Capital Clean Energy Carriers Corp (CCEC) 2021 Q2 法說會逐字稿

Thank you for standing by and welcome to the Capital Product Partners Second Quarter 2021 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.

The statements in today's conference call that are not historical facts, including our expectation regarding cash generation, equity returns 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 expectation 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 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 predictions or statements about the performance of our common units.

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

Thank you, Valerie, 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.

The Partnership's net income for the second quarter of 2021 was $35.4 million or $10 million excluding a gain of $25.4 million from the sale of the CMA CGM Magdalena in May 2021 compared with net income of $8.7 million for the second quarter of 2020.

Our Board of Directors has declared a cash distribution of $0.10 per common unit for the second quarter of 2021. The second quarter cash distribution will be paid on August 10 to common unitholders of record on August 3.

The Partnership's operating surplus for the second quarter was $23.5 million or $15.2 million after the quarterly allocation to the capital reserve. In addition and as stated, we concluded on May 17 the sale of the CMA CGM Magdalena. Since the launching of the unit repurchase plan on February 19 and as of June 30, we repurchased approximately 331,200 common units at an average cost of $11.65 per unit. Finally, the Partnership's charter coverage for 2021 and for 2022 stands at 92% and 85%, respectively, while the remaining charter duration corresponds to 3.9 years.

Turning to Slide 3. Revenues for the quarter were $39.8 million compared to $36.6 million during the second quarter of 2020. The increase in revenue was primarily attributable to the increase in the size of our fleet following the acquisition of 3 Panamax containers in February 2021 and a decrease in the net amortization of time charters acquired together with certain of our vessels. The increase was partly set off by the decrease in the average daily charter rate and by the vessels in our fleet and the sale of the CMA CGM Magdalena in May 2021.

Total expense for the quarter were $25.6 million compared to $22.7 million in the second quarter of 2020. Voyage expense for the quarter increased to $2.2 million compared to $1.3 million in the second quarter of 2020 as currently, our sole dry bulk vessel, the Cape Agamemnon, trades in the dry bulk spot market.

Total vessel operating expenses during the second quarter of 2021 amounted to $11.7 million compared to $9 million during the second quarter of 2020. The increase in vessel operating expenses was mainly due to the increase in the size of our fleet following the acquisition of the 3 vessels in February 2021.

Total expenses for the second quarter of 2021 also included vessel depreciation and amortization of $10.1 million compared to $10.5 million in the second quarter of last year. The decrease in depreciation and amortization during the second quarter of 2021 was mainly attributable to the classification of the vessels CMA CGM Magdalena and Adonis as vessels held for sale, partly offset by the increase reflecting the acquisition of the 3 Panamax container vessels in February 2021.

Upon the delivery of the CMA CGM Magdalena to its new owners in May, we recognized a gain from sale of $25.4 million, representing the difference of the net proceeds we received from the sale and the vessel's net book value upon delivery.

General and administrative expenses for the second quarter of 2021 amounted to $1.7 million as compared to $1.8 million in the second quarter of last year. Interest expense and finance costs decreased by $1 million due to the decrease in the LIBOR-weighted average interest rate compared to the second quarter of 2020 and the decrease in the average long-term debt outstanding during the period. The Partnership recorded net income of $35.4 million for the second quarter compared with net income of $8.7 million for the second quarter of 2020.

On Slide 4, you can see 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, which is defined fully in our press release.

We have generated approximately $23.5 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $8.3 million to the capital reserve, a decrease of $1.8 million compared to the previous quarter, resulting from the decrease in our scheduled quarterly debt principal payments due to the sale of the CMA CGM Magdalena earlier this year. After adjusting for the capital reserve, the adjusted operating surplus amounted to $15.2 million.

On Slide 5, you can see the details of our balance sheet. As of the end of the second quarter, the partners' capital amounted to $461.7 million, an increase of $39.6 million compared to $422.1 million at year-end 2020. The increase reflects net income for the 6 months ended June 30 and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in the total amount of $3.8 million and the repurchase of Partnership's common units for an aggregate amount of $3.9 million.

Total debt decreased by $32.1 million to $347.6 million compared to $379.7 million as of year-end 2020. The decrease attributable to the sale of the Magdalena under respective debt repayment and under respective financing arrangement in the total amount of $49.6 million and scheduled principal payments during the period, partly offset by the $30 million sale and leaseback transaction and the sellers' credit agreement in the amount of $6 million in connection with the acquisition of the 3 Panamax container vessels in February 2021. Total cash as of the end of the quarter amounted to $112.2 million, including restricted cash of $8 million.

Turning to Slide 6. The Partnership has concluded the sale of CMA CGM Magdalena, and the vessel was delivered to its new owners on May 17. The transaction generated gross proceeds of approximately $49.4 million after repaying outstanding debt. Although the vessel was recognized in the Partnership's books at an acquisition cost of $88.5 million, the cash consideration paid for the acquisition of the vessel in 2016 was $81.5 million, where the difference represented the value allocated at the time to the specific vessel for resetting the Partnership's IDRs, incentive distribution rights, that is adjusted by the value of the above-market acquired charter.

We now expect the sale of the sister ship Adonis to be concluded in November 2021 after the vessel completes its current time charter employment or potentially earlier if we come to an agreement with current charters and the buyer for the innovation of the charter party. We expect the sale to result in gross proceeds of approximately $49.4 million after repaying outstanding debt.

Moving to Slide 7. Following the sale of the Magdalena, the Partnership's charter coverage for 2021 and 2022 corresponds to 92% and 85%, respectively, while the remaining charter duration amounts to 3.9 years. Looking ahead, all our container vessels are under long-term charters. The earliest charter expiry is our remaining 9,000 TEU vessel, Akadimos, in March 2022. The charters have a 6-month option until September 2022, declarable in early February 2022, in which case, the day rate will increase from $31,500 to $35,000 per day.

The Cape Agamemnon continues to trade in the spot market having earned approximately $26,000 per day for the second quarter of 2021. As previously discussed, we believe that the opportunistic strategy we have followed for this vessel has paid off as we have seen a material improvement both in terms of the underlying charter market as well as the value of the vessel.

The Cape Agamemnon is now expected to open up again in mid-August for new business with current market being estimated in the mid- to low $30,000 for an Australia to China round. We will continue to monitor the dry bulk market closely as the recent increase in asset prices makes the opportunistic divestment of this asset more attractive.

On Slide 8, we review the container market. The second quarter of 2021 saw further increases to charter rates and longer periods being fixed for all sizes. Currently, charter rates in all segments are at an all-time high, and the standard 8,500 TEU container has gone from fixing around $17,000 in the second quarter of 2020 to over $40,000 for a 5-year period in the first quarter of 2021 to presently, low $60,000, that is, of course, if there are any prompt ships available.

The driving force for the very strong improvement in the container market is the increase in container demand due to unprecedented fiscal stimulus measures, pent-up demand as well as change in consumer spending patterns. Overall demand growth for the full year 2021 is expected at 6.6%.

At the same time, the supply side remains very much disrupted due to shortage of equipment, port congestion globally and general COVID-19-related problems all around the world. Supply growth for 2021 is estimated at 4.5%.

As a result of the extremely high rates, the container order book has increased to 20% of the total fleet capacity. Importantly, if all options and letters of intent out there are exercised, the actual order book could be well higher. This needs to be compared against an order book of just short of 11% at the beginning of the fourth quarter of 2020, 2023 and beyond since especially having deliveries with presently 3.5 million TEU scheduled for delivery.

As of quarter end, slippage in TEU terms of newbuilding container vessels amounted 22%, including cancellations, whereas demolition year-to-date stands at only 13 units of 10,000 TEU capacity versus 79 units of 190,000 TEU capacity last year.

Due to the increased vessel ordering, newbuilding prices have increased rapidly with most yards now being fully booked beyond 2023, especially for larger container vessels. The fall of the U.S. dollar, the increase in steel prices and inflationary pressures on equipment costs have also resulted in upwards pressure on prices.

While we believe that the container charter market has legs in the short to medium term on the back of strong momentum and the supply/demand dynamics, we remain cautious on the long-term prospects of the container market. The longevity of the container freight and charter bull market is closely intertwined with the developments of COVID-19 front, including the rollout pace of vaccines, virus mutations and their impact on quarantine measures globally and other demand and supply drivers, such as a change in consumer behavior and supply chain disruptions.

An easing of the logistics chain disruption going forward, combined with a more balanced spending pattern between manufactured products and services, could have an adverse effect on demand for container vessels that could lead to a weaker market. This could be further exacerbated if it coincides with increased vessel deliveries on the back of the now inflated order book.

Turning to Slide 9. As we have discussed in the previous earnings call, the Partnership has access to a number of assets with employment in place that could be potential drop-down candidates, including 6 XDF LNG carriers and 3 eco container vessels. Out of the 6 LNG carriers, 3 are in the water, another 3 will be delivered by the end of the third quarter this year. All of them have medium to long charters in place to investment-grade counterparties.

In our view, an investment in LNG carriers would allow us to deploy equity in vessels that are currently in the water with an immediate return and would come at the moment in time that the LNG charter market and its fundamentals are at an inflection point.

Apart from the LNGCs, the Partnership will be considering the acquisition of 3 latest eco-type 13,000 TEU container vessels currently under construction at Hyundai shipyard in South Korea and due for delivery from November 2022 to May 2023. As previously communicated, the 3 vessels have secured employment with Hapag-Lloyd for a maximum period of 14 years, including options.

Moving to Slide 10. I would like to conclude by reiterating the strategy of the Partnership going forward. We believe that by releasing the equity locked into the 2 vessels we sold and the increased liquidity from internally generated cash flows, we'll have a unique opportunity to achieve a number of objectives for the Partnership at a larger scale while we continue to return capital to our unitholders.

Firstly, continue to grow the Partnership's fleet with the aim of concluding, first and foremost, accretive transactions to our earnings and distributable cash flow. At the same time, we will seek to reduce the Partnership's fleet average age as well as its environmental footprint. With regard to the latter, we expect ESG considerations, and especially the environmental footprint of the industry, to come under increased scrutiny in the future.

The inclusion of vessels emissions in the EU carbon trading scheme or other forms of taxing emissions, in addition to the increasingly heavier IMO regulatory framework when it comes to emissions, are expected to increasingly penalize older and less efficient vessels. Hence, we aim to focus going forward on modern vessels, take into account their emissions profile as well as their contribution towards reducing the Partnership's footprint.

For example, the LNG carriers we discussed earlier, which use natural gas for their propulsion, reduce CO2 emissions by almost 30% compared to fuel oil propulsion and deliver 100% reduction in sulfur oxides and 85% in nitrous oxide emissions, while particulate matter emissions fall by 95% to 100%.

We have also estimated that the newbuilding 13,000 TEU container vessels, assuming the same trading speed with the 2 9,000 TEU vessels we sold, are expected to save 30,000 tons per year of CO2 due to their innovative design, fuel-efficient engines and the series of energy-saving devices and improvement. Again, assuming a price of $50 per ton for CO2 emissions, that would imply a monetary benefit of $1.5 million per vessel per year or $4,000 per day.

Finally, and with the above in mind, to the extent we can take advantage of increased asset prices, we will continue to look for divestment opportunities for older tonnage.

We are fortunate to have access in this endeavor, to a substantial asset pipeline with medium- to long-term charters in place as described earlier, amounting to approximately $1.5 billion in value with an estimated annual EBITDA of approximately $155 million. Our preliminary estimates show that the acquisition of any combination of these assets would be highly accretive to our earnings, will enhance the sustainability of our common unit distribution and create the basis for increasing the distribution in the future while materially improving the average age of our fleet as well as the environmental footprint of the Partnership.

In addition, the medium- to long-term charters of these vessels will ensure long-term cash flow visibility beyond 2024 and 2025 when most of our existing charters expire and certain of our vessels approach their 20th anniversary. As we think about these potential acquisitions, it is important to note that we are going to prioritize internally generated cash flows and taking over the existing debt in place as well as explore avenues of raising additional capital.

We are making progress on the above considerations as we are in advanced discussions with the Partnership's Board, and I hope that we will be able shortly to communicate to the market our plans in this regard.

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

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

This is Randy Giveans from Jefferies. Can you hear me?

Randy, yes, I can hear you now.

I guess a couple of questions, just looking at your fleet, right? One is the Cape Agamemnon, kind of plans for that. Obviously, the asset values keep rising on capesizes. And then secondly, any updated timing or thoughts around drop-downs, right? Are we looking LNG or kind of staying in the containership family?

Thank you, Randy. So with regard to the Cape, as I said in my prepared remarks, I think waiting this out has paid off. We have seen definitely an increased pickup in asset prices for Capes. I think the Cape Agamemnon, you can safely say, has seen over the last 12 months a pickup in value of more than $10 million.

Looking at the forward curve and dry bulk fundamentals, I think there's still strength in that. So we want to see how the next month or so fares. If we see additional strength in the charter market, hopefully that will translate into an even higher price. And we would be definitely very much alert if we are to take advantage of that market.

So we are still being opportunistic. So far, it has paid off, but it is very much to the forefront of our mind to, at some point, divest of this asset. It is -- and the reasons behind that is that it's a dry bulk vessel, if you want. It's a bit outside what we have been doing so far. But importantly, it's more difficult to secure long-term charters for a vessel like that. Of course, this might change. We have seen things that we have never seen before in the container market. So never say never. So that's one thing.

And with regard to drop-downs, we are definitely working on that. We are sitting in a -- on a very comfortable, if you want to call it that, liquidity position. And we're going to take advantage of that, and we are working towards having a plan for acquisitions going forward.

Just to give you an idea, pro forma for the sale of the other vessel, as of June 30, our liquidity will increase to approximately $160 million. That is, of course, before taking into account any cash left on our balance sheet after paying out distributions going forward.

If you were to use recommended reserves, and there are operating surplus as a proxy for additional cash for the next quarter, that was $13.3 million. If you adjust this for the sale of the Magdalena, you can, I think, comfortably come up with a number close to $170 million as of -- of liquidity as of quarter end for the third quarter.

Just as a side note, our market cap today is $220 million. So effectively, you're getting the rest of our fleet plus the associated cash flows for less than $50 million. Anyway, setting this aside, what this means is that we will have award, let's say, of close to $150 million. I think we would focus first on the LNG carriers simply because these vessels are in the water and they can generate returns from day 1. And this is something that we are looking at very closely.

In addition, these are brand-new vessels so they will tick the box. That is very important to us to bring down the average age of our fleet. They are very environmental-friendly. And to make this a little more tangible, not just use the generic word -- terminology, it will actually bring down the carbon intensity of the fleet. And this is, as I said, very important as well as the other emissions that we have been looking at in terms of the Partnership.

And estimating an EBITDA of $18 million to $20 million per vessel, it could be quite significant. I think by innovating the debt, we potentially could complete 2 or 3 acquisitions just with internal -- with our own liquidity, maybe plus some incremental capital.

And again, just to give you a bit sense of the relative magnitude, I said EBITDA of $18 million to $20 million per vessel when our first half 2021 EBITDA, excluding the gain from sale, amounted to $53 million. So that's quite significant.

Now if we can source external capital going forward, including preferred equity or debt instruments as well as other primarily nondilutive securities, we will endeavor to complete a larger acquisition. But I think with our liquidity position, we can deliver significant growth in the short term. And hopefully, we will have more news in the coming weeks, if not months.

That's fair. And then, yes, I guess, in terms of other uses of cash, you've done a little bit on share -- or the unit buybacks. Can you discuss that kind of timing and scale? How you came up with that number? Is it just daily trading liquidity kind of constraint? And then in terms of the distribution, clearly, you have a lot of room to pay more as an MLP, but you're deciding not to, to I guess prepare for further drop-downs. So can you talk on those 2 items?

Sure. As far as the unit buybacks, we have set a program of $30 million. We have set a program within the allowed parameters to buy back units. And since inception of the program, I think that was February 19, we have acquired 353,200 common units at an average cost of $11.7 per unit. So we have spent approximately $4.1 million. I think given the size of our buyback program and the liquidity of the stock and if you see this combined with our common unit distribution, we are well on track.

As far as the unit buyback program is concerned, no dividend increases, for example, as we have discussed at this juncture, I think it's a better way to return capital to our unitholders. That is, of course, in addition to our stated common unit distribution policy. We are getting 2 birds with 1 stone. That is, we are returning capital to unitholders, but at the same time, we are taking advantage of the dislocation between our NAV and our equity valuation. So I think it's a good way to do that.

Sorry, and your second question, Randy?

Just about the distribution, I guess, keeping that at current levels. I guess I understand and I agree that you should prioritize unit repurchases over distribution increases, especially at these discounted unit price levels.

Yes. Look, I think we will try to balance returning capital, be it through distributions or doing the buybacks with growth. In the end, you have also to look at the longer term. We have to make sure that we replenish our asset base. Many of our vessels come off charter in 2024, 2025. Some of them will be reaching also their fourth special survey anniversary. Who knows how the market is going to be by then. And in the end, also value dislocations, value gaps, like the one we are experiencing, tend to close more efficiently by...

(technical difficulty)

Please continue.

Sorry, there seems to be some issue. I don't know. Randy, where did you lose me?

Something about you're going to buy back 20 million of units this month.

No. I did not say that, sorry. So I was -- so -- but it might have been wishful thinking. So I will say that...

You're going to balance share -- unit buybacks with distributions and kind of see the cash position drop-down opportunities. I think that's what you were saying.

Yes. I was really saying that you have to do both because in the end, value gaps like the one that we are experiencing today and from past experience also with other companies, they don't just close with unit buybacks.

I think larger companies, larger market caps, liquidity in the trading of the shares typically is also a good way to close value gap. So I think we have to balance both, that is returning capital to unitholders but also growing the fleet.

We will now take our next question.

Jerry, this is Ben Nolan. Hopefully, you can hear me okay. I'm on my cell here, but...

Yes.

Good. So I wanted to dig in a little bit more -- first of all, you're pretty thorough so you got me. I wanted to dig in a little bit more on -- it certainly sound -- you made it abundantly clear that LNG is the priority more so than the containerships. And I think in your prepared remarks, you said that it was your view that -- or Capital's view that LNG has been at an inflection point. I was hoping that maybe you could just dig in a little bit more into that sort of fundamental investment thesis. What gives you confidence that LNG is at, in fact, an inflection point and that is the right move.

Okay. Sure. Can you hear me?

Yes, yes.

Good. Good. So firstly, with regard to the containers, I think these are really very suitable assets for us. The only reason that I think we will look at the LNG first is that they are in the water and they can deliver returns. But it is something -- the containers with long-term contracts to Hapag, I think that could be very nice assets for CPLP as well, but that's something that we can look at subsequently.

Now with regard to LNG. So I think that's also where our relationship with Capital Maritime is quite useful because we get the unique advantage point, if you want, of all main commercial shipping markets. That is containers, tankers, bulkers and LNG carriers.

And stating the obvious, not all markets move together and different opportunities arise in different markets. Our business model is that of assets that have medium- to long-term charters in place. So we always pursue cash flow visibility and tangible accretion in our transactions.

Now when you look at the LNG market, it does look as if it's at a turning point. And we have seen the charter market there improve rapidly over the last few months and the LNG industry enjoying very strong prospects. That is -- I mean you can look at the long-term fundamentals and we can -- that's maybe a whole different call, but you can do -- look at LNG production, which I know that if you look at very closely and is expected more or less to double over the next 15, 20 years. There is demand in the Far East and Southeast Asia, which is growing quite rapidly as LNG replaces coal in the energy mix, which leads to higher ton-mile demand.

And LNG remains probably a very real and viable alternative to reduce carbon emissions both onshore and offshore. You have seen how LNG has been in more demand in Europe as carbon taxes -- carbon credits have been increasing in price. And I do think as the regulatory process becomes stronger, we expect LNG demand to increase in the short to medium term.

And at the same time, when you look at the supply of ships, the order book is almost everything you've spoken for, for specific charters or projects. There is increasingly very little space in shipyards because they are -- because other segments are competing, predominantly containers, at a large extent, also tankers.

And newbuilding prices are coming up very quickly. We have seen an uplift in asset values across but also for LNG carriers. And as a function of that -- and of course, underlying demand, charter market is also increasing.

And finally, as far as we are concerned, there was, if you want, an issue, an investment deterrent in the past when it came to LNG, which was technology propulsion and cargo containment technology. I think that has now reached a plateau. There's no -- there are no visible technological changes in the near future. There are, of course, improvements that will happen all the time. But that gives us confidence about the useful life of our assets.

And finally, as I said earlier on, because we do think that emissions is going to be a very important matter going forward not just because of the wider ESG discussion but also because it can be -- it will be -- you will be able to translate that into a financial gain or loss if, for example, you have much older, inefficient ships, LNGCs can meaningfully improve the environmental footprint of CPLP. And it's a real technology. It's a viable technology. It's a tested technology that we all know. And there are many other competing technologies or alternatives on paper, but all of them are still in the remote future when it comes to seeing long-haul commercial vessels propulsion.

Okay. Well, always appreciate that, Jerry. And then just to remind, I think we had talked about this last time or at some point in the past. How are you thinking about the multiple? Is it 9, 9.5, something like that, just sort of where you feel is appropriate capital outlay or cost of capital relative to sort of your other alternatives?

That, I think, is something that will be determined by the discussion between the Board and Capital Maritime, the Comms Committee and the Capital Maritime. Of course, LNG carriers tend to have a longer useful life than your average container dry bulk vessel. So you tend to see slightly higher multiples. But I think I will be able to have more color on that after there has been an agreement on the transaction.

Okay. And then lastly, you outlined these assets and I think, if memory serves, that only in the past you acquired assets from the sponsor here. But it's a big world, a lot of ships out there. Do you think there's any possibility at all looking for assets outside of the sponsor's portfolio?

For sure. And we are very much alert to opportunities outside Capital Maritime. But it's not necessarily easy to find what we're looking for, that is assets with long-term charters, when -- and especially a seller that is willing to wait for our process to complete. So there are advantages to having a pipeline of assets from Capital Maritime.

In addition, I mean we have been looking at, for example, secondhand acquisitions in the container market. But there, we find that it is difficult to come to terms with residual risk. I think in a way, residual risk is being undervalued at this point because we do not know the exact impact of the new regulatory regime.

And I think that, especially for older vessels, we might have a much higher depreciation going forward. So it's not an easy market. The dry bulk market has seen also prices increase quite rapidly. So it is -- and it's a very fast-moving market.

Yes, I agree. And it's good to hear you say that. I think you and I share similar views there that the market maybe is not appropriately looking at residual value risk fully and letting sort of near-term opportunities instead of long-term risk, but glad to hear that's where you're seeing things as well. So all right, I appreciate it.

Of course.

This was our last question. I would now like to hand the floor back to Jerry Kalogiratos for his closing remarks. Please go ahead, sir.

Thank you all for joining us today. Wishing you a great weekend.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating, and you may now disconnect.