Capital Product Partners L.P.

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.

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.

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.