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spk01: Thank you for standing by, and welcome to the Capital Product Partners Second Quarter 2023 Financial Results Conference Call. We have with us Mr. Jerry Calogiratos, 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 would like 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 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 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 prediction or statement about the performance of our common units. I would now like to hand over to your speaker today, Mr. Calagir-Ratos. Please go ahead, sir.
spk00: Thank you, Paul, 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. During the second quarter of 2023, we took delivery of the motor vessel Buena Ventura Express, the last of three 13,000-U container vessels we have agreed to acquire last year together with the LNG carrier Asterix 1. Furthermore, we agreed to sell our sole dry cargo vessel, the motor vessel Cape Agamemnon, with delivery of the vessel to her new owners expected in the fourth quarter of 2023. Finally, during this quarter, we completed the dry dock of the Athos and the Athenian, along with significant energy efficiency and emissions abatement upgrades. Now, turning to the partnership's financial performance, net income for the second quarter of 2023 was $7.4 million. Our board of directors has declared a cash distribution of 15 cents per common unit for the second quarter. The second quarter cash distribution will be paid on August 8th to common unit holders of record on August 2nd. We continued acquiring units under our unit buyback program, and during the second quarter of 2023, we repurchased 156,560 of the partnership's common units at an average cost of $13.30 per unit. Finally, the partnership's charter coverage for both 2023 and 2024 stands at 96%, with the remaining charter duration corresponding to 6.7 years and contracted revenue backlog of more than 1.8 billion. Turning to slide 3, total revenue for the second quarter of 2023 was 88.5 million, compared to 74 million during the second quarter of 2022. The increase in revenue was primarily attributable to the revenue contributed by the three 13,000-U container new building vessels and the new building LNG carrier Asterix 1, recently delivered to the partnership, as well as the increase in the daily rate earned by two of the partnership's LNG carriers, partly upset by the sale of two 8,000-U container vessels in July 2022. Total expenses for the second quarter of 2023 were 58.6 million compared to 40.9 million in the second quarter of 2022. Total vessel operating expenses during the second quarter amounted to 23.5 million compared to 16.4 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 costs incurred during scheduled maintenance of certain of our vessels. Total expenses for the second quarter of 2023 also include a non-cashing permanent charge of 8 million that we recognized on the date we agreed to sell the Cape Agamemnon, and vessel depreciation and amortization of 20.9 million compared to 17.7 million in the second quarter of last year. The increase in depreciation and amortization during the second quarter of this year 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 administrative expenses for the second quarter of 2023 amounted to 2.3 million in line with the second quarter of 2022. Now interest expense and finance costs increased to 25.5 million for the second quarter of 23 compared to 11.7 million for the second quarter of last year. The increase in interest expense and finance costs was mainly attributable to the increase in the partnership's average indebtedness and the increase in the weighted average interest rate to 6.28% from 3.46% in the second quarter of 2022. The partnership recorded net income of 7.4 million for the quarter, or 15.4 million, before the impairment from the agreed sale of the Cape Agamemnon, compared with net income of 20.4 million for the second quarter of last year. Net income per common unit for the quarter was 36 cents, or 75 cents, before the impairment from the agreed sale, compared to $1 per common unit in the second quarter of last year. On slide 4, 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 38.2 million in cash from operations for the quarter before accounting for the capital reserve. We allocated 35 million to the capital reserve, an increase of 1.6 million compared to the previous quarter due to the increased debt amortization resulting from the drawdown of the Buena Ventura Express facility. After deducting the capital reserve, the adjusted operating surplus amounted to 3.2 million. On slide five, you can see the details of our balance sheet. As of the end of the second quarter, the partners' capital amounted to 649.4 million, an increase of 11 million compared to 638.4 million as of the end of 2022. The increase reflects net income for the first half of the year, other comprehensive income of 1.7 million relating to the net effect of the cross-currency swap agreement we designated as an accounting hedge, and the amortization associated with the equity incentive plan, partly offset by distributions declared unpaid during the period for a total amount of 6.2 million, and the total cost of repurchasing our common units and our unit repurchase program for a total amount of 3.8 million. Total debt increased by 332.5 million to 1.6 billion, compared to 1.3 billion as of year-end 2022. The increase is attributable to a $5 million increase in the U.S. dollar equivalent of our Euro-denominated bonds as of June 30th. The drawdown of a total of $392 million to finance new vessel acquisitions, partly offset by scheduled principal payments for the period of $41.1 million, and the early prepayment in full of one of our facilities for an amount of $23.4 million. Total cash, as of the end of the quarter, amounted to 104.7 million, including restricted cash of 11.7 million, which represents the minimum liquidity requirement under our financing arrangements. Turning to slide six, the Buenaventura Express was successfully delivered to the partnership on June 20th and commenced their 10-year charter with Hapag-Lloyd. Hapag maintains three two-year options to extend the charter. The acquisition was funded through a combination of a cash deposit of 6 million advanced in 2022, 100 million drawn under a new credit facility, and 16.5 million of cash at hand. The new credit facility has a quarterly principal repayment of 1.6 million, an eight-year term, and a balloon payment of 50 million due in June, 2031. On slide seven, we provide a summary on our recent fleet developments. Our latest acquisition cycle has now been completed and the partnership has taken delivery of three 13,000 U hybrid scrubber fitted tier 3 and phase 3 dual fuel ready eco container sister vessels, together with the latest generation XDF LNG carrier, the Asterix 1. All vessels have commenced their long-term time charters, increasing our contracted cash flow, at the same time reducing the average age and carbon intensity of our fleet. In the second quarter of 2023, the partnership completed the scheduled dry dock of two of our 10,000 EU containers, the Athos and the Athenian, and the installation of a shock scrubber system on each vessel. In addition, both vessels were retrofitted with a bulbous bow and cellulac-related self-polishing technology hull coating, which are expected to improve the energy efficiency and carbon footprint of these vessels. The sister vessel, Aristomenes, completed her scheduled dry dock and was retrofitted with the same upgrades this month, leaving the yard on July 22. The partnership has reached an agreement with HAPAC, whereby the latter will refund part of the total cost of these upgrades to the partnership. On June 27, the partnership agreed to sell the dry cargo vessel Cape Agamemnon, a non-core asset for the partnership. Delivery of the vessel to her buyer is expected by October 2023. In view of the agreed sale, the partnership classified the vessel as held for sale and recorded a non-cash impairment charge of 8 million. Moving to slide 8, the partnership's contracted revenue backlog now stands at 1.8 billion, with over 63% of contracted revenue coming from LNG vessels with diversified and credit-worthy customer base of seven charterers. Turning to slide 9, the partnership's remaining charter duration amounts to approximately 6.7 years, while charter coverage remains at 96% for both 2023 and 2024. It is worth noting here that our next period charter expiration does not occur before the first quarter of 2025. Turning to slide 10, we review the LNG market. Demand for LNG carriers on the term market remains strong, despite the recent drop from the record highs reached in the fourth quarter of 2022. Currently, one-year DC rate for a two-stroke LNG carrier stands at 140,000 per day, while the term market is expected to tighten as we get closer to the winter, especially for modern vessels. Overall, the second quarter of 2023 saw a continuation of the seasonal downward pressure experienced the first quarter of the year, both on gas prices and spot charter rates. However, towards the end of the quarter, there was a slight rebound in prices due to the emergence of inter-basin arbitrage and contango into winter, while demand fundamentals remained strong. Seven one-year deals were concluded in the second quarter of 2023, broadly aligned with the quarterly levels seen last year. Longer-term three- to five-year deals are, however, slightly lower compared to last year, with five deals concluded year-to-date versus a quarterly average of seven last year. Recently reported fixtures for new-building LNG carriers with prompt delivery lie around the $100,000 per day mark for a 10-year period. The LNG fleet order book currently stands at around 51.4% of the total fleet, with 331 vessels on order. Established shipyards have effectively no slots left until mid-2027, both in Korea and China. New building prices continue to rise and currently stand at 261 million per vessel for a basic specification vessel. Year on year, LNG orders are down by approximately 70 percent. On slide 11, we review the container market. The container market conditions the first half of 2023 were relatively soft due to weaker trade volumes and reduced port congestion. The Clarkson Shutter Index stood at 103 points in the first week of July 2023. Although it has decreased 76 percent from the peak in April 2022, it remains more than 100 percent higher than the average recorded during the 2010-2019 period and 1.8 times higher than the 2019 average. The SCFI Spot Box Rate Index stood at 932 points in the first week of July 2023. Despite its decrease by 82% compared to the peak in 2022, it is only 3% lower than the average observed during the 2010-2019 period and 15% higher than the 2019 average. Analysts and brokers anticipate that trade will improve in the second half of 2023 as the economy bottoms out. Compared to earlier forecasts, global container trade is now expected to grow by 0.3% in TEU terms against the previously projected 1.2% contraction in the first quarter of 2023, while the container fleet is expected to grow by 6.8%. Looking ahead to 2024, analysts predict a more robust demand growth rate of 3.3% for the contradiant trade, with supply also growing at a pace of 6.3%. As of the beginning of July, the order book for new vessels stands at 889 units, equivalent to 7.4 million TEU, or 27.7% of the total fleet capacity. Demolition activity has also increased, with 38 units of approximately 73,400 TEU being demolished so far in 2023, compared to 11 units only in 2022. Now turning to slide 12, and having completed a significant round of growth for the partnership, which we announced last year with the acquisition of the three 13,000-year container vessels and the LNG carrier Asterix-1, we review additional growth opportunities for the partnership. On this slide, you can see the order book of our sponsor, Capital Maritime and Trading, which, among others, comprises an additional 11 latest technology LNG carriers. These vessels are second-generation two-stroke vessels with a mega-propulsion and sub-generator arrangement, thus reducing further the carbon equivalent emissions of these already very efficient vessels. Deliveries of these LNG carriers are expected between the fourth quarter of 2023 and up to the second quarter of 2027. Importantly, the five vessels delivering between 2023 and 2024 have either already secured term employment or under advanced commercial discussions with an average tenure of 7.5 years and approximate gross revenues of 1.4 billion. In principle, these constitute attractive assets and subject to our ability to acquire these vessels, CPLP would be uniquely positioned over time to control a fleet of up to 18 latest generation LNG carriers with a diversified portfolio of charters. This would make CPLP the largest publicly listed owner of latest generation LNG vessels with contracted cash flows and a nice mix of staggered expirations at a time when LNG fundamentals remain strong. As we maintain financial flexibility, 10 unencumbered vessels and good cash flow generation, we believe that CPLP is strategically positioned to take advantage of such growth as opportunities as we continue to focus on growing our distributable cash flow and renewing our fleet. And with that, I'm happy to answer any questions you may have. Thank you.
spk01: We will now be conducting a question and answer session. If you would like to ask your question, please press star 1 on your telephone keypad. The 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 key. One moment, please, while we poll for questions. Thank you. Our first question is from Omar Nocta with Jefferies. Please proceed with your question.
spk02: Thank you. Hi, Jerry. Good afternoon. I just wanted to ask about the, you know, obviously you completed the acquisitions from last year. You took the three container shifts and the LMG carrier. And so now that's completed and you're basically harvesting the cash flows. And then you just outlined on slide 12 the drop-down opportunities, which you've continuously How do you think about those right now in terms of timing? Can we expect drop-downs near term? Is it really just about timing of the vessel deliveries themselves, or is there something you're waiting for before proceeding with any drop-downs?
spk00: Thank you, Omar. No, I think it has been important, as we have communicated in the past, to complete this acquisition cycle before we start considering what we do next. And again, today is a very premature discussion as the board considers where we go from here and how we grow the partnership into the future. But, you know, as just high-level thoughts, obviously growth is not being pursued for growth's sake. But when you look at our peers, especially those on the LNG side, we believe that by further growing the partnerships fleet and becoming among the largest two-stroke LNG vessel owners in the public domain, it is possible that over time we can achieve more investor visibility, liquidity, and what is also the end goal here, a better equity valuation. So in my prepared remarks, as you say, this is just an outline of the LNG carrier order well in excess of $3 billion in terms of charter-free fair market value today. Of course, as you pointed out, there is also the distinction there are about five vessels that either have or are very close to securing employment, and that would be, you know, an average charter duration of seven years, which is, I think, quite attractive. Importantly, I think for the partnership, this is an interesting segment, and we see this as a multiyear upcycle, especially for vessels like this, that is two-stroke vessels. I think this is supported by the increasing commodity supply, and we have seen the FIDs taken this year. But energy security considerations that have played also a very important role over the last couple of years, and I expect them to remain at the forefront. And, of course, the role of that LNG is expected to play as a transducer fuel to net zero, which, of course, in turn is expected to spare long-term demand for the commodity. So I think there is a multiyear upcycle with regard to demand for LNG and hence also LNG vessels. And then you also look at the dynamics of the LNG fleet. This is quite unique, I think, have changed the unit freight cost over time, and then you look at the advantage that the two-stroke vessel brings compared to a TFD or, even more important, a steam vessel, and then you think also about the emissions, especially in the framework of ETS or carbon levy. And you can see also that there will be a very interesting vessel supply. And this is, you know, this type of demand-supply dynamics you don't, I think, necessarily see in other segments. But, you know, as far as CPLP is concerned, the segment is very interesting. There is access to dropdowns. But the question will be how we fuel this potential further expansion. Our cash position as of the end of the first half of this year amounted to about 105 million. We expect good cash generation going forward, and we have a number of unencumbered vessels on the balance sheet, which could be liquidity levers. In certain cases in the past, as you know, we have also used our equity as a currency for such transactions, which could also be helpful in larger acquisitions. So, you know, we have to... to assess not only the attractiveness of the drop-downs and, of course, how we grow our distributable cash flow, but also how we fund these acquisitions. And I think this is what we're going to think over the coming months and hopefully have more to share soon.
spk02: Thanks, Jared. That's a very, very deep dive. I appreciate that. And it sounds like, you know, clearly, you know, Capital Maritime as an organization has a pretty substantial size two-stroke LNG fleet and would be one of the biggest, right? Publicly, as you think about that in... further strategically about where CPLP is. You mentioned, you know, some of the unencumbered assets. Do you think that perhaps could one of the options be monetizing the container ship fleet over time and utilizing those proceeds for the investment in LNG?
spk00: Potentially, yes. I mean, you know, we sold the Cape Agamemnon. Of course, this is something that we have signaled for for some time. And there is also a very conscious move from our side over the last few years to modernize our fleet. I mean, it started with the spinoff of the old container market, and bringing in brand new containers and LNG carriers. I think we will have to think, as you say exactly, this is what we need to think about the positioning and the strategy. I'm not sure if it is divesting simplicity. selling, for example, the containers, it might be more looking to how to structure transactions so that we can, if you want, unlock some of the value that we have. over the last few years. I think we have been creative in the past, you know, from spin-offs to mergers to whatever we think it's necessary to create more value for shareholders. And I think that's something that we need to think about, but still quite early, I think.
spk02: You know, you had a very... At this time last year, the spot rates were through the roof, if I recall. And they had a pretty strong fall. And since then, they've been a bit volatile towards the downside. But that's just the spot market. How would you characterize the term target market here recently? It's obviously been very active for maybe at least two years or so. How has that sort of been moving here over the past couple of months? Is that still... firm? Has there been any kind of impact from a softer spot market or lower LNG prices?
spk00: I think that apart from the seasonal softness that we see in the spot market and then kind of affects the short-term period curve, you know, anywhere between one to three years, when you look at what has transpired in the long-term market, it has been increasingly at higher rates. to 10 years. Over the last few months, we have seen FIDs for three new liquefaction terminals being granted. That's more than 41 MTPA. And, you know, Whatever multiplier you use, you still come up with anywhere between 70-plus new vessels that we will be requiring somewhere in the period 2026-2027. And then you look at the order book, which always looks quite big, if you think in a nominal way, right? I mean, it's still 52% of the current fleet, but the uncommitted ships are only 33%. And that's without taking into account potential removal of all the inefficient vessels like steamships or whatnot. I think the long-term period demand is there. The softer commodity price and the seasonal downturn has affected slightly the short-term period market, but it's still quite tight. Not to mention, of course, that new building prices have been moving up. In reality, we say that today you will order a basic That basic spec sheet, if you want to be half respectable in this market, means automatically mid-260s plus, maybe even above that. And then you look at the delivered cost, taking into account cost of capital and whatnot, and maybe you are... now much closer to $300 million, together with supervision and pre-delivery installments. So, you know, in order to get a decent return on a $300 million vessel for delivery in 2027, you still need to be very close to six-digit day rate numbers. So I think for all these reasons, there might be short fluctuations, but still a very tight market overall.
spk02: Yeah, interesting. That's very helpful. Thank you, Jerry. I'll turn it over. Of course. Thank you, Omar.
spk01: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the questions here. Our next question is from Ben Nolan with Steeple. Please proceed with your question.
spk03: Hi, Jerry. This is Frank Galantian for Ben. I wanted to follow up on the discussion around the LNG drop-downs, potential drop-downs. It's sort of sounding like growth through drop-downs is becoming a priority and sort of correct me if I'm putting words in your mouth, but can you sort of frame in and how much capacity you think the partnership has for drop-downs and how do you sort of think about balancing that between paying down debt and returning capital to shareholders?
spk00: I think this is exactly the question that we will need to answer over the coming quarters. I pointed out to our cash position and the unencumbered assets, but this is still quite capital-intensive sport, the LNG industry. So, you know, there is so much that we can do with these tools. So this is what we're going to think about, I think, over the coming months. Is it a priority? I think it It is very much the same message that it hasn't really changed that we have communicated before. So we have said that over time we will continue to allocate about a quarter to a fifth of our free cash flow. which is going to be returned to our unit holders, be it distributions and unit buybacks, and I think we are quite close to these levels. And then the rest, we will continue to focus on growth. Opportunistically, we will repay debt, but we can always repay debt and avoid that incremental cost of capital. And then if needed, relever if there is an accretive opportunity. So I don't think we are ready to say what we want to do and how much we want to do. But I think the message has not changed. It's really the same. We will continue to be focused on growing both the fleet, especially in the LNG and container segment, with the LNG being quite attractive at this point. And with that, the same allocation, so return of capital to unit holders and then also equity going towards growth.
spk03: Okay, that's really helpful. Sort of following up, well, Yeah, actually, so following up on the leverage question, the euro-denominated bonds come in due in 2026. Obviously, it's a pretty far way away, but it's a big bullet maturity. And sort of given where prices have, where interest rates have gone, it would probably be more expensive to refinance. How do you think about that specific debt instrument?
spk00: I think we have some time until we cross that bridge. And we have been always prudent in the way that we calculate our capital reserve, even notionally. despite this being a non-amortizing instrument, we are still, when we're looking at the cash we generate, we allocate notional cash under capital reserve. But having said that, I think the basic scenario is right now that we will potentially refinance with a similar bond closer to maturity. The market, the Athens Stock Exchange, seems to be open. a placement by another issuer recently and not very different pricing compared to what we achieved a year ago or so. But, you know, this is at the same time we are also creating a lot of headway in terms of our leverage. I mean, we are repaying about $88 million of debt amortization every year. We have unencumbered assets. We are generating cash. So one way or another, I think we're not particularly concerned about that maturity.
spk03: That makes sense. And one more, if I could, just in terms of you said about a quarter to a fifth of capital to be returned to shareholders. And now that All the vessel dropdowns have been completed. Can you sort of talk about how you are thinking about the split between share buybacks and distributions?
spk00: Yeah, I think it's that very logic that we have communicated in the past. And we have said that once the drop-downs are complete, that we will reconsider our distribution policy in line always with this strategy. And I think that if you look at what we're doing today, that is unit buybacks and distributions, we're actually quite close to these targets. having also somewhat increased the pace of our unit buybacks over the last few months. Now, I think the difference compared to when we started is, of course, the current interest rate environment. I mean, when we started thinking about the drop-downs and the potential distribution uptick. But it is a very different interest rate environment. And until we have more visibility with regard to the forward interest curve, we will continue cents per quarter. You know, the Fed decision just two days ago clearly demonstrates that we're not past that increasing interest rate cycle. So I think we are in line with our stated policy with regard to how we allocate our cash flows. But, of course, we are going to be mindful of the industry environment and changing circumstances as to how we look at this in the future.
spk03: That makes a lot of sense. I really appreciate you taking the time.
spk01: Thank you. Thank you, Frank. Thank you. Our next question is from Clement Mullins with Value Investors Edge. Please proceed with your question. Hi, Jerry. Thank you for taking my questions. I wanted to ask a bit about the environmental upgrades you've done over the past few months. Could you speak a bit about what kind of efficiency improvement are you looking at? And secondly, you mentioned that HAPAC has paid for part of the cost. Should we expect charters to foot part of the bill on other potential upgrades going forward?
spk00: That's a great question. So the bow modification and the self-polishing, the lacquer-related paints, Each of them, theoretically, they will give you net efficiency gains anywhere between 2% to 4%. But it's not always, they don't always work as you would expect. So it's not necessarily that you would expect 4 plus 4 equals 8%. They definitely make a difference. We expect that this will help the CII rating of the vessel and, of course, the energy efficiency. I think we can maybe in a couple of quarters from now we can revisit this and give you actual numbers. because these are, for the moment, theoretical. But from other power modifications and use of paints, we see that they can be meaningful. And, of course, the benefit is here for the charterer who pays for the bankers. The charterer in this specific case, they also wanted... A scrubber, which, of course, does not really change the energy efficiency of the vessel, but reduces SOx emissions. And effectively what we have agreed, which is, I think, more unique to this charter party than in others, is that HAPAC will pay part of these modifications. You know, this is always a function, and without wanting to go into the confidential nature of the agreements, in the end it's a function of market conditions, the age of the vessel, so, you know, who is going to benefit most from these improvements, and the duration of the charter. So I don't think there is one-size-fits-all for this type of arrangements. But as you know, we have done it again in the past with HMM and scrubbers. We, for example, in that case financed the scrubber installation cost and we got an increased rate on our charters. So it can work in many ways. And as I said, it depends on the number of things as to whether it will be the same for future deals. Makes sense. Thanks for the call. Regarding the dry docking schedule, you did a couple of vessels during the second quarter and the Aristomenes in July. Do you have any additional special service scheduled for the remainder of the year? No, there is none for this year. All right. That's all from me. Thank you for taking my questions.
spk01: Thank you, Clement. Thank you. There are no further questions at this time. I'd like to hand the floor back over to Mr. Jerry Caligari for any closing comments.
spk00: Thank you all for joining us today and wishing you all a great weekend.
spk01: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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