Cool Company Ltd.

Good morning, ladies and gentlemen, and welcome to the Call Company Limited's first half 2023 business update call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 31st, 2023. I would now like to turn the conference over to Richard Harrell, Chief Executive Officer. Please go ahead.

Good morning or good afternoon, ladies and gentlemen, depending on where you are. And thank you for joining us and thank you for moderating. And turning to page three, I'd first like to welcome you to Coolco's second quarter earnings presentation, where I'll take you through the highlights and comment on how we see the current market before handing over to John, who will take you through the quarter in more detail. The slide provides a snapshot of the quarter and we'll get into what's behind these numbers as we move through the presentation. I'm pleased to confirm another 41 cents per share dividend for the quarter and an outlook that we're really quite excited by. Just like last year, European storage is full and we're starting to see charters use LNG carriers for floating storage once again. The heating season is around the corner and the Contango trade is in focus. Gas markets have normalised compared to last year, but remain volatile because of the threat of strike action in Australia, the possibility of what remains of Russian gas supplied by pipeline to Europe being cut, and uncertainty over winter weather. LNG carrier spot rates are responding, and as per the plan, we have Cool Husky coming open into this strong market. We have a portfolio that enables us to take measured risk on this vessel, and we're seeing more upside than downside in the rates at this time. Turning to page four, as always, the second quarter was a shoulder period where we optimised and prepared for the more interesting quarters to come. The highlights of the quarter were firstly the exercise and financing of two state-of-the-art Hyundai Samho new builds for which we are in active discussions on long-term charges. Secondly, we upsized our largest bank facility by $70 million in the quarter at a 50 bps reduction in cost, which is worth about 2 million per year in less interest cost. The 70 million upsizing will be used to fund our LNG e-upgrades in 2024 and 2025. Our time charter equivalent, or TCE, dropped slightly for the quarter because of the seasonal impact on our variable rate contract in Q2. However, we already see this very low rate has bounced back in Q3, where we will be capped out at just above $100,000 per day from mid-August. Iberda fell to $59.9 million in the quarter, primarily due to the fleet shrinking from 12 to 11 vessels after the nicely profitable sale of the seal, the proceeds from which have been redeployed in the acquisition of the two new buildings delivering at in the second half of 2024. We also have some catch-up costs on the ING vessels, which were purchased without spares, weighing on EBITDA. These elevated costs won't be such a feature in the second half. Our firm backlog increased in the quarter as a result of a charter exercising an extension option. On this occasion, it was on a TFTE vessel, taking contract coverage on the vessel to 2028. We view this as another confirmation of the attractiveness of our vessels to our customers. Turning to page five, and here we show why the quarter is looking interesting from our perspective. We have the Cool Husky available, and as you can see, the spot rates have started their seasonal climb. Term rates are yet to follow, but our sense is that they will as charterers focus after the summer holidays and given the characteristics of the market. Sublets are exiting as charterers ready themselves for the heating season, and we believe the Husky to be one of the last two independently owned TFTE vessels available in the market. Onshore storage is nearing full, as can be seen in the chart at the top right of the page, and as a result, we're already starting to see vessels use the floating storage. This is the time of year when shipments start to Asia, tying up tonnage along the voyages and throwing the strikes in Australia, the potential for Panama disruption, heightened sensitivity around energy security, and the forthcoming winter, and we have all the ingredients for an interesting near-term shipping market. And I don't think the interesting market only applies to the short term. Page six shows new supply that is coming to the market along with some very encouraging progress on FIDs. The FID of the Rio Grande LNG 16.2 million tonnes per annum project with the support of Total, one of our customers, is particularly large and notable. Some people ask where the LNG is going to go. but I don't see this as being a concern at the right price, as evidenced by the demonstrated ability of India, China, and other markets to take very large LNG volumes when they are available and suitably priced. There has been a huge build-out of Regas infrastructure, and this isn't a constraint. So what about price? At the top of the page in the pop-out chart, you can see that TTF is much less expensive this year than it was last year, while still supporting reasonable margins for our customers. This leaves LNG today priced at a small discount to the Brent equivalent price, making it cost effective in markets where liquid fuel is the alternative. LNG is still priced above coal effective price, but some of this is offset by the higher efficiency of gas and not to mention the environmental benefits of the lower CO2 emissions, which are approximately 50% lower for gas than they are for coal. Europe didn't burn more coal as a result of the Ukraine war, as is sometimes reported. In fact, forecast European coal demand in 2023 was actually down. But what I wanted to really highlight with this chart on the right is just what an opportunity there still is for LNG. Replacing 500 million tonnes of coal or under 10% of Chinese coal demand takes around 200 million tonnes per annum of LNG. which is a 50% increase in supply from current levels. And this demand need not all come from China. India and the rest of the world also have considerable potential. The projects listed in the table amount to 150 million tonnes per annum of LNG supply. So you don't have to believe in too much coal to gas substitution to see where additional LNG demand is going to come from. This, along with the current focus on energy security, provide a backdrop for fixing Coolco's new bills, as well as our existing vessels as they come open through the medium term at attractive rates. And I expect to have updates by the next earnings call, if not before. John will now take the quarter in more detail. John, over to you.

Thank you, Richard. Good afternoon and good morning to those of you who are in the US. Turning to slide seven, I'm giving an overview of the backlog. It shows a solid backlog in the near term with only 22% open days expected by year-end 24 and 34% open days expected by year-end 25. Given the current expectations for the markets, we believe that this level of open days provides us with an excellent and unique level of exposure to an improving charter market. On the chart on the right, The cash flow of our backlog, which is calculated as revenue backlog minus direct OPEX, surpasses the net debt. This underscores a strong level of coverage, while acknowledging, though, that the decline in net debt over time occurs sooner than the reduction in the backlog. Turning to slide eight, where I will recap the second quarter results, When discussing and analyzing our results, it's important to bear in mind that due to the opportunistic sale of the seal towards the end of the first quarter, the second quarter of 2023 only includes the full quarter contribution of 11 vessels as opposed to 12 vessels in the first quarter. This variance has implications for most of the metrics we will discuss, as will the fact that we have one vessel on a market-linked charter under which we would typically expect its earnings to dip during the summer months and outperformed during the winter. On the whole, the second quarter demonstrated significant strength, with time and voyage charter revenues reaching around 82.1 million, leading to an average time charter equivalent rate of 81,100 per day. Revenue for the quarter included non-cash amortization of net intangible liabilities, totaling 4.5 million, along with roughly $3.8 million from third-party vessel management revenues. As a result, our total operating revenues amounted to $90.3 million, aligning well with the higher end of the guidance range provided during our first quarter earnings presentation in May. Our year-to-date revenues were nearly double those of the same period in the prior year, largely due to the higher renewal rates during 2022 and the acquisition of four vessels in November of 22. For context, at this time last year, COOLCO reported an average TCE of 59,000 per day as compared to 81 we're reporting today. Our operating income for the quarter reached 45.4 million. This includes roughly 19 million in vessel operating expenses, slightly higher compared to historical trends for the reason Richard mentioned earlier. For the second half of 23, though, we anticipate these figures to refer back to historical norms. Operating income included 9 million in depreciation and amortization, along with 6.2 million in administrative expenses, which is a combination of third-party vessel management expenses and routine corporate overhead. Adjusted EBITDA for the second quarter, was 59.9 compared to 67.8 for the first quarter in 23. Again, mainly the result of the opportunistic sale and profitable sale of the SEAL vessel. Year-to-date adjusted EBITDA also nearly doubled when compared to the same six months in 2022. When comparing the net income between the first and second quarter, it's important to note the one-time gain on the sale of the SEAL. and the negative mark-to-market losses on the interest rate swaps in the first quarter, while for the second quarter, we incurred substantial mark-to-market gains on these swaps. Turning to page nine, the net income bridge, the left-hand diagram echoes my earlier points illustrating the transition from Q1 to Q2. Looking at the chart on the right, the second quarter net income adjusted for non-cash elements equaled 23.4 million. As previously indicated, the non-cash of net intangible assets and liabilities pertains to the revaluation of the charter agreements as a result of the purchase price adjustments related to the ex-GOLAR vessel acquisitions or spinoff and the subsequent four acquired vessels. The noteworthy gain from interest rate swaps in the second quarter is primarily due to higher market interest rates, with most of the gains being unrealized. Excluding non-cash items, the dividend of 41 cents per share represents approximately a 94% payout of the second quarter net income. Turning to slide 10, the cash flow bridge. The bridge for the first half of 23 highlights the starting and ending cash, resulting in 180 million in cash flow generation. mainly the result of the SEAL proceeds of $184 million minus the $90 million in related debts and fees, $128 million in EBITDA generation over the first half, and $70 million in borrowings to fund the previously announced LNGE CapEx improvements across five vessels. These cash inflows were partially offset by the dividends paid in the first half and the scheduled debt service of $90 million. Excluding working capital, the highlighted area with the circle in the first half of 23 is effectively the free cash flow to equity, approximately $42 million, leading to a dividend payout roughly 100%. Looking ahead, the ex-dividend date is set for September 8th, with the record date set for September 11th. The dividend will be distributed to DTC-registered shareholders around September 18th, followed by Norwegian registered shareholders approximately three trading days later around September 22nd. Turning to slide 11, the balance sheet. This chart shows our simplified balance sheet position with our assets, contractual debt, and book equity. Thanks to a robust market, strong earnings, and substantial cash flow generation, our net leverage was reduced by 10% since a year ago. Assuming the remainder of the new bill payments of the shipyard will be financed by the committed new bill debt, our net leverage would be in the 65% mark on a performer basis. Our dual listing in both Oslo and New York has facilitated share transfers to the U.S. with 67% now listed in the U.S. and the remainder in Oslo. We reiterate that Oslo shareholders aiming to shift their shares to the U.S., a process is outlined is outlined in the FAQ section on our website under the Investors tab. Moving on to the next slide, slide 12, with some selected financial information. In the chart on the left at the top, you can see our debt maturities are well spread out. The table on the right shows that we have 73% of our gross debt locked in at fixed interest rates. leaving 27% unhatched. But when we account for excess cash, excluding the $114 million in cash used to exercise the option for the new bills on July 3rd, our effective hedging reaches approximately 88%. And this cash is netted because the yields on our excess cash and the unhatched floating rate exposure tend to move in sync. At the bottom of the slide, the table highlights the significant volatility of the interest rate swaps mark-to-market values. For those of you modeling Coolco quarter-to-quarter, be aware of this significant but largely unrealized mark-to-market element in our earnings reporting. The realized portion in a specific period can be offset against our reported interest expenses to determine the effective interest rate for such periods. Overall, our effective interest rate stands at approximately 5.6%. Turning to slide 13 on the selected Q3 guidance, similar to our approach during the previous earnings call, we provide some insights into the third quarter's revenue outlook, which is guided to be slightly higher than Q1. Among our fleet of 11 vessels, secured under medium to long-term charters. For the remaining uncommitted vessel, we have assumed a spot voyage starting from September 11 onwards, and typically a very firm period for the charter market. With this financial overview concluded, I'll hand over the call back to Richard.

Thank you, John. And I will just end with saying how pleased we are with the reception that the company has received in the US market since it listed on the New York Stock Exchange earlier this year. We do have a lot of new US investors and obviously a lot of investors from all around the world are investing through that market as well. So before we get into Q&A, let me just end by summarizing Coolco. And as you know, we connect the world with cleaner, more secure energy, And as explained earlier, we see growth in the LNG market and the long-term need for LNG as a transition fuel. We are a pure play LNG company with a balanced portfolio of short and longer term charters. We have built in and funded growth from two new bills delivering in the second half of 2024. And this is an addition to our measured rechartering exposure, where we expect to see vessels rolling off older legacy charters achieve better rates. We have a high-quality fleet that we are looking to improve still further with our LNG-E upgrade program that will reduce emissions by between 10 and 15% per vessel as part of our wider 35% emissions reduction goal that will include the addition of new vessels over time. We have, in Eastern Pacific Shipping, a highly supported 58% shareholder who enables Coolco to punch above its weight with shipyards, financing institutions, and on deal flow. And last but not least, we have an attractive dividend, which is approximately 12% yield at today's share price, a strong balance sheet, and that enables us to make opportunistic acquisitions and consolidate the market across the cycle. And with that, I'd like to open up for Q&A. Shintu, over to you. Thank you.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchstone phone. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your request, please press the star followed by the two. Our first question comes from Chris from Webber Research. Please go ahead. Your line is open.

Hey, good afternoon, Richard and John. How are you?

Good, thanks. Hi, Chris. Hi, Chris.

Hi. So just touching on a point in your prepared remarks in your presentation, for the Cool Husky, when you're talking about taking risks, do you mean trading in the spot market instead of perhaps securing a long-term contract?

We certainly have the option to do either or, and what path we choose will depend upon the respective markets.

Okay. And as a follow-up, what are the rates that you're seeing now for TFDs both on a spot and term basis?

I think what you see in that chart, which I forget which page it was on now, but that's a fair reflection of what we see in the market. I would say the liquidity is relatively thin, but what's indicated on that chart, which is I think about 120 in the spot market and rising fast and 100 in the term market is realistic. But as I mentioned in my comments, we do expect the term market to pick up in reaction to the way in which the spot market is moving. And that'll kind of put it back into where it has been in the recent past for term business in our view.

Right. I see. Great. Fair enough. And with the LNGC supply story very well understood, and you just pointed out that there's a very thin market for liquidity on those vessels, I'm assuming there's no opportunity to time charter, but if those opportunities do present itself, is that something you would consider?

I'm sorry, you're asking whether we would consider to time charter in other vessels?

Right. If the opportunities were available.

Yeah, we always like to stay abreast of the market just in case we, you know, we feel that those kinds of opportunities are worth following up. But we would, of course, you know, look at those in the context of our own fleet and, you know, where we wouldn't want to be in a position where we ended up with a lot of vessels available in the same quarter. We've spent a lot of time working on the portfolio and making sure that everything is nicely spaced. and that would remain a priority.

Sure, portfolio plus, makes sense. And if I can squeeze one last one in, just more of a modeling question. If you can help quantify the impact to vessel assets from the LNG-E upgrades, like how much per day savings are we looking at?

The savings, we believe, and it will depend on LNG price, of course, But we're modeling something in the order of $10,000 a day on average. And it will also depend on how you're operating the ship as well. But that's what we're looking at. What we can secure from the charters is in a way sort of subject to negotiation. Obviously, we'll look to secure as much of that $10,000 a day as possible.

Okay, perfect. Thanks for that, and I'll turn it over. Thanks for the questions, Chris.

Thank you. Our next question comes from from . Please go ahead. Your line is open.

Thank you. Good afternoon, Richard. Good afternoon, John. Good afternoon, Liam. Richard, could you give some sense as to on the global supply, fleet supply equation where we have a good percentage of the fleet operating under steam turbine vessels? As those vessels come off long-term charters, how do you see the supply side of the equation going forward?

Yeah, in the last quarter, we spent a page on that very question. Yeah, the way we look at it is by asking how many older vessels are going to reach their 20th birthday in each of the years going forward. And the reason why we ask ourselves that question is because many of those vessels will be off contract as of that time. And it depends a little bit on the year, but there's between 15 and 20 older vessels that are reaching that age per year over the next few years. I think that's as good a guide as any for how many steam turbines we would expect to leave the market annually.

Okay, fair enough. And the dividend was, you maintained the 41 cents per quarter. Looking at your debt amortization schedule, which is very manageable, but you do have capital outlays for the two new bills. Do you see this as a payable through the cycle, understanding you have other needs for your capital?

We do. We obviously kind of have a stated policy on dividends, which has the word variable in there. But of course, we aim to sort of manage a little bit through the cycle. And this quarter, the dividend payout ratio was relatively high. However, you've got to remember that we aren't actually seeing any cash flows from those new bills until they deliver at the end of next year. And the equity has already gone out. So You know, we do think that, well, we are comfortable with the current levels of dividend in a nutshell.

Great.

Thank you.

Yeah, so any remaining shipyard payments are going to be funded by the committed debt financing. So the equity, as Richard said, has already been paid out effectively.

Great. Thank you.

Thank you. As a reminder, if you wish to register for a question, please press the star followed by the one on your touch-tone phone. Our next question comes from Frodo Mokdal from Clarkson Security. Please go ahead. Your line is open.

Thank you. Hi, guys. Hi, Frodo. Hi, Frodo.

I'm not sure if you already talked about this, but on the new build, I think last time you talked about that you wanted to have secured employment before taking or declaring the options. So maybe you could talk a little bit about the chartering landscape since they're not employed yet. Haven't you been, or is it the race that you haven't been happy with or something else at play here?

Yeah, we're sort of waiting for the for to reach a landing zone on race is how I'd put it in respect of the new bells and we are holding out for a rate which reflects the current price of new bells which is obviously quite significantly higher than what we paid for those vessels and I suppose charterers are hoping that we'll settle on something slightly lower. But we have quite some time yet. Not that I think we'll need it to fix those vessels.

Sure. I guess it's a good time to wait. The seasonality should be in your favor, I guess. On that note, I think you rose in the Press release about the rising national gas prices being beneficial for shipping rates. Maybe you could talk a bit about that given the prices have come off obviously from the peak but are now coming up again. How's that impacting chartering decisions both in the spot and maybe the term market as well?

Well, firstly, I'm not sure that volatility, if it's extreme, isn't necessarily a good thing. But it does focus the mind. It does encourage our charters to be a bit longer. However, I think almost equally important is that the charters are making reasonably healthy margins. And the nice thing about the level at which the gas crisis is settling at is that it it is at a level where the chargers are making healthy margins while also being at a level where plus or minus it's interesting to the more price sensitive markets. And we talked to a little bit the equivalent pricing of oil and coal and so on. And obviously now LNG is back in this zip code, the equation is something which people are looking at again, whereas this time last year, when LNG was at its peak, it wasn't really even a question.

The last question I had is on the retrofits with reliquifaction. I guess this might be obvious for some shifting people, but I would think that a lot of General investors might not know that much about it, so maybe it could be helpful for you to explain the cost and benefit of doing those investments.

Sure, more than happy to. When you look at the operating profiles of our vessels, they, at the very maximum, are going at 19, maybe even 20 knots. However, quite often they're sailing at a speed that we typically call slow steaming, somewhere maybe 13, 14 knots. And sometimes they're being used for storage and not moving at all. So we've got upgrades which target various regions of the operating range. When the ships are going fast We've got plans to install lubrication, which reduces the drag and efficiency of the ship at speed. And that's at one end of the spectrum. At the other end of the spectrum, we're installing what's called subcoolers, and subcoolers deal with the boil-off gas. So LNG always boils off. In the old days, it all went through the engines, and that was that. Today, the engines are more efficient, and at slower speed, there is an excess amount of boil-off, and subcoolers take that excess and reliquify it. So to put it into context, one of our ships typically will have a boil-off of 0.1% of the cargo per day, and if you are stationary with a subcooler, you can reduce that down to 0.03% per day. And, you know, that's very valuable. It's not something that's going to apply all the time because you're not always stationary. But when you are, that's big dollars, and it's real value for our customers. That's good to hear. That's it for me. Thank you very much.

Thank you. There appear to be no further questions. I will now return the conference to Richard for closing remarks.

Well, thanks, everybody, for joining the call, and thanks for the excellent questions. I look forward to seeing some of you at the various events over the fall, and look forward to bringing you the news of new charges and when they come in. Thanks again.

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.