Capital Clean Energy Carriers Corp (CCEC) 2020 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Capital Product Partners Third Quarter 2020 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the company. (Operator Instructions) I must advise you that this conference is being recorded today, 2nd of November, 2020.

The statements in today's conference call that are not historical facts, including our expectations regarding cash generation and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocation as well as our expectations regarding market fundamentals and the employment of our vessels, including redelivery dates and charter rates, may be forward-looking statements, as such as defined in Section 21A 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.

I would now hand the conference over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

Thank you, Heidi, 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.

As previously announced, we concluded on March 27, 2019, the spin-off of the partnership's tanker fleet and subsequent merger with DSS Holdings, forming Diamond S Shipping. Accordingly, we present our financial results for the comparative periods on the continuing operations basis, except where references made to discontinued operations.

The partnership's net income for the third quarter was $7.8 million compared with net income of $3.4 million for the third quarter of 2019. Our Board of Directors has declared a cash distribution of $0.10 per common unit for the third quarter of 2020. The third quarter cash distribution will be paid on November 10 to common unitholders of record on November 2.

The partnership's operating surplus for the third quarter was $21 million or $11.7 million after the quarterly allocation to the capital reserve. We are pleased that during the quarter, we secured employment for the container vessel Adonis with ZIM for a period of 12 to 14 months. As a result, the partnership's charter coverage for the remainder of 2020 and for 2021 stands at 91% and 86%, respectively. Correspondingly, the partnership's remaining charter duration stood at the end of the third quarter at 4.5 years.

During the quarter, CPLP's sponsor, Capital Maritime Trading Corp., purchased approximately 234,000 common units in the opening market, demonstrating our sponsor's continuous commitment to the partnership.

Now turning to Slide 3. Revenues for the quarter were $35.5 million compared to $26.4 million during the third quarter of 2019. The increase in revenue was primarily attributable to the increase in the size of our fleet following the acquisition of 3 10,000 TEU containers in January, partly set off by the decrease in the daily charter rate and on average by our vessels. It's important to note here that our sole dry bulk vessel, the Cape Agamemnon, completed its 10-year charter with Cosco in July 2020. It has since traded in the spot market but had to incur 15 off-hire days due to the unfortunate passing of its first engineer from natural causes and the associated formalities. Our thoughts and prayers are with his family.

Total expense for the quarter were $23.8 million compared to $19.3 million in the third quarter of 2019. Voyage expense for the quarter increased $1.9 million, up from $0.7 million in the third quarter of '19, mostly due to the Cape Agamemnon being employed under voyage charter during the quarter.

Total vessel operating expenses during the third quarter amounted to $9.5 million versus $9.8 million during the third quarter of '19. The decrease in operating expenses was mainly due to expenses incurred during the third quarter 2019 in connection with the passing of a special survey of the container vessel, Agamemnon, partly offset by the increase in the size of our fleet following the acquisition of the 3 10,000 TEU container vessels earlier this year.

Total expense for the third quarter of 2020 also include vessel depreciation and amortization of $10.6 million compared to $7.3 million in the third quarter of 2019. The increase in depreciation and amortization is mainly attributable to the increase in the size of our fleet, the completion of the special surveys of 8 of our vessels and the installation of scrubber systems on 7 of our vessels. General and administrative expense for the third quarter amounted to $1.8 million as compared to $1.5 million in the third quarter of '19.

The partnership recorded net income from continuing operations of $7.8 million compared with net income from continuing operations of $3.4 million for the third quarter of '19.

On Slide 4, you can see the details of our operating surplus calculations to determine the distributions to our unitholders 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 $21 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $9.3 million to the capital reserve, in line with the previous quarter. After adjusted for the capital reserve, the adjusted operating surplus amounted to $11.7 million.

On Slide 5, you can see the details of our balance sheet. As of the end of the third quarter, the partner's capital amounted to $416.2 million, a decrease of $9.5 million compared to $406.7 million as of year-end 2019. The increase reflects net income for the 9 months ended September 30 and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the first 9 months of 2020 in the total amount of $15.2 million.

Total debt increased by $126.6 million to $389 million compared to $262.4 million as of the end of 2019. The increase is attributable to the term loan entered with Hamburg Commercial Bank and the sale and leaseback transaction entered with the CMB Financial Leasing, in connection with the acquisition of the 3 10,000 TEU containers in January 2020 and the refinancing of 3 9,000 TEU container vessels, which was completed in May 2020, partially offset by scheduled principal payments during the period.

Total cash as of the end of the quarter amounted to $47.7 million, including restricted cash of $14.9 million in total, representing the $7 million minimum liquidity requirement under financial arrangements and the $7.9 million pledged to ICBC Leasing. The release of the pledged amount is expected within the fourth quarter as the release condition has been fulfilled with the container vessel Akadimos entering into a new long-term charter.

Turning to Slide 6. We are delighted that our strategy of fixing the container vessel Akadimos for the shortest period possible once it came out first for charter renewal in May has worked out well, as the new employment with ONE for 20, 24 months is almost double the rate and offer at the time. In addition, we have secured employment for the Adonis with ZIM for 12 to 14 months of $33,500 gross per day. Both charters commenced in late September 2020.

These recent fixtures have further diversified their customer base with the addition of ZIM and ONE to our roster, and the staggered expirations over 2021 and 2022 help mitigate any restructuring risk going forward.

As a result of the aforementioned deployment developments, and turning to Slide 7, the partnership's charter coverage for the remainder of 2020 and for 2021 stands at 91% and 86%, respectively, while the remaining

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4.5 years. We now have 1 container vessel that we need to recharter early in the first quarter of 2021, namely the CMA CGM Magdalena, which will see its 5-year charter with CMA expire in February 2021. Currently, the 1- to 2-year market for this type of vessel is in the mid- to high 30s, but we will, of course, need to be closer to the expiration date in order to have better visibility of what is feasible on our vessel.

The Cape Agamemnon, our sole dry bulk capesize vessel, has continued to trade in the spot market until the end of October and is now scheduled to pass its special survey in early November. As previously discussed, we will continue to be opportunistic with regard to this vessel, both in terms of period versus spot employment as well as in terms of a potential divestment.

On Slide 8, we review the container market. Following the sharp decline in charter rates during the second quarter of 2020, the charter market experienced a strong rebound across all sizes during the third quarter. For example, the charter rate for 12 months period for standard 8,500 TEU container has increased from around $17,000 per day early in the previous quarter to excess $30,000 per day today. The improvement in the market is attributable to a rebound in consumer demand and the operator's stringent capacity management, which, coupled with lower bunker prices, have lifted line of profitability at or close to historical highs.

As a result, available tonnage in the market has been picked up by liner companies at increasing rates with the container idle fleet decreasing from around 11% in May to less than 4% by the end of the third quarter 2020, including vessels in dry docks and retrofitting scrubbers. Currently, the base case forecast for container trade for 2020 has been revised to minus 4.1% compared to minus 10.7% projected in May.

For 2021, overall demand growth is expected to rebound to 5.7% compared to a previous projection of 6.8% in the second quarter and 9.3% in the first quarter.

On the other hand, supply growth forecast for full year 2020 stands at 1.8%, a drastic decline from 3.1% expectation at the end of 2019 as slippage, including cancellations of newbuilding container vessels, stood at 29% in terms of TEU as of quarter end compared to none a year ago. Also importantly, the container order book is estimated to be at historical lows and now stands at 303 units of 7.9 million TEU, which represents 8% of the total worldwide container fleet.

The improved charter market and record-high freight rates bode well for the container market ahead. However, we believe that the right attitude here is to be cautiously optimistic as there remains a high degree of uncertainty that could swing the pendulum the other way. Already the second, and in some cases, like the U.S., the third wave of the pandemic has caught many nations by surprise. We're now seeing in many European countries measures as a result of the lockdowns we experienced in May and brought economies across the globe to a halt. The prolonged closure of economies in the western world will eventually adversely impact consumer demand, and this, in turn, might affect demand for containerized goods.

However, we expect CPLP to be a winner under any foreseeable scenario. As the global economy recovery stalls amid COVID-19 uncertainty, extended lockdowns and geopolitical tensions, the partnership is well fortified to deal with increased volatility going forward and potentially pick up distressed assets. If, on the other hand, we see a mostly steady recovery followed by increasing volumes in global seaborne trade, CPLP with its war chest will be able to grow its asset base with the aim of increasing its long-term distributable cash flow and create long-term value for its unitholders.

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

(Operator Instructions) We will now take our first question.

This is Ben at Stifel. I want to start a little bit with a few things from a capital allocation perspective. You've mentioned that the sponsor have been buying shares of the partnership since the acquisitions in the first of the year isn't really -- the partnership hasn't acquired anything else. But it is, especially with the lower distributions, liquidity is improving and so forth. But the units are trading at, I don't know, 5x EBITDA. So pretty cheap, which I can guess is why the sponsor is buying. How do you think about what is the highest and best use of your cash as it continues to build from here over the course of, let's say, the next 6 to 12 months?

Well, until now, as we discussed last quarter, we have been retaining liquidity to make sure that we have maximum flexibility, I guess, in lieu of the uncertainty surrounding COVID-19. The next few months ahead of us remain critical. And I think we will better understand how this second wave of the pandemic is going to affect the global economy and containerized trade. And we also have our final 9,000 TEU container vessel coming out for charter renewal that's in a couple of months.

As this next few critical months go by, I think we will have more visibility. And we can endeavor to deploy and increase liquidity to grow our asset base because, as we discussed, I think it's important for our business to replenish its fleet. We have assets with finite life. But I think also our Board will seek to balance these with returning capital to unitholders. And I do think that either increased distributions or unit buybacks would be a good way to do that depending on our equity valuation.

Just to be clear, I don't think any decision has been made. And as I said, I think there's still a lot of uncertainty around how things are going to fare in the next few months. But you cannot ignore the fact that we have had a very strong rebound in the container market. I don't think anybody was expecting that. And right now, when you look at the demand supply balance, it looks pretty good. But we do live in a very fluid environment. So we have -- I think we will hold off taking any major decisions with regard to capital allocation for at least a couple of months.

Okay. No, that's helpful and clear. As it relates to recontracting with the Magdalena and I assume other ships at the sponsor level, you mentioned in the conversation there that -- or in your prepared remarks that you would -- rates at 1- to 2-year contracts or for 1 to 2 years. Is that sort of the tenet that you're looking at? Or is there a market for something longer? I mean we're getting pretty close. Probably it's not that far away. So do you think there's potential for 5 years or something a little bit longer?

That's a great question. The whole reason why liner companies were able to get where they are today was because, unlike 10 years ago, they had a portfolio of chartered [endorsements] on flexible periods or shorter terms than they had in the past. So at the moment that COVID hit, they redelivered vessels as much as they could, streamlined their operations, and then they were disciplined enough to take advantage of the hike in consumer demand as well as, of course, the lower bunker prices had helped.

So I think -- at the same time, liners, obviously, they are enjoying a fantastic market in terms of profitability, and many have announced results that are record highs. But at the same time, they are also facing the same uncertainty. So I think they were, at the beginning, at least increasing unwilling to lock in longer charter rates. But given where rates have moved today, and I think we are probably seeing, in terms of charter rates, 10- to 12-year high, the owners, first of all, feel that these are good rates to lock in for longer period; and secondly, there is not enough tonnage out there for liners to get their hands on. So increasingly, and this is, let's say, over the last 2 to 4 weeks, we see owners pressing for longer periods, and increasingly, charter is willing to offer longer periods just to get their hands on tonnage.

Then you look at the situation for post-Panamax vessels, especially 9,000 TEU vessels with high reefer capacity like ours. And we don't expect anything to open up until our vessel is up in January or February. So we should have a fairly good leverage as to what we can achieve in terms of rate and duration if this market persists. You will probably have noticed that we have staggered charter expirations of our previous 2 9,000 TEU ships. So we have 1 vessel coming up now in October 2021, another 1 in 2022. So if you ask me, I think, potentially at the rates that we're seeing today and to the extent that we can achieve it, we will probably try to go for longer than 2 years. But there's always this display between duration and rates. So I don't think we won't necessarily -- to kill the rate just in order to get to the tenor. But if you cannot really a achieve good balance, we will probably go for a longer tenor.

Okay. That's helpful, as always. And then lastly, for me, and I'll turn it over. Especially -- and I appreciate that you're probably not doing anything from a capital allocation perspective in the next few months. But now that you're building cash and the -- it seems like there is perhaps the liners beginning again to look at ordering new vessels, perhaps. And you now, without paying out everything that's distributed

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and maybe some of these new building contracts have done letting the sponsor do it and buy past the delivery. Is that a door that you could envision going down? Or do you think that you'll continue to do it as you have traditionally and wait until the vessels are actually operating and generating cash flow before doing something?

I definitely think we have more flexibility than before. So it was much more difficult for CPLP, for example, to look at new builds in the past and commit equity given the much higher distribution. I don't think we have spent, though, a lot of time thinking about new buildings as of late. The focus has been mostly on secondhand ships. And especially the post-Panamax segment, the market moved so fast that there wasn't enough of -- enough vessels out there or, let's say, enough sellers that were willing to part vessels at a decent price because charter rates moved. There is -- and today, there's very little that you can get your hands on in terms of post-Panamaxes.

In terms of smaller ships, so Panamaxes and below, there is much more activity, especially over the last month, 45 days that we have seen a lot of transactions taking place at substantially increased prices compared to, let's say, 3, 4 months ago, in certain cases, more than 30% increases compared to, let's say, where you could get your -- those ships in June.

Our sponsor has picked up -- or rather, an affiliate of our sponsor has picked up 3 vessels in that segment. It's a segment that CPLP would typically probably avoid because it's more volatile. There is more residual risk in the Panamax segment. But if there was a long-term charter like the one that our sponsor is trying to put together for those ships, then that will be also something that we can look at. So if you were able to get a good equity return and mitigate substantially the residual risk, we might look also at smaller sizes.

But I think in terms of new builds, it's something that we haven't thought about much.

We will now take our next question.

Liam Burke. Let's, for a moment, think about tighter capacity and how it runs past this period of uncertainty. And obviously, there's a lag between new builds. With tighter capacity, secondhand market stays pretty rich. Are you content to continue to just allocate capital towards strengthening the balance sheet and buying back shares or potentially increasing the payout?

I think that even in a market like the one we are seeing today, there are opportunities. If you could -- especially, as liners are there to offer longer-term charters, then even if you pay a slightly higher price on an asset but you have the visibility and you know your return for the next 3, 5 years, then there are transactions that are attractive today. Still, many of those ships' vessel prices are still lagging below historical averages. So it's not that we are necessarily at the peak of the market today.

But we are going to be selective. Customer visibility, accretion, all that is going to be very important. And I don't think you want to be allocating all your capital today given the prospects as well as the uncertainty. And as I said, over the next few months, depending on the kind of visibility that we can attain, we can also think about other ways of deploying our liquidity and returning capital to unitholders.

Great. And then on the sponsor side, the drop-down pipeline, is there anything potentially that is there or just price is just too high?

Well, I just mentioned the 3 Panamax vessels, our 3 2008 Panamax vessels. The sponsor has -- is in the process of actually of acquiring those vessels today. The acquisition has not been completed. They need to install ballast water treatment systems, pass special surveys. And then if a longer charter is put in place like -- and right now, this is under -- very much under discussion, then that's something that we can look at depending on the accretiveness of the deal. And as I said earlier on, as to how we treat the residual because the Panamax segment has been very volatile over the last few years, and you want to make sure that you have adequate visibility.

We will now take our next question.

Jerry, it's Randy Giveans at Jefferies. So you mentioned the Magdalena is on charter until February. When is the earliest you would be able to lock in terms for this new charter? Is that something we expect before year-end?

Yes. Probably -- if I had to guess, it will be some time before year-end. Again, as the market is changing, so is the appetite of liners. When the market is bad, you have to wait until the very last minute, and the liners are not willing to commit forward positions. Now obviously, given the dearth of available tonnage, there is -- it's much easier to fix forward positions even with dry docks and much wider laycans. So I think if I had to guess and given the strength of the market, we should know before year-end.

Got it. Okay. And then final question, for the Cape Agamemnon. Following the dry docking, do you expect to put that on time charter? Or do the opposite and kind of sell that vessel? How would you handicap it?

I think we are going to be very, very opportunistic. So if market picks up and we see a very good period and offer, it's not that you can fix those vessels for much longer than it will be, I guess, typically 12 to 24 months. We might look at it. Asset prices on the dry bulk side have been kind of subdued even when capesize spot rates were soaring above 30,000. We didn't see much of a movement. So we thought that it's not worth looking at divesting of the asset. So we will continue to play it by ear.

Again, as for example, we decided to continue trading the vessel on the spot market because of the better rates instead of putting the vessel in the dry dock, the same way, I think we will decide depending on market developments. I know that doesn't help much, but given the volatility of the market, I think we should retain flexibility.

There are no further questions. I would now like to hand the conference back.

Great. Thank you, Heidi. Thank you all for joining us today.

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