Capital Clean Energy Carriers Corp (CCEC) 2010 Q2 法說會逐字稿

Welcome to the second-quarter earnings conference call for Capital Product Partners. As you know, earlier today the Partnership reported its financial results for the second quarter of 2010. Our 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 e-mailed to you, please contact Capital Link at 001-212-661-7566. Please also note that the slides of the webcast presentation are user controlled and each participant can click on the proper button on the webcast screen to move to the next or the previous slides on your own.

I would remind everybody that the conference call today will include some forward-looking statements that are subject to certain risks and uncertainties, which are detailed in our recently filed 2009 Form 20-F as well as other filings we have made with the SEC.

Please also review the forward-looking statements included in the supporting slides. These and other forward-looking statements are made based on 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 that actual results could differ materially from those expressed or implied in the forward-looking statements.

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.

We have with us Mr. Ioannis Lazaridis, Chairman and Chief Executive Officer. (Operator Instructions). I must advise you that this conference call is being recorded today, Friday, July 30, 2010. We now pass the floor to your speaker today, Mr. Lazaridis. Please go ahead, sir.

Thank you, Tony, 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.

Starting with slide one, I'm going to make some comparisons on today's call between the second quarter of 2010 and the second quarter of 2009, as this is the most meaningful analogy in our business. Please note that the reported results of operations to be discussed, except for the partnership's net income, reflect the reconsolidation of Motor Tanker Alkiviadis, acquired on June 30, 2010, for the full quarter, as the transaction was between two entities under common control.

The Partnership's net income for the second quarter was $5.2 million, compared with $8 million in the second quarter of last year. Earnings per limited partnership unit were at $0.16 in the second quarter this year, which is $0.09 lower than the $0.25 per unit achieved in the previous quarter and $0.16 lower than the $0.32 per unit achieved in the second quarter of 2009. The lower earnings compared to the same quarter last year reflect primarily the lower charter rates, of which we have rechartered the partnership's vessels as a result of the prevailing market conditions, and higher net interest expenses.

Our operating surplus amounted to $10.2 million for the quarter, $1.5 million lower than the $11.7 million for the first quarter of 2010 and $1.3 million lower than the $11.5 million for the second quarter of 2009.

Last week, our Board of Directors declared a cash distribution for the first quarter of $0.225, in line with the annual guidance of $0.90 per unit discussed in our fourth-quarter 2009 earnings release.

Importantly, the partnership successfully completed an additional accretive acquisition of the product tanker Alkiviadis, which is a sister vessel to other medium-range tankers in our fleet and is deployed under a two-year time charter to our sponsor, Capital Maritime & Trading. The acquisition was funded with cash at hand.

The acquisitions of the Alkiviadis and the Atrotos earlier this year mark the partnership's return to its long-term goal of growing its fleet through accretive acquisitions and they expand our revenue and profit generation capacity.

On the back of these two accretive acquisitions and the improving product tanker market fundamentals, which we will discuss in more detail later, we are pleased to announce that the partnership's management, with the approval of our Board, has revised upwards its annual distribution level from $0.90 to $0.93. Unit distributions under the revised guidance are expected to commence from the third quarter 2010 onwards.

Turning to slide two, total revenues for the quarter were approximately $31.8 million, down from $33.4 million in the second quarter last year. The partnership's revenues for the second quarter of 2010 reflect the acquisition of Alkiviadis. In addition, for continuing operations, this reflects the lower charter rates at which we have rechartered a number of the partnership's vessels whose original charters expired during the previous two quarters.

Total vessels expenses and G&A costs for the period were at $10.8 million, compared with $10.2 million a year ago. The increase in expenses is largely related to the larger fleet and that two of our vessels were trading in the spot market.

Net interest expense and finance cost was $8 million, up from $7.3 million for the same period last year. The increase in interest expense is due to the higher interest margin applicable to our loan facilities since June 30, 2009, following amendments to the terms of our loan agreements, as well as an additional cost of $0.3 million which is due to the increased funding costs of the banks incurred in accordance with the terms of our loan agreements. The funding cost for the third quarter 2010 is estimated at approximately $0.4 million.

Moving on to slide three, you can see the details of our operating surplus calculations that determine the distributions to our unit holders, compared to the previous quarter. Operating surplus is a non-GAAP financial measure which is defined fully in our press release.

Adding certain non-cash items back to net income, we've generated approximately $12.8 million in cash from operations during the second quarter of 2010. After setting aside $2.6 million for the revised replacement capital expenditures and $3.1 million in reserves, we will pay $7.1 million to our unit holders for this quarter, or $0.225 per unit.

Our unit coverage for this quarter stands at 1.4 times. The cash distribution for the first quarter is payable on August 13 to unit holders of record on August 6.

On slide four, you can see the details of our balance sheet. I would like to remind you that we have not purchased or new building commitment, and both our debt facilities are non-amortizing until June 2012 and March 2013, respectively.

Our partner's capital increased to $192.7 million, compared to $157.1 million, following the issuance of additional common units in February 2010.

Turning to slide five, we continue to observe a gradual recovery in the demand for product tankers, albeit from the very low level rates in 2009, as global seaborne trade returns to positive growth. Refinery margins and refinery utilization, especially in the Western Hemisphere, have improved during the second quarter and oil demand was at higher levels compared to a year ago. Certain non-OECD countries and the U.S. revised their oil demand estimates upwards on the back of increased industrial output and restocking.

In the beginning of the second quarter, the increased product demand was met by the spare refining capacity available in the U.S. and in Europe and by historically high product stocks. The beginning of Q3 saw, however, an unseasonal rebound in spot product tanker rates on the back of increased gasoline arbitrage opportunities in the Atlantic market and congestion in the west African and Caribbean ports.

Following the improved spot rate environment, improving charter rate expectations have been reflected on the increased activity in the time charter market. Period rates for product tankers recovered from the historical lows experienced over the last few quarters. It is positive that the number of fixtures has jumped and that longer period rates are above the shorter period ones, demonstrating charter's confidence for the future.

Importantly, product tanker vessel transactions have increased and prices have firmed during the quarter. The supply of product tanker vessels continues to positively surprise us as all the book [sleepers] is estimated north of 30%, according to various industry sources, and staffing of all the tonnage remains at healthy levels.

The Suezmax spot market experienced a solid quarter during the second quarter due to increased demand from [areas] such as India and China, as well as U.S. refiners' increased utilization in anticipation of a stronger driving season. However, the Suezmax spot market slowed down at the beginning of Q3, which traditionally has been a seasonally weaker quarter for crude tankers.

The IEA focus for 2010 oil demand growth remains unchanged at 2.1%, while 2011 global oil demand is expected to continue on a positive trajectory at 1.6% growth, or 87.8 million barrels per day.

Turning to slide six, the Alkiviadis, the 37,000-ton, 2006-built, Ice Class 1A MR product tanker, joined the CPOT fleet on June 30, 2010, under a period charter to our sponsor Capital Maritime & Trading until June 2012. The charter rate is $13,000 gross per day, plus profit sharing if it breaks IWL, which compares favorably with market rates for this time period. Profits for this vessel are fixed for five years until June 2015 at $7,000 per day.

The acquisition price of $31.5 million was paid with cash from our balance sheet. The Alkiviadis is the second acquisition completed this year and brings the partnership total fleet numbered to 20 vessels, including 17 MR product tankers. The transaction was approved by our Board following the recommendation and approval of our conflicts committee.

On slide seven, you will find our revised fleet list. The Partnership's fleet coverage remaining charter division is approximately 3.7 years and the average age of our fleet is approximately 3.9 years, which compares very favorably with the industry average. The young age and mobility of our fleet, as well as the oil measure qualifications of our manager, are distinct competitive advantages for our Company, especially in today's markets with increased focus on safety, security, and efficiency.

On slide eight, you can see that our fleet continues to enjoy high charter coverage for the medium term. The Partnership's fleet charter coverage, following the addition of the Alkiviadis, stands for the second half of 2010 at approximately 81%, based on total fleet days, and 52% for 2011. It is important to note that while the present charter coverage provides us with significant customer stability, it also enables us to take advantage of the improving market conditions as the number of our charters open in 2011.

Turning to slide nine, the accretive acquisitions of the Alkiviadis and the Atrotos and the improving product tanker market fundamentals, which I discussed earlier, led us to revise the Partnership's annual distribution guidance by $0.03 to $0.93, to be paid equally over four quarters. We expect that the quarterly distributions over the revised guidance will start from the third quarter onwards. Moreover, we expect that the new guidance is sustainable, even in a lower time charter environment, given our cash flow stability.

We continue to closely monitor key industry factors in order to assess a further market recovery for the remainder of 2010 and 2011. These factors include changes in oil product demand, oil and refinery utilization rates, the implementation of the single-hull tanker phaseout, the availability of shipping finance, as well as further delays and cancellations that could reduce the number of new tanker [S L] deliveries.

Finally, I would like to conclude by saying that we are very pleased to have increased our annual distribution guidance to $0.93 from $0.90, and the partnership resumes once more its distribution [glow]. We will continue to monitor market developments and explore further accretive acquisitions, and as a result we will revisit further our annual distribution guidance.

And with that, I'm now ready to answer any questions you may have. Tony, thank you.

(Operator Instructions). Jon Chappell, JPMorgan.

On some of your commentary about the product tanker market, you mentioned that time charter activity or period activity was starting to pick up. As you look at your fleet and with some of the renewals coming up for the MRs -- the Axios, Anemos, Apostolos, are you getting close to the point where you would start to lock those charters in? And given that we are only at the beginning of this kind of uptick in the MR market, would you do shorter term contracts? Would you let them roll on spot for a little bit or would you think about one-, two-, or three-year contracts on those ships?

Jonathan, as you know, since the beginning of the year, we have seen six of our vessels coming off charter. What we have communicated to the market is that we believe that the level of rates will gradually improve throughout the year.

So, we've said that we are not prepared to fix for a longer period. So, we have fixed most of these vessels at around a year, and a couple, we operated them spot.

We continue to believe that the level of rate is low. We have only two more vessels that are coming up for renewal in this year and these are Anemos and Apostolos. They are due in early September. We are negotiating with charters currently.

Be aware of the fact, as I mentioned to you earlier and you can see on slide five of the presentation, that the three-year rate is above the one-year period rate. That is a very encouraging sign, showing that the charters believe that, longer term, the market is set to improve. So, as we have a number of our vessels opening in the beginning of 2011, we are cautiously committed that we will be able to recharter those at better rates than before.

Okay. Then, I know the Attikos and the Aristofanis are completely different animals. What's the market like for those and do you feel comfortable leaving those on the spot market for now?

The vessels have -- both vessels have gone through extensive upgrading. Both are now chemical -- high multi-chemical tankers. That improves their commercial opportunities. They have been trading at circa $8,000 recently, and I think that in the foreseeable future we'll keep them in the spot market.

One more, just on the strategy going forward. You've done well this year with the two accretive acquisitions by using cash on hand and also one equity deal. But as you look at your capital structure, and I know that your facilities are not amortizing, although June 2012 is kind of creeping up on us, how would you prefer to finance recent -- or, I should say, the next acquisitions? Are the banks willing to lend? Are you thinking about trying to deleverage? How are you thinking about growth and financing that?

I remember you asking a similar question back at the Q1 results, and as I said then and I repeat now, we believe at this point it is important to increase the number of assets in the Partnership. It is important to boost the equity of the Partnership, and as long as we can find accretive deals that can be financed with equity, we will raise money to make more acquisitions.

Scott Burk, Oppenheimer & Co.

I had a question about the charge that you would be looking at as well. With your MLP structure, you are typically looking for a stable cash flow long term. Assuming we get back to midcycle rates in the next year or so, what kind of charter length would you be looking to sign? Are you kind of thinking a three-year time charter range or would you consider longer charters as well -- five-year?

If we say that the midpoint of the cycle or the average over the past cycle was about $15,000 or $16,000 in three-year rates, then as we move towards that level, we will certainly diversify more of the duration of our charters.

What is important to highlight here, Scott, is that we just announced an increased distribution guidance looking ahead, which is supported very much even if rates stay historically low. If the market improves, that certainly would also improve our capacity to improve distributions in the future. We are positive about the product tanker market fundamentals.

As I mentioned to you earlier, importantly, the delays in the deliveries of new buildings are substantial. Slippage, as we call it, is in excess of 30% in the second quarter. According to certain reports, it was much higher than that. And we believe, alongside the fact that you have a better refining market environment, I'm quite positive that in the coming few months as the rates improve, our options to charter vessels under different durations will also improve.

Then I had a question about the acquisition of the Alkiviadis. Sorry, can't pronounce it right, but you had that -- that acquisition closed June 30. What specific impact did it have on the results by closing on June 30 as opposed to July 31? Also wondering why you didn't announce it back then.

We didn't announce it because at the time we were during our closed period, and we wanted also on the back of this acquisition to be able to discuss our revised distribution guidance. So, that's the reason why we did not announce it.

The impact of the acquisition on June 30 was the fact that we had to retrospectively adjust our numbers. The effect on the P&L, you can see, really is minimal when it comes to the Partnership net income, but all other lines have been influenced. That is what happened with all of our previous acquisitions from Capital Maritime. We retrospectively adjust the numbers.

And I don't know if you're asking this question because you have seen the 6-K, but had we done this acquisition on July 30, following our AGM on July 22, the majority of our Board now is elected by, let's say, third parties, i.e., unit holders apart from Capital Maritime. That means after July 22 when we acquire a vessel from our sponsor, we will not be required to retrospectively adjust our numbers because from then on, 22nd of July, the Partnership is not considered under common control with Capital Maritime.

So, if that answers your question or if that was the reason why you are asking this question, that's one answer.

I did see the K. I didn't make the connection, though, so appreciate that color.

That [snake off blind] doesn't affect -- this is clearly a technical point. As I said, the partnership net income is always adjusted for the results of the operations for the period prior to the consolidation.

Kind of a related question. The price of the sale seemed a little bit higher than what Clarksons has got it for right now for 5-year-old vessels, but then also the charter is a bit higher to Capital Maritime. I'm just wondering, is that recognition of trends that you are seeing in the marketplace or is there something special about the vessel that allowed it to garner a bit of a premium?

Definitely, asset prices have moved up over the past few months. And you can say they are at least 10% to 15% up from their lows, maybe in certain cases more.

The rate is quite a good rate, and I would like to point out that there have been recent transactions of vessels that have had their long-term charters that were of similar specification and were in the mid-40s. So I don't necessarily feel that the price paid is that high, and as you know, this has been approved by our conflicts committee.

And then, just kind of one related question, and then I'll get off for now. You have the four vessels chartered to Capital Maritime. Is that -- do you expect to end up chartering more through Capital Maritime or are you starting to see more opportunities to your more typical customers -- BP, OSG, the other customers?

When we first chartered our vessels to Capital Maritime, it was during a time that the rate environment was weaker. Capital Maritime is commercially a very successful organization. It offered us rates, which were quite attractive relative to the market, also containing profit-sharing arrangements.

It is good to have a sponsor which is strong committing to the partnership longer term. But we will judge in the future charter opportunities on their merits, including Capital Maritime.

Okay. Then one final question on profit-sharing. The -- it looks like so far you might be in a position where you actually might get some profit-sharing for the third quarter, based on product increases that have held up a bit better than the larger tankers. Can you give us any kind of estimate about what kind of profit-sharing you might have booked for the farthest quarter?

It's a little early to judge spot. Let's see how the market develops. But as you say, the market was quite positive for the reasons that I described during the month of July.

In the second quarter, we have booked approximately 200,000 in profit-sharing as a result of a very good market in the Suezmaxes. So, it's good that we have a certain number of charters and profit-sharing arrangements, so as the market improves, hopefully we'll be able to capitalize.

Ken Hoexter, BofA Merrill Lynch.

This is actually Wilson sitting in for Ken. First off, I just had a question about just a follow-up on the charters. I noticed looking over your charter coverage that you have quite a number of shares exposed to BP. Do you guys see any risk there going forward in terms of just the type of business that you will be able to do with them in the future?

Certainly, what I mentioned during the call is that what happened in the Gulf of Mexico will increase the safety requirements in the industry. And I think companies with managers such as capital sea management, companies like ourselves, will benefit from the qualifications that they have to do long-term business with the oil majors because I think oil majors will become stricter in choosing counterparties for either short- or long-term business.

So from that end, I think that certainly there's going to be much more focus on safety and the track record of the counterparties of all the majors.

During that crisis of -- during the past couple of months in the Gulf, BP has fixed two more vessels with us, the Avax and the Akeraios. So from where we stand, we see that BP remains a very important counterparty and a very strong counterparty.

Right. And just -- final question is just on where do you see rates kind of ending the year or even averaging towards the back half of the year? Product rates, I mean.

I'm afraid, Wilson, I cannot answer this question. As I mentioned -- as I answered an earlier question, certainly the fundamentals, both in terms of how refining is doing, how oil demand is developing, and how the slippage in the new buildings are developing, are all pointed towards a better outlook.

At the same time, as I mentioned earlier, the three-year period rates are above the one-year period rates. That doesn't happen very often, and whenever it happens, it signifies that charters really believe that the bottom of the rates is here. So, rates have moved up and we are hopeful that they will continue doing so.

Darren Horowitz, Raymond James & Associates.

A couple of quick questions for you. Back to an earlier comment that you made about the MR new build slippage and the cancellation rate is running around 30%, within the markets that you operate, can you give us the [competitive] utilization of both the 37,000 and 47,000 fleets? More importantly, what I'm trying to do is get my arms around whether or not that magnitude of slippage and cancellations is enough to tighten the market to the extent that you get a material day rate tailwind when demand really kicks back in.

Utilization rates of the fleet are sometimes very difficult to get. But I think during July, you saw the drop [amotic] market in certain cases reaching $23,000. That was a rate reminding us of the levels two years ago.

So, I think that you saw delays, congestion in west Africa because of better demand there. I think that what you see is a better utilization of the fleet, despite the fact that during the quarter you had a lot of destocking, a lot of the vessels, as well as products left storage. I think the market has held up remarkably well.

So in my opinion, with less tonnage coming in, you have -- especially the smaller vessels, the 37s, about a fifth of the fleet not meeting the regulations about double hull, so it's going to go and the order book in that particular segment is much smaller than the, let's say, the phaseout. The order book there is in the region of 10% to 15%. So, I'm quite hopeful that utilization will improve.

You already see that charter rates have jumped in the period market as well. Back in the early part of the year, they were about 11,000 or 11,500. Now they are 13,000 to 14,000. So that's all positive signs.

Final question for me really more of a housekeeping issue. But when we were looking at reconciling EBITDA down to cash flow and we were building in the appropriate maintenance CapEx for the Atrotos, we factored in, I want to say, between $600,000 or $700,000 on an annual basis, which pointed to around $10.5 million training and maintenance CapEx. Now, with this new boat in the mix, can we assume a similar type of annual run rate? Another $600,000 or $700,000 tacked on?

With a new vessel, the annual maintenance will be about $11.2 million.

Justin Yagerman, Deutsche Bank.

It's [Josh Cantsufant] for Justin. Most of my questions have actually been asked, but I just wanted to follow up on a couple of things. Sticking with the time charter theme, have you seen much volumes in the one-year and three-year time charter rates -- I mean, time charter markets? Especially in the three-year?

I've seen a lot of activity. When it comes to the number of pictures, year to date we have almost three-quarters of what we've had for the full year last year. So, there's much more activity, and you have seen -- I mean, I don't want to name the charters, but that's all public information. People came in and they paid $14,000 and $15,000 for three years or longer, so you have a lot of activity on the long rates.

With regard to future acquisitions for this year, you guys have purchased two vessels so far. Any thoughts on growing for the rest of the year? Can you comment on that?

And then, have you seen any third-party kind of in block transactions for sale or is it more just kind of one-off vessels?

We have said in the previous quarter, and we are saying again, that we will be looking to add to our tonnage, so we're looking. If we find accretive deals, we will always pursue them. Otherwise, the -- this is a liquid market so we'll be looking both from Capital Maritime and from third parties.

Have you seen any multi-vessel fleets up for sale or has it been more single vessels?

There have been a couple multi-vessel fleet sales that have taken place.

(Operator Instructions). [Anthony Taylor], Bridgeview Capital.

Can you give me a little bit more insight on the sustainability of your dividend?

Sure. As I mentioned during the call, we are very pleased that we have once more resumed our distribution growth. Following two accretive acquisitions and the improving product time to market, we have increased our distribution guidance from $0.90 to $0.93.

This new distribution will commence from the third quarter. So, the new distribution that will be $0.2325 from $0.225 quarterly. And we still base our distribution on a scenario that rates stay low. As I mentioned earlier, as rates improve, that certainly will result to us a revisiting our distribution.

We believe that it's important at this point to show our renewed confidence in the market looking ahead. It's important to demonstrate that we want to grow our distributions, and we are very pleased that the -- we have decided to increase it. I think, with 80% charter coverage in 2010, 52% charter coverage in 2011, with cash in the balance sheet at $24 million at the end of the quarter, we believe that this distribution is very sustainable in the future.

There are no further questions at this time. I now pass the call back to our speakers for any closing comments. Please go ahead.

Thank you, Tony. Thank you all for joining us. You can look at our contact details in the press release in case you want to discuss any of the topics that we went through today. Thank you very much once more.

That does conclude our conference for today. For those of you wishing to review this conference, the replay facility can be accessed by dialing country code 44-1452-550000. The reservation number is 696-48481, followed by a hash sign. Thank you for participating. You may all disconnect.