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.
spk05: Thank you for standing by, and welcome to the Capital Product Partners First Quarter 2023 Financial Results Conference Call. We have with us Mr. Jerry Calogaratos, 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, please press star 1 on your telephone keypad and wait for your name to be announced. I must advise you this conference is being recorded today. The statements made 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 allocation, as well as our expectations regarding market fundamentals and the employment of our vessels, including re-delivery 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 the completeness of forward-looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand the call over to your speaker today. Mr. Calogaratos, please go ahead.
spk04: Thank you, 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. Since the end of the fourth quarter of 2022, we have completed a number of significant transactions for the partnership, including the delivery of one 13,000 EU new building, EU container vessel, and one latest generation LNG carrier, both with long-term employment in place. In addition, we secured new employment for one of our container vessels from approximately two years, which is expected to add 34.4 million of gross revenue to our backlog. With this fixture, our next period charter expiration does not come before the first quarter of 2025. Furthermore, we repaid in full one of our leasing agreements, which now leaves us with a total of 10 vessels unencumbered. Turning to the partnership's financial performance, net income for the first quarter of 2023 was 10 million. Our board of directors has declared a cash distribution of 15 cents per common unit for the first quarter of 2023. The cash distribution will be paid on May 12th to common unit holders of record on May 8th. We continued acquiring units under a unit buyback program and during the first quarter of 2023 we repurchased approximately 129,000 common units at an average cost of $13.57 per unit. Finally, the partnership's charter coverage for both 2023 and 2024 stands at 96%, with the remaining charter duration corresponding to 6.8 years, including the final new building container vessel expected to be delivered to the partnership towards the end of the second quarter of 2023. Now turning to slide three, total revenue for the first quarter of 2023 was 81 million compared to 73.4 million during the first quarter of 22. The increase in revenue was primarily attributable to the revenue contributed by the two new building container vessels and the LNG carrier Asterix 1, and the previously announced increase in the daily rate earned by two of our LNG carriers, partly offset by the sale of two container vessels in July 2022. Total expenses for the first quarter of 2023 were 45.1 million compared to 40.2 million in the first quarter of 2022. Voyage expenses for the first quarter of 2023 increased to 3.8 million compared to 3.6 million in the first quarter of last year due to the increase in the average size of our fleet. Total vessel operating expenses during the first quarter of 2023 amounted to 19.3 million compared to 16.7 million during the same period in 2022. The increase in vessel operating expenses was mainly due to the net increase in the average number of vessels in our fleet and the increase in the operating expenses of certain of our vessels in view of scheduled maintenance and one-off repairs. Total expenses for the first quarter 2023 also include vessel depreciation and amortization million in the first quarter of 2022. The increase in depreciation and amortization was mainly attributable to the net increase in the average size of our fleet, partly offset by lower amortization of deferred dry docking costs. General and administrative expenses for the first quarter of 2023 amount to 2.8 million, compared to 1.5 million in the first quarter of 2022. The increase in general administrative expenses was mainly attributable to the increase in the amortization associated with our equity incentive plan. Interest expense and finance costs increased to $23.7 million for the first quarter of 2023 compared to $10.3 million for the first quarter of last year. The increase in interest expense and finance cost was mainly attributable to the increase in the partnership's total average indebtedness and the increase in the weighted average interest rate to 6.1% from 3% during the first quarter of 2022. The partnerships recorded a net income of 10 million for the quarter compared with a net income of 25.1 million for the first quarter of last year. Net income for the first quarter of 2023 also includes an unrealized net loss of $2.3 million, resulting from the increase in the U.S. dollar equivalent over Euro-denominated bonds issued in October 2021, partly offset by the change in the fair value of the relevant cross-currency swap agreements not designated as an accounting hedge and presented under other expense income net. Net income per common unit was 49 cents for the first quarter of 23 compared to $1.26 in the first quarter of last year. 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 36.3 million in cash from operations for the quarter before accounting for the capital reserve. We allocated 33.4 million to the capital reserve, an increase of 2.4 million compared to the previous quarter due to the increased data amortization resulting from the drawdown of the Itagai Express and the Aster X1 facilities, partly offset by the repayment in full of one of our leasing facilities. After deducting the capital reserve, the adjusted operating surplus amounted to 3 million. On slide 5, you can see the details of our balance sheet. As of the end of the first quarter, the partners' capital amounted to 642.9 million, an increase of 4.5 million compared to year-end 2022. The increase reflects net income for the first quarter of 2023 and the amortization associated with the equity incentive plan, partly offset by distributions declared unpaid during the period in the total amount of 3.1 million. the repurchase of common units for an aggregate amount of 1.8 million, and other comprehensive loss of 1.7 million resulting from the increase in the U.S. dollar equivalent of our Euro-denominated bonds issued in July 2022, partly upset by the change in the fair value of the relevant cross-currency swap agreement we designated as accounting hedge. So total debt increased by 254.7 million to 1.55 billion. compared to 1.3 billion as of year-end 2022. The increase is attributable to a 5.9 million increase in the U.S. dollar equivalent over Euro-denominated bonds as of quarter-end, the drawdown of 108 million under a new financing arrangement to partly finance the acquisition of the Itagai Express in January 2023, and the drawdown of 184 million under sale and leaseback transaction to partly finance the acquisition of Asterix One in February 23, partly upset by debt repayments of a total of 43.2 million. It is important to note here once again that following the repayment of an additional facility during the first quarter, we retained 10 out of our current fleet of 22 vessels unencumbered, which could be a potential source of additional liquidity in the future. For example, if we were to take on debt at 50% to 55% of the fair market value of these 10 vessels, we could raise additional liquidity to the tune of $200 million. Total cash, as of the end of the quarter, amounted to $99.8 million, including restricted cash of $11.2 million, which represents the minimum liquidity requirement under our financing arrangements. Turning to slide six, the LNG carrier Asterix 1, Hartree maintains the option to extend the charter by an additional two years. The acquisition was funded through a combination of a 12 million cash deposit paid in 2022, 184 million drawn under a new sale-leaseback transaction, and 34 million of cash paid on delivery. The sale-and-leaseback transaction has a term of 10 years, repayable in equal quarterly installments, and the partnership retains the option to repurchase the including a purchase option of 96.5 million at the expiration of the lease in February 2033. On slide 7, we provide an overview of the acquisitions announced in June 2022. Of those, the Manzanillo Express and the maintained three two-year options to extend the relevant charters. The last of the three container vessels to be named Buenaventura Express is currently under construction at Hyundai Heavy Industries Korea and is expected to be delivered to the partnership in mid-June 2023. Moving to slide 8, you can see our debt maturities by year. As you can see, we have eliminated all maturities through 2025 and do not have any significant maturities before 2026, when our first 150 million euro bond becomes due. As of the end of the first quarter of 2023, 29% of our debt was fixed at an average weighted rate of 4.5%, and the remaining floating debt is subject to a weighted average margin point 43% over LIBOR or SOFR. Moving to slide 9, the partnership's contracted revenue backlog now stands at 1,890,000,000 with over 63% of contracted revenues coming from LNG assets with a highly diversified customer base of seven charters. The partnership's remaining charter duration amounts to approximately 6.8 years, while charter coverage remains at 96% for both 2023 and 2024. It's worth noting here again that after the new charter of the ACADEMOS, our next period charter expiration does not occur before the first quarter of 2025. Turning to slide 11, we review the LNG market. Global LNG demand, which expanded significantly in 2022, is expected to continue its steady growth in 2023 as well. Despite the short-term seasonal pressure that has been seen in the LNG carrier spot market in recent months, with healthy gas inventories in Europe in particular weighing on market sentiment, the average spot rate for 160,000 cubic TFTE A unit stood at around $50,000 per day. That was by the end of April, which is the lowest level since July 2022. The term charter market remains, though, at very firm levels, with one year time charter rate for 170,000 cubic two-stroke vessel standing at excess $175,000 per day, providing strong evidence of structural tightness. Longer-term rates for periods in excess of five years also remain firm and are significantly higher compared to the start of 2022 due to the scarcity of available vessels, as well as rising new building prices and interest rates. The LNG fleet order book stands at 50 percent of the total fleet, with 326 vessels currently on order. CPR capacity remains limited, with the first available delivery year for new orders being 2027. New building prices continue to rise and currently exceed 255 to 260 million per vessel. Latest reports include the four-vessel new building order at the Korean shipyard for delivery throughout 2027 at around 263 million. If one was to add the cost of capital for the pre-delivery installment and supervision costs, the delivery cost is closer to 285 to 290 million. On slide two, we review the container market. Container shipping market has started 2023 on a softer note after weakening from record highs throughout the final few months of 2022. Freight rates have continued to soften since last year amid faltering demand caused by economic headwinds, cost of living pressure, and excess retail inventories in key regions, as well as reduced port congestion, although charter rates have seen increases since February 2023. The Clarkson Shutter Rate Index stood at 112 points at the end of April of this year, up by around 121% compared to the 2010-2019 average, and two times higher than the 2019 average. Container spot freight levels have softened on most freight lanes, with the SFI Index standing at around 1,000 points, down 80% from the start of 2022-2021. peak, but 23 percent higher compared to the 2019 average. In response to weaker rates, operators have employed a range of measures to manage capacity, from blank sailings and lower speeds to rerouting some ships on backhaul legs. Indicatively, in 2023, the average box ship speed was down 3.4 percent compared to the 2022 average. Contracting remains robust, albeit at lower levels than the 2021 record. The order book stands at 916 units of 7.5 million TEU, or about 29% of total fleet capacity. 26 units of around 50,000 have been scrapped so far this year. But demolition volumes are likely to be higher going forward with impetus from softer markets and upcoming environmental regulations. And with that, I'm happy to answer any questions you may have.
spk05: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Omar with Jefferies. Please proceed with your question.
spk03: Thank you. Hi, Jerry. Good afternoon. Thanks for the update. I just wanted to maybe ask, you know, how are you thinking about things strategically right now? You've got the container ship that was coming up for renewal. You fixed that on a pretty solid contract. You've got the LNG fleet that's fully contracted. How are you thinking now about the business as it is today? What are your top priorities?
spk04: So I think the top priority is to finish with the current acquisition that we have announced last year, the $600 million acquisition of the four vessels. We have one vessel to go, the last 13,000-U container vessel to be delivered to X-Yard in mid-June. But beyond that, I think that we continue to find the LNG segment particularly interesting. I think this is a multiyear upcycle for latest generation two-stroke vessels. Fundamentals are strong, be it the increased supply of the commodity going forward in terms of liquefaction capacity. Energy security considerations, the role that LNG is also expected to play in terms of the the energy transition, I think all these are going to favor the LNG industry long-term. And in addition to that, we of course like the long-term profile of the LNG charter structure. We have the right to first refusal in certain LNG carriers. We have, I think, discussed this over the last few quarters. And I think once we are done with the current acquisitions, we will look again as to what we can do in the space. So I think probably... The second half of the year is when you should expect to hear more from us in terms of concrete growth plans going forward.
spk03: Got it. Thanks, Jerry. And then maybe, obviously, you spent lots of focus on LNG, lots of opportunities with multi-year growth for that segment in terms of just the trade and then the fleet needed for that. How are you thinking just about containers at the moment? Because there's clearly been a – we're in this, you know, potentially – where we are in the market because you have liners that are, as you mentioned, are taking many measures to try to support freight rates, and yet they continue to be active looking for vessels on contract as you were able to secure your ship at a pretty decent rate for two years. What do you think, are there opportunities that are developing in the container ship space? Is it too early? What's going on with ship values? Is there an opportunity in the S&P market to take advantage of buying vessels perhaps cheaply and then maybe securing them on contract? Is there any opportunity that you see there, or is it still too early?
spk04: I think it's still early in the sense that the dust has not settled down. As you said, we have seen charter rates fall and then also recover over the last couple of months. months to the tune of, you know, anywhere between 15 to 25 percent, depending on the size and type of ship and age, which is quite significant. Again, case in point is the charter that we managed to secure. Obviously, it's not what it would have been if we were fixing last year, but it's still an above, let's say, cyclical average rate with a first-class account. So the demand seems to be there, and I think both owners as well as liners have been caught a little by surprise as to how the market has developed. Let's see how things fare. I think In the medium term, we are quite optimistic because the regulatory impact in terms of the, especially environmental regulations, I think are going to affect the container market maybe more than others, given the fact that... more sensitive to Scope 3 emissions. In addition to that, of course, you have ETS here, fuel EU, EXI, all these and will force older ships to either slow steam and we're pretty sure that a number of vessels will head to the scrapyards as a result of a combination of a worse market potentially as well as the regulatory framework. So I think we still need to see the dust settle with regard to the order book as well as the regulatory impact. before one makes a move. It's still maybe a little early. But I'm confident there will be opportunities, especially for owners that have modern fleets and liquidity to take advantage of them.
spk03: Thanks, Jerry. That's a very good overview. And maybe just one final one. You mentioned the 10 ships that you own right now, debt-free, and you used the example of potentially levering them up 50% as a source of cash if you wanted. Is that kind of how you're thinking about that? Do you plan to refinance those? Any sense of timing to do so, or do you think you'll monetize them as another option?
spk04: I think we are in no hurry. Effectively, what I was trying to highlight is that having a number of unencumbered chips on the balance sheet gives you a lot of flexibility. It is a liquidity lever. It is a sign of financial strength and flexibility. We don't know. We don't have any plans. At this point, we have plenty of liquidity, and if anything, it is going to increase going forward, given the cash flow generation of our existing fleets. If there is an acquisition that is accretive and makes sense, and for us to take on more leverage, then we can pull that lever. But there are no immediate plans.
spk03: Okay, well, thanks, Jerry. I'll turn it over. Thank you, Omar.
spk05: Thank you. Our next question comes from the line of Ben Nolan with Stiefel. Please proceed with your question.
spk02: Thank you. Hey, Jerry. Hi, Dr. Eaton. I've got a couple here. So I'm... I'm a little surprised to hear about the potential of adding incremental vessels next year, given interest rates are, you know, you guys are paying more than 6% for your debt, and at the same time, the unit price is down pretty substantially. It seems like... It seems like on a relative basis, even just paying down debt might be a better use of capital. Can you maybe talk me through how you're thinking about that?
spk04: I think we can hopefully achieve a better return than a 7% return if we acquire assets. And I think we have been able to achieve much better than that so far. So the repaying of the debt is a short-term issue. for excess cash, and I think we are getting a decent return from that. Don't forget that at the same time, you know, we can put up cash at 4% or 5% interest income. of 2%, 3%. So this is also why we're doing it while we don't have immediate use of the cash. But I'm hopefully confident that we will be able to put that equity to good use and achieve higher returns than that if and when we acquire additional vessels. On the buyback side, we have increased the pace somewhat. It is challenging. Liquidity has dried up. It has halved effectively over the last couple of quarters. But, you know, we have been out there for some time having bought... a total of just short of a million units over time, so a cash outlay of about 13 million, and we will definitely continue doing that. That's at least the plan for now. Okay.
spk02: So circling back to the returns that you were able to get historically, you know, in the recent years, you had, I don't know, cost of debt of maybe 3%, and your cash-on-cash returns when you were buying or dropping down an asset were 10%, call it. So assuming that your cost of debt has gone up by 300 basis points, is it fair to assume that the required return, given that equity risk premium of, you know, 6%, 7% is now, you know, 12%, 13%, like that's the kind of cash-on-cash return that you would need to be able to get.
spk04: It is definitely higher than it was before. But I think in the past we have achieved returns closer to the... And when I'm saying the past, over the last four or five years in terms of acquisitions, closer to the mid-teens. If you look at certain transactions that have effectively... closed in terms of buying, chartering, and then selling, some of them are well in excess of that. So hopefully we can replicate that.
spk02: Yeah, yeah, I was just talking about, like, unlevered cash on cash. But certainly, you know, the back end of those transactions is pretty important to driving the value. The last one comes up all the time. There's still the Cape Agamemnon, the final of the dry bulk vessels, after all these years, that we've talked about selling for a long time. Asset values are a little higher. I don't know, is it now the time, do you think? Yeah, but again, it's...
spk04: The KPI amendment has been a drag in the sense that it doesn't fit with the business model. And it has been also, it had also certain unscheduled repairs last quarter and, you know, higher that spilled into this quarter. So it turned on average around 4,400 per day, so So it really underperformed. So we are, yes, I think it's not for the lack of conviction. We are just trying to optimize the sale. But I think we'll do it at an opportune time. I know we have talked about it a lot, but we are just trying to optimize the exit. All right. Sounds good. Thank you, Jerry. Thank you, Vincent.
spk05: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Liam Burke with B Riley Securities. Please proceed with your question.
spk04: Thank you. Hi, Jerry. How are you? Hi, Liam. I'm well. How are you? Good. Thank you.
spk01: Jerry, you have, I mean, contract coverage that extends fairly significantly. Would it be... Do you ever consider just moving excess cash from the buybacks to a unit payout and up the unit payout? You're an MLP.
spk04: So we have said that we will revisit the unit distribution after we complete the acquisitions. The... The way that we see returning capital to unit holders is obviously the combination of unit buybacks and quarterly distributions. Of course, the interest rate rises have kind of changed the long-term... forward outlook as well as our ability to earn incremental cash. The decision that I think the board will have to take in the second half of the year would be whether continuing this two-pronged approach between unit distributions and unit buybacks is the right way, and what is the ratio between the two. As far as I'm concerned, I think unit buybacks at this point because it's not only returning capital, but importantly, they are, you know, the acquisitions are quite accretive given the NAV dislocation that we have discussed a few times in the past.
spk01: Okay, great. Thank you. And we're looking at an LNG order book continuing to grow and then spiking in the your view about adding assets in the long term?
spk04: I think this is, if you look really at the demand that will be coming online for LNG transportation, and by this I mean liquefaction capacity, we have recently two major projects taking FID. and then you look at the order book, then if anything it looks like the current order book might not be enough to cover the demand. Then if you add to this the technological, the importance of technological sizable when it comes to LNG carriers, and the strong preference of charters for two-stroke vessels that would probably push steamships and, to a certain extent, TFT vessels in a two-tier or three-tier market, and potentially some of the, especially the steamships into the scrapyard, you can see, you can very quickly paint a picture where the LNG shipping market might be in deficit by 2020, 2027. the fundamentals of the LNG market are unique both in terms of the demand and the supply factor. And this is without Even talking about the impact of regulations, again, if you look at the potential impact of EU ETS or of ULEU and, of course, CEXI and CII on all the technology ships, there will be a substantial impact. a very significant player in the LNG market. This was not the case two years ago. All this will create incremental demand for two-stroke latest generation ships and make older steamships And, up to a certain extent, EFT is more obsolete. So, I think there is, despite that headline number, I think this is going to be a good market for a while. Great. Thank you, Jerry. Thank you, Liam.
spk05: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Caligratos for any final comments.
spk04: Great. Thank you, and thank you all for joining us today.
spk05: This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer