further enhance the strong relationships built over the last decades with shipowners and commercial lenders in the ship financing sector. Moving now to the slide presentation. On Slide 3, you can see our first quarter results. Net income for the quarter was roughly $142 million or $1.60 per share. Adjusted net income was $46.5 million or $0.38 per share. Our liquidity is up over $400 million year-over-year to more than $1 billion. Slide 4, the first quarter of 2023 was the first full operational quarter of CBI. We have fixed 51 period vessels with a majority of the fleet being on index linked charter-in agreement. 39 of the period vessels have been already delivered and are running. Slide 5, we have become the leading investor in Neptune Maritime Leasing having agreed to invest up to $200 million. Neptune is a favorable opportunity for the deployment of the company's excess capital. In this slide, you can also see an update on our financing arrangements, which amounted to roughly $95 million without any material increase in leverage. Those deals have been capitaled with extension of maturities and improvement of our funding cost. Slide 6, we continue to charter all our dry bulk vessels in the spot market having entered into more than 60 chartering agreements since our last earnings release. On the containership side, our revenue days are essentially 100% fixed for 2023 and 86% fixed for 2024 while our contracted revenues are roughly $3.1 billion with TEU-weighted remaining duration of 4.1 years. Turning into Slide 7, during the first quarter of 2023, the estimated combined net capital from SAP activity stood at approximately $85 million gain. We sold and have agreed to sell in total two containerships and three dry bulk vessels. Following the conclusion of the transactions with your capital, the company will own 100% of one vessel versus initial combined ownership of 98% on two vessels. Turning to Slide 8, because then as the charter market has shown an upward trend with high demand across the board, while fixed periods are increasing in duration. The dry bulk market remains volatile, while for the remainder of 2023, the FFA market indicates strengthening on the segments where we own vessels. Finally, we continue to have a long uninterrupted dividend track record boosted by strong sponsor support. Slide 9. Our liquidity has increased significantly year-over-year, starting at about $1 billion. This liquidity gives us the ability to look for opportunity to grow the company on a healthy basis. Slide 10. Charter of the containerships are on a rising trend with high demand across the board. The latest containership fixtures have been for longer periods. The idle capacity is at a level of 1.4%. Slide 11, which is the final slide, here you can see the recent dry bulk market trends in the spot and forward market. The order book starts at 6.9% of the total fleet, and new ordering continues to remain subdued. With that we can conclude our presentation and we can now take questions. Thank you. Operator, we can take questions now.

[Operator Instructions] Your first question today comes from Chris Wetherbee with Citigroup. Please go ahead.

Hey. Hey, thanks. Good morning guys. I wanted to touch base on the leasing activity that you guys have undertaken in the platform there. So maybe you could help us a little bit with sort of how to think about what the revenue profile of this business might look like over the course of the year. Just give us some help with sort of how that might play out in terms of how you want to expand it and what maybe the vessel exposure might look like as you grow through the rest of the year?

Yes, sure. No this is the right question. Look, this is a leading platform that was already established with some transactions already in place, although of a smaller scale. So we have agreed to invest, of course, subject to this being done and approved up to $200 million of our equity. Gradually, as I said depending on the deal that we see in the pipeline, and we feel that it makes sense to invest. Now we have invested, as already mentioned, around two $21 million. And the goal there is to have a healthy return on our investments. This could be containership, dry bulk vessels, tankers, offshore, whatever has to do with shipping. I mean, we're not confined to containerships for instance. We would fund through this leasing platform at levels which we feel it would make sense at levels at which we might as well be an owner of that asset. So if it's a 60%, 70%, 80% level depending on the specific asset. So the goal is to have a steady and relatively secured and healthy return on our investment as we move forward. At the same time if necessary, we have the platform in place. We manage our own 140 investors today, plus, like we have a trading platform. So the platform is in place for the -- if we have in the future to have the technical or commercial management of those vessels, although this is not the purpose. But the goal initially would be to have a steady and healthy return on our investment in a sector we feel comfortable with.

Okay. And then just maybe a little bit more help in terms of how to think about, as we're thinking about modeling this business and whether we want to think about on EBITDA or some form of profitability are there certain targets that you have that you'd like to be able to hit either on a margin basis or absolute dollars, whether it be this year or maybe on a run rate once you get capital fully deployed?

Yes, I mean, first of all, in order to have the full $200 million deployed, I'm not saying that it's going to take long, but most probably it's going to take more than a couple of quarters. Right? Until we find the deal, until we negotiate, we agree, we document, and then we sort of draw and deploy the funds. So it's going to take, it's not going to be the next quarter, although it would be growing. So and the way we look at it, we don't look at it from the terms of like EBITDA or EPS accretion. We look at it in terms of cash and cash return. So there we would try to maximize our sort of equity investment cash and cash return, which is according to what leasing platforms they have been yielding. Now, I cannot give you an exact figure right now. We started with two transactions, but if you assume a share returns normally achieved by shipping leasing platforms, I think you're going to be close to that, of course, as we progress over the next quarters and then we have more deals so we can be more specific and also, so show EBITDA, also the revenues, EBITDA, profitability on a segment basis, also including the leasing business. Is this okay with you?

Yes, yes, no, that's helpful. I appreciate the color. Thanks very much.

The next question comes from Omar Nokta with Jefferies. Please go ahead.

Thank you. Hey Greg, good afternoon. Thanks for the update. Yes, I just wanted to check in on the dry bulk trading platform. Obviously you've built it up very aggressively to 50 plus shifts. You've taken delivery, I think you said 39 thus far, but yes, how much bigger are you envisioning this getting to in terms of fleet size? And then, do you feel, or, well, what risk management protocols do you have in place given the trading nature of the business?

Yes a couple of things. First of all, yes it has grown to -- it's actually started in 51 vessels and 39 of those have been delivered. So considering that this started like some months ago, yes, I would say that this is quite a fast a fast growth level up to now. But now it's -- it is a business where we do manage from a risk perspective I think we manage it properly. First of all, we look our liquidity because it is a cash intensive business. We look on our exposure, and then you may have exposure in a couple fronts. First of all, you have exposure on derivatives because you have to utilize FFAs. It is a necessary tool. You have exposure on ships that you may charter in for a short period at fixed rate. And then you may also have exposure if you do like [indiscernible] where like you pay fixed rate and then you charge floating rate. And in generally, you don't have a lot of market risk for ships chartered in on index. And as you will notice, we mentioned that most of the ships have been chartered in have been chartered in on an index linked basis, which means that the commercial is for the market risk there is minimized. So we look at our exposure in the physical market. We look at our exposure in the paper market, in the FFAs. We do run sensitivities. We look at our liquidity today and how this is going evolve over the next quarters. At the same time we look at the operational side of the business. There is also exposure in the bank as when we take a position in the bank as we shared, and we have in place banker share lines. So it is a business which has a lot of potential. I mean potential not only to grow, but in terms of returns simply because it is volatile and it has to be volatile in order to produce those returns. At the same time, I agree with you that you need to have a tight risk management structure which is what I think we have put in place up to now.

Okay, thank you. And then maybe, it seems that the trading platform is a bit more top heavy with a lot of Cape exposure, and then your own platform is more mid-size, dry bulk assets. How are those two businesses related? Are those functioning together? Are they separate? Any kind of synergies that can be realized between both?

At the same time, of course, there are synergies. Those people talk to each other. We have a full view of the whole market. We have our internal research, which is utilized within the whole company. So there are a lot of synergies. However, it's two different teams of people managing each business, and I think this is how it should be. And the trading platform has a lot of Capes, which as a ship owner, we don't own. Initially we didn’t buy Capes because we didn't like this volatility. However, in the trading platform, Capes have to be there because they are by default a more volatile asset.

Got it. Makes sense. I'll turn it over. Thanks, Greg.

Okay, thank you.

[Operator Instructions] Your next question comes from Ben Nolan with Stifel. Please go ahead.

Thanks. Hey, Greg. I wanted to, well, I'll touch on both the leasing and the dry bulk platform, but maybe starting with the dry bulk platform. It seems like in the near-term here, it has been well, unequivocally, it has been a cost to the company. I mean, your earnings would have been twice as high had it not been there. The -- is it part of the ramp up process? I know even on a rate basis, it was substantially, you can kind of back into the numbers, it would have been substantially lower than market level. So is this just part of the ramp up basis and on a go forward fully built platform, how should we think about what you expect the profitability of that business to look like?

Now regarding the dry bulk owned vessels, which I think what you are referring to, in that case the result was affected because we did a lot of repositioning in the first quarter due to market conditions. So this is not something that I think in general it is something that we would expect to take place in the next quarters as well, although I can never predict the market, but normally we don't sort of assess during the same quarter. So normally this is not something that should be happening over the next quarter, something that happened in the quarters before. So I would normally treat it as a one off item, those repositioning costs. Now in our adjusted EPS, we didn't adjust for it. We have treated it from an accounting and like presentation perspective as like something which is not extraordinary, but practically, I wouldn't expect this to be a recurring item over the next quarters, normally because the dry bulk owned vessels they are trading on spot. So we follow the sport market and of course we try to be as efficient and as profitable as possible.

Okay. And, and with respect to the leasing platform, I mean, I sort of understand the rationale behind it, but I think through the capital allocation, you guys haven't been buying back shares, although the share price has been under some pressure here. Can you maybe talk through the capital deployment strategy from a return basis? I mean, it would seem to me that the shares would be a pretty compelling investment opportunity, maybe relative to the leasing platform?

Yes. look, it's a couple of things regarding capital allocation this point that has been discussed internally and will also be discussed internally soon. You see that we have got some balance sheet of like close to $1 billion. We definitely have the means to buy back sales. We have a share buyback program in place with $90 million share value still available. And at the same time, we could also gradually increase the dividend on a quarterly basis or even have one off big dividend payment or both. This is something that the dividend policy puts part of the capital allocation. It is being discussed internally. We still have the ability to do it irrespective of the trading platform and also of the capital assigned to the leasing business. The leasing business is up $200 million gradually over the following quarters and they do provide, or they are expected to provide, and this is our goal to have a healthy return which in shipping compared to other sectors can be quite competitive and that's our goal. So the one does not exclude the other. It's not that our capital allocation ability to pay more dividends or to buy back shares is in any way restricted by either the leasing business or some other banker thing. I want to make this clear. We just feel that we normally deploy our capital in either dry bulk ships, containerships now are too expensive still. We didn't put any new building orders because we felt the market was too high. The same applies for the dry bulk second hand ships today. It's not at levels that we feel it would be interesting for us. So Costamare marketing and Neptune Maritime Leasing, these are alternative methods of -- to deploy capital, which we think it's going to be on accretive basis. Buy back sales and dividend increases potentially, it's something that it is discussed separately and we are discussing this at the board level, but the one does not exclude the other.

Okay. All right. I appreciate it. Thanks, Greg.

Okay, thank you.

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

Thank you very much for dialing in today and for your interest in Costamare Inc.. We look forward to speaking to you again during our next quarter results call. Thank you.

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