This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Thank you for standing by and welcome to the Capital Products Partners' fourth quarter 2020 Financial Results Conference call. We have with us Mr. Jerry Caligiratos, Chief Executive Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star 1 on your telephone. I must advise you that this conference is being recorded today. The statements in today's conference call 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 obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our view 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. Kalo Giratos. Please go ahead, sir.
spk00: 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. As previously announced, we concluded on March 27, 2019, the spin-off of the Partnership Stanker Fleet and subsequent merger with DSS Holdings, forming Diamond as CP. Accordingly, we present our financial results for the comparative periods on a continuing operations basis, except where reference is made to discontinued operations. The partnership's net income for the fourth quarter was $7.3 million, compared with net income of $5.8 million for the fourth quarter of 2019. Our board of directors has declared the cash distribution of 10 cents per common unit for the fourth quarter of 2020. And the fourth quarter cash distribution will be paid on February 10th to common unit holders of record on February 2nd. The partnerships operating surplus for the fourth quarter was 20.7 million or 11.4 million after the quarterly allocation to the capital reserve. This translates to common unit coverage of six times. We are pleased to announce that we have agreed to acquire three 5,100 TEU sister container vessels, with long-term employment for a total consideration of 40.5 million. Moreover, our Board of Directors has authorized a common unit repurchase program of up to 30 million, expected to commence in February 2021. Finally, the partnership's charter coverage for 2021 and for 2022 stands at 90% and 81% respectively, and the remaining charter duration stands at 4.2 years. Turning to slide 3, revenues for the quarter were $31.5 million compared to $27.7 million during the fourth quarter of 2019. The increase in revenue was primarily attributable to the increase in the size of our fleet, partly set off by the decrease in the average daily charter rate earned by the vessels in our fleet, the off-hire period associated with the Cape size Cape Agamemnon, which underwent its special survey during the quarter, and one of our 5,000 EUs that had to remain off-hire for 21 days due to a COVID-19 incident and the associated quarantine rules. Total expenses for the quarter were 24.6 million compared to 18.2 million in the fourth quarter of 2019. Voyage expenses for the quarter increased 1.9 million compared to 1.1 million in the fourth quarter of 2019, as one of the vessels in our fleet was employed under Voyage Charter compared to none during the respective period in 2019. Total vessel operating expenses during the fourth quarter of 2020 amounted to 10.3 million compared to 7.7 million during the fourth quarter of 2019. The increase in operating expenses was mainly due to the increase in the size of our fleet. Total expenses for the quarter of 2020 also include vessel depreciation and amortization of 10.7 million compared to 7.5 million in the fourth quarter of 2019. The increase in depreciation and amortization during the fourth quarter of 2020 was mainly attributable to the increase in the size of our fleet, the completion of the special surveys of nine of our vessels, and the installation of scrubber systems in seven of our vessels during the second half of 2019 and the full year of 2020. General administrative expenses for the fourth quarter of 2020 amounted to 1.8 million as compared to 2 million in the fourth quarter of 2019. Interest expense and finance costs decreased by half a million despite the increase in average debt outstanding during the period due to lower LIBOR weighted average interest rate compared to the fourth quarter of 2019. The partnership recorded net income from continuing operations of 7.3 million compared with net income from continuing operations of 5.8 million for the fourth quarter of 2019. On slide four, 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 20.7 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 adjusting for the capital reserve, the adjusted operating surplus amounted to 11.4 million. On slide 5, you can see the details of our balance sheet. As of the end of the fourth quarter, the partners' capital amounted to 422.1 million, an increase of 15.3 million compared to 425. 6.7 million as of year-end 2019. The increase reflects net income for 2020 and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in a total amount of 17.1 million. Total debt increased by 117.3 million to 379.7 compared to 262.4 million as of the end of 2019. The increase is attributable to increased indebtedness associated with the acquisition of the three 10,000 EU containers in January 2020 under financing of certain of our 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 54.3 million, including restricted cash of 7 million, which represents the minimum liquidity requirement under our financing arrangements. Turning to slide six, we are delighted that we have agreed to acquire from Capital Maritime and Trading Corp. three 5,100 EU sister container vessels, namely the motor vessels Seattle Express, Long Beach Express, and Foss Express, all built in 2008 at Hanjin Heavy Industries, for a total consideration of $40.5 million. All three vessels will be delivered with their special vays freshly passed and have been retrofitted with ballast water treatment systems and AMP systems, which translate into more than 2 million in upgrades and costs. This design is among the most popular Panamax designs, with charters due to their high container intake and increased refer capacity. In addition, they have an enhanced environmental profile, as they are fitted with alternative maritime power equipment, AMP, which allows them to connect to one shore power when at port, thus reducing emissions within port limits, have also optimizers for trimming and refueling power capacity management, are able to super slow steam, and have been painted with high-specification anti-fouling paint, which reduces fuel consumption. As you can see on slide 7, the vessels come with approximately five-year remaining employment to Hapag-Lloyd at a gross daily rate of $12,300 per day. Charters have the option to extend the employment for 2 plus 1 years at $17,000 per day. Turning to slide 8, the partnership will partly fund the acquisition of the three vessels by entering into a sale and leaseback transaction with China Merchant Bank, CMB Financial Leasing, for an amount of $30 million. The lease has a duration of 5 years and will be repaid in 20 equal consecutive quarterly installments of $0.8 million. including a purchase option for the partnership to acquire the vessel and expiration of the lease at the predetermined price of 4.5 million. In addition, the partnership has various purchase options commencing from the first anniversary of the lease. The sale and leaseback arrangement bears interest at a rate of LIBOR plus 2, spot 85. Furthermore, the partnership entered into a seller's credit agreement with Capital Maritime to defer 6 million of the purchase price for up to five years from the delivery of the vessels. The seller's credit is unsecured and bears interest at a fixed rate of 5% per year. Overall, and in view of the advantageous debt and seller's credit arrangements that the partnership obtained, we are pleased that the transaction will be completed with a minimal cash outlay from the partnership of approximately 5.1 million. This leaves the partnership dry powder for further growth, as well as for the implementation of the unit buyback program. Moving to slide 9, we believe that the transaction is highly accretive, offering very favorable returns on equity deployed. We estimate that the three vessels will generate an EBITDA of about $32 million over the next five years. Given the tenor of the charter and the age of the vessels, we have endeavored on this slide to depict equity returns on a standalone basis. Indicatively, and assuming in a worst-case scenario that we will sell these ships for scrap upon expiry of the time charters, the transaction is expected to result in an internal rate of return of approximately 41%, while taking a more normalized exit price would result in excess 50% over the five years and almost 90% IRR if we assume a robust second-hand market like the one we are currently experiencing. Importantly, container vessels have a useful life of close to 25 years, which could translate into further upside dependent on market conditions. Overall, the transaction is an important step forward in our stated target of growing and diversifying the partnership's asset base. As with the completion of this transaction, we will have achieved a fleet growth rate of 54% year-on-year in terms of number of vessels and 65% in terms of TEU capacity. In view of this addition of the three vessels and turning to slide 10, The partnership's charter coverage for 2020 and for – apologies – for 2021 and for 2022 has increased to 90 percent and 81 percent, respectively, while the remaining charter duration amounts to 4.2 years. Looking ahead, we now have one container vessel that we need to recharter over the next few months, namely the CMA-CGM Madalena. which will see its five-year charter with CMA-CGM expire at the latest in May 2021. Currently, the three- to five-year market for this type of vessel is in the high 30s to 40s region, and as soon as we get closer to the re-delivery date from the current charter, we will have better visibility of what is feasible on this vessel. The Cape Agamemnon continues to trade in the spot market, as it did for most of the fourth quarter, when it also passed its special survey in early November. So far, the opportunistic strategy 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. As previously discussed, we will continue to monitor the dry bulk market closely, both in terms of period versus point deployment, as well as in terms of the potential divestment. On slide 11, we'll review the container market. Following the sharp decline in charter rates during the second quarter of 2020, The charter market has experienced a strong rebound across all sizes during the third quarter, which accelerated further during the fourth quarter of 2020. For example, time charter rates for neopanamized containers have more than doubled compared to early the third quarter of 2020. The rally in rates is driven by increased demand, which results from, among others, faster-than-expected global economic recovery, inventory restocking, and changing consumer behavior. Similarly, the supply of vessels has been positively affected by the disrupted supply chain as operators were unable to utilize available capacity efficiently due to, among others, lack of equipment, displaced boxes, and poor congestion across the globe. Overall, the base case forecast for container trade for 2020 has been revised down to minus 1.1% versus an original minus 10.7% estimate in May. Going forward, the base case forecast for the container trade for 2021 stands at 5.7%. On the supply side, the container order book has increased from the historical lows of around 8%, as operators seem to be using at least in part the market windfall to order new vessels. As a result, the order book as of mid-January stood at 10.8% as a percentage of the fleet, which is still close to historical lows. This has also resulted in an upward pressure on new building prices due to the increased ordering, the fall of the U.S. dollar, especially versus the Korean won, and the increase in steel prices. Finally, as a result of the improving charter market, we have seen an increase in second-hand values, with Panamaxes seeing the lion's share in terms of appreciation. As of quarter-end, slippage, including cancellations of new-built container vessels, stood at 25% in TEU terms, compared to 29% at the end of the third quarter of 2020. Demolition for full year 2020 was similar to the previous year, with 80 units of about 190,000 TEU scrapped. Altogether, supply growth for 2021 is estimated at 3.8 percent, compared to 2.9 percent for the full year of 2020. Overall, the longevity of the container freight and charter bull market is closely intertwined with the developments on the COVID-19 front, including the rollout pace of vaccines, virus mutations, and their impact on quarantine measures globally, as demand and supply drivers, such as the changing consumer behavior, as well as supply chain disruptions, can be up to a large extent attributed to the impact of COVID-19. In the short term, however, tonnage supply is very limited, with increasingly more forward positions being covered, And as a result, we expect the container charter market to remain tight. Turning to slide 12, as reported in the press, Capital Maritime placed in December 2020 a speculative order for four plus two latest ecotight 13,200 EU container vessels and the Hyundai Heavy Industries Group. Deliveries are scheduled between the third quarter of 2022 and the second quarter of 2023. These very high-specification vessels are especially suitable for the reefer-intense Latin American trade and have the latest eco-hull form designed for the specific trading pattern. They will be equipped with energy and emissions-efficient main engines, and together with a series of other operational and energy efficiency upgrades, will altogether result in a very attractive vessel design, both commercially as well as in terms of its environmental footprint. If these vessels secure at some point in the future attractive long-term employment, there could be excellent drop-down opportunities for the partnership, as they could deliver sustainable growth in scale with modern, environmentally friendly assets, thus replenishing our fleet and assistance in achieving the aim of increasing our long-term distributable cash flow and creating long-term value for the partnership's union holders. In the meantime, we will continue to balance growth with returning capital to our unit holders through our existing distribution policy, as well as the recently announced unit buyback program. The container market has surprised everyone with its strength over the last few months, and as a result today, we feel much more comfortable with market prospects and our rechartering risk compared to three quarters ago. Thus, we decided at this juncture to complement our common unit distribution policy with unit buybacks, as we can attain at the same time two goals. Firstly, return additional capital to unit holders, but at the same time deploy capital in an accretive manner. We have done so with the three Panamax drop-downs, but the unit buyback program is also expected to be highly accretive to our earnings per unit and distributable cash flow per unit in terms of dollars spent, in view of the substantial discount to NAV that the partnership is trading at. So all in all, I believe that the partnership is delivering on all fronts, that is growing its asset base, returning capital to unit holders through distributions and the unit buyback program, and hopefully improving valuation over time, and of course, recharging vessels at historically favorable rates. And with that, I'm happy to answer any questions you may have.
spk01: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for the automated message advising your line is open. Please state your name and company name before you ask your question. If you wish to cancel your request, please press star 2. Once again, please press star 1 if you wish to ask a question and star 2 to cancel that request. Thank you. We will now take our first question. Please go ahead. Your line is now open.
spk02: Howdy, gentlemen. It's Randy Givens from Jefferies. How's it going? Hi, Randy. I'm Matt. How are you? Good, good. A couple quick questions for me. So on the last call, you mentioned the Magdalena is on charter until February, but now you're saying it's expiring in May. So kind of what happened there with those few months slippage. And then
spk00: Yeah, so I think this is the result of a very quickly changing market. When we had our last earnings call, the 39 to 50 that CMA and CGM was paying was out of the market. So we were assuming that CMA and CGM would probably re-deliver towards the earlier re-delivery period. Now the market has moved on, and 39 to 50 is well in the money. So now it seems that CMA-CGM will keep the vessels until the very end of the delivery window. So the charter period really hasn't changed. It was a different assumption with regard as to when they are going to re-deliver within the re-delivery window. To be honest, it's still a very good number. I mean, earning 39 to 50 until late April, early May, I don't think it's bad at all. Now, with regard to rechartering, the numbers that I gave you are for, let's say, a three- to five-year deal. Potentially, a deal can be had at even higher than that. For a one-year deal, the number should be considerably higher. But I think at this point, we will try to pin down, if possible, a kind of a longer-term charter. These are above-average numbers. uh cyclical uh rate so i think it's good to to lock in duration at this point yep and then timing for that is that a february or march event how how much in advance do you lock in that new charter well that again this has been changing i mean in a normalized market in the soft market you would fix much closer to the re-delivery Now it is much easier to fix forward positions. You can expect it at any point. We might fix tomorrow or we might fix closer to the date. We will be very, going to be very opportunistic about it. As we discussed, there are very few ships like that out there, almost none. So we'll try to make the best out of this position.
spk02: Okay, and then I guess looking at the acquisition. All right, so the three vessels, they're fixed at $12,300 a day for the next five years. Current market for these vessels is closer to, I don't know, $30,000 a day, right, for one to two years?
spk00: Correct, correct. And their asset value is probably closer to $20-plus million as well.
spk02: Got it. So these vessels would certainly come at a steep discount to those asset values on the below-market charters.
spk00: The latest charter-attached valuations that we got from appraisers are around $17 million. Charter-attached, not charter-free.
spk02: And based on the charters that you have attached, $12,300. Correct. All right. And aren't these the same ships that Capital bought for $28.5 million four months ago, right, and at $9 million or so, $9.5 million each? So I guess with that, were you not able to purchase them back then, and why pay $12 million extra in a few months considering the asset values are locked on long-term charters and there's no will uplift in the current market strength? Like, well, what pushed the rates from the asset values from $28 million that Capital paid to the $40 million that you just paid to Capital in four months?
spk00: So the vessels that Capital Maritime bought, they were bought speculatively. There was no charter. It was not at all obvious at the time that a charter of that rate could be obtained. So Capital Maritime took... risk by fixing those vessels, and then warehouse those vessels. Importantly, Capital Maritime passed a special service for these vessels, fitted them with ballast water treatment system, and they are also fitted with AMP. There was no idle time for CPLP. They were delivered directly into the charter, and the total cost of passing a special survey and of the upgrades is more than $2 million. But more importantly, it's the first point. I mean, you are now looking at the market as it has evolved within really 45 to 60 days. But as Capital Maritime was buying those assets, there was no charter attached, and it was a very risky proposition. CPLP typically will not acquire assets, especially Panamax assets, of that type without cash flow visibility. Finally, I think it's also very good to look at the returns proposition for CPLP. I think during my prepared remarks and in the presentation, you can see a range of equity returns. And even if you assume that... the vessels are sold for scrap the moment that the charter finishes, you're still getting a 40% type of IRR. I don't think there are many transactions like that out there that are done by our peers. If you are a little more optimistic that the vessels would trade to 22, 23, 25 years, that IRR could be well into almost three digits. So I think it's a fantastic transaction for CPLP. Effectively, CPLP took no risk. It took ships with space survey passed and all the equipment. They are in the water already delivered to a charterer, so zero of hire for CPLP. So if you put all this in, it's a very small premium that actually Capital Maritime took for warehousing the vessels and taking the risk. I think it's, again, a very... And together with a seller's credit, which I think it's at a very attractive rate, I think it's a fantastic transaction all along.
spk02: Yeah. All right. That's fair. And I guess lastly, you issued this new share repurchase or unit repurchase program. How does that jive with distributions? You cut the distribution a few months ago. Now you've got to buy back units. Any chance of an increase in distribution, or is that not until you obviously purchase the full $30 million allotment on these repurchases?
spk00: So what we have said all along, even after the second quarter 2020 distribution cut, is that the priority of the partnership is to grow and replenish our fleet and continue to return capital to unit holders, as it has done nonstop since 2007. I think the container market has surprised everyone with its strength, and today we feel much more comfortable with market prospects compared to two, three quarters ago. Show me one company or even one liner that saw this coming. You remember the massive re-deliveries from every single liner company back in May, June, as if there was no tomorrow. Even in September, October, people were very reluctant to call this a bull market until, I think, actually December, January. So, you know, it's easy to look back with hindsight, but I think it is now that the market is very tight that it looks better. For reasons that have to do with market supply, we will see in the short-term continuation of the current market environment. So given this, let's say, backdrop, we decided at this juncture to complement our common unit distribution policy with unit buybacks. And it's really kind of two birds with one stone strategy. So we are returning the capital to unit holders as we set out. But at the same time, we thought that the unit buyback is going to be also very accretive in view of the discount to NAV that the partnership is trading at. So we think that this is the right instrument at this point. Now, this has been just announced. We'll continue to focus on executing on this, the unit buyback and on growth, and then we can revisit the capital allocation policy going forward. Perfect. All right, well, that's it for me. Thanks so much.
spk02: Thank you, Randy.
spk01: Thank you. We will now take our next question. Please go ahead. Your line is now open.
spk03: Hey, Jerry. There's no one here. I bet. Returns do look really good on the transaction. Randy brought up an interesting point relative to the purchase price. And I think, frankly, you gave a really good answer with respect to the ships not having secure employment at the time. But it does sort of bring up the idea that what's to stop CPLP from undertaking those sort of things now that... you are retaining a lot more cash flow, not paying the dividends. Why not be a little bit more opportunistic when you see the opportunities arise? Because obviously, you know, it's the same people making the investment decisions. It's just a matter of what vehicle those assets are being warehoused in. So, you know, why wouldn't For instance, the partnership have done that deal in August rather than apparent, given that you're seeking to use internally generated cash flow for growth.
spk00: Because really I think the business model of CPLP, at least the way that we have presented and we see it, is that of cash flow visibility and stability of income. The moment that we will start buying, let's say, Panamax vessels without a charter, which whose value, I mean, has oscillated over the last year between scrap to about three times that over really the last six months, is a very different and a very speculative proposition. So far, I think we have avoided acquiring assets like that. If it was a more modern asset, let's say a post-Panamax asset where we have more visibility with regard to its ability to retain value and earnings, it might have been a little different. Importantly, as I said, if you look at the...if we were to market these vessels today for sale, which is also what is indicated by the appraisal that we got, we would probably have...we would probably get much more than we paid for. What I'm trying to say is that I don't see many deals like that being offered around in the market with that type of returns. And we are, as you say, the same people. So I think Capital Maritime, in a way, is also supporting the partnership when it gives deals like that at prices like that, at multiples of this sort. So I think we're getting the visibility and the security of income that we want, especially with more risky assets like this. And at the same time, we don't necessarily have to look at this, let's say, part of the market and focus more on more stable assets. Okay.
spk03: Well, then that sort of leads me to another point. Obviously, you're doing a buyback program here because the thinking is that the shares or units are trading at a discount to NAV. And I presume that the thinking is, well, NAV is artificially low or something. But ordinarily, NAVs come under pressure because they're are less confident that the numbers are going to materialize the way that they should. It appears... and maybe you have a different opinion on this, but it appears as though the market is valuing the company as if it did not have good cash flow visibility. If that's the case, again, it sort of leans back to my previous question. If the market is going to value that way, then why not take advantage of situations as they arise and take what the market gives you?
spk00: Well, as far as certain segments are concerned, I mean, irrespective of the valuation, you have to do what you think is right. So if you, as we have said in the past, buying Panamaxes on spec, on a speculative basis, we always thought that it is a very opportunistic and a very risky play. I think the thesis is kind of indifferent to valuation. So what? I mean, let's say that we buy, that just means that we go out and we buy very risky assets at the peak of the market and we risk the health of the company. So what we do think is that with the unitary purchase program, with good drop-downs like the one that we are completing today, with more in the pipeline in terms of growth, this valuation gap can close. And I don't think it's very CPLP-specific. I mean, the discount, I think it's something that many other shipping companies are suffering from. But you can only execute, I guess, your business model and do your best. I think otherwise, saying, oh, well, my valuation is like this, why don't I take on more risk? At least we don't think that way. Okay.
spk03: That's helpful. And then lastly for me, just sort of as it relates to that and the buyback program and sort of where you think fair value is for the company, you know, at least in ballpark, as sort of how you... what you think the share should be worth, and that sort of is the compelling argument for buying back at levels below that. So NAV estimate, I guess, is the question.
spk00: So we have seen NAV estimates, which are also supported by the... appraisals that we get for our fleet on a quarterly basis almost double what the unit price is today. So it's a steep discount. Okay.
spk03: All right. I appreciate it. And again, the returns on this are pretty fantastic, I think. So hats off on that. Thank you, Ben.
spk01: Thank you. Once again, if you wish to ask a question, please post one on your telephone. and wait for the automated message advising your line is open. If you wish to cancel your request, please press Start to. There are no further questions coming through at this time. I would now like to hand the call back to Jerry Kellogigeratos. Please go ahead, sir.
spk00: Great. Thank you all for joining us today.
spk01: Thank you, ladies and gentlemen. That does conclude your conference call for today. Thank you for participating, and you may now disconnect.
Disclaimer