Capital Clean Energy Carriers Corp (CCEC) 2009 Q1 法說會逐字稿

Welcome to the first-quarter earnings conference call for Capital Product Partners. As you know, earlier today the Partnership reported its final financial results for the first quarter of 2009 and a press release has been posted to the Capital Product Partners website at www.capitalpplp.com. There are also slides supporting today's audio presentation available on the website. If you don't have access to the Internet or would like a copy of the release faxed or emailed to you, please contact Jerry Kalogiratos at 00-30(210)4584 950.

I would like to remind everyone that the conference call today will include some forward-looking statements and that subject to certain risks and uncertainties which are detailed in our 2008 Form 20-F filing as well as other filings we have made with the SEC. These and other forward-looking statements are made based on the management's current plans, expectations, estimates, assumptions, and beliefs concerning future events impacting the Partnership. The Partnership cautions that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. Please refer to our forward-looking statements included in the accompanying slides.

In addition, non-GAAP financial measures as defined by the SEC may be discussed on this call. To comply with SEC rules, reconciliations of non-GAAP financial measures have been attached to this morning's release.

Now I will turn the call over to the primary speaker on today's call, Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of Capital Product Partners general partners.

Thank you, J.D., and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation. I am going to make some comparisons on today's call between the first quarter of 2009 and the first quarter of 2008 as due to the seasonality of our business, this is the most meaningful period to compare to.

Starting with slide 1, Capital Product Partners achieved solid financial results in the first quarter despite the overall deterioration of the tanker market. Net income for the quarter was $8.8 million, compared with $8 million in the first quarter of last year. Earnings per limited Partnership units were $0.35 in the first quarter this year, equal to the net income per unit for the first quarter of 2008, but $0.19 less than the $0.54 achieved in the fourth quarter of 2008 primarily due to the lower profit sharing revenues for the quarter.

We are pleased to have achieved $0.7 million in profit sharing revenues despite a very challenging spot market for both product and crude tankers. Our operating surplus amounted to $11.9 million for the quarter.

On April 24, 2009, our Board declared a cash distribution for the quarter of $0.41 reverting to the same distribution as for the third quarter 2008 and prior to the exceptional nonrecurring distribution of $1.05 per unit declared for the fourth quarter of 2008. We are also pleased to announce that we have replaced two of our vessels with charter expirations in 2008 and early 2009 with two brand-new high-specification MRs from the fleet of our sponsor on three-year time charters to BP Shipping, thus increasing our charter coverage to approximately 100% and 67% for 2009 and 2010 respectively.

Importantly, the base charter rate for these vessels is higher than both the replaced and considerably higher than the current market rate for similar periods and includes profit-sharing elements. We believe that this vessel swap contributes to the protection of the Partnership from the continuing turmoil in the financial and shipping markets. As a result of the swap, we increased the profitability of our revenues, lowered the age of our fleet further, and extended our relationship with BP Shipping, which we believe to be one of the most solid counterparties in today's environment.

It is also important to highlight that the Partnership currently has no debt amortization obligations until June 2012 nor any capital commitments or vessel purchases and new buildings.

Turning to slide two, total revenues for the quarter were approximately $30.2 million, up from $27.2 million in the first quarter last year. The increase is primarily due to the higher average number of vessels in operations, 18 vessels were in operation during first quarter 2009 up from 13.7 vessels in the same period last year. The profit share contribution of $0.7 million for the quarter was above the $0.3 million earned in the first quarter 2008 but substantially lower than the $6.1 million earned in the fourth quarter 2008 as the product and crude tanker markets softened noticeably toward the end of the first quarter of 2009.

Total vessels operating expenses and SG&A costs for the period were $14.3 million compared with $15.1 million a year ago. Interest expense and finance cost was $7.6 million, up from $5.6 million in the same period last year. The increase in interest expense is due to the increased debt of the Partnership compared to a year ago.

The first quarter of 2009 interest expense includes an additional cost of $0.6 million, which is due to the increased funding costs of our banks incurred in accordance with the terms of our existing loan agreements. Net income for the quarter was $8.8 million compared with $8 million in the same period last year.

Turning to slide three, we are pleased to announce today that we have extended the partnership charter coverage and renewed our fleet following two separate transactions with Capital Maritime, our sponsor. Specifically, the 2006 build multi-tanker Assos, was substituted with the multi-tanker Agamemnon II and the 2007 build multi-tanker Atrotos was substituted with multi-tanker Ayrton II. Both are 51,000 deadweight tonne chemical product tankers built in November 2008 and April 2009 respectively at STX Shipbuilding in Korea and are sisters to other vessels in our existing fleet.

The multi-tanker Agamemnon II has been chartered to BP Shipping Limited under a time charter expected to expire in December 2011 at the earliest at a rate of $22,000 per day plus a 50-50 profit share for bridging IWL, Institute Warranty Limits. This applies to voyages to certain ports at certain periods of the year, usually when adverse weather conditions prevail.

The multi-tanker Ayrton II has also been chartered to BP Shipping Limited under the same terms and conditions with expected expiration in March 2012 or March 2011 if the charters do not exercise an option for a third year of trading. Both vessels operating expenses are fixed at a daily rate of $6,500 per day for approximately the next five years. The increased rate reflects the inflationary environment ship managers have been facing over the last few years and which is expected to continue in the near future.

The Partnership paid an additional consideration of $4 million for each vessel to Capital Maritime to reflect the value and longer duration of the charters attached to its vessel as well as the younger age of the vessels in addition to each vessel being swapped. The Partnership is also responsible for any costs associated with the delivery of the vessel to Capital Maritime.

Last week, Morgan Stanley Capital Group, the charter of multi-tanker Assos and the multi-tanker Apolostos agreed to pay compensation to the Partnership for the early termination of the previous charters. Overall and given the lack of potential credit acquisitions, we believe that this transaction brings considerable value to the Partnership and demonstrates our sponsor's ability to conclude attractive repeat business with our charters as well as its long-term commitment to the Partnership.

Moving on to slide four, we show the details of our operating surplus calculations that determine the distributions to our unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure that is defined fully in our press release. As these certain non-cash items back to net income, we generated approximately $15.7 million in cash from operations during the first quarter 2009. After setting aside $3.8 million in replacement capital expenditures and the hold back of $1.5 million, we will take $10.4 million or $0.41 per unit, the same distribution as in the [third] quarter of 2008.

As previously stated, the Partnership has reverted this distribution policy prior to the payment of the exceptional non-recurring cash distribution of $1.05 underlining the confidence of our Board in the Partnership's ability to generate stable cash flows and return value to our unitholders.

Our unit coverage for the first quarter stands at 1.1 times. I would like to draw to your attention that our current annualized distribution implies an annualized dividend yield of approximately 18%. The first-quarter distribution will be paid on May 15 to our unitholders of record on May 7.

On slide five you can see that our balance sheet remains strong. The reduction of the equities related to the payment of the exceptional non-recurring distribution in February 2009. I would like to remind you that we have zero purchase in new building commitments and our debt facilities are not amortizing until June 2012 and March 2013 respectively. Of the total $720 million available under our facilities, the remaining undrawn amounts under the terms of our debt facilities currently stand at $246 million.

Turning to slide six, we discuss the tanker market for the first quarter of 2009, which was characterized by a steep downward correction in the spot charter market for both Suezmaxes and product tankers. The high utilization rates achieved by our charters and serve above average market performance for our MR on time charter, which earned close to $21,000 per day for the quarter. The Amore Mio II average TC was in the region of $43,700.

Spot rates for the product tankers deteriorated sharply towards the end of the first quarter and remained at historically low levels as demand for oil products has declined. Refineries worldwide are increasingly able to serve domestic markets limiting the need for the seaborne products trade. The decline in demand in the OECD countries, including the noticeable fall in Japan for naphtha imports has been pronounced.

At the same time, we have continued to see more MR vessels getting delivered from the yard. The build up of oil product inventories both in the US and Europe indicates that the severe softening of tonnage demand to continue at least in the short term. The Suezmax market appeared to buck the trend until the end of the quarter when rates also started to drop following pressure from the weaker VLCC markets and the lower volumes of Russian crude coming out of the Black Sea. Overall, the weakening crude oil demand and the OPEC supply gap have continued to affect the trade on Suezmaxes.

The recent steep downturn in both the crude and product spot markets made charters more reluctant to fix longer period while very few asset transactions seems to take place in the second half in new building markets. As a result, it has become increasingly difficult to make calls or predictions about the period rates and level of asset values in the time to market.

Oil product demand for 2009 has been revised once more downwards by IEA, but there is still an expectation of growth for 2010. Overall, we are facing an environment of increased uncertainty in the time-to-market, which is further exacerbated by the financial and economic crisis as well as the severe weakness in other segments of the shipping market.

While we expect that this should result in an accelerated removal of all the non-double-hulled tonnage and it might alleviate part of the pressure from the current order book, it is likely that a protracted slump in the spot markets may result in a further correction in asset prices and period rates from their current levels.

You can see an updated description of our fleet on slide seven. Following the vessels that I described earlier, our fleet numbers 18 very high-specification vessels with an average age of only 2.9 years after the April 30, 2009 and includes 15 virtually brand-new chemical product MR tankers including 10 (inaudible) class 1A vessels, which represent the largest fleet of this type in the world.

All our vessels are chartered with strong counterparties and we are delighted to have extended our relationship with BP Shipping with the acquisition of the Agamemnon II and the Ayrton II. The remaining average charter duration has now been extended to 4.3 years and 10 out of 12 of our time charters have profit sharing agreements which could potentially provide us with significant upside when spot markets rebound, as was demonstrated through our results in the previous quarters.

Slide eight provides an overview of our charter coverage by vessel. We have extensive charter coverage in the medium term with close to 100% of our fleet under charter for 2009 and 67% in 2010. In addition, six of our vessels are under long-term charters with reliable counterparties set to expire during or after 2014 at the earliest.

I would like to conclude by pointing out that we continue to execute successfully our business model by ensuring long-term revenue predictability and creating value for our unitholders. We have managed in this quarter and under very adverse market conditions to extend our charter coverage at an increased rate to our previous charters and a substantial premium to the current market. We have renewed our fleet with [stable] (inaudible) brand-new vessels and continued our cash distribution policy in line with previous quarters.

And with that, I will turn the call over to the operator and take any questions you may have.

(Operator Instructions) Scott Burk, Oppenheimer.

I just wanted to get some color behind the switch, the change out of the two vessels. First, was Morgan Stanley trying to cancel those contracts? Is that what led to the swap or what was kind of the main reason behind the change?

That was not the case. Morgan Stanley is performing well under the charters and as the remaining vessels will continue to perform well with Morgan Stanley. The reasoning behind the swap is simply the two vessels at the sponsor that we got delivery from the yard very recently had quite good charters relevant to the charters of Morgan Stanley. So given the absence of the equity markets instead of doing anything else, we decided to start these vessels. As in addition to the better charter rates, the duration of the charters is significant increasing the coverage for both 2009, 2010, and beyond.

In terms of the payment for the cancellation of the charter with Morgan Stanley, that payment does go to capital products. What is the amount?

The amount has not been determined yet, but it will go to Capital Products. As you can see from the press release, from the one hand, Morgan Stanley will pay a compensation to the Partnership. On the other hand, the Partnership is responsible for any costs related to the delivery of the vessels to Capital Maritime.

Right, and just the order of magnitude of those, is that going to be in the millions of dollars or hundreds of thousands? Tens of millions? What is the --?

By definition you can see when the charters were expiring and that was quite soon, so certainly the amount is not going to be significant. But it is yet to be determined.

Okay and then similarly for the delivery costs, is that going to be some kind of significant amount?

Yet to be determined. It has only happened very recently.

Okay. Are there other vessel changes that you might consider? Kind of give me Capital Maritime's perspective. This seems like a pretty good deal for Capital Product. What is the incentive from the sponsor side to put these vessels on to Capital Product?

As we have said before, the sponsor is very committed to the Partnership. It owns 46.6%. It wants the Partnership to succeed. That is something that I think we have demonstrated in different forms in the past. I think that any future swaps will depend on the market and what charter rates we may be able to secure at the sponsor level.

Okay. Then I guess just two more -- one other question I guess. Can you explain better or give me some more color on the profit-sharing component? What does it mean to breach IWL? And does that mean you only get the profit sharing if they are going into a port that isn't covered by some kind of warranty? I just don't understand what that clause means.

That is a good question. What it means effectively is that in certain ports or at certain points of the year mainly during the ice season for instance or in severe weather conditions, if the vessel -- because we're talking about high-specification vessels here -- if the vessel is able to navigate and perform well under these conditions, it returns more than what this IWL determines, then we split the difference 50-50.

Okay, so it sounds like it is profit -- you get the profit sharing, but it is only in specific times, so it's not like -- it's a fairly limited amount of profit sharing potential then.

We will have to wait and see but these are as we say specific to certain ports at certain points in the year.

I see. Okay, thank you.

Justin Yagerman, Wachovia.

Good morning, guys. This is Mike Webber filling in for Justin. How are you? I just wanted to get back real quick and I know you touched on sort of the first question, but I want to make sure I completely understood this. The compensation that is going to Morgan Stanley and I guess the timeline of events that led to the sort of swapping of the assets, I know you said it was more if I guess a mutual decision. But was there -- I guess who approached whom I guess to swap these assets out? And I guess is this -- how should we think about this from Morgan Stanley's perspective? I mean was this close to a counterparty (inaudible)? How do we think about this?

Nothing like that. We approached Morgan Stanley with both the vessels. Morgan Stanley is continuing to perform under its current charters and the other vessels performed well under their current charters. So it was us going to them, Capital Product. Morgan Stanley continues to perform. What happens is that because we pulled the vessels effectively in this environment, they were losing money. So they are going to pay us a compensation that as I mentioned earlier to Scott is yet to be determined.

Okay, that makes sense. I guess kind of changing gears I guess away from the transaction and taking a look at I guess your current book, this goes a long way to shoring up a fair amount of your charter exposure. But I guess if you could give any color on where you guys see -- I guess the directionality of the product tanker market and given the fact that you guys were essentially willing to swap out rates right now at what looks to be more or less a wash, just to insulate yourselves from having any sort of charter exposure, I guess what does that mean for your near-term recharters? And how do you think about that strategy?

Well, clearly we have fewer near-term recharters than before as we have increased our charter coverage in 2010 to 67% and we are almost 100% chartered for this year. As we have said before, we are continuously negotiating with our charters for charter extensions and more opportunities. So that has not stopped. But at the same time, I have said that the current weakness in the spot market has resulted to fewer transactions overall for period charters. And at the same time as you can see, charter rates, period charter rates have been under pressure.

So we are not in any immediate need to do something, but we continuously speak to our charters trying to discuss with them opportunities.

So you said you were in conversations I guess continuously on charter extensions. How real is that $17,000 a day right now for one to three years? We haven't seen a whole lot of business being done there.

There haven't been that many -- there haven't been that many fixtures of late, but certainly there has been a fixture recently at the 16,000. There has been another -- a couple of other fixtures recently at 17,850 that was in mid-March. So we have seen here and there some fixtures, but as I say, today there hasn't been as much.

Okay, you would feel comfortable pegging the market right around the $17,000 a day level for period business?

As I say, I wouldn't like to speculate. And as I said earlier to you for 2009, we are fully fixed and we don't have that many charter expiries at the beginning of 2010 either. So --

Fair enough, fair enough, and I guess just finally looking through your I guess your statements here, you've got I guess a short-term investment on your balance sheet. Can you get into a little bit of detail on what that is?

That is cash. Simply auditors require us to classify cash, which is in the positive for more than three months as a short-term investment.

Okay, so it's just equivalence.

I think that there is an explanation of this.

Okay, all right, guys. That's all I have. I really appreciate your time.

Ken Hoexter, Merrill Lynch.

Great, good morning. Ioannis, you are looking at the swap of vessels that you're doing. You call them sister vessels, but you're actually getting rid of ice class vessels for some MR tankers and you are paying out $4 million in cash to do this. I'm just wondering -- I know you get the longer charter coverage but can you delve into your view on how that third-party valuation came up with the values they did? I am just trying to dig into the money that is changing hands in exchange for the extended charter coverage.

As you can see also from our press release, this was decided and approved by the Conflicts Committee as well. The point is that the vessels are apart from the ice class notation are very similar. I mean the STX has specification as a very high standard notification. So we are talking about very good vessels.

Then we are talking also about younger vessels between one and two years younger than the ones that they replace. It is important in this market. Do not underestimate the fact that the charter rate is considerably higher because for instance, you are talking about charters at least until end of 2011. And it's important to highlight that the one vessel that is being replaced was having its charter expiring in October and the other one in March 2010.

So the value that we got from third parties regarding the difference between the two, we are talking is quite considerable. So it was the amount paid to Capital Maritime $4 million times 2 is considerably less than what was indicated the valuation difference being.

Why -- were there any discussions with Morgan Stanley about perhaps extending the charters that you currently have with them?

Even if they were, $722,000 level that we have secured with BP was better than the current market indications today. As I mentioned earlier I think in another question, the current market is around 16,000 to 17,000, so --

Okay, these were done -- one of them was done almost three weeks ago. I mean with such a major impact, you have 16, 18 vessels. This is -- it accounts for about 11% of your fleet. Why the -- any reason for the delay of announcing this major swap of your fleet?

That's a good question. We talked about it internally, but as there were going to be two transactions with a difference of a week and we were in the middle of the quiet period, we thought it was better to wait until the results to give the details all together. We hoped to have a bit more detail by now on some items that people ask, but I think it was better to discuss that on the conference call of the earnings as we will have had a bigger audience and the transaction was only completed a few days ago. The second one at least.

Okay, can you provide the -- what the rates were for your 37,000, 47,000 in the Suezmax in the quarter?

I think it is in the presentation -- in the presentation coverage. The average rate of our MR vessels was $20,940 and for the Suezmax, it was $43,670.

Okay, yes, I did see that. So you don't break down the MR into the $37,000 and $47,000, do you?

No, we don't.

Okay. I want to come back to your overview slide for a second, where you talked about the medium- and long-term deterioration. I mean, that's quite a significant statement. I understood when you went over everything on the market on slide six, you talked about kind of '09 and 2010. I am just wondering why you have shifted your longer-term view of the market?

I think in the statements that we have made both in the earnings release and during this call, we talk about the short to medium term. We don't talk about the long term. So the statement refers to what we see near to medium term. The fact is that as you see, the spot market has deteriorated. The recession is alive and kicking and at the same time, you see that oil product demand is falling and actually this -- the agencies that monitor that have continued to downgrade all the oil product demand for this year.

So in this environment, alongside with the fact that there is very few transactions, we have financial pricings going on, we have to be very realistic about the outlook we have (technical difficulty). And as I mentioned, with inventories high in the states as well, the near-term trading is not very good. What I can say is that at least the Partnership is protected because at least for this year, there is no charter expirations effectively at all.

No, no, I fully understand that. You made that quite clear and that's why I brought it back to the slide. But in the press release, you said it is likely to continue in the short term, so you highlighted all of that. But then you said while medium-term and long-term prospects are deteriorating, so I am just wondering what on that long-term prospect has shifted for you to make that statement?

I think when we look at the earnings release, we don't talk about the long-term. I don't think I spoke about the long-term in the transcript and as I mentioned to you --

That's it. I'm picking that out as a direct quote from your release this morning. It says while medium- to long-term prospects are deteriorating.

Okay, probably the emphasis on the medium rather than the long. I think in the long term, what we have discussed in the past, i.e., where the refineries are being built, regarding the vesting requirements of the majors, regarding the fact that the oil majors are getting rid of tonnage, the long-term outlook for products, we have not changed our view there. And I think if anything, this crisis would translate to more scrapping soon and also it will probably translate and we believe that some of the 2010 deliveries will not take place or be postponed.

But I don't think that it would affect the long term. We are trying to find where you mean -- you saw that, but --

Okay. Last question I have then is on the increased bank fee. That's a significant jump on your interest expense. Is there -- was there a covenant violation or something that shifted that caused that increase or can you explain what caused that $600,000 increase there?

Nothing like that. Nothing to do with covenants. Simply the banks can unilaterally enforce the market disruption will as they cannot raise funds in the LIBOR market. So according to the terms of our loan agreements, we need to compensate them for that. So because the interbank market is still not working, they cannot effectively borrow at LIBOR so they pass through on the increased cost.

So that's an ongoing cost going forward or is that a one-time?

The cost in the first quarter was approximately $580,000. We estimate the cost in the second quarter to be in the region of $370,000. We spoke about that in our annual report that came out a few weeks ago.

Okay. And then it should dissipate thereafter or is that something that (multiple speakers)?

Hopefully as the markets normalize, hopefully they will dissipate. Already you see a difference between the second quarter and the first quarter, but there is no guarantee for that and you know better than I do that the banking market remains turbulent.

My last question actually just is on the vessels that you are swapping. Just trying to understand BP, they wanted I guess these vessels, they already speced out through Capital Maritime and then you decided to drop them in. Just wondering why your thought process on -- the Partnership already has vessels that it has paid for, why there wasn't a move to kind of go recharter those, maybe get BP to take those vessels? Why you are doing the swap in and out of vessels in the -- (multiple speakers)

Simply because we have an agreement with BP before and when the vessels were delivered, these charters were -- it was effective.

Oh, so the BP already had the charters with the parent vessels, just waiting for them to be delivered?

Yes.

Great. Thanks for the time, Ioannis.

Darren Horowitz, Raymond James.

Thanks, Ioannis. Actually my questions have been answered. I appreciate it.

Selman Akyol, Stifel Nicolaus.

Thank you, good morning. One quick question. On the $4 million paid to the sponsor, how should we think about that in terms of being expensed? Is it going to be expensed over the life of the contract there or is it just going to hit all in the second quarter?

It will hit in the second quarter.

Okay, thank you.

(Operator Instructions) Scott Burk, Oppenheimer.

Hi, Ioannis. I did want to ask about the covenants. That kind of got brought up in an earlier question in terms of debt covenants. Did you guys go through evaluation process of your fleet for the banks for the first quarter or when was the last time you did that?

We have provided the bank with a compliance certificate, which requires us to do a valuation, yes. And we are (multiple speakers) of course.

I'm sorry?

We are in compliance, in full compliance with all.

In compliance, okay. So no pressure at all from the lenders on that. In terms of your -- the availability under your credit facility, is that -- is there any amortization? Can you remind me if there's any amortization of that -- or is that -- you have full use of that until the expiration of the facility?

There is no amortization on the balance. We can utilize it either between June -- until June 2012 or until March 2013 and because the bulk of this amount, the remaining amount of $246 million is in the second facility, so it is available until effectively March 2013.

Okay. And then kind of switching gears to -- I wanted to go back to the expenses, $6,500. You bumped up the expenses on these two new vessels a bit compared to the older vessels, but is that locked in then for the next five years through 2014?

Yes, effectively yes.

And so given those rates, (multiple speakers)

Towards the end of 2013 and beginning of 2014 depending on the vessels, yes.

Okay. Given those rates, can we expect as the expense agreements start to roll over in 2011, should we expect that same kind of movement upward? I know that's two years away, but should we expect that same kind of movement upward in vessel OpEx for the rest of the fleet?

We have spoken many times in the past and we have also written it in our press releases that the underlying cost environment for operating expenses is inflationary, so I believe that in 2011 when some of the agreements do expire, they will probably be negotiated up. But we have to wait and see. But you also realize that the level at which we are talking about the 5.5 or 6.5 is still very competitive for the industry.

Yes, okay. Let's see, then I think I have one more question. Oh, yes. You talked about needing support from the equity markets to go out and do acquisitions. You know, with asset prices at least what kind of brokers are giving us, it may start to make sense just relative to NAV to consider equity offerings at this point. Does that make sense to Capital Product as an organization or are you more focused on kind of the yield that you are offering and when that gets back to a -- yield will have to be at kind of a lower level before you consider offering equity?

I think whatever we decide to do with the equity markets, the deal that we consume must be accretive to the distribution. So that is the main criterion. So it will depend apart from the equity prices. Also on the charter rates that we are able to secure for the vessels that we want to acquire.

I see. Yes. So the charter market will probably be the bigger driver than it seems like?

It's -- you know, we have to find the common denominator of everything that results to an accretion to the distributions.

Okay, thanks.

Thank you.

As we have no further questions, I would like to turn the call back over to you, Mr. Lazaridis for any additional or closing remarks.

Thank you all for participating today and thank you for your questions. We will talk soon. Thank you very much.

This concludes today's conference call. You may now disconnect your lines.