Capital Clean Energy Carriers Corp (CCEC) 2015 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Capital Product Partners second-quarter 2015 financial results conference call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer and Chief Financial Officer of the Company.

At this time, all participants are in a listen-only mode. (Operator Instructions). I must advise that this conference is being recorded today, Thursday, 30 July 2015.

The statements in today's conference call that are not historical facts, including our expectations regarding developments in the market, the expected use of proceeds from the offering of our common units, fleet development, our ability to pursue growth opportunities, our expected charter coverage ratio for 2015, and expectations or objectives regarding our quarterly distributions and annual distribution guidance, maybe forward-looking statements as such as defined in Section 21E of the Securities & Exchange Act of 1934 as amended.

These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units.

And I would now like to have the conference over to your speaker today, Mr. Jerry Kalogiratos. Please go ahead, sir.

Thank you, Jenny, 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.

On July 23, 2015, our Board of Directors declared a cash distribution of $0.2365 per common unit and $0.21775 per Class B unit for the second quarter of 2015, which represents an increase of spot $0.20 compared to the common and Class B unit distribution for the first quarter of 2015 and a total increase of spot $0.40 since the beginning of the year.

In the second quarter, common unit cash distribution will be paid on August 14 to unit holders of record on August 7. The second-quarter Class B unit distribution will be paid on August 10 to unit holders of record on August 3. The partnership's operating surplus for the quarter amounted to $31.7 million, which is $4.8 million higher than $26.9 million of the second quarter of 2014.

Common unit coverage for the fourth-quarter 2014 stood at 1 times due to the drydocking and related off-hire for three of our vessels during the quarter. We expect that the full impact of the two drop-down vessels we took delivery of towards the end of the second quarter and the recent charter renewals at higher rates should help improve the unit coverage going forward.

Four of our vessels with charters unveil a profit share element generated $2 million in profit share revenue on the back of a short group and product spot market environment in the beginning of the year.

In June 2015 we took timely delivery of two additional drop-down vessels, one eco-flex wide beam 9000 TU container ship and one eco MR product tanker, both with long-term charters attached, which represent the second and third vessels in a series of five drop-down vessels we agreed to acquire in 2014.

Moreover, during the quarter, the partnership secured period employment and extended time charter contracts for four of its vessels, all at increased rates. As a result of the new charters and as of the end of the second-quarter 2015, the average remaining charter duration of our charter stood at seven years with approximate charter coverage of approximately -- 93% for 2015 and 74% for 2016.

As most of our remaining charter expirations in 2015 relate to product tankers, we expect to be well positioned to take advantage of the improving market condition in the segment.

As previously announced, during the second-quarter 2015, the partnership successfully completed the issuance and sale of 14.6 million common units at a public offering price of $9.53, raising net profits before operating expenses of $133.3 million. In conjunction with the offering, we entered into amendments to three of our credit facilities providing for repayment of approximately $116 million under these three facilities, the deferral of further scheduled amortization payments until the fourth quarter of 2017, and the extension of the final maturity for two of our largest facilities to the fourth quarter of 2019.

Turning to slide 2, the revenues for the second quarter of 2015 were $54.5 million compared to $74.4 million in the second quarter of 2014. The increase is mainly a result of the improving employment day rates for certain of the partnerships vessels, the increased size of the partnerships fleet and the $2 million in profit share and by four of the partnerships vessels.

It is worth mentioning at this point that we had a total of 54 days of off hire in the second quarter of 2015 due to the drydocking of certain of our vessels.

Total expenses for the second quarter of 2015 were $35.6 million compared to $35.5 million in the second quarter of 2014. Vessel operating expenses for the second quarter of 2015 amounted to $17.7 million, which is $0.9 million higher than the $16.8 million in the second quarter of 2014. The increase reflects primarily the increased fleet size of the partnership and expenses related to the drydocking of the M/T Avax, M/T Akeraios and M/T Agisilaos.

General and administrative expenses for the second quarter of 2015 amounted to $1.3 million compared to $1.6 million in the second quarter of 2014. Total other expense net for the second quarter of 2015 amounted to $4.8 million compared to $4.2 million in the respective quarter of 2014. The increase reflects the lower other expense incurred in the second quarter of 2014, mostly due to the reimbursement of certain expenses related to the redelivery of the motor tanker Assos and motor tanker Atrotos from their charters in the second-quarter 2014.

The partnership's net income for the second quarter of 2015 was $14.1 million or $11.1 million after taking into account the preferred interest in net income attributable to the Class B unit holders and GP interests. That is $0.09 per common unit.

Moving on to the next slide, 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.

We have generated approximately $31.7 million in cash from operations before accounting for the Class B preferred unit distribution. After adjusting for the Class B unit distribution, the adjusted operating surplus amounted to $28.9 million. Common unit coverage for the second quarter was at 1 times as three of our vessels were drydocked during the quarter.

In the third quarter of 2015, we anticipate to have an additional two drydockings taking place. However, we expect that the full impact of the two drop-down vessels we took delivery towards the end of the second quarter, and the recent charter renewals at higher rates should help improve the unit coverage going forward.

On slide 4, you can see the details of our balance sheet. As of June 30, the partner's capital amounted to $972.3 million, which is $99.7 million higher than the partner's capital as of the end of 2014, which amounted to $872.6 million. The increase was mainly a result of the partnership's equities to enable 2015, which raised net profits before operating expenses of $133.3 million.

As of the end of the second quarter, the partnership's total debt had decreased by $46.2 million to $531.7 million compared to total debt of $577.9 million as of year-end 2014, following the prepayment of approximately $116 million under three of our credit facilities and the $2.7 million loan amortization under one of our other trade facilities.

Separately, we partly financed with $72.4 million of debt from the partnership's senior secured credit facility with ING Bank; the acquisition of the motor tanker active, which was delivered at the end of the first quarter; the motor vessel CMA CGM Amazon, which was delivered on June 10; and finally, the motor tanker Amadeus, which was delivered at the end of the second quarter.

Overall our balance sheet remains strong with a net debt to capitalization of 26.5% and with partner's capital representing [62.7] of our total assets.

On slide 5, you can see that our fleet is well diversified predominantly between product tankers and container vessels and is built at top-tier yards and at high specification.

At the bottom right, you can see that the average fleet age stands at 6.6 years compared to 9.8 years for the industry average with 2.4 million deadweight capacity.

Turning to slide 6, we are pleased to have secured new time charter employment and extended period contracts for a total of four of our product tankers during the quarter at an average increase of $1150 per day as the partnership continues to take advantage of the current favorable rate environment in the product and crude tanker markets.

Furthermore and as previously announced, the motor vessel CMA CGM Amazon, the second drop-down vessel was delivered to the partnership in mid-June and commenced its five-year charter with CMA CGM. The vessel is earning 39 to 50 gross per day over the period.

At the end of the quarter, the motor tanker, Amadeus, the third drop-down vessel, was delivered to us and commenced its two-year time charter with capital maritime at $17,000 gross per day plus 50-50 profit share settled biannually.

It is important to note that for seven of the 12 vessels fixed year to date, we have secured employment for two years longer. In addition, we have reduced the number of vessels belonging to capital maritime from 13 out of a total fleet of 30 vessels on June 30, 2014 to nine out of 33 currently in our fleet, thereby reducing our exposure to capital maritime and further diversifying our customer portfolio.

Moving to slide 7 and taking into account the new charters, the average remaining charter duration is seven years. We have six product tankers, two Suezmax tankers and two containers that will see their present charters expire over the next 12 months. Excluding the vessels for which our charters hold options to extend, our MRs are currently fixed at an average rate of $16,000 versus the current one- to three-year period rate of between $18,000 to $19,000 per day. The two Suezmaxes that are coming off charter in March and April 2016 are currently fixed at an average rate of $30,000 per day versus the current one- to two-year period market of $33,000 to $35,000 per day.

Moving on to slide 8, we review the product tanker market developments in the second quarter of 2015. MR product tanker spot rates continue to improve in the second quarter of 2015 with earnings for the sector averaging above $20,000 per day for the third consecutive quarter and at the highest level since the third quarter of 2008.

Growing global oil demand and high refining margins in both Asia and Europe have been supporting refined product movements. In the Atlantic product tankers generated strong returns in the spot market on the back of increased product imports into US East Coast, which are estimated to have increased by 20% in the first half of 2015 compared to the same period last year.

Concurrently, exports from the US Gulf remain close to record levels during the second quarter, contributing the strong sentiment to the market. East of Suez, firm naphtha demand and refinery capacity additions, including the startup of Aramco's Yanbu refinery and the expansion of the Ruwais refinery in the UA further increased ton miles per product tankers.

The product tanker period markets remained very active during the second quarter with rates rising to the highest level since the first quarter of 2009 in response to the improvement in spot freight rates. The bullion spot product tanker market is expected to further support period rates and activity going forward.

On the supply side, the MR product tanker order book has declined over the last months, currently standing at 14.3% of the current fleet as the ordering activity for MR tankers has slowed significantly over the last 12 months. Highlighting the slowing contracting activity, only seven orders have been placed in the first half of the year compared to 66 for the full year of 2014 and 261 in 2013 as most quality CTRs have exhausted their capacity throughout 2016 and early 2017.

Concurrently the order book continues to experience sleepiness during the first half of 2015 as approximately 42% of the expected MR and Handysize tanker new builds were not delivered on schedule.

Turning to slide 9, the Suezmax spot market maintained a positive momentum with a market registering the strongest second quarter since 2009. Record Chinese growth imports and multi-decade highs in oil production have stimulated Suezmax tanker demand.

On the supply side, increased long-haul voyages from the Atlantic to the Far East have seen ships removed from the position leased for longer time, thus tightening ton availability, a positive development that is also supported by the minimal year-to-date fleet growth.

As a result of the strong spot market, period rates have increased to their highest point since the first quarter of 2009.

According to the IEA, world oil demand is set to grow by 1.4 million barrels to 94 million barrels in 2015. Industry analysts expect Suezmax tanker dead weight demand to expand by 2.4% for 2015 compared to projected fleet growth of 1%. At the same time, the Suezmax tanker order book through 2018 corresponds to 18.1% of the current fleet, but slippage year-to-date remains high at 40%.

Turning to the last slide, slide 10, we've increased the partnership's distribution for the second quarter of 2015 by spot $0.20 to $0.2365 per common unit and $0.21775 per Class B unit after having increased the first-quarter distributions by the same amount earlier in the year.

Looking ahead, we aim to fulfill our stated distribution growth objective of 2% to 3% per annum for the foreseeable future by raising the common and preferred distribution by the same amount every quarter as in the past two quarters. Our distribution guidance is supported by the positive effect of the full-year contribution of the contracted drop-down vessels delivered year-to-date and to be delivered by the first quarter of 2016.

It is important to note that our distribution guidance does not take into account any further acquisitions. At the same time, we enjoy a strong balance sheet, and as discussed, any further rate improvement that can help us build further our distribution coverage and support our distribution objective ahead.

Finally, we continue to hold the right of first refusal on six MR product tankers currently under construction by capital maritime, in addition to other accretive transactions that we can source for our sponsor or other wide receiving markets.

And with that, I'm happy to answer any questions you may have.

(Operator Instructions). Ken Hoexter, Bank of America Merrill Lynch.

Great. Good morning. Jerry, on the new distribution policy, I just want to understand that a little bit deeper. When you said it doesn't include acquisitions, are you planning on accelerating around acquisitions, or is that a steady irrespective of acquisition?

The distribution guidance is steady respective of the acquisitions. It is based on the five drop-down vessels we agreed to acquire in the third quarter of last year, and as you know, we have taken successful delivery of three out of the five. Any additional drop downs or growth in our asset base could be a reason to potentially revise our distribution guidance upwards.

Understood. Thank you. So, as you now have migrated away from capital maritime dropping from the 13 down to nine and even with an enlarged fleet, what are your thoughts on counterparties going forward in this rising market? Do you look to move away from capital maritime into more of the market, or is that kind of a comfort zone that you have now at that level?

Capital maritime, as you know, is an active player in the spot market. They have an extensive spot platform, and they have chartered vessels of the partnership now for a number of years. They have been also at that point that the period market has been less liquid, they have provided more liquidity for us in terms of period coverage, and that's why you have seen us fixing a little more with the capital maritime.

Now that we've seen increased liquidity in both -- let's say the Suezmax and more importantly the product tanker market, we will continue to fix with both capital maritime and other parties, and in the end it very much depends on what is available and what is the highest bid at the time.

Okay. And thank you for that. Last question, just on the rates I guess that you are seeing as you see these accelerating rates, you even mentioned on the container side you had slides on the product in Suezmax, but you noted a couple of tankers -- I'm sorry, containers are coming up for renewal. Can you walk us through your views on the market there, and then I'll come back on the product side after that?

Well, the charters of the two containers hold a number of options for another three years for these vessels. But still, as you know, the container market, especially in the post-Panamax segment, is quite illiquid.

So far most Panamax vessels supply remains limited, and all new builds for 2015 and 2016 have found deployment. On the other hand, we are in the midst of the usual summer dull period, if you want off-season, and we will need to see how this year's Christmas pick will affect the charter market.

We yet need to see a few more fixtures in that segment in order to better understand where this market is. Because unlike the, let's say, tanker or drybulk market, they are very much pure fixtures. But recently we have seen fixtures anywhere between $25,000 to $28,000 for similar kind of vessels.

Wonderful. And then just to wrap up on the product side, given the spike in rates that we are seeing more recently, how do you -- that was a great walk-through on slide 8 in terms of kind of the progression of long-term rates. Are you seeing stronger activity in terms of your bid for upcoming renewals?

Sure. As the spot rate -- spot rates are very strong, many charters, including your usual suspects -- the oil majors, the traders -- they are trying to get period coverage. Owners who enjoy the very strong spot earnings and are increasingly more optimistic about the future, they refuse to fix period and other results. You have seen charters not only bid higher, but also for longer periods.

So recently have seen, for example, traffic (inaudible) take 2006 build MR for two years at $18,000 or Cargill for 12 months at $18,500.

Having said that, the one-year period market is very much spot dependent and position dependent. So, if you're giving away a good front hole volumes, the charters will pay even more. So there's definitely a lot of activity and demand, and I think the positive thing and as you've seen from our fixtures is that we have been able to find more interest for longer fixtures than one year at this point.

Wonderful, Jerry. Appreciate the thoughts and insight.

[Spiro Dunes], UBS Securities.

Good morning, Jerry, and congratulations on the recent promotion.

Thank you. Good morning to you.

Wanted to touch on the fixed right of first refusal assets real quick. Just wondering if you can give us any color on whether those assets, those vessels have started to, I guess, be chartered? I know they start to deliver, I believe, at the end of the year, and if they haven't been chartered yet, just any timing around that if you can offer anything.

Well, one of the six vessels has been fixed. The rest are still unfixed. That very much depends on capital maritime as to what they tend to do with these vessels. So there is not much to add from this perspective. But in any case, I think we have to focus in taking delivery of the already contracted drop downs going forward, and when and if we can do an accretive transaction and assuming that these assets find proper employment, we will also look at them.

Okay. That makes sense. And you mentioned at the end of your prepared comments, that I guess you could start looking at maybe acquisition opportunities outside of capital maritime. I was just wondering maybe you could offer some guidance on what that might look like. Could you maybe do a sale leaseback type structure where you are buying from one of your customers and leasing back to them, or would you be able to buy something on the water and then fix it yourself?

We are pretty open to any opportunity, and we always scan the markets for opportunities, but obviously whatever we do, it has to be accretive. So there's nothing specific that we have in minds but the market -- as you know, the S&P markets are quite liquid and quite sizable. So we always look at opportunities. But the prime criteria is obviously accretiveness at this point.

That makes sense. And just one last one. In terms of, I guess, financing future growth, obviously unit price is probably not where you want it to be today, and I guess other options there may be levering up a little bit more than you've done in the past. And with a stronger balance sheet now, I suppose you'd be more easily able to do that. I would imagine at better terms, too.

I guess another option is maybe hitting a preferred market to the extent it's open. Just wondering how you're thinking about financing future growth broadly speaking. I realize you can't be that specific.

Well, with regard to leverage, which is one part of that, I can probably answer is that we will continue to aim for 50-50 going forward or at least something in that range. So don't expect us to deviate a lot from that.

With regard to other opportunities, we are, of course, open, but there is nothing specific that I can comment at this point.

Got it. Appreciate the color, Jerry. Take care.

Shawn Collins, Bank of America Merrill Lynch.

Good morning. Good afternoon. Thanks for taking my question. I just wanted to ask what kind of rate difference are you observing in the market between eco design MRs versus traditional MRs? Can you comment on that?

Sure. You have seen a number of fixtures, and to be perfectly frank, this has differed a lot and this has also to do with the period duration, the position of the vessel, as well as the so-called first or second generation eco or when they were fixed. Because, as you can imagine, the premium was different a year ago compared to what you see recently.

As a rule of thumb, I would say that today stands at around $1000, maybe $1500, but again it very much depends on other factors as a duration and position.

Great. That's helpful and somewhat in context with the past kind of maximum differential of almost $3000.

Just a second question. Asian shipyards have recently been in the news with large financial losses. I know you have strong relationships with the yards and have been working with them for a long time. Do you expect any potential consolidation or capacity rationalization or change in the landscape in the major shipyards?

That's an interesting question. So I think we have that we will see some consolidation, and you have seen various CPRs in the news who are expected to take -- to consolidate other smaller CPRs that have issues that have had financial issues now for some time.

I think in a way this has been positive now for some time for the industry as we have rehabilitation process that some of these CPRs have gone through. It means that they have been out of competition. So as they are -- as the bank that controls them have deterred them from taking orders below costs, and especially on the MR product tanker side, we have seen product tanker ordering remain at bay, and this has been definitely positive for supply. At least three CPRs in Korea that build MRs have had financial issues.

So I'm not sure to what extent we will see capacity utilization, but definitely what has happened in Korea is good for the supply side.

Great. That's helpful, Jerry. Just my last question and I know you and I have touched upon this off-line before, but just wanted to touch upon the Greek volatility and the social and political situation there. I just wanted to ask is this having any operational impact on your business, and if you can just comment on that, please?

Sure. As you know, capital products is an international Maritime MLP, and it's registered under the laws of Marshall Islands. And as such, it is not subject to Greek corporate tax. It controls vessels that sail under the Liberian or the Marshall Islands flags, and they operate worldwide.

Commercial management, as well as technical management, of these vessels is done by Capital Ship Management who have corporate headquarters in [Bairelles], but the management is also affected by their other international offices in New York, London, Constantine Romania, as well as Singapore. So there is very little actual exposure to Greece.

In terms of the financial side, as you know, our business is US-dollar-based. We charter our vessels to international companies. And all our debt facilities are with international consortia led by the likes of HSH, [Kitibicol] and ING. We have immaterial balances, cash balances with the Greek banks. So there is -- there has been very little impact that the partnership has failed from the Greek crisis.

Great. That is helpful, Jerry. Thank you for the time and insight.

[Dan Brownlow], Raymond James.

Good morning, Jerry. Just as a follow-up, on the distribution growth, which is pretty steady, and I know you are implying 2/10 of $0.01 sequential increase in the third quarter. With that annual growth target, that is within the annual growth target of 2% to 3% that you set, but it's trending toward the low end of that to 8%. And just now that you have a quarter or three drop downs flowing through the increase in recharter rates locked down for several tankers, I would expect a higher coverage ratio in the third quarter. Just why not get us a slightly more aggressive stance in that distribution growth?

I think that you'll find that the distribution growth by the end of the year compared to year-end last year is just -- and if you assume a spot $0.20 increase, it's just above the 3% growth. So hopefully we will end up on the upper end of our guidance.

But overall, I think the idea very much remains that the distribution growth guidance that we gave is tied to asset growth. Effectively the incremental cash flow expected from the drop-downs will support this distribution growth for the foreseeable future.

Now, as you say, the charter rates have been increasing, and these will definitely help us build our distribution coverage and reserves. And in the long-term, these will also underpin this distribution guidance.

Don't forget that our balance sheet is quite strong. So that is -- that should help us -- that should help us use these proceeds either as a cushion for a rainy day or potentially as equity for acquiring more assets.

Thank you. And then just two quick ones on the expense side. Can you quantify the drydocking expenses in the second quarter? And you touched on drydocking schedules for the third quarter, if you could just repeat that. And then G&A dropped off a little bit sequentially from the first quarter and year over year. Any color there?

On the drydocking total cost expense for the second quarter where it was about $1 million and had to do with the drydocking with three of our vessels, we have another two vessels drydocking in the third quarter that is the Cape Agamemnon and the motor tanker Atrotos. We do not expect any other drydockings unless we find that there is an opportunity to dry dock a vessel ahead of its time, depending on the position mostly. So that's it on the drydocking.

With regard to 2016 and with regard to special surveys in 2016 and after that we have five scheduled for 2016: two MR product tankers, two Suezmaxes and one 8000 TU container, and another three in 2017.

So finally, on the SG&A, we had a small reduction compared to last year as last year we had to increase the expenses on the back of the IDR reset and certain expenses related to that.

Thanks for the color.

(Operator Instructions). There appear to be no further questions, sir. So I shall pass the call back to you for closing remarks.

Thank you all for joining us today, and please do not hesitate to contact me if you have any further questions. Thank you.

And with many thanks to our speaker today, that does conclude the conference. Thank you all for participating, and you may now disconnect. Thank you, Mr. Kalogiratos. All the very best. Bye, bye.