Gregory Zikos - CFO.

William Katz - Citi Fotis Giannakoulis - Morgan Stanley Michael Webber - Wells Fargo Securities Donald McLee - Berenberg.

…. Conference Call on the Second Quarter 2018 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, Wednesday, July 25, 2018. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide number 2 of the presentation, which contains the forward-looking statements. Thank you.

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 second quarter, the company delivered profitable results. As already announced, we enter with Yang Ming into a 10-year charter agreement for five 13,000 TEU new buildings to be delivered between the second quarter of 2020 and the second quarter of 2021.

Last week, we concluded with a leading European financial institution that this financing of the two recently acquired 5,000 TEU wide-beam vessels. We have accepted delivery of the first ship which commenced its 7-year charter to Maersk.

As it is common during this period of the year, the market has softened over the last weeks, and a falling demand for tonnage has pushed up the idle fleet. We have chartered, however, 27 ships during the quarter, including our recent acquisitions. Finally, on the dividends, we declared our 31st consecutive quarterly dividend since going public.

Insiders have decided as has been the case since June 2016, to reinvest in full their cash dividends in new shares. Moving now to the slides presentation. On Slide 3, you can see the highlights of the second quarter. Our adjusted EPS for Q2 was $0.10. Over the last quarter, we have chartered 27 vessels, including our recent acquisitions.

We maintain a strong balance sheet with close to 40% leverage. Regarding the market, the idle fleet is as we mentioned 1.4% of the total fleet and order book less than 12%. On Slides 4 and 5, you can see a summary of our recent chartering activity.

While it is worth mentioning here is the recent chartering of our 11,000 TEU ship Cape Sounio for a rate of above $30,000 per day. Moving on to Slide 6, you can see our dividend payments as well as the sale for scrap of two older vessels. Slide 7 shows the second quarter 2018 results.

During the second quarter of this year, the Company generated revenues of $91 million and adjusted net income of $10.5 million. Based on the above, the second quarter adjusted EPS amounts to $0.10.

Our adjusted figures exclude the following non-cash items, the accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other non-cash charges. On Slide 8, we’re showing the revenue contribution for our fleet.

99% of our contracted cash comes from first class charterers like Maersk, MSC, Evergreen, Yang Ming, Cosco and Hapag Lloyd. We currently have $1.8 billion in contracted revenues and $30 million in time charter duration of above 3.7 years. As you can see on Slide 9, as of the end of this quarter, we had cash of $160 million.

We are conservatively managing our balance sheet, having brought down net debt from $1.7 billion in 2013 to $900 million as of today, which represents a net debt to equity ratio of 68%. Over the last 5.5 years, we have raised debt funding of close to $750 million for new business. On the last slide we’re discussing the markets.

Regarding charter rates, there has been some softening in the market which is not uncommon for this time of the year. The idle fleet still stands at the low level. The order book remains at historically low levels of less than 12%. As already mentioned in the past, we are actively looking for new transaction in this market environment.

This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now..

Hi. This is William on for Chris. Thank you for taking my question..

Yes, hi. Good morning..

So of the 27 vessels you enter into new charters for during the quarter, it seems that a few of them saw some pretty significant increases in rates.

Should we see this as kind of like indicative of potential like turn in the market or higher? And do you think that you would be able to continue to see the same level of rate increases going forward on new charters?.

Look, most of the vessels they have been chartered at a higher level since -- as mentioned during the presentation for 11,000 TEU ship the Cape Sounio. It was getting on average 18,000. And now it's getting above 30,000.

So compared to last year or as of the beginning of last year, the market is definitely like a much better stage, especially for the larger vessels.

Now, I cannot predict whether the market will be having an -- as mentioned, we’ve seen some softening in the charter rates over the last weeks, which partly has to do with this time of the year, partly it is attributed to seasonality. But overall, I think that if you look over like the last 12 to 18 months, charter rates have moved substantially up.

So since most of the ships we have, especially the smaller vessels, they’ve been fixed like for 9, 12 months or for generally short-term periods. I think that for those ships we are now seeing some upside..

Got it.

And I guess, focusing on like the timeframe, I guess, particularly for the small vessels, are -- as rates kind of improved, are you going to continue to look for new 9 to 12 months charters, or you are going to kind of consider taking longer-term charters? I'm just thinking about your perspective on the length of the charters?.

It depends on the rate. It would feel that the rate is set, so that it can ratify a medium or long-term commitment and assuming that there is a market there for a medium-term charter. We will do it, we are pretty flexible.

Otherwise we may keep chartering for like 6, 9 to 12 months, and especially for ships that have been bought in a low asset value environment outside of most of our second-hand vessels, those that you know we have been buying over the last 2 to 3 years. I think there is generally more upside rather than downside.

But regarding the tenure, it is a function of the charterer, a function of the charterers appetite for like a medium or long-term commitment, as you know the charter rates we will be offered..

Got it. And just one follow-up question.

As you guys kind of think about capital allocation going forward, I know you guys placed the new building orders and have purchased a couple of vessels recently, so I am just thinking about going forward how do you see your focus in terms of capital allocation?.

I guess, we are pretty much flexible. First of all, our main priority is to cover our downside in every single transaction, whether it's like a new building, second hand vessels, with or without charter. So as you’ve seen, we’ve done like a new buildings with a 10-year charter back-to-back upon delivery.

We have done second-hand ships, 2015 built with like a 7-year charter. And in the past or like recently we have also done second-hand vessels that are charter free. As long as the numbers work and as long as we are -- we feel comfortable with our residual value risk, we are pretty much flexible.

We cannot do everything, as long as it has to do with container shipping. And if you look at our fleet list, you will see that we start like from a 1,300 TEU ship up to 14,000 TEU new buildings. So what matters is the numbers and whether we feel that, first of all, the risk associated with every transactions is within our tolerance levels.

And secondly, of course, there needs to be some upside for our shareholders..

Got it. Thank you very much for taking my question..

Thank you. Thanks..

Thank you very much. The next question is from Fotis Giannakoulis of Morgan Stanley. Please go ahead..

Yes. Hi, Greg. And [indiscernible] going through a very difficult time right now. Jumping to business, I want to ask you about if you have seen any impact from this trade frictions and the tariff discussion.

And if you have any views over how the industry will be impacted by this potential U.S tariffs on Chinese goods? And how your company and other companies in the industry are prepared for such a scenario?.

Yes. First of all, I think today it's a bit early to forecast or to judge what's going to be the effects going forward, because there are various discussions regarding whether there will be some tariffs imposed on like what value of goods et cetera.

So this is like -- its something that has not been utilized yet, so it's just something that I’m prepared to forecast what’s going to be the effect, if any, on the Transpacific or generally on the trade. So, at the same time I need to mention that we have seen some line of companies cutting their schedules, especially from the Transpacific.

But we need to remember that this part of the year it is -- this will be flat season for container shipping. So there are also some seasonality factors there. Admittedly, it's not only seasonality, but I think it's too early to judge what's going to be the impact on the Transpacific.

Now from our side we have ships that are chartered on the long-term contracts and we have especially smaller ships that may be on the spot market 6, 9 months charters. So we continue doing the same business in the same strategy as before. And I'm not in a position now to judge what's going to be the effect over the next 3, 6, or 9 months.

I think that it's in the benefit of no one to have any new trade barriers. But it remains to be seen how this is going to play out..

Can you also comment how is your company protected or prepared for any scenario that might affect trade?.

Look, it's -- I think very simply we have low leverage. We are repaying our debt prudently. We are trying to buy low end charter at the low charter rate, so that this is a deal which is beneficial for both the line of company, our customer and ourselves.

We have net debt as you may have seen of $900 million and as of the end of this quarter and we are repaying north of $200 million of capital every year. So, I mean we're deleveraging very rapidly. And I think that we are one of the very few companies that during the post Lehman crisis, we didn’t even breach a single financial covenant.

So I don't think that we have not been tested in previous crisis. In case there is going to be one average, it may not be the case at all.

Also, we feel very comfortable with the quality of our charterers and with -- and those are without contracted cash flows, and we make sure that always we have cash in the side in order to service our obligations first, and then opportunistically do some new transactions.

So I think this is what we have been doing that we will continue doing irrespective of any potential trade barriers..

Thank you, Greg. I want to jump on this new deals that you announced recently, the five new buildings and the two modern vessels with Maersk. First of all, these are among the very few transactions that we have seen with very long-term contracts after a very long time, especially for new buildings.

Can you give us a little bit of a background of how did we get this deals and what was the competition for this transactions? Why Yang Ming needs this vessels and if -- how do you view Yang Ming, this is a new name in your portfolio.

And also if you can comment about this the returns of this deals, how they compare with the previous transactions that they were giving double-digit EBITDA yields?.

Yes. First of all, regarding the Yang Ming new buildings, with Yang Ming we did have a relation in the past, we have ships chartered there. But I agree that this is the first new building transaction we have with this company. We are very happy with the expansion of this relation with Yang Ming.

And this was a simple competitive bid process where also other ship owners participated, providing a bid for the vessels. And apparently Costamare won five ships and five other ships were won by another ship owner. But this was a competitive bid process that took place some months ago.

Now regarding the returns and the numbers, I am not at liberty to discuss those publicly. But I can say that the returns more or less reflective of previous new buildings transaction -- new building transactions we have done in the past. We are now in the process of arranging the financing for those ships, on the pre and post delivery basis.

And hopefully during the next quarterly results, we will be in a position to announce the closing of this funding. Now apart from the Yang Ming transaction there were 2,000 wide-beam vessels, which we bought and on a back-to-back from a third-party and we chartered it on a back-to-back basis to Maersk.

This mirrors another transaction we did with Maersk in 2017 for the KYPARISSIA and for the LEONIDIO, similar vessels again for seven years. There are not a lot of long-term -- medium to long-term commitments -- charter commitments in the market today for second-hand ships.

And we are very happy that we concluded this deal with Maersk, which is one of our main clients today. So those two transactions today we talk about contracted revenues of close to $650 million in aggregate for both deals. And I think that these are deals that are definitely accretive and make sense for the company..

And can you comment a little bit on why you managed to have the more -- most competitive bid for this long-term charters? Was it a matter of cost of capital or financing? Did you know what type of financing you would be able to get when you were bidding for this vessel? And give us, if you can, some idea about the cost of construction of the new buildings? I see on Clarksons that the prices for 13,000 to 14,000 TEU new building has jumped from $108 million to $112 million.

I’m just trying to see this value that we see on the Clarksons, they’re close to what you are buying this vessels and what was the competitive edge that you had?.

Yes. First of all, I don't have the information about what [indiscernible] other ship owners offered. But I can tell you that we try to put together a competitive bid that had to do with a new building price, that have to do with a charter rate. Into the charter rate offering, we are factoring our cost of funding and we try to be competitive there.

So I mean, it's not only the charter rate, it is a whole packet we just provided to the line of company. It apparently -- this is something that may tends [ph] for Yang Ming and we’re very happy with that. Now regarding the new building prices, I’m afraid, again, I cannot reveal the price.

But I think the $110 million or something, I think we had more competitive price compared to those figures..

And can you also comment about the potential of new transactions and where do you view the opportunities going forward? We saw very spectacular rally for the smaller ships. How shall we view the fact that you chartered so many vessels during this quarter? Is this more of a defensive approach or just an opportunity that it was still good to take it.

And also where do you see that among the different classes, there are better returns going forward that in the past you have been -- you have said that you will avoid the traditional Panamax vessels.

Has this view changed given the recent improvements in rate for Panamaxes?.

Yes. First of all, as mentioned, we look at pretty much everything whether it is second-hand or it is a new buildings. We are actively looking at new transactions both buildings and second-hand vessels. Now regarding the Panamax ships as you can also see in our fleet list, we have very few traditional Panamaxes in our fleet.

These are ships that we bought years ago with a long-term charter. And two ships now we -- we have chartered for seven years to Maersk, these are like 5,000 wide-beam ships, so these are not -- these are definitely not the traditional Panamax vessels.

I agree that charter rates for the Panamax ships for the traditional 4,250 TEU, they have moved up from like -- from 2016 up until now or like the beginning of the year. Still we feel that we could make a better use of our funds.

If we invested in other ship types compared to the traditional Panamax vessels, which today they are getting to close to $13,000 per day, let's say. But still we don't view a lot of upside on this specific asset class. So I think that most probably you will not see us entering into any second-hand Panamax type transaction..

And one last question about the favorite topic of the year and the volume of 2020, if you have seen the approach of the liners changing at all, in the last few months, we have been hearing in other sectors a lot of companies willing to install scrubbers.

How do you view that the container ship industry overall will address this new regulations and what will be the impact also on speed of the fleet and also the profitability of the industry overall?.

Look, generally the scrubbers when there is a long-term charter, it's normal and it makes sense to enter into an open discussion with the charterer. Regarding the scrub, the cost of installing the scrubbers and it is something that should be discussed with the charterer.

For smaller second hand ships, older vessels, it's more a wait-and-see type of approach from us for the time being. We are now evaluating the situation. I cannot tell you that today we are prepared to start installing scrubbers in the whole of the fleet, it doesn't make sense.

But for long-term charters we are in discussion with the current charterer or with future charters that have an interest in the vessel, how to allocate the cost of the scrubbers.

I think this is pretty much it, but for second-hand ships or like for all the vessels, we're not in a position now to start installing scrubbers, especially when we don't have the clear view about the payback period and mainly whether there will be any payback at all..

And can you comment from the perspective of the line of operators how do they view the new regulations? Are they going to install scrubber in a large part of the fleet? Do you have an estimate? Because it is going to be 10%, 20%, 30% of the fleet or if they will go with a new low sulfur fuel and what would be the impact on the average speed of the global fleet with new regulations?.

I think don’t have a concrete number for the whole sector right now, and in this equation, this will be mainly addressed to the liners. But I think different line of companies have come out publicly with a different approach. Some have said that most probably they will not be installing scrubbers. Others have been more positive on scrubber potential.

So I don't think that today there is a common view to be followed by sort of all the sector participants. So each line of company has its own circumstances and concerns and may follow a different path. Some of them have publicly mentioned that they will not be installing scrubbers. Others have hinted that they may be doing the opposite.

So I am afraid there is not a clear answer here..

Thank you very much, Greg..

Thank you. Thanks for the questions..

Thank you very much. Our next question is from Michael Webber of Wells Fargo Securities. Please go ahead..

Hey. Good morning, Greg.

How are you?.

Yes. Hi, Mike. Good morning..

Right. I just want to -- I think there's probably a handful of questions left. But just digging back into, I guess, both the new build deal and then maybe the scrubber, maybe starting on scrubbers, because it is where you just left off.

Forgive me if you mentioned it during your prepared remarks, but the new builds that you're providing to Yang Ming, are those going to be scrubber ready, and was that something that was specified in the tender, or was that left open to the ship owners to make their best estimates on?.

You know this is something that was specified in the tender. And there is an agreement with the charterer regarding the use or probably not the use of scrubbers. I think, I cannot go into more details, but I can tell you for sure that there has been an agreement with the charterer regarding the potential use of scrubbers in the future..

So it would be safe for us to consider those scrub -- the new build scrubber ready, at least?.

You, you can say that. But as I said, this is it common decision within the -- I mean, this was a discussion that took place during the bidding process with the charterer. There is a very specific timeframe within which to sort of decide whether to install scrubbers or not..

Okay. Now I guess within that conversation and others that -- others you had, are you noticing within the container lines are they in your customer base? Are they starting to have -- they’re starting to get a bit more specific around their views where maybe 6 months it was left wider open.

I guess are more people on -- in your customer base starting to make up their minds now and then maybe if you -- maybe about some of your recent conversations -- that you had any recent conversations with liners, were they just weren't sure about what they were going to do?.

I think that for long-term charters, liners are investigating the possibility of installing scrubbers subject to agreeing on the cost..

Yes..

There are discussions. So they’re definitely many more discussions for long-term charters compared to discussions we have with the scrubbers like 6 or -- 6 months ago or a year-ago, obviously. So there are discussions, but I cannot say that this is an easy decision.

There is some interest, but I'm not showing how many cases this interest will finally lead us to installing scrubbers or not, I cannot tell. But there are definitely discussions with others..

Got you. And that type of math is going to be different for your smaller ships that are going to be on shorter term employment..

For shorter term ….

Have you guys -- has that started to permeate the way -- maybe the way you think about the residual value risk? You got that some older ships and the smaller size -- in your smaller scale tonnage that are pretty flexible, I think provide a lot of utility to this container lines.

They don't -- it doesn’t drive a lot of your cash flow, but I think it's nice for your customers.

I'm just curious have you guys internally with those ships knowing that if you put scrubbers on them, you’re probably going to pay for it, is that something that you guys will make your mind up about yet and just how you think about it for, specifically for the Panamax and below?.

No. For those ships, unless we had a very clear picture and conviction that, I mean, there's going to be a payback period for those scrubbers, no one would start investing in something without having an investment plan.

And the payback unless it is clear, I don't think any ship owner would be willing to put money for something that not sure whether this will be paid back or not and over what period of time. Especially for shipments after 6 or like 9 months time charter, it's going to be difficult.

So for those ships, I think we are considering our option, but as the situation is today we wait and see, we are not ready to proceed installing scrubbers for those ships..

Right. So for smaller container ships tonnage it's more likely we see people after 2020 to see how spreadsheet at that point you’re going. Okay, that makes sense.

Just one more on the deal on adding the term tonnage, I now you guys have left some of the specifics out, but with the revenue guidance, you’re kind of back into a rate, and there is obviously a fair amount of sensitivity in terms of frieght, but can you give us a vague sense of an EBITDA multiple you think we could apply to that tonnage? If I just -- I think about -- I think your rate of a little over between 35 and 36 a day, does that fit the price like -- what the data stream and services was referencing, that implies a multiple to single low to mid double digits, if that price more like 10,000 TEU vessels kind of added below a 100, and that’s something around 10.5x, which seems a bit more palatable.

I’m just curious within that -- with that kind of context can you help us out with the earnings exactly how much you paid for these ships..

Look, I cannot comment on any figures, neither on the charter rate nor of the acquisition price. But I can tell you that the economics of those transactions are very similar to the economics of previous new building transactions we have done. But I cannot -- I'm afraid I cannot discuss ….

So where would you ballpark the payback period on the ships? I mean, you have got -- getting color on exactly how much you paid for a pretty big investment, I think it's pretty reasonable, right.

So without getting too specific or getting in -- giving any kind of trade secrets like some ballpark number around either payback period or even a range of EBITDA multiples, that is probably big enough to drive a ball through would be helpful at this point.

Are we talking about an EBITDA multiple that's north of 11x?.

Look, regarding the capital commitment, okay, to start with, I think in our 6-K, we will have some disclosure because it is required and you will see it then. Now regarding -- again, EBITDA multiples, you will have a different EBITDA multiple for a 10-year deal compared to a 5 or 7-year deal.

So, I'm afraid I cannot provide an EBITDA multiple there has been -- but if you see the capital commitment for those five vessels, and also knowing that the economics are pretty similar to previous new building transactions we have for a similar tenure of like 10 years, I think it's going to be pretty obvious that’s going to be the EBITDA multiple or what is the range of the time charter rate.

But I'm afraid I cannot enter into more discussions here on the numbers..

Yes. But I -- what I’m saying is when I apply that historical math, I get to a EBITDA multiple that’s pretty high. That implies -- a pretty healthy amount of it is a value risk, which is why I was hoping you could give a bit of a range.

So, again, because that pricing is fuzzy, but I can wait until the filing comes out or when we get actual pricing details, but it's helpful for owners of your stock than what you’re paying for big [indiscernible]..

I understand. I understand. No, no, I fully understand and I wish I was at liberty to discuss more, because I truly believe that these are very good transactions and accretive transactions for our shareholders.

And because they are done in a low asset value environment, I consider them to be good transaction both for the line of company and for ourselves. So, there will be some disclosure in our 6-K and we can take it from there. I think this is the wisest way forward..

Okay. Thanks a lot..

Thank you..

Thank you very much. Our next question is from Donald McLee of Berenberg. Please go ahead..

Good morning, Greg..

Yes. Hi, Donald. Good morning..

So a lot of the questions have already been addressed. But I just want to -- one follow-up on the Cape Sounio charter.

Could you provide more color on the negotiating process there? Was there an opportunity for more term or was that duration exceeded by the charter?.

I think the ship -- it was getting around 18,000 and this was extended with the same charterer for a period of 7 to 9 months at about 30,000 -- it is close to 30,700 or so. The reason is that the charterer apparently has submitted a vessel. This is a 2017 new build. We can -- back in June in Philippines.

And the market for those type of vessels has moved up substantially compared to where the market was in 2017, beginning of like mid 2017. So, especially those type of vessels have a -- have moved up a lot now. We didn’t fixed for a longer period, because we feel quite comfortable with this -- with the earnings potential of the vessel.

At this point, we decided to extend it for 7 to 9 months and then we will see. But the 30,000 plus charter hire is more than enough in order to service the ships debt obligations and provide us with an equity return..

Got it. And then just looking at some of the sister ship, the [indiscernible] quarter here.

Is there similar level of interest for re-chartering discussions there?.

Yes, there's some interest and the second ship -- the second sister ship, it opens up in October. We are in discussion with potential charterers for period and for charter hire. We will see. But the market today definitely is not very -- like used to be in the region of 18,000, it's a much healthier market environment for those ships today..

All right. Perfect. That’s all my questions. Thanks. I will turn it over..

Thanks..

Thank you very much. We don't have any questions in the queue at the moment.

Do you have some closing comments?.

Okay. Thank you very much for dialing in today and for your interest in Costamare. We are looking forward to speaking with you again during our next quarterly results call. Thank you..

Thank you very much, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating and you may now disconnect your lines..