Cool Company Ltd.

Good morning, ladies and gentlemen, and welcome to the Cool Companies Limited Q4 2023 Business Update conference 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 Wednesday, February 28, 2024. I would now like to turn the conference over to Richard Terrell. Please go ahead.

Thank you, Eric, and good day, everybody. Thank you for joining the Coolco fourth quarter 2023 results call. Let's get started by turning through the first couple of pages and taking a look at page three, cool company at a glance for the quarter. On the left, we have the headlines. Our time charter equivalent increased to $87,300 per day, a record level that was driven by our contracted revenues and seasonal tailwinds. This fed into higher revenue, higher EBITDA and higher net income if you adjust for the mark-to-market losses on interest rate swaps. The natural consumption of backlog over the quarter as a result of the passage of time was offset by the announcement of a 12-month charter for one of our open vessels after the end of the quarter. As a result of our strong operational performance, the board announced a dividend of 41 cents per share for the fourth quarter of 2023. This equates to a dividend yield of 14% at the current share price. The shares have been under pressure since the end of the quarter because some of the factors you see on the right-hand side of the page We'll get into these as we go through the presentation, but in summary, the warm winter has resulted in falling gas prices, and charter is seeking to sublet any excess capacity in their fleets. These sublets have weighed on rates and resulted in negative sentiment, but we do see them clearing the market, and as shipping demand increases with longer shipping distances as we move through the year, we expect rates to bounce back. Shipping distances have started to increase, because of the distributions in the Panama Canal and the Red Sea. Current LNG prices are expected to spur demand in the more distant markets that are even further away than normal because of these disruptions. And this is positive for our modern ships. It's not so great for smaller, less efficient steam turbine vessels, and it's hard to envisage how they stay in the market. This last point, along with the new LNG supply that is now visibly coming,

is expected to balance the shipping market.

Turning to page four, as you would expect, we have seen an increase in the rates in the fourth quarter, driven by one vessel trading in the spot market at an opportune time and another vessel on a variable rate contract. A favorable ballast bonus also played a part in the results. In addition to this, I am pleased to announce that the Increase in revenue has more than flowed into EBITDA because of a solid cost performance. We've had some movements in the fleet between this quarter and the comparison quarter in 2022 with the arrival of the ING vessels in the fourth quarter of 2022 and the disposal of the seal in the first quarter of 2023. But nonetheless, the results stand out as the highest since Coolco's formation. John will get into the numbers in more detail shortly. before he does i wanted to say a few words about the market and our expectations going forward please turn to page five where you will see the story of the past three years 2021 was a cold winter in asia and you can just see the lng prices coming off their peak on the left-hand side of the chart wind the clock forward and the market rose in anticipation of another cold winter in 2022. And while this didn't really materialize, it shows the tendency of the markets to anticipate based on most recent history. By January 2022, gas prices were falling, only to be disrupted by the Ukrainian shock. This worsened during the summer as Europe scrambled to fill storage, culminating with the sabotage of the Nord Stream gas pipeline but at the time still provided a material amount of supply. The peak LNG price shown on this chart is almost 10 times the low price. To put this into perspective, cargo values have ranged from 30 million to 300 million over this period, a factor that at its highs convinced charters to maintain additional length in their shipping fleets. Gas prices dropped heading into the autumn of 2022 and the winter of 2023, but still remained elevated. Something that's prompted price sensitive markets to focus on coal for the next season. This year or last year now, 2023 has seen much less volatility in prices, and our expectation is that this will result in increases in LNG shipments to far away markets. Those markets being predominantly in the east. Such markets will consume their stockpiles of coal this year and are looking forward to using more environmentally friendly gas in the future. Turning to page six, and of course there has been a recent lack of volatility in the gas markets, and that has created a negative sentiment towards shipping. But even in this market, we were very pleased to announce the charter of the Husky earlier this month. The Husky is on a 12-month charter, during which time it will be upgraded to LNG-E specs during a dry dock that you can see from the chart. The level of this charter is decent, and it has a nice feature in that we will share the upside from the upgrades with the charterer. Conservatively, these are anticipated to be worth a few thousand dollars a day above and beyond what is shown on the chart. While Husky is coming off a very healthy Ukraine-driven contract and a lucrative period in the spot market, and the contract it is moving on to is at a lower level, the decrease is offset by the Kelvin that is about to start its three-year time charter at higher levels than those at which it was previously chartered, as can be seen in the line that is dashed and in turquoise on the right-hand side. The next point I'd like to make on these slides is that we expect the market to be improving by the time our next available vessels come available for recharging. We've spent quite some effort making sure that these vessels don't come available at this time of year when rates can be low, and we believe that rates will be significantly better by the time they become available and are rechartered. in the second half of this year. The spot chart on the left shows how this is typically the case for TFTE vessels and will provide further support for this case when we go through the next pages. The chart on the right shows how spot rates and the knowledge that a considerable number of new vessels are delivering over the coming years has depressed the term business in a way that was not seen last year. liquidity for long-term charters has been hit by the charters being able to bridge needs with sublets and defer decisions. But there remain enough requirements for me to be confident of fixing our new buildings before delivery. I don't have an announcement for you today, but it will most certainly be enough to be material enough to warrant its own announcement outside the normal results schedule when it happens. Turning to page seven, and here we show how the new supply of LNG will soak up much of the forthcoming shipping. The chart on the left reflects COORCO's view on forthcoming projects. It totals more than 110 million tons per annum of LNG between now and the end of 2026, with shipping needs of approximately two to three vessels per NTPA. depending on how much LNG goes to Asia versus the Atlantic. I won't get into the ins and outs of specific projects, but in general it's fair to say that the projects are led by large and established LNG players, and these are on schedule, with Novatec's Atlantic LNG2 being the only wildcard. What it is important to appreciate is is that most of these incremental volumes will have to go east given the peak demand in europe is already behind us this is very good news for shipping and we're not concerned about demand lower gas prices are a major facilitator and the key markets are really gearing up to take the product the table on the right shows some key steps that have been taken in china india and vietnam thailand the philippines and bangladesh these changes are providing the industry with confidence around the levels of demand. And this is something that's supported by anecdotal evidence from our business development activities.

The other part of the equation are the new bills and possible retirements.

And page eight provides an update on this picture. You can see a fairly straight line of deliveries over the same period as we plotted on the previous page And whereas the deliveries are potentially on a more steady trajectory compared to an S-curve in supply, the overall picture is reasonably well balanced. Importantly, most of the vessels are fixed to known volumes, and Corco vessels are the first to deliver amongst those still to be fixed. As expressed before, we remain confident of fixing these vessels before delivery. On the other side of the coin, we're expecting many more retirements in the coming years compared to what we've seen previously. A number of old steam turbine vessels received a new lease of life as a result of the high rates seen after the Russian invasion of the Ukraine. However, this is not a trend that we see continuing given the high cost of keeping these vessels on the water in the face of lower rates. Is it worth spending up to $10 million on a dry dock for an off-contract vessel when spot rates for steam turbines are as low as $25,000 per day? We don't see how anyone can make that work. These vessels are typically smaller than new bills, but even if they're not replaced on quite a one-for-one basis, their retirements still amount to a significant additional demand for more modern tonnage. That concludes my market overview. And I'd now like to pass the baton on to John, who will take you through the quarter in more detail.

Thank you, Richard. I will provide a financial overview for the fourth quarter and the full year of 23. So turning to slide nine, in our Q4 earnings release today, we announced a solid fourth quarter with some metrics reaching record levels in the history of Coolco. Time and voyage charter revenues for the quarter were 89.3 million, resulting in an average time charter equivalent rate of 87,300 per day across our fleet of 11 vessels, also a record. The improvement versus the last quarter is primarily attributed to higher floating and spot rates during the winter season on two of our vessels. Fourth quarter total operating revenues generated 97.1 million, which is inclusive of non-cash amortization of net intangible liabilities of 4.5 million and 3.3 million from third-party vessel management revenues. This number is above the guidance range provided during our third quarter earnings presentation in late November. This is mainly because of one vessel operating in the spot market that finished off the quarter the fourth quarter on the favorable spot rate that was not committed at the time of providing the guidance. Full year time in voyage charter revenues were 347 million and full year total operating revenues were 379 million. Operating income for the quarter reached a healthy 55.1 million, an improvement of 14% compared to the third quarter of 23. The fourth quarter operating margin relative to the fourth quarter revenues was very strong and reached a level of 57% margin. We're also very pleased to report that our vessel operating expenses for the quarter came in at $16,600 per day per vessel, which was roughly $2,000 per day per vessel better than the two previous quarters, mainly due to the timing of main engine overhauls and lower purchasing activities on acquired vessels. Operating income also included 18.9 million in depreciation and amortization, along with 5.4 million in administrative expenses, which includes a combination of third party fleet management expenses and routine corporate overhead. Adjusted EBITDA for the third quarter of 23 was 69.4 million compared to 62.8 for the third quarter of 23, also a healthy improvement. Moving on to the next slide, the net income bridge. The net income chart on the left illustrates the transition from Q3 to Q4. Reported net income for the fourth quarter was $22.4 million compared to $39.2 million in the third quarter, primarily reflecting a $23 million unrealized mark-to-market valuation swing on our interest rate swaps. This was partially offset by roughly 4 million in higher revenues and the aforementioned OPEX savings. The mark-to-market swing was the result of a significant market interest rate drop from the end of Q3 to the end of Q4. The fourth quarter net income in the chart on the right adjusts for recurring non-cash elements and equaled 34.2 million, a record quarter for the company if one excludes the non-recurring gain on the sale of the seal vessel during the first quarter of last year. The non-cash amortization of net intangible assets and liabilities is associated with the revaluation of charter agreements related to the spinoff from Golar and the subsequent acquisitions in late 22. Excluding such non-cash items, the approved dividend of 41 cents per share represents approximately a 64% payout of fourth quarter net income. Turning to slide 11, the cash flow bridge for the full year. This chart shows the starting and ending cash and the cash movements during the entire year. Excluding new built CapEx related borrowings and sale proceeds from the seal, the free cash flow to equity in the circled area was around 84 million. We declared a cumulative $88 million in dividends for 2023, so we effectively distributed slightly higher in dividends than the free cash flow available to equity holders. Also, for the full year, we paid $114 million for the exercise of the new-build option and $67 million in subsequent milestone payments to the shipyard, totaling $181 million. We also spent $16 million in advance payments for the previously announced L&GE upgrades. In addition, we upsized the 570 million facility by 70 million back in June of last year. And during the fourth quarter, we borrowed 40 million under our new-built sale and leaseback pre-delivery finance facility, which together with the upsize adds up to 110 million in new borrowings during the year. Turning to slide 12. We are reiterating our dividend policy that we announced back in October 2022. On a quarterly basis, our free cash flow to equity shows a bit of variability due to the semi-annual debt repayments on one of our facilities. However, on a cumulative basis, since inception of our dividend policy, you will see that we paid out slightly higher than our free cash flow to equity. The basis for calculating free cash flow to equity is adjusted EBITDA minus regular debt service plus interest income. The Board has approved a dividend payout of 41 cents per share with an ex-dividend date that is set for March 8 and a record date of March 11. The dividend will be distributed to DTC registered shareholders on or around March 18. followed by Norwegian registered shareholders approximately three days later on or around March 21st. Turning to slide 13 on the financing. In this morning's press release, we were very pleased to announce that we have received commitments from several quality commercial banks to refinance our sale and lease back facility, recurring in the first quarter of 2025. by upsizing the existing 520 million bank facility. Because this existing sale and leaseback debt has a very low interest rate, we structured the refinancing with a delayed drawdown to ensure that we maintain the benefit of this low interest rate through the interim period. Alongside this upsize, the banks have also committed to make some changes to the financial covenants. the main one being a relaxation of the cash covenant, which will become 4% of total debt. As you can see on the chart, once the upsize is closed, which we expect in March, we have no debt maturities for the next three years. Turning to slide 14, on this slide we show the split between commercial and current sale and leaseback debts. we have fixed our interest rates for about 85% of our net debt, with an average interest rate well below 6%, even on a pro forma basis, which includes the new-built debt. The table at the bottom shows the split between realized and unrealized mark-to-market gains and losses, which on our income statement are combined in one line item. Our cumulative realized swap results since inception of our swap program in July 2022 We're well in the money with 11 million in net gains. So our hedging program has paid off well so far. The unrealized gains as of the end of the year were approximately 5 million. For those modeling Koolco quarter to quarter, please take note of this significant and largely unrealized mark to market swing in our quarterly earnings reporting. So in summary on this financing slide, No debt maturities until February 27. We're freeing up between $50 million and $100 million in cash as part of the upsides and the amendments. And an interest rate that is substantially fixed and well below 6%. Moving on to the next slide with an overview of the backlog. This slide highlights the revenues for 2024 are committed for approximately 95%. with one open vessel in late July and another one late November. While this open day percentage will obviously increase over time, the time charter equivalent rate from our backlog is approximately $76,000 per day per vessel. And on average, we maintain roughly 4.6 years of backlog per operating vessel, including auctions. This includes the options exercised to the maximum extent. Of particular significance on the chart to the right is the cash flow generated by our backlog, calculated as contracted revenue backlog minus direct operating expenses, which surpasses our net debt. This underscores a robust level of coverage even before accounting for any future chartering activity related to our open days. Turning to slide 16, first half year guidance. On this slide we reiterate our February 7 selected revenue guidance for the first half of this year. In 24 we anticipate four dry dockings, one in the second quarter and three in the third quarter. Currently we expect these dry dockings to begin and end within the relevant quarter, but the exact dates may change depending on the timing of cargo deliveries and our client needs. These dry dockings will result in some unpaid dry docking time. As Richard mentioned, the cool Husky will undergo upgrades with a subcooler and an air lubrication system to enhance performance and reduce emissions. With the financial overview concluded, I'm handing the call back to Richard.

Thanks, John. I think it's time to open up the lines for questions. Eric, if you could please do that for us.

Thank you. 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 touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Froda Morkadal with Clarkson Security. Please go ahead.

Hi, guys. Thank you. On this one-day chart you announced in February, which I assume is the Husky you showed on this chart, it was a bit hard to read on the line there, but I guess also based on the revenue guidance for Q2 you provided, you are able to back out that the charter rate needs to be above 80,000 per day. Are you able to confirm this?

The chart is accurate, Frodo, and your maths is also accurate. Thanks for that question. It's an important clarification because I think a few people have had it at a somewhat lower level.

Yeah, it's a really strong chart rate, obviously. I guess, is this chart rate inclusive of the, let's say, the benefits of the re-electrification capex later this year? no that's in addition okay uh interesting i guess more broadly can you discuss how you are able to share the capex with the customer to a higher higher rate for these lng lng e investments it's not so much sharing the the capex uh the the capex on us is on us uh it's

It's more of a question of how we get paid, and in this particular contract, it made sense to share the upside. It'll be the first vessel that's had these upgrades, so there's an inevitable uncertainty around certain elements of the performance. The agreement we've come to with Santos is that we share the improvements. And I think that's a very fair agreement. And it also very much aligns us with the charter. So we obviously want to improve our performance as far as possible. And that's for their benefit. And it's also for our benefit because of this mechanism.

Perfect. That's great. Thank you.

Thanks, Nicole.

Your next question comes from the line of Liam Burke with B. Riley. Please go ahead.

Thank you.

Hi, Richard. Hi, John.

How are you today?

Good, thanks, Liam.

How are you? I'm fine, thank you. Could we go into a little detail about your two new bills? You're talking to several charters and they're looking at unmet, I guess right out of your press release, unmet transportation requirements. Would that translate into longer time charters or would they be spot market type agreements?

These vessels are going to be more targeted at the long-term market. Now we're relatively agnostic on whether long-term means five years or whether it means 15 years. I think there's a sort of a rate sensitivity as you go from one end of that scale to the other. But we are very much focused on those kinds of opportunities. Now within the customer universe for those vessels, We've found that the traditional customers who will charter vessels through the cycle, they are still there and they have RFP processes which are quite structured and obviously we participate in those. I think the fact that the market has been a bit softer more broadly has put off some people who have a stated need from doing anything immediately. And some of the more traders or big portfolio players might fall into that camp. So overall, the level of inquiry is down somewhat because of that. But it is still there. And we are still seeing these inquiries from people who will charter through the cycle. And they basically view it as winning some and losing some.

Fair enough. And with the disruption in both the Panama and Suez canals, are you seeing charters more anxious to grab onto carrier assets, or is this just a function of short-term supply-demand?

Very much so.

We haven't seen an immediate step change because at least so far in general, the Atlantic volumes have stayed in the Atlantic and the Pacific volumes have stayed in the Pacific. But what we are seeing for next year or for this coming year, people are looking at their cargoes, they're looking at their schedules, and they're saying, well, wait a minute, if we have to go around the Cape of Good Hope, we're going to need an extra ship. So there are people who are really starting to pay attention to this issue now, and it will be positive for demand going forward.

Great. Thank you, Richard.

Thanks for the questions, Liam.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from the line of Mike Webber with Webber Research. Please go ahead.

Hey, good morning, guys. How are you?

Very well, thanks. Mike, and you? Hi, Mike.

Good, good. Hey, guys. So, Richard, just a couple here. I wanted to follow up on the first question on the Husky. And based on your answer, I think I know what the implication is, but you touched on the relic and then kind of the alignment between the yourselves, the charterer, But with regards to the ALS system that you guys are upgrading or introducing to that later on this year for a trial, how did the economics work associated with that and your charter in terms of potential fuel savings?

Yeah, the way to think about it is that we have a level of a performance switch which goes sort of across the speed range. So if you're going below natural boil-off speed or, you know, basically just stationary, then you're going to get a lot of utility out of the relic. If you're going faster than the natural boil-off speed, you're going to be getting your value, somewhat less value, but still a few percentage points out of the ALS. So what we're doing is that we're benchmarking the performance of the vessel. before the dry dock and then we're benchmarking or we're then comparing that to the actual performance of the vessel after the dry dock and calculating the benefit and sharing it between us.

Gotcha. So they're effectively tethered together. Okay. That's helpful. Just to follow up on the Red Sea, if I think about the dynamics in place now where you've got You know, obviously, well, I guess maybe first and foremost, right, in terms of the rerouting, we're starting to see around the Cape of Good Hope. Do you think we've seen the majority of that impact yet in terms of longer ton miles, or do you think that's still ahead of us?

I think it's still ahead of us. And, you know, as I mentioned, I think so far, in general, LNG has stayed within its basin. So a lot of the LNG out of the U.S. has been targeted at the Atlantic Basin coming into Europe. And within the Pacific Basin, you've got the Australian volumes going up to Asia, going up to Japan and Korea, China and those markets. Qatari volumes, obviously, there's a bit of a sort of split. Some of them go east and some of them go west. But we haven't seen a lot of LNG switching basins. And the interesting thing about the volumes that are coming, they're going to have to go east because Europe is kind of full. And a lot of these volumes are coming out of the Gulf. And the primary destination will be the East. And unfortunately, right now, the East is difficult to get to because of these channel issues.

Yeah. And if I think about QP's volumes there, obviously, they're expanding with their NFB push. which actually looks on time, if not early, as opposed to most of the stuff in the U.S. And they're actively marketing some of those volumes as well, some of their legacy volumes. Are you starting to see, at least in conversations with potential charters, any kind of mix shifts in terms of who you're talking to there? And I guess the thought process is shifting towards more of an FOB focus there in terms of people setting up their transportation capacity for longer term volumes and might be coming online now and, you know, one to two years from now or two to three years from now.

Yeah. Yeah.

I mean, we are, I think this is a reason why we have, we have quite good visibility, visibility on, on the needs going forward. Uh, what, what we, um, have less control over is, uh, sort of the timing of when people, you know, feel the need to pull, pull the trigger. Uh, so, you know, we, we, we do have a strong sense of, um, how many ships are going to be needed over time. And that's what gives us the confidence in the new belts. I mean, of course, if you're a kind of charterer who's got a little bit more of a kind of trading mentality right now, you look at the market and you think, well, maybe I can wait and take us up that for a little while. If you're a charterer that's got a much more, I guess, more conservative approach and you're seeking to match your volumes with your shipping with your volumes, then you do what you've always done, which is run a RFP type process and secure your shipping.

Yep. Okay. That makes sense. One more for me and I'll turn it over. We saw new build prices inch down in January for the first time in a while. They're still up more than 20%, I think, over the last three years. Just curious on a relative basis, how do you think about returns on new build programs here versus, say, where we were a year ago, um, and how attractive or unattractive you might find them.

Yeah.

I mean, I think, um, the, well, the new book cost right now, let's start with that because that's, that's pretty well established. And, uh, you know, we've seen numbers as high as two to 70, uh, you know, recently, but I, I think in reality with, with discounts, it's probably more like two to 60 or maybe even slightly, slightly, slightly below that. Um, but you know, the prices are elevated and, um, uh, today's, uh, cost of financing in order to turn a buck on your equity, you need to have a certain rate. So that's a positive thing for us because it kind of anchors things at a decent level. I think that rate is above $100,000 a day. Do I think you're necessarily going to get that if you go out into the market tomorrow? I mean, no, not quite. So there's, I think, a potential for a bit of a standoff while the bid-off spread comes together.

Okay. That makes sense. And no, I'm not going to lie. I've got one more on your balance sheet. But with regards to the facility that you've got maturing in 27, my presumption would be that that was probably the first place you looked in terms of upsizing and the collateral pool might not have been might have been more fully baked into the advance rate on that facility. Is there room to expand that in a similar way that you did the 2029 facility? Or is that more or less tapped?

Yeah, I know John Z gets to take one, so let me pass this on to John.

I mean, we did consider that one as well, but it had a much shorter maturity than the May 29 one. That's the main reason we upsized the May 29 facility. But is there room in the February 27? Yes, as long as we add collateral to it. The banks, I'm sure, are willing to lend. But what's the point, right? It's only three years. So we'd rather term it out a bit longer.

Yeah.

If that answers your question.

Yeah. Yeah. Okay. No, it just seems like a more complicated conversation because you need an extension on it.

um okay that's uh that's all i've got i appreciate the time guys thank you i would now like to turn the call back over to richard terrell for closing remarks please go ahead i think without any further ado i'll just thank everybody for joining the call and uh

Look forward to reporting back with developments as they come in. Many thanks, Eric.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.