Cool Company Ltd.

Good day, everyone, and welcome to the Cool Company Limited Q1 2024 Business Update. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. You may remove yourself by pressing star 2. Please note today's call is being recorded. and I'll be standing by if you should need any assistance. It is now my pleasure to turn the call over to Richard Tyrell, CEO. Please go ahead.

Thanks, Todd. Good morning to those in the U.S. and good afternoon to those in Europe and further east. Welcome to Coolco's first quarter 2024 results presentation. Please turn to slide three, Coolco at a glance. I'm pleased to be able to present a set of results that have benefited from our charter backlog, something that has grown materially since the end of the quarter with the announcement of the largest single contract Coolco has ever entered into, namely last week's 14-year charter with Gale of India, who have the option to extend by two years at the end of the period. While this has taken some patience, this is an exciting development that I'll get back to later in the presentation. Our backlog held TCE for the quarter and partially offset the effects of a weakening spot market and some off-hire for one of our vessels that was in between charters. Our second quarter outlook is for a stabilization in LNG prices and shipping rates. This has been helped by an uptick in demand for air conditioning in Asian markets, something that typically preludes a stronger market for shipping with the refilling of storage in Europe coming next ahead of winter. Our expectation for the forthcoming fixing season is that rates will be higher compared to what we see today. Shipping distances will be up as more cargo is delivered to the east. Distributions, disruptions, excuse me, to Panama and Suez will continue to result in vessels taking the longer route around the Cape of Good Hope. and steam turbine vessels will bear the brunt of any falls in utilization levels as new builds deliver. Slide four takes the quarter in greater detail with a summary. The longer term employment for one of our new builds at attractive rates helps the seasonal downturn in rates and the in-between off-hire on one of our vessels. Total operating revenues were in line with guidance at just over $88 million. In a reversal from the fourth quarter of 2023, the rate on our solo variable charter fell with spot market rates from $102,000 per day to $55,000 per day, quarter on quarter. Between charter off hire of 51 days further weighed on the TCE, along with delivery-related voyage costs. This is the end of the quarter. We've had the new-build charter I've mentioned, and the first of our vessels for this dry dock cycle has entered the yard. Three more are scheduled to enter the yard in the third quarter of 2024, and you'll want to reflect this in your models. John will provide the relevant inputs for this later on slide 15. Our dividend for the first quarter of 2024 was maintained at 41 cents per share. The rate and adjusted EBITDA charts show seasonal weakness this quarter, but we expect an improvement in the second quarter based on contracted revenues. The backlog tells the story of the new charter, and that's something we're very pleased with. Please turn to slide five. The newly signed charter is for 14 years to Gale, India's leading natural gas company. Gale is investment grade and a significant importer of LNG into one of the highest potential markets. It is great to establish our relationship and we're aiming to work together on future projects. Gale is an end user for LNG in that it imports and trades the commodity, regasifies it, and sells on the gas to customers in the fertilizer city grid, power, refinery and petrochem sectors amongst others in India. Growth is underpinned by a booming economy and high growth niches like the compressed natural gas and LNG markets for transportation. You can see how LNG imports have bounced back now that the prices have stabilized after the Ukraine shock and are now back on their upward trajectory. The high teen return on equity that we achieved on the new build sets a supportive precedent for the second vessel around which active discussions continue. While talk of vessels that cost $260 million per day today before capitalized interest requiring more than $100,000 per day may prove, on the optimistic side, something well into the 90s will be required to cover even the most competitive costs of capital in the industry. We generated higher returns on this ship because of when we ordered it and how much we paid. And we can see how important this is to our performance on the next slide, slide six. Combining well-timed sales with purchases orders, fleet renewal, and the award of value-accreted charters is core to our value proposition, and the charter on the new build demonstrates this. In the last 18 months, we've acquired four vessels with a gain of 66 million based on fair market value accounting treatment. We've harvested a year of high rates on another vessel before selling it at a premium value with a gain of $78 million. And now we have the attractive charter on the new build that compares highly favorably with its purchase price, crystallizing at least $25 million in value. The third deal was funded by the second deal, thus allowing us to fund internally, along with competitively priced debt, which is another area where we have created value for our shareholders. Turning to slide seven, this is our familiar look at the LNG carrier market. It has been weaker, but our well-diversified portfolio of charters limits near-term exposure. The chart on the left has spot data for TFDEs, and you can see from the orange line that this has bottomed out. And last year, if anything to go by, it will be up from here. The longer-term 12-month market, which is where we focus, is also starting to show signs of life. is important that this develops positively before the blizzard and the glacier come off charter later this year both markets have an important bearing on sentiment which is also important for our second new build even though it is targeted at more long-term opportunities it's also worth highlighting the improvements that we see on the husky which is the dotted teal line in the second quarter now that it is delivered onto its 12-month charter, and on the glacier, which is the dotted grey line that has had a nice step-up in rate since March. Slide 8 lists some of the reasons why a mild rebound in shipping rates is on the cards. The price of LNG and margins the shippers can achieve, whilst not what it was, remains supportive to shipping. As is shown on the chart, LNG prices are stabilising at a level that includes an energy security premium compared to before the Ukraine war. This makes LNG nicely profitable, as shown by the margins in the middle chart. The value of a cargo today is approximately $30 million. and with more than 25% of this being margin, the shippers are motivated to maintain lengths in their fleet. While LNG prices have increased in absolute terms, it is competitive again as a commodity compared to oil and coal, which is an important factor in growth markets. We saw earlier how more LNG is flowing into India, and the same applies to China and elsewhere in Asia. Above average GDP growth in these regions is a primary driver with high summer temperatures for air conditioning adding seasonal demand. India is already hot and China is getting hotter, which means more cargoes are heading east, more tonne miles and more shipping requirements. The last factor that we think makes LNG shipping interesting is volatility. While Coolco has been quite defensive in its chartering strategy, It does have vessels that would benefit if volatility returns. We saw volatility in the cold winter of 2020-2021 and saw it again because of the war in the Ukraine. This year, the question marks around how Russian LNG volumes will reach end markets if banned from Europe. And if oil and tanker markets are having to go by, the volumes will flow to the more distant markets that are willing to take them, and this will soak up quite some shipping capacity. John will now get into the first quarter in greater detail.

Thank you, Richard. Today I will provide a financial overview for the first quarter of 24. So turning to slide 9, in our Q1 earnings release earlier today, we reported operating revenues of $88.1 million, a level consistent with our previous guidance and expectations. These operating revenues were inclusive of non-cash amortization of net intangible liabilities of 4.5 million and third-party vessel management revenues of 4.9 million. The latter number is slightly higher than previous quarter because it includes notice and termination revenues due to the reduction in the number of third-party vessels under management. Time and voyage charter revenues for the quarter amounted to 78.7 million, resulting in an average TCE rate of 77,200 per day across our fleet of 11 vessels. This decrease versus last quarter TCE revenues of 89.3 million is primarily due to lower floating and spot rates during the winter season for one of our vessels, and an off-hire period for another vessel as it transitioned from interim work in the spot market to a new one-year charter. Operating income for the quarter was 44.1 million, and the 11 million declined from the prior quarter, which was 55.1 million, which is mainly the result of the 10 million reduction in TCE revenues, and some incremental voyage and delivery expenses related to the vessel that transitioned to a new charter. The operating margin relative to revenues was 50%. Vessel operating expenses for the quarter were 17,600 per day per vessel, which was on par with our rolling four-quarter average. Adjusted EBITDA for the first quarter of 24 was 58.5 million compared to 69.4 million for the fourth quarter of 23, again, mainly the result of lower TCE revenues. I would like to reiterate that adjusted EBITDA is calculated by netting out non-cash amortization of intangibles, which are part of our revenues, resulting in adjusted EBITDA this quarter being 4.5 million lower than what an unadjusted EBITDA would have been. Turning to slide 10, the net income chart on the left depicts the transition from Q4 to Q1. Reported net income for the first quarter was 36.8, up from 22.4 million in the fourth quarter. This increase is primarily due to a 24.5 million unrealized mark-to-market valuation swing on our interest rate swaps, and partially offset by the aforementioned lower TCE revenues. On the chart on the right, excluding the non-cash items, the approved dividend of 41 cents per share represents approximately a 91% payout. Turning to slide 11, As we reported last week, our backlog now includes the newly announced new-builds charter with GAIL. Including extension options, our backlog totals nearly 1.9 billion, equivalent to approximately 64 years of backlog, or an average of close to five years per vessel, which considers all 13 vessels in our fleet, including the currently un-contracted new-builds. We have one vessel available in late July, early August, and another in late November. With last week's new build announcements, the TCE rate from our backlog increased from approximately $76,000 per day per vessel to more than $79,000 per day per vessel, accounting for all exercise options to the maximum extent. Turning to slide 12. This slide demonstrates that on a cumulative basis, since the inception of our dividend policy, we have paid out slightly more than our free cash flow to equity. Free cash flow to equity is calculated as 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 set for the New York Stock Exchange at May 31st, and the OSE at May 30th, and a record date of May 31st. From May 28 onwards, the standard settlement cycle for transactions executed in securities traded on the New York Stock Exchange will be shortened from T plus 2 to T plus 1, while the Oslo Exchange, will continue to settle its trades on a T plus 2 basis. As a result, there will be different dates between the two exchanges as set out in our dividend press release. During these interim days, investors may be restricted to move shares between the New York Stock Exchange and the OSC. The dividend will be distributed to DTC registered shareholders on and around June 10th. with Norwegian registered shareholders receiving their payouts approximately three trading days later, which will be on around June 13. Turning to slide 13 on the financing, in late March, we reported a successful refinancing of our sale and leaseback facility, maturing in the first quarter of 25. by increasing the existing 520 million bank facility by 200 million. Given the very low interest rate on this existing Salem-Eastback debt, we structured the refinancing with a delayed drawdown to ensure we continue to benefit from the low interest rates during the interim period until the maturity of the Salem-Eastback. Along with this increase, the banks approved certain changes to the financial covenants the most significant one being a relaxation of the cash covenant to 4% of total debt. The chart on the left illustrates that once we draw on this upsize, our first debt maturity will not be until February 27. Our average interest rate is below 6%, and we have hedges in place for approximately 90% of our pro forma debt, which takes into account the new-build financing. As of March 31st, cash and cash equivalents were approximately 106 million, which is a decrease versus the last quarter's cash balance of 133 million, which is mainly due to a new bill milestone payment of 22 million during the quarter. As you may recall, the proceeds of our opportunistic sale of the seal in the first quarter of 23 provided the equity to fund these new bills. As a result, the March 31st cash balance is exclusive of the available pre-delivery liquidity of around $49 million under our new-built financing, which we have opted not to draw yet. Turning to slide 14, this slide presents the breakdown between realized and unrealized mark-to-market gains and losses. which are combined into a single line item on our income statements. Since the inception of our swap program in July 22, our cumulative realized swap gains have been quite significant, with 14 million in net gains. As of March, the unrealized gains for the interest rate swaps that have not yet matured are approximately $13 million. As previously mentioned, for those modeling Coolco's performance on a quarterly basis. Please take note of these significant and largely unrealized mark-to-market swings in our earnings reports. Then turning to slide 15, this slide provides selected guidance for the second quarter of 24. Second quarter revenues are expected to align closely with our previous guidance. I'd like to reiterate that on one of our debt facilities, the principal repayments are on a semi-annual basis, which affects our quarterly free cash flow to equity figures. Finally, we anticipate four dry docks this year, one currently ongoing, and three scheduled to start in the third quarter of 24. We expect these dry docks to begin and end within their respective quarters. though the exact dates may shift based on cargo delivery schedules and charterers' needs. The resulting unpaid dry docking time accounts for some of the anticipated revenue decline from Q1 to Q2. With the financial overview concluded, I'll hand it back to you, Richard.

Thanks, John. To those who've listened through the call, I'll just take a moment to underscore what we believe to be a very important takeaway. This is an industry that experiences both seasonality and cyclicality as regular occurrences, particularly in the spot market, but it's important to remain focused on the bigger picture and the longer term. The strength and promise of which you can clearly see reflected in our signing of the 14-year charter with Gale, a great counterparty, at a high teen return on equity. We feel very good about the future of Coolco's modern LNG carriers, and we believe that we're in a great position to seize opportunities and realize very significant value for shareholders in the way that we've demonstrated to date. Thank you very much for listening, and Todd, please can we open up for questions?

The floor is now open for your questions. If you would like to ask a question at this time, please press star 1 on your telephone keypad. You may remove yourself, of course, at any time by pressing star 2. Once again, if you would like to ask a question, please press star 1 at this time. Our first question will come from Froda Morkadal with Clarkson Securities. Please go ahead. Thank you.

Hi, guys. Hi, Froda. First off, congrats on this new talker with Gail. I'm not sure if you actually said the rate, but based on the backlog increase, I just estimated to be in the low 90,000 per day. I'm not sure if that's a good estimate or not, but could you perhaps discuss the expected returns on this? You mentioned the high teens, but If you could compare the rate to let's say the cash per given first off and let's say a normal 10% return on equity, what type of day rate would that be? Just to have a framework to understand the rate.

So in November 22, we put a chart in our investor relations deck, Frodo, that showed the economics. And there you see that in order for us to make a 10% equity return with the assumption that I mentioned there, we need at least $82,000 per day. And the break-even is 69 in that chart. So if you then use your number that you calculated and you extrapolate, then you effectively come to the conclusion that equity returns are in the high teens.

And then looking at it from the other angle, This vessel cost us $236 million compared to the prevailing cost of these vessels, which is $260 million. So we've managed to harvest the benefit of that lower cost fundamentally.

Yeah, indeed.

Great, Brett. Yeah.

Go ahead.

Yeah, that's good. That's a good comment. I hope... Do you expect to level up to the 90% or so loan-to-value? I think you have that optionality. In your chart, you just presented, you talked about... I think you said 80% loan-to-value based on the new bill, but I think you could increase it further, right, given this long-term charter?

Yeah, today we can't because we need formal approval by the financier, but we expect that to happen. So we expect to increase the leverage to 92.5% of the shipyard expenses, which is in the mid-220s for each new build. So the answer is yes.

but but you know okay that should add you 28 million or so um maybe you could talk about the next next new build um i guess given the long-term chart right you have now i guess you could opt for lower or shorter contract uh if you wanted to what's your thinking here on the next new build the answer that is you know yes we

we can look at shorter charters. However, the rate advantage you get on a shorter charter in this market isn't going to be as great as what it would have been, call it, 12, 18 months ago. So you've got to ask yourself whether that makes sense or not, because obviously, With a 10-year plus charter, you can get the extra leverage, you can release some equity, and that has significant value, which I think probably outweighs any rate advantage you can get from doing a shorter-term charter today. Now, that can change, of course, quite quickly. The market is volatile, but that's at least how we see it today.

Okay.

enough uh my last question is on the dividend it's been pretty steady at 41 cents even though you have your stated policies uh floating i think right um but it seems like you you find 41 cents to be a good one um so the simple question is really if you do you expect it to stay at that level or are you expecting it to become floating in the coming quarters i guess you have some capex commitments in the neutron

Yeah, we do, and we've got the policy that spells out how we think about it. We actually do the maths each quarter, and we get to our dividend. Ultimately, it will depend upon the rates, and we've got the backlog, which is clearly very helpful. but it will depend on the rates for the vessels that are coming over.

Okay, I might have another question really. Given the cash you have today and the increase in leverage, what's the capex you expect this year, your remaining capex, and what type of cash position would you be comfortable or do you need to have?

So from a cash perspective, we need – the covenant cash is roughly 60 million. So on top of that, we need some working capital to run the business, right, call it 30 million or so, so close to 100. or a little bit less than 100. You know, today we are at 106, but effectively our liquidity is 155. And if you get the increase in the LTV, it's even more. It gets close to 200. But, you know, common minimum cash is 90. And then we have CapEx payments to be paid, right, based on the announcement we made back in June. and that is in progress already to some extent. We've already paid 15 to 20 million on the CAPEX so far. And what we announced back in June was for the upgrades, 15 million times five vessels.

Okay. Clear. Thank you. Thank you, guys.

Thanks, Gordon. Thank you. Thank you. As a reminder, if you would like to ask a question, please press star 1 at this time. Our next question comes from Liam Burke with B Reilly. Please go ahead.

Thank you. Good afternoon, Richard. How are you? Very well, thanks, Liam. How are you? Fine, thank you. Richard, can you give us some color on the vessels that are up for recharter? And would you think that the appetite that you saw for the long-term charter on the first new build is a positive reflection on the outlook for the recharters you have later in the year?

I think the markets are a little bit different, but sentiment from one does influence the other. The new bills, they're focused a little bit more on these longer-term opportunities where you have quite often off-takers and end-users for gas, wanting to secure shipping, and not just for one or two years, but we've seen with Gale, 14 years. That is the main focus for that vessel. I wouldn't say it's the deepest market, but it's still very much there, and we're having some very good discussions in relation to that second ship. I mean, of course, we could always charge it on a shorter-term basis as well, but as I explained, based on today's market, I'm not sure it would be particularly advantageous to do so. It could easily change, but at least as of today, that's the way we see it. The other vessels, they are more in that sort of short-term market, which does follow a cycle. And we are coming into what is normally a good period for those types of vessels. And we'll have to see, but we're quite confident.

Great. Thank you. And on the loan covenants that you discussed earlier in the call, Is there any discussion on any kind of limitations on dividend payouts? I mean, as you said earlier, your payout is over 90%. Does that come into the discussion with the bank covenants?

As long as we comply with the financial covenants, we have no dividend limitations.

Okay, great.

That's what I needed to know.

Anyway, thank you very much.

Thanks for the questions, Liam. Thank you. And it appears at this time we have no further questions in queue. I will now turn the call back to Richard Tyrell for any additional or closing remarks.

Great. Well, it seems that everybody is keen to wait for the NVIDIA results, which I believe are later today. We will not compete with NVIDIA, but if anyone does have any further questions, I'm more than happy to take them offline. We will be in New York for marine money towards the end of June. So we'll be available for in-person meetings as well at that time. Should anyone like one, please let us know. We'll also be up in Boston, and if there's demand elsewhere, we're more than happy to travel. Our ships travel all over the world, and so can we.

Thanks, Todd.

Thank you. This does conclude the Cool Company Limited Q1 2024 business update. You may disconnect your line at this time and have a wonderful day.