Capital Clean Energy Carriers Corp (CCEC) 2022 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Capital Product Partners' Second Quarter 2022 Financial Results Conference Call.

We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the company. (Operator Instructions). I must advise you this conference is being recorded today.

The statements in today's conference call that are not historical facts, including our expectations 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 allocations 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 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 obligations 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 like to hand over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

Thank you, and thank you all for joining us today. As a reminder, we'll be referring to the supporting slides available on our website as we go through today's presentation.

So since the end of the first quarter of 2022, we have announced a number of significant transactions for the partnership, including the divestment of our two oldest container vessels for $130 million and the agreement to acquire 4 newbuilding vessels with long-term charters attached for $597.5 million. We have also owned last week, successfully placed 100 million-euro bond maturing in 7 years on the Athens Exchange.

Turning to the partnership's financial performance. Net income for the second quarter of 2022 was $20.4 million compared with net income of $35.4 million for the second quarter of last year or $10 million if we exclude the gain from the sale of a vessel we sold at the time. So our net income more than doubled year-on-year when comparing the operational performance of the partnership.

Our Board of Directors has declared a cash distribution of $0.15 per common unit for the second quarter of 2022. The second quarter cash distribution will be paid on August 12 to common unitholders of record on August 8. The partnership's operating surplus for the second quarter was $43.9 million or $12.7 million after the quarterly allocation to the capital reserve. We continued acquiring units under our unit buyback program. And during the second quarter of 2022, we repurchased approximately 185,000 common units.

As of yesterday and since inception of our unit buyback program, we have acquired a total of 592,190 units at an average unit price of $13.11. Finally, the Partnership's charter coverage for 2022 and for 2023 stands at 95% and 92%, respectively, with the remaining charter duration corresponding to 6.2 years take into account the 4 newbuilding vessels we have agreed to acquire and of course, excluding the 2 containers we recently sold.

Turning to Slide 3. Revenues for the quarter were $74 million compared to $39.8 million during the second quarter of last year. The increase was primarily attributable to the net increase in the average number of vessels in our fleet by 27%. Following the acquisition of 6 LNG carriers during the second half of 2021, contributing $38.1 million of total revenue, partly set off by the sale of the two 9,000 TEU container vessels in 2021. Total expenses for the quarter were $40.9 million compared to $25.6 million in the second quarter of 2021.

Voyage expenses increased to $4.5 million compared to $2.2 million in the second quarter of last year, primarily due to the increase in the average size of our fleet and the increase in the voyage expenses incurred by one of the vessels in our fleet employed under voyage charters compared to their respective period of last year.

Total vessel operating expenses during the quarter amounted to $16.4 million compared to $11.7 million during the second quarter of 2021. The increase in vessel operating expenses was mainly due to the net decrease in the average size of our fleet versus the second quarter of last year. Total expenses for the second quarter of 2022 also included vessel depreciation and amortization of $17.7 million compared to $10.1 million in the second quarter of 2021. The increase in depreciation and amortization was again mainly attributable to the net increase in the average size of our fleet.

General and Administrative expenses for the quarter increased to $2.3 million compared to $1.7 million in the second quarter of last year, mainly due to the increase in the amortization associated with our equity incentive plan. Interest expense and finance costs increased to $11.7 million from $4.2 million in the second quarter of last year.

The increase in interest expense and finance costs is attributable to the increase in the Partnership's total outstanding debt following the acquisition of the 6 LNG carriers in the second half of 2021 and increase in the LIBOR-weighted average interest rate compared to the second quarter of last year.

The Partnership recorded net income of $20.4 million for the quarter compared with net income of $35.4 million for the second quarter of 2021 or net income of $10 million for the second quarter of 2021 if we exclude a $25.4 million gain from sale of a vessel recorded in that period. If we were to exclude this gain, the net income increase of the second quarter of 2022 to the second quarter of 2021 corresponds to 104%.

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 $43.9 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $31.1 million to the capital reserve, in line with the previous quarter. After deducting the capital reserve, the adjusted operating surplus amounted to $12.7 million.

On Slide 5, you can see the details of our balance sheet. As of the end of the second quarter, the Partner's capital amounted to $563.2 million, an increase of $37.7 million compared to $525.5 million as of the end of 2021.

The increase reflects net income for the 6 months and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during that period in the total amount of $6.1 million and the repurchase of the Partnership's common units for an aggregate amount of $2.9 million. Total debt decreased by $59.1 million to $1.26 billion compared to $1.32 billion as of year-end 2021. The decrease is attributable to the scheduled principal payments during the period of $45 million and a decrease by $14.1 million of the euro-denominated balance of the bonds translated into U.S. dollars as of quarter end.

Total cash as of the end of the quarter amounted to $34.5 million, including receivable cash of $10.6 million, which represents a minimum liquidity requirement under our financing arrangements.

Over the next 2 slides, you can find an overview of the recent transactions completed by the partnership during the quarter. On Slide 6, we discuss the sale of the vessels, Archmidis and Agamemnon, which were built in 2006 and 2007 and were the oldest vessels in our fleet with about 1.5 years of remaining charter at the rate of $23,000 per day. We agreed to sell the vessels to a third party for $130 million and expect to recognize an accounting gain from sale of approximately $49.5 million. Gross cash proceeds after debt repayment and before sale expenses are expected at $102 million.

Both vessels were delivered to their new owner in July 2022. Moving to Slide 7. The partnership exercised its right of first offer to acquire 174,000 cubics late generation X-DF LNG carrier and 3 13,000 TEU hybrid scrubber-fitted Tier 3 and Phase 3 dual fuel ready eco-container sister vessels from Capital Maritime for a total consideration of $597.5 million. The partnership paid in June 2022 a refundable deposit of $30 million and the remaining consideration will be paid upon the delivery of its vessel, including $7.5 million in CPLP common units, which will be issued upon the delivery of the first vessel expected in October 2022.

The LNG carrier to be named Asterix I is under construction by Hyundai Heavy Industries in South Korea and delivery from the yard down to the partnership is expected in January 2023. The Asterix I is fixed on the long-term time charter with Hartree for the same period of 5 years, which together with the optional period expires in January 2032.

The 3 13,000 TEU eco-container sister vessels are under construction at Hyundai Samho Industry, South Korea and are scheduled for delivery to the partnership in October 2022, and then January and May 2023 upon their respective deliveries from the shipyard. The vessels have secured long-term time charters with Hapag-Lloyd for a same period of 10 years, which together with the optional periods expire between October 2038 and May 2039. All 4 vessels joining our fleet are exceptional vessels, adopting the latest in terms of energy efficiency design and equipment and are in compliance with current and future regulatory requirements. For example, the 3 13,000 TEU containers are both hybrid scrubber and A&P fitted, and their design is expected to offer substantial energy savings to other charters, but at the same time, they are the largest refer ships ever built with 40% more nominal intake compared to older vessels of similar design.

Moving to Slide 8. The Partnership's forward contracted revenue now ranges from a minimum of $1.6 billion to a maximum of $2.6 billion if all charters options are exercised. Given the current market environment, especially on the LNG side and the scarcity of available vessels until 2027, we very much expect our charters to exercise all options. In addition, our recently announced 4-vessel acquisition is expected to contribute approximately a minimum of $481 million to our revenue backlog, which is already reflected in the numbers you see on this slide.

Now turning to Slide 9. The partnership's remaining charter duration amounts to approximately 6.2 years, while charter coverage remains high throughout 2025. Thus providing our unitholders with increased cash flow visibility. Please note that the charters of Adamastos one of our LNG carriers have exercised an option to extend the charter to 7 years against a 3.5% decrease of the tailing charter rate and as a result, the Adamastos charter is now expected to expire at the earliest in September 2028.

Now turning to Slide 10. In July, the partnership through its wholly owned subsidiary, CPLP Shipping Holdings plc, issued a second 7-year senior unsecured bond on the Athens Exchange for EUR 100 million. The bonds, which are guaranteed by the partnership have semiannual coupon of 4.4% and will mature in July 2029. The proceeds are intended for vessel acquisitions, debt repayment and working capital. It is worth noting the success of our second shipping bond on the Athens Exchange, which came less than 1 year after the first and priced at the low end of the yield rates as it was supported by exceptionally high demand and was 3.6x oversubscribed, with total bids of approximately [EUR 360 million].

On Slide 11, you can see the key terms of the bond. The financial covenants are in line with the covenants under our current financing arrangements and the previous bond. As a net debt-to-market value adjusted total assets ratio should be less than 75%, while the adjusted EBITDA to net interest expense ratio should be no less than 2x.

Now turning to Slide 12, you can see our debt maturities over the next few years. As you can see, we do not have any significant maturities until 2026 when our first 150 million eurobond becomes due. In the meantime, we intend to use the additional liquidity generated by the sale of the 2 vessels and the process of the second bond to repay the outstanding debt maturing in 2023 and 2025 under the 2 HCOB facilities. The 2 facilities have currently approximately $95.7 million debt outstanding after adjusting for the sale of the 2 vessels and a blended margin of 3.1% plus LIBOR, which today amounts approximately 5.9% all-in cost. In this way, we will be left with 7 vessels, mortgage-free and having converted part of our debt from floating to fixed.

According to the latest valuations, we received at the end of the second quarter of 2022, the charter free value of these 7 vessels amounts to approximately $710 million. Hence, these mortgage-free vessels can be an additional liquidity lever that we will have at our disposal down the line, providing us with substantial financial flexibility.

Turning to Slide 13 and the LNG market update. The spot market saw a weaker start to the quarter, but rates soon strengthened as energy security concerns, high gas prices and charters increased appetite for tonnage prevailed counter to usual spot market seasonality. The Freeport liquefaction terminal shut down, which is expected to last until the fourth quarter of this year, has weighed somewhat on freight rates as of late, denting that upward trend. The period market, on the other hand, continued at the same time, its bullish run on the back of the geopolitical developments and the commodity market with a 2-stroke vessel for 1-year charter currently valued at $165,000 per day. This all-time high for term rates is supported by the extraordinary level of gas prices as TTF LNG pricing is averaging $34 per MMBtu year-to-date, and charters are taking conservative approach to securing shipping capacity.

In this gas price environment, the demand for more than 2-stroke vessels is bolstered further as the savings for charters amount to hundreds of thousands of dollars per day when compared, for example, to steam vessels. Overall, demand fundamentals for LNG shipping remain robust as the expectations for global LNG trade have increased and volumes are projected to grow by 5.3% in 2022 and -- sorry, 5.3% in 2022 as LNG has been replacing reduced Russian gas inflows in Europe this year. We expect that investment in LNG infrastructure will intensify both in terms of new liquefaction projects, primarily in the U.S. and in -- and for receiving terminals in Europe and potentially in Southeast Asia in the long run.

The LNG fleet order book stands at around 40% of the current fleet with 54 new orders placed during the quarter and 94 year-to-date, leaving only a handful of available slots for 2026. As a result of the continued increased demand as well as inflationary pressures in raw materials and equipment, CPHs are continuing to increase prices with latest newbuild prices reaching $245 million per vessel.

On Slide 14, we review the container market. Market sentiment and activity during most of the first half of 2022 has been positive. Few fixtures were concluded due to a shortage of prom ships and a more conservative approach by charters with regard to long-term tonnage. The [Glaxo's] charter rate index rose 3% in the second quarter of 2022 compared to the previous quarter and stood at 423 points, an all-time high. However, towards the end of June and into July, the index dropped by approximately 6%. In June, the 3-year time charter rate for a prompt eco wide beam 9,000 TEU container vessel like the Akadimos stood at $96,500 per day. The Akadimos, our first vessel opening up for employment is expected to come off its present charter by latest April 2023.

In the box freight market, spot rates remain firm with the SEFI comprehensive index averaging 4,200 points in the first half of 2022, up 50% compared to the same period of 2021 and more than triple the 2020 average. The market has seen close to record levels of containership port congestion through the second quarter and into July. Such congestion combined with scarcity of available vessels has resulted in persisting logistics chain disruptions and has supported tight container shipping market conditions.

The newbuilding market remained active during the first half of 2022, but contracting of new vessels was lower in the second quarter compared to the first. In total, 96 ships were contracted in the second quarter of 2022 and amounting to 0.7 million TEU. The order book has increased to 27.8% of the total fleet. Concurrently, no vessels were scrapped in the first 6 months of 2022, which comes as no surprise given the exceptional market conditions. As a result, fleet growth is expected at 3.4% in 2022, accelerating to 8.2% next year, while global container growth is expected to be flat this year and to grow by 2.3% in 2023. Overall, the outlook for the container sector remains positive in the short term, with logistical disruptions likely to continue to provide support despite trade headwinds. Further ahead, an eventual normalization of market conditions appears likely at some point as capacity supply is expected to grow with increased newbuilding deliveries in 2023.

Now turning to Slide 15. As previously discussed, we have now exercised our right of first offer for 4 vessels. We still retain the right of first offer on 2 more LNG carriers currently under construction in Hyundai Heavy Industries in South Korea and delivering late in 2023. In addition, Capital Maritime has contracted an additional 5 sister LNG carriers in Hyundai Heavy with deliveries set for 2024 and 2026. As these vessels find attractive employment in a currently strong charter market and subject to our ability to acquire these vessels, CPLP can potentially become one of the very few companies -- public companies that control a large fleet of latest generation LNG carriers with a unique portfolio of charters. We anticipate that 2-stroke latest generation LNG carriers, like the vessels we already own and this potential drop-down candidates will benefit greatly from the positive LNG market fundamentals ahead as described earlier.

Having secured further financial flexibility with the issuance of our second bond and the proceeds from the sale of our 2 oldest container vessels, and in view of the strong cash flow generation, we expect from our remaining fleet as well as the new acquisitions, we expect to be in a good position to take advantage of such growth opportunities while continuing to return capital to unitholders through distributions and unit buybacks.

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

(Operator Instructions) I show our first question comes from the line of Ben Nolan from Stifel. .

This is Macalla on for Ben. Just a quick one here. Would you be able to provide any insight on how you're thinking about maximum leverage? And additionally, what does capital firepower look like after the LNG vessel acquisition?

I think if you look at the average leverage across the 6 vessels we acquired last year, it's probably today less than 50%. That's partly due to the increase in the underlying charter-free asset prices and some debt amortization paid. So our indebtedness has been increasing by quite a bit if you compare it, for example, to last -- to the same period last year. So almost from $400 million to $1.2 billion as at the end of the second quarter. But you'll find that net leverage continues to be at a very reasonable levels as defined in our loan agreements, and that's below 40%. I think given our -- the profile of our fleet, that is the average age of our fleet and the employment profile, as we discussed, we have a minimum of remaining charter duration of 6 years, and against very creditworthy counterparties, there is definitely more room.

I think a leverage up to potentially 65% to 70% can be reasonable. If you have that type of employment profile, but that is also always taking into account the potential volatility of your underlying assets. So right now, this leverage point is on the back also of a very frothy, if you want, container market, and we are very mindful of that.

So the answer is that the LTV at any given point is -- and the maximum levers that you can take is also connected to the underlying assets and where its asset is in the cycle. I think the good thing is that with the addition of the LNGs, we have diversified our exposure in terms of the underlying assets. And secondly, also LNG carriers have shown over time that they have a smaller beta. So their asset value volatility is less compared to other assets. So I think with the diversification of our asset base to both containers at LNG and the fact that LNG tends to be stable than other shipping assets in terms of its valuation, I think we have room to increase. But the exact levers, I think it will depend on where we think we are in its shipping cycle and making sure that even if there are more dire conditions ahead, the balance sheet can remain strong.

I show our next question comes from the line of Omar Nokta from Jefferies. .

I wanted to just ask about the -- you mentioned LNG carrier that was extended until I believe 2028 from 2026 originally in exchange for that 3.5% reduction. Is there an opportunity you think, to do that with the other 2 ships that roll off in circa early 2025?

Omar, yes, so this was a baked-in option. So that was part of the charter party agreement. And the charter simply exercised an option that they already had. But I think your question is very, very topical. So we are having from time to time such discussions with charters. And given the scarcity of available (inaudible) forward, even for 2026, 2027 deliveries and increase in newbuilding prices, there are discussions to be had with charters if you want to fix for longer. But I think given also the backdrop of the market environment, if we do something like that and depending on which charter we're talking about, it could be that we extend at a higher rate, not at a lower rate. But it does depend on which charter we're talking about across our fleet. But such discussions are being had as we speak.

Okay. And I guess for those 2 ships I was referencing that roll-off in '25, do they have that similar type of option to extend it? Or would these be you think at altogether just new charters?

So are you talking about the 3 BP ships or the senior ships? .

I'm just double checking there, it's Aristarchos and the (inaudible). I forgot the charter.

So these are the 2 vessels that are fixed to Cheniere. These were fixed for 3.5 years original term and they have 2-year options -- sorry, 2 1-year options. So they run until 2027, really early 2027. These are at higher rates. The options that they have, they are at higher rates compared to what they have today. And this, for example, could be prime candidates for a potential extension.

Okay. Got it. That clarification. One follow-up just on the containerships. Clearly, you sold those 2 vessels or you agree to sell them to $130 million. How are you thinking about some of the other containerships in the fleet today? Perhaps maybe the narrow -- or the older 5,000 TEU ships (inaudible), are those potential candidates you think, to monetize given where secondhand prices have gone to?

Absolutely. I think it's a question of whether we find an interesting bid because these vessels are there an until 2025 and beyond. So it will require a charter to take quite a long-term view. And this is -- I think, if anything, has changed in the container market, it's mostly that, that you don't have so much liquidity in the forward market. That today is very firm, and there is a lot of interest and you can fix at very high rates, potentially historically high rates. But this is what has changed, I think, over the last 6 months in the container market, that forward view. So if we see interesting bids, we will definitely consider divesting from these assets. It is also very much in line with our policy of divesting from older ships. So the answer is yes, but the bid has to make sense.

I show our next question comes from the line of Clement Mullins from [Valley Investors Edge].

I wanted to start by asking about the increase of other expenses on a quarter-over-quarter basis. Could you provide some commentary regarding what have been the main drivers behind this increase?

Clement, do you mean in other income? .

Yes, exactly.

So in other income, you'll find the effect of 2 things. First of all, the effect of the FX change in terms of the -- in terms of our euro exposure. And as you know, we had in that quarter the 150 million eurobond exposure. So as you have changes in the U.S. dollar euro FX you will see an effect creeping into the other income expense line. And then you have, on the other hand, the change in the fair market value of the swap, the hedge that we have done for this bond. So in particular, in this quarter, the effect of the change in the fair value of the swap was a loss of EUR 12 million, but then we had a gain from the translation of the euro-denominated debt of about $10.6 million. .

So we had from -- just from these 2 things, we had the net effect which is recorded in other income of minus $1.4 million. Then we had some other income from certain other things that is potential underreported claims, a certain piece of equipment that was installed on our vessels by the charters and which we do not pay for and that reduced that loss to $0.9 million. So this is what you see in other income. It's -- most of it is a noncash effect, but it's still shown there. .

That's very helpful. And you recently completed the second raft of acquisitions, which are set to be delivered later this year and into 2023. Could you provide some commentary on how your capital allocation priorities will shift once the vessels are delivered? And what's your current stance regarding the additional LNG carrier drop-downs?

I think it's a fair question. But for the moment, we want to concentrate on executing against the four vessel acquisition. That's a $597.5 million acquisition. We have vessels starting delivered from October until May next year. So I think we want to make sure we get all this done before we think about our next move, as discussed. And previously, we want to make sure also at any given point that we retain a strong balance sheet with reasonable leverage.

We do have room, but also the container market seems to be in flux. We think that the container market will do well over the next few months. But what happens beyond that and well into 2023, who knows. So I think before we commit to our next move, we want to see more of the announced transaction being executed. So hopefully, we'll start thinking about that towards Q3, Q4.

Now in terms of the remaining LNG carriers, if there is a segment that we like, it definitely -- LNG is definitely very interesting. I think we are in a multiyear upcycle for latest generation 2-stroke vessels. And the economics for these vessels together with this in a market where commodity prices are high and are expected to remain high for at least the next few years are going to be exceptional. And you can see that already from the market. So it is very much a segment where we would like to expand. I think in view of our business model, of course, we would like also to see cash more flow visibility on these assets. And currently, they have none. So while we definitely want to grow in the LNG space, and I think, as I pointed out in my prepared remarks, they're literally -- there's literally only one company out there, which has a similar fleet to CPLP, that is only 2-stroke LNG ships. We want to make sure that we do it in the right way. I mean, so far, I think we have done a very well-timed entry into the LNG space. We have acquired 7 LNG carriers -- brand new ships, two-stroke ships, latest technology at an average price of about [$208,000] when today, a resale will be at [$245,000] plus or potentially even higher. I mean, we have new builds being now contracted for 2026 and '27 for $245 million, and then you have to add delivery costs on top. So I think we will look very good at the moment, but we want to make sure we do this the proper way.

I'm showing no further questions in the queue. That concludes our Q&A session. At this time, I'd like to turn the call back over to Jerry Kalogiratos, CEO, for closing remarks.

Thank you all for joining today. Have a good morning.

This concludes today's conference call. Thank you for participating. You may all disconnect.