Capital Product Partners L.P. (NASDAQ:CPLP) Q1 2024 Earnings Call Transcript

Capital Product Partners L.P. (NASDAQ:CPLP) Q1 2024 Earnings Call Transcript April 30, 2024

Capital Product Partners L.P. beats earnings expectations. Reported EPS is $0.32, expectations were $0.31. Capital Product Partners L.P. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the Capital Product Partners’ First Quarter 2024 Financial Results Conference Call. We have with us today Mr. Jerry Kalogiratos, Chief Executive Officer; Mr. Spyros Leoussis; and Mr. Nikos Kalapotharakos, Chief Financial 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 [Operator Instructions] I must advise you this conference is being recorded today, April 30, 2024. The statements in today’s conference call that are not historical facts, including our expectations regarding acquisition transactions and their expected effect on us, cash generation, equity returns and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts or unit buyback 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 also 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 are 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 expectation to conform to actual results or otherwise. We make no prediction or statement about the performance of our common units. I would now like to turn the call over to your speaker today, Mr. Kalogiratos. Please go ahead, Sir.

A closeup of the bow of a Liquefied Natural Gas carrier on a calm ocean.

Jerry Kalogiratos: 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. In the first quarter of 2024, we did delivery of the LNG Carrier Axios II, the second delivery under our agreement acquire 11 latest generation two-stroke LNG carriers. Moreover, we concluded the sale of two container vessels, recognizing a gain on sale of $16.4 million. Furthermore, we announced a sale of three 10,000 new containers and two Panamax container vessels. Turning to the partnership’s financial performance, net income for the first quarter of 2024 was $33.9 million or $17.5 million, excluding the gain on sale of vessels.

Our Board of Directors have declared a cash distribution of $0.15 per common unit for the first quarter of 2024. The first quarter cash distribution will be paid on May 14, the common unit holders of record on May 7. Finally, the partnership’s current fleet, charter coverage for 2024 and ’25, stands at 100% and 82% respectively, with a remaining charter duration corresponding to 7.3 years and contracted revenue backlog of $2.8 billion. Turning to slide 3, total revenue for the first quarter of 2024 was $104.5 million compared to $81 million during the first quarter of 2023. The increase in revenue was primarily attributable to the revenue contributed by the new building vessels we acquired between February 2023 and January 2024, partly offset by the sales of our.

So,le cape-sized vessel in the fourth quarter of last year and the two containers during the first quarter of this year. Total expenses for the first quarter of 2024 were $54.9 million compared to $45.1 million in the first quarter of last year; total vessel operating expenses during the first quarter of 2024 amounted $22.7 million compared to $19.3 million during the first quarter of 2023 and were higher mainly due to the net increase in the average size of our fleet. Total expenses for the first quarter of 2024 also include vessel depreciation and amortization of $24 million compared to $19.2 million in the first quarter of last year. The increase in depreciation and amortization during the first quarter of 2024 was mainly attributable to the net increase in the average size of our fleet.

General administrative expenses for the first quarter of this year increased to $4.4 million from $2.8 million in the same quarter last year, mainly attributable to certain one, of course, we recognized in connection to adequate incentive land. Interest expense and finance costs increased to $34 million for the first quarter of 2024 compared to $23.7 million for the first quarter of last year. The increase was mainly attributable to the increase in the partnership’s average in debtness and the increase in the weighted average interest rate compared to the first quarter of 2023. Average interest rate for the quarter amounted to $7 million –. So,rry, to 7%. The partnerships recorded net income of $33.9 million or $17.5 million excluding the gain on sale of vessels for the quarter compared to net income of $10 million in the same quarter of last year.

Net income per common unit for the quarter was $0.61 or $0.32 excluding gain on vessel sales compared to $0.49 per common unit in the first quarter of last year. On slide 4, you can see the details of our balance sheet. As of the end of the first quarter, the partner’s capital amounted to $1.204 billion, an increase of $29 million compared to $1.175 billion as of the end of 2023. The increase reflects net income for the first quarter of this year. Other comprehensive income and the amortization associated with the equity incentive plan of $2.6 million partly upset by distributions declared and paid during the period in a total amount of $8.3 million. Total debt increased by $156 million to $1.944 billion compared to $1.788 billion as of the end of 2023.

The increase is attributable to the assumption of $190 million of bank debt and $92.6 million of seller’s credit in connection with the acquisition of the LNG Carrier Axios II in January of this year. Partly upset by the $7.2 million decrease in the US dollar equivalent of the Euro denominated bonds issued by the partnership, the scheduled principal payments for the period of $28.5 million. The early payment in full of the facility went into partly finance the acquisition of Akadimos and the partial prepayment of $52.8 million of the seller’s credit we drew to partly finance the acquisition of LNG Carrier Axios II. Total cashers of the end of the quarter amounted to $157.7 million including the received cash of $11.2 million which represents the minimliquidity requirement under financing arrangements.

On slide 5, you can find an update on the progress of the container vessel sales. As mentioned earlier during the first quarter of 2024, which successfully. So,ld and delivered the containers Long Beach Express and Akadimos. In April 2024 we also completed the sale of the container vessels Athos, Athenian and Seattle Express. Finally we expect to complete the sales of the Aristomenes and the Force Express in early May. From the sale of container vessels we expect net proceeds after debt repayment of approximately $182.5 million.. So, far for the net proceeds of approximately $144 million received from the vessels delivered already to their new owners we have used $92.6 million to repay in full the amount we drew under the seller’s credit for the acquisition of the LNG Carrier Axios II.

Under the Umbrella Agreement and the provisions of the seller’s credit any sale proceeds net of debt repayment are applied first or towards repayment of any balance outstanding under the facility. Moving to slide 6, the Partnerships Contracted Revenue backlog stands at $2.8 billion with over 85% of contracted revenue coming from LNG vessels with a highly diversified and high quality customer base of 10 charters. This is excluding the seven container vessels we have. So,ld or agreed to sell. On slide 7 you can see the chapter profile of our LNG fleet. We have a contracted backlog of 76 years at an average daily rate of 88,500, which could increase to 111 years if all options were to be exercised. I should stress that we have no open vessels between now the first quarter of 2026.

In total we have four LNG carriers coming up for delivery from the shipyard and one being re-delivered from its charters in the fourth quarter of 2026. In 2027, we have an additional two vessels being delivered from the shipyard in the first quarter of the year and potentially one additional vessel coming up for renewal in the fourth quarter of 2027 if its charters do not exercise certain options. These vessels are expected to be seeking employment when the new wave of about 170 mtpa of additional and new liquefaction capacity is expected to come online between 2026 and 2028. We estimate that these projects alone which have taken FID and export permits will require between 190 and 220 additional vessels with only 156 vessels due for delivery during that period.

This is without taking into account the replacement of older technology vessels and the particular steam turbine vessels which are expected to incremental demand for two-stroke vessels like ours. Currently we count only 31 vessels in the order book between now and 2028 that are not committed to a certain project. We see PLP controlling six or about 20% of these uncommitted vessels. On slide 8, you can see the charter expiration of the container fleet. Once all agreed sales are complete we will have. So,ld the total of seven container vessels leaving us with a fleet of eight vessels. Our contracted backlog on the container fleet spans 32 years, at a weighted average daily rate of 38,200 and could increase to 51 years if all options are exercised.

We continue to seek to divest opportunistically from containers provided we deem the sale price reasonable in view of the contracted cash flows, our market views and our expectations with regard to residual value. And with this I will pass on the floor to our Chief Commercial Officer Mr. Leoussis.

Spyros Leoussis: Thank you Jerry.. So, turning to slide 9, we review the LNG market. After a period of historical high rate following the start of the Russian cream conflict rates are normalizing towards labor levels. One weather and high gas storage levels in Europe and Asia have led to decreased demand for LNG causing sport rates to weaken. Today combined with the long availability of vessels throughout the year have kept charter rates lower compared to previous years. Sport rates for two-stroke vessels average at $58.57 thousand per day, $5 per day in Q1.’24. With the average one year time charter, charter rate hovered around $76,000 per day. On the other hand the three year time charter stands today at $85,000 per day, while for longer periods as for example for five years rates are even higher indicating that the market is pricing in and anticipating tightening from 2026 onwards.

Geopolitical disruptions are key for the LNG carrier sector and while we are yet to see any major upside movement for day-rate we expect high volatility rate later in the year. LNG carrier transit through the Panama Canal remain highly limited with just four ships having transplants since start of February. At the same time no LNG vessels have crossed the Suez Canal since January 16. Overall it is fair to say that the LNG shipping market appears more balanced for 2024 and 2025 with multiple new buildings being delivered and only incremental new LNG volumes coming online. Charter markets for two-stroke vessels are expected to remain generally healthy in 2024 and 2025 due to the attractive unit freight cost they offer compared to DFT and steam turbine vessels, as well as environmental benefits that deliver to charters as EUT — EU ETS, CII and other regulations start to have an economic and reputation impact on LNG charters.

Global LNG imports remain strong at both basins with China continuing to import decision records. Overall Tonne-miles have been higher in Q1 this year versus last year due to a close west canal and limited use of the Panama Canal. Total gas in storage also remains high and with the recent mild climate conditions putting further downward pressure on gust demand, Europe has finished the winter period with near record levels of inventories. Russian gas applied to the EU is now at less than two million tons per month. Finally the LNG fleet order book currently stands at approximately 50% of the total fleet encompassing 332 vessels on order. CPRs responding to heightened demand find themselves mostly fully booked throughout 2027. Appetite remains high for LNG carrier new builds following elevated contracting activity across 2021 and 2023 with 44 new building orders being placed in 2021-2024.

35 orders were part of the second phase of ordering for the Qatar expansion and with Qatar related orders now complete the pace of ordering for the remainder of the year is expected to be slower. Looking at the [indiscernible] project in March NextDecade announced plans to take FID on a fourth train for Rio Grande LNG in the second half of 2024. The company took FID on phase one of the project last year comprising three trains of 5.4 mtpa which is time to expect to come online in 2027. And with this I’ll pass back to Jerry.

Jerry Kalogiratos: Thank you Spyros. Now to the final slide slide 10 you can see an updated timeline of the transaction we closed in the fourth quarter of 2023 for the acquisition of the 11 LNG carriers. They have. So, far taken delivery of two LNG carriers the Amore Mio-I and the Axios-II. We have. So,ld five container vessels and agreed to sell another two while we continue with our LNG carrier C building program. Looking ahead we are focused on taking delivery of the next three LNG carriers which are expected at the end of May early June and then July and of course we continue to make progress with the conversion of the partnership with the corporation as previously communicated which we expect to conclude over the coming months. And with that I’m happy to answer any questions you may have.

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Q&A Session

Operator: Thank you we will now be conducting a question-and-answer session. [Operator instructions]. Thank you. Our first question is from Omar Nokta with Jeffrey. Please proceed with your question.

Omar Nokta: Thank you. Hi Jerry and Spyros good afternoon. Thanks for the update. I just a couple for me maybe just one on the first firstly on the last comment you made Jerry just regarding the corporate conversion. You still making progress expecting that in the coming months. Just wanted to check in. So,rt of timing of that. I know you had put a target of I think June 20 or 21. Is that still feasible that’s still realistic or you think it’s going to be pushed out a little bit?

Jerry Kalogiratos: It feels — thank you Omar. It feels that we should be able to be done by that date or at least communicate the outline of the new corporate governance and the conversion. There’s still a few things that are now including whether we will need a unit holder or shareholder vote for the approval of the conversion which seems quite likely.. So, I would expect that we will be able to announce our plan. Sometime in June or thereabouts maybe sleep by a few weeks but nothing material and then go into the shareholder vote.

Omar Nokta: Okay, Thank you and I mean just a couple more just kind of a method specific. I just wanted to ask on the access to deliver that earlier this year that’s going to go on a contract long-term. But before it starts that it’s doing a 12 month on a spot length contract or index link. Just wanted to ask what are the mechanics of that contract. Is that the spot length or is it linked to like the time charter assessments and is there a collar like a base in a ceiling and any card you can give on that?

Jerry Kalogiratos: Sure the — it’s a 12 month index related charter it’s fully floating. So, it is based on two Baltic the average of two Baltic indices. Axios in the first quarter has earned a cash DC which is slightly lower than the market that was around $45,000 per day because under the charter party the first 12 days of the quarter, she did not any higher until she was delivered to its shutters. For April she has recorded on average around $49,000 per day always on the on the back of the two average indices. But as the spot market for electric car is highly volatile and highly seasonal. Today if you look at the second third and fourth quarter forward rates for the same indices you would be around $55,000, $78,000, $140,000 per day respectively.. So, we are going through now the seasonal low but the market has feels already tighter and we expect that it will start picking up as we go into the summer months.

Omar Nokta: Okay thanks Jerry and then just a double check that those indices not saying that we’re going to go there again but they had been showing $200,000, $300,000 backward things are on fire in 2021 and 2022 if we were to see that type of index rate is that achievable for for you guys?

Jerry Kalogiratos: No I think going forward I mean for the other vessels we would be looking at fixed rates like the floating rate I think it was kind of a bit opportunistic play for from us because we had the only one year opening but the priority for for the other vessels is to fix that longer-term rate as we have with with all the fleet including Axios from January from starting a start of next year.

Omar Nokta: No I appreciate that I was just checking just on the axis specifically if the index would have hit $200,000 you would that basically transferred into the TC for the ship?

Spyros Leoussis: Yes of course yes, yes. So,rry yes that’s of course yes that’s a it’s a fully float as Jerry said I mean that’s a full floating index. So, that’s — that’s a way it would work.

Omar Nokta: Okay all right thank you and then maybe just the final one on the remaining container ship vessel what’s the liquidity look like in the in the SMP market for those clearly you’ve been fairly active and you were able to move a bunch of vessels already what does it look like or what’s the appetite look like you think for — for the remainder?

Jerry Kalogiratos: The container market as has been feeling also quite tight as of late. Charter rates have been moving up and especially for Panamax and Post Panamax container vessels. As a result you have seen this moment also being reflected in asset values and also in appetite of buyers be it the Trump owners or liners to acquire more tonnes, we have seen increasingly higher period rates I mean longer period rates and higher period rates and as well as asset values we have I think. So, far taken advantage of this moment with all our all our container charters they have long-term charters. So, it’s either a button the residual or more of a moment buying. So, I think we have been quite — quite good in taking advantage of that.

In terms of the remaining vessels now these are all very high quality assets we have the 5000 DU wide beam container vessels effectively if you were to order ships today you would get the same design. So, these are actually quite attractive assets for charters and buyers alike and I should also say here that these 5000 DU vessels do not have any debt. So, they are the 313000 DU brand new again Niko wide beam you have feel ready LNC carriers that have a long term charter to [indiscernible] they have another nine years or. So, given the tenor of the remaining charter. I think these are this is more of a cash flow transaction and less of a kind of your typical second hand container transaction. So, there is no lack of interest for sure for us, we are not in a hurry we — we do see people approaching us on these assets but I think we are going to be quite patient until we see what we think we should be realizing in a market like this given both our market expectations the charters in place as well as the our view on the residual.

So, I think we have done the bulk of it now we’ll we will be looking for good opportunities to divest from the remaining assets.

Operator: Thank you our next question is from Ben Nolan with Stifel. Please proceed with your question.

Ben Nolan: Thank you guys going back I think maybe to Omar’s first question about the timing of transition and. So, forth appreciate the color that you did give but as you guys have got closer is there anything more that you can, let me know about how you’re thinking on the on the dividend or the capital return policy it just is we’re. So,rt of getting close to that time?

Spyros Leoussis: Thank you Ben that’s — that’s a fair question. I — the truth is that I think we will leave this decision for after the — for after the conversion what I can say and I think that echoes the overall view of the board is that the idea is to move at. Some point in a more flexible type of payout and a slightly different capital allocation policy that could involve a fixed dividend plus. Some share of the of net income or free cash flow generation but with regard to the exact structure of the payout when it will start and I think those details. I’m afraid I cannot give more detail right now. I think we’ll wait for a final decision for the board, which I presume will be definitely within this year and post conversion.

Ben Nolan: Okay and then secondly on the container sales, it is the 313000 DU ships have super long contracts on them. Are those, I don’t know, I’m I get. Some curious if you view those as. So,rt of also for sale or given the contracted nature of the assets that maybe they are still a fine fit within the broader portfolio.

Jerry Kalogiratos: I think just like the other vessels, we are perfectly happy to sit with those vessels going forward; we know these are good assets and there will be an opportunity to, at. Some point to reach out to divest. So, we are — I mean the decision is that was taken was not to enter into the container segment. Strategies to focus on LNG and energy transition gas right, So,, ammonia LPG, liquid CO2 and. So, on and. So, forth.. So, no more containers, however I think that the timing of potential sale is contingent 100% on whether we believe that the valuation we are getting is a reasonable price. And as you say especially for these 13,000 new containers with the long term chapters the contracted cash flows and maybe whether valuations may be more a little more contingent on movement of interest rates rather than anything else. I think we would be also perfectly happy to have them in the background to generate cash if we don’t find a reasonable bid.

Ben Nolan: Okay and then lastly for me is it relate. Soon, you just mentioned the ammonia carriers on the private side the multi gas or more CO2 carriers; curious if you have contracts in place on those or if you can if not or maybe even if you do you give a little bit of color on. Sort of what you’re seeing in the market in terms of customer appetite to put assets like that on long term charter or is it is it still in development stage and probably have to get closer to delivery to know what. So,rt of a business those — those assets will have?

Jerry Kalogiratos: In terms of the overall exposure of capital my time as far as the other gas sectors are concerned that comprises 6 mgc, So, medium gas carriers. LPG ammonia carriers that is and the four liquid CO2 carriers. So, which are effectively handy multi gas or in a more generic way LPG carriers, that can also carry liquid. So,2 because of their separate cargo system and strengthened tanks and other functionalities and then there is also the two very large ammonia carriers. So overall we have had dozens of discussions around the world and literally I mean around the world from the us to Europe to the Asia pacific region, regarding let us let’s say the new trade. So, apart from the usual LPG ammonia trade both in terms of how the maritime transportation of liquid CO2 carrier of liquid CO2 is going to be done in the different regions on what is dependent, what are the drivers who are the customers and about and we had similar discussions for the — for the ammonia, that is especially the transportation of green and blue ammonia.

Overall there is there are dozens of projects on both sides that are moving ahead and are materializing at different levels of maturity. Overall I would say that the timeline for those would be 2027-2028 onwards and then you can see almost a snowball effect from there. The very interesting thing is that. So, me of these projects are led by independent operators or investors but the bulk of these projects are being moved along by existing clients of ours. So that these energy companies utilities traders and. So, forth; So, we are and also this is very much part of the strategy that we that we have going forward the ability to sit at the table and have the discussion with an energy company or utility across all these different segments, So, we would discuss an LG carrier and then move on to the liquid CO2 or the carriage of blue or green ammonia and this has happened multiple times.

So it is still early to say whether we can I mean we can fix today long-term chapters for this type of trades, although we have had we continue to have discussions I think the demand will as I said will be much higher from 2027-2028 onwards but because of the fact that. So, me of these customers have multiple trades, including for example LPG current gray ammonia trades. They might be able to — for example to charter in a vessel long-term in 2026 and then use it in one trade for a while and then move it to another trade. So, right now I would say that the base case is that this piece let’s say multi-gas carriers LPG carriers or ammonia carriers will start with the conventional trades and start moving into the for the lack of a better word energy transition trades from 2027-2028 onwards.

Operator: Our next question is from Liam Burke with B. Riley Securities. Please proceed with your question.

Liam Burke: Thank you, hi Jerry, hi Spyros. As you go through the conversion from an MLP to a corporate, is there any hiccups with the lenders or are they comfortable with the transition?

Jerry Kalogiratos: Though in reality, there is no material change to the company other than the let’s say the corporate structure. So, we don’t foresee any issues with the lenders or our and bond holders going forward.

Liam Burke: Great and on the six new builds, are there does it seem to be an appetite for longer-term contracts, there especially when you’re looking at significant amount of sleep being a less efficient steam turbine?

Jerry Kalogiratos: But yes I think as you said I mean we see. Some activity now obviously the current market doesn’t help but we still have a lot of time. If we had to guess I would say that our vessels probably go to a field replacement project as we see we see that there will be significant demand as you said from replacing steam turbines to with newer fleet; especially as people start to realize the effect of EU ETS and CII under our local schemes.

Operator: Our next question is from [indiscernible] with value investor Edge, please proceed with your question.

Unidentified Analyst: Good afternoon, thank you for taking my questions. Following up on Liam’s question on the [indiscernible] new builds, could you talk a bit about the terms currently being offered and secondly is there any appetite to potentially forward fix. some of them over the next year?

Jerry Kalogiratos: Yes let me pass this on to…

Spyros Leoussis: Hi. So, I think the strategy is — we’re always open to discussions. I don’t think we can actually discuss specific — specific terms as we the discussions are a bit premature at this stage. We foresee that there should be. Some activity during the next the next year but for sure the target is to fix the vessels before the before we get delivery and I pass to Jerry.

Jerry Kalogiratos: I think the important thing is what we said during the call that in reality there are very few available ships for longer term period and you see today one year or three year or. Some three year deals that are done at lower levels but these are all relays from existing charters as they wait for their projects to take off. But in reality, when you look at five years or longer there is effectively no relation because their current charter is know that they will need the vessels going forward and. So, your competition if it’s not available ships is going to be new builds; and then you look at new building prices at $260 million plus for a basic spec. Often today’s appears will require you to pay 15-20 up front for delivery, at the end of ’27 early ’28 and then and then the additional milestones, which will end up resulting in a delivered cost that together with supervision of close to $300 million.

So, if you look at let’s say a financing of 75%, 80%, 85% on a vessel like that and then you break in and a decent even a single digit return on your equity, then you will find that the guys that will be ordering vessels in order to fulfill new requirements as they come up the replacement or inquiries related to new projects new projects, they will have let’s say a break even for one for single digit equity returns in the $90,000 to $95,000 per day area. So, this I think will kind of create a natural floor to the long-term market because this is going what to set the rate the long-term rate going forward that is the lowest common denominator in terms of cost of capital and if they order a new building for a new project. So, that’s a long way to say that we see that there’s going to be a floor in the in the middle of 90s for the long-term market and if our expectations with regard to vessel demand materialize that is we expect the demand for new projects if I did projects to be much more than the ordered ships plus of course the replacements of all the technology vessels then we can see a much tighter market which of course will be well above $100,000 that I hope that kind of gives you an indirect answer.

Unidentified Analyst: It does that’s helpful thank you. Most has already been covered but I also had a question more on the modeling side, could you provide some commentary on the remaining CapEx you had, outstanding for the LNG C’s as of the end of the quarter?

Jerry Kalogiratos: So, effectively, we have a remaining 9 LNG carriers, with three of these to come until July. So, May, June, July, in terms of the total CapEx let me give you a number offline, it should be around $2.5 billion but let me let me also drop me a line and happy to confirm the exact number.

Operator: Thank you, no further questions at this time. I’d like to hand it back over to Mr Jerry Kalogiratos, for the closing. Comment.

Jerry Kalogiratos: Great thank you Paul and thank you all for joining us today.

Operator: This concludes today’s conference and we disconnect your lines at this time thank you for your participation