Capital Product Partners L.P. (NASDAQ:CPLP) Q2 2023 Earnings Call Transcript

Capital Product Partners L.P. (NASDAQ:CPLP) Q2 2023 Earnings Call Transcript July 28, 2023

Capital Product Partners L.P. beats earnings expectations. Reported EPS is $1, expectations were $0.69.

Operator: Thank you for standing by, and welcome to the Capital Product Partners Second Quarter 2023 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the Company. At this time, all participants are in a listen-only mode. [Operator Instructions] I must advise you this conference is being recorded today. The statements made in today’s conference call that are not historical facts, including our expectations regarding cash generation, equity returns and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocation as well as our expectations regarding market fundamentals and the employment of our vessels, including redelivery dates and charter rates, may be forward-looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended.

These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and the completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

Jerry Kalogiratos: Thank you, Paul. And thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today’s presentation. During the second quarter of 2023, we took delivery of the motor vessel Buenaventura Express, the last of three 13,000 TEU container vessels we have agreed to acquire last year together with the LNG Carrier, Asterix I. Furthermore, we agreed to sell our sole dry cargo vessel, the motor vessel Cape Agamemnon with delivery of the vessel to her new owners expected in the fourth quarter of 2023. Finally, during this quarter, we completed the dry dock of the Athos and Athenian, along with significant energy efficiency and emissions abatement upgrades.

Now turning to the Partnership’s financial performance. Net income for the second quarter of 2023 was $7.4 million. Our Board of Directors has declared a cash distribution of $0.15 per common unit for the second quarter. The second quarter cash distribution will be paid on August 8th to common unitholders of record on August 2nd. We continued acquiring units under our unit buyback program. And during the second quarter of 2023, we repurchased 156,560 of the Partnership’s common units at an average cost of $13.30 per unit. Finally, the Partnership charter coverage for both 2023 and ’24 stands at 96%, with the remaining charter duration corresponding to 6.7 years and contracted revenue backlog of more than $1.8 billion. Turning to slide 3. Total revenue for the second quarter of 2023 was $88.5 million compared to $74 million during the second quarter of 2022.

The increase in revenue was primarily attributable to the revenue contributed by the three 13,000 TEU container newbuilding vessels and the newbuilding LNG Carrier Asterix I recently delivered to the Partnership as well as the increase in the daily rate earned by two of the Partnership’s LNG carriers, partly offset by the sale of two 8,000 TEU container vessels in July 2022. Total expenses for the second quarter of 2023 were $58.6 million compared to $40.9 million in the second quarter of 2022. Total vessel operating expenses during the second quarter amounted to $23.5 million compared to $16.4 million during the same period in 2022. The increase in vessel operating expenses was mainly due to the net increase in the average number of vessels in our fleet and costs incurred during scheduled maintenance of certain of our vessels.

Total expenses for the second quarter of 2023 also include a noncash impairment charge of $8 million that we recognized on the date we agreed to sell the Cape Agamemnon, and vessel depreciation and amortization of $20.9 million compared to $17.7 million in the second quarter of last year. The increase in depreciation and amortization during the second quarter of this year was mainly attributable to the net increase in the average size of our fleet, partly offset by lower amortization of deferred dry docking costs. General and administrative expenses for the second quarter of 2023 amounted to $2.3 million, in line with the second quarter of 2022. Now interest expense and finance costs increased to $25.5 million for the second quarter of ’23 compared to $11.7 million for the second quarter of last year.

The increase in interest expense and finance cost was mainly attributable to the increase in the Partnership’s average indebtedness and increase in the weighted average interest rate to 6.28% from 3.46% in the second quarter of 2022. The Partnership recorded net income of $7.4 million for the quarter or $15.4 million before the impairment from the agreed sale of the Cape Agamemnon compared with net income of $20.4 million for the second quarter of last year. Net income per common unit for the quarter was $0.36 or $0.75 before the impairment from the agreed sale compared to $1 per common unit in the second quarter of last year. On slide 4, you can see the details of our operating surplus calculations that determine the distributions to our unitholders compared to the previous quarter.

Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately $38.2 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $35 million to the capital reserve, an increase of $1.6 million compared to the previous quarter due to the increased debt amortization resulting from the drawdown of the Buenaventura Express facility. After deducting the capital reserve, the adjusted operating surplus amounted to $3.2 million. On slide 5, you can see the details of our balance sheet. As of the end of the second quarter, the partners’ capital amounted to $649.4 million, an increase of $11 million compared to $638.4 million as of the end of 2022.

The increase reflects net income for the first half of the year, other comprehensive income of $1.7 million relating to the net effect of the cross-currency swap agreement we designated as an accounting hedge, and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period for a total amount of $6.2 million and the total cost of repurchasing our common units under unit repurchase program for a total amount of $3.8 million. Total debt increased by $332.5 million to $1.6 billion compared to $1.3 billion as of year-end 2022. The increase is attributable to a $5 million increase in the U.S. dollar equivalent of our euro-denominated bonds as of June 30th, the drawdown of a total of $392 million to finance new vessel acquisitions, partly offset by scheduled principal payments for the period of $41.1 million and the early prepayment in full of one of our facilities for an amount of $23.4 million.

Total cash as of the end of the quarter amounted to $104.7 million, including restricted cash of $11.7 million, which represents the minimum liquidity requirement under our financing arrangements. Turning to slide 6. The Buenaventura Express was successfully delivered to the Partnership on June 20th and commenced a 10-year charter with Hapag Lloyd. Hapag maintains three two-year options to extend the charter. The acquisition was funded through a combination of a cash deposit of $6 million advanced in 2022, $100 million drawn under a new credit facility and $16.5 million of cash at hand. The new credit facility has a quarterly principal repayments of $1.6 million, an 8-year term and the balloon payment $50 million due in June 2031. On slide 7, we provide a summary on our recent key developments.

Photo by Shaah Shahidh on Unsplash

Our latest acquisition cycle has now been completed, and the Partnership has taken delivery of three 13,000 TEU hybrid scrubber-fitted Tier III and Phase III dual fee-ready, eco-container sister vessels, together with the latest generation X-DF LNG Carrier, the Asterix I. All vessels have commenced their long-term time charters, increasing our contracted cash flow, at the same time, reducing the average age and carbon intensity of our fleet. In the second quarter of 2023, the Partnership completed the scheduled dry dock of two of our 10,000 TEU containers, the Athos and Athenian, and the installation of the SOx scrubber system on each vessel. In addition, both vessels were retrofitted with a bulbous bow and silyl acrylate self-polishing technology hull coating, which are expected to improve the energy efficiency and carbon footprint of these vessels.

The sister vessel Aristomenis completed her scheduled dry dock and was retrofitted with the same upgrades this month, leaving the yard on July 22nd. The Partnership has reached an agreement with Hapag, whereby the latter will refund part of the total cost of these upgrades to the Partnership. On June 27th, the Partnership agreed to sell the dry cargo vessel Cape Agamemnon, a noncore asset for the Partnership. Delivery of the vessel to the buyer is expected by October 2023. In view of the agreed sale, the Partnership classified the vessel as held for sale and recorded a noncash impairment charge of $8 million. Moving to slide 8. The Partnership’s contracted revenue backlog now stands at $1.8 billion, with over 63% of contracted revenue coming from LNG vessels with diversified and creditworthy customer base of 7 charters.

Turning to slide 9. The Partnership’s remaining charter duration amounts approximately 6.7 years, while charter coverage remains at 96% for both 2023 and 2024. It’s worth noting here that our next period charter expiration does not occur before the first quarter of 2025. Turning to slide 10, we review the LNG market. Demand for LNG carriers on the term market remained strong despite the recent drop from the record highs reached in the fourth quarter of 2022. Currently, one-year TC rate for a two-stroke LNG Carrier stands at $140,000 per day, while the term market is expected to tighten as we get closer to the winter, especially for modern vessels. Overall, the second quarter of 2023 saw a continuation of the seasonal downward pressure experienced in the first quarter of the year, both on gas prices and spot charter rates.

However, towards the end of the quarter, there was a slight rebound in prices due to the emergence of interbasin arbitrage and contango into winter, while demand fundamentals remain strong. Seven one-year deals were concluded in the second quarter of 2023, broadly in line with the quarterly levels in last year. Longer term three- to five-year deals are, however, slightly lower compared to last year with five deals concluded year-to-date versus a quarterly average of seven last year. Recently reported fixtures for newbuilding LNG Carriers with home [ph] delivery lie around $100,000 per day mark for a 10-year period. The LNG fleet order book currently stands at around 51.4% of the total fleet with 331 vessels on order. Established shipyards have effectively no slots left until mid-2027, both in Korea and China.

Newbuilding prices continue to rise and currently stand at $261 million per vessel for a basic specification vessel. Year-on-year, LNG orders are down by approximately 70%. On slide 11, we review the container market. The container market conditions in the first half of 2023 were relatively soft due to weaker trade volumes and reduced port congestion. The Clarkson’s charter index stood at 103 points in the first week of July 2023. Although it has decreased 76% from the peak in April 2022, it remains more than 100% higher than the average recorded during the 2010-2019 period and 1.8 times higher than the 2019 average. The SCFI spot box rate index stood at 932 points in the first week of July 2023. Despite this decrease by 82% compared to the peak in 2022, it is only 3% lower than the average observed during the 2010-2019 period and 15% higher than the 2019 average.

Analysts and brokers anticipate the rate will improve in the second half of 2023 as the economy bottoms out. Compared to earlier forecast, global container trade is now expected to grow by 0.3% in TEU terms against the previously projected 1.2% contraction in the first quarter of 2023, while the container fleet is expected to grow by 6.8%. Looking ahead to 2024, analysts predict a more robust demand growth rate of 3.3% for the container trade, with supply also growing at the pace of 6.3%. As of the beginning of July, the order book for new vessels stands at 889 units, equivalent to 7.4 million TEU or 27.7% of the total fleet capacity. Demolition activity has also increased with 38 units of approximately 73,400 TEU being demolished so far in 2023 compared to 11 units only in 2022.

Now turning to slide 12 and having completed a significant round of growth for the Partnership, which we announced last year with the acquisition of the three 13,000 TEU container vessels and the LNG Carrier Asterix I, we view additional growth opportunities for the Partnership. On this slide, you can see the order book of our sponsor, Capital Maritime & Trading, which, among others, comprises an additional 11 latest technology LNG carriers. These vessels are second-generation two-stroke vessels with a MEGA propulsion and shaft generator arrangement, thus reducing further the carbon equivalent emissions of these already very-efficient vessels. Deliveries of these LNG carriers are expected between the fourth quarter of 2023 and up to the second quarter of 2027.

Importantly, the five vessels delivering between 2023 and 2024, have either already secured term employment or under advanced commercial discussions with an average tenure of 7.5 years and approximate gross revenues of $1.4 billion. In principal, this constitutes attractive assets, and subject to our ability to acquire these vessels, CPLP would be uniquely positioned over time to control a fleet of up to 18 latest-generation LNG carriers with a diversified portfolio of charters. This would make CPLP the largest publicly listed owner of latest-generation LNG vessels with contracted cash flows and a nice mix of staggered expirations at a time when LNG fundamentals remain strong. As we maintain financial flexibility, 10 unencumbered vessels and good cash flow generation, we believe that CPLP is strategically positioned to take advantage of such growth opportunities as we continue to focus on growing our distributable cash flow and renewing our fleet.

And with that, I’m happy to answer any questions you may have.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Omar Nokta with Jefferies. Please proceed with your question.

Omar Nokta: I just wanted to ask about the — obviously, you completed the acquisitions from last year. You took the three container shifts in the LNG Carrier. And so now that’s completed and you’re basically harvesting the cash flows. And then you just outlined on slide 12, the drop-down opportunities, which you’ve continuously updated us with, and we’ve been seeing the contracts now filling in. How do you think about those right now in terms of timing? Can we expect drop-down near term? Is it really just about timing of the vessel deliveries themselves, or is there something you’re waiting for before proceeding with any drop-down?

Jerry Kalogiratos: Thank you, Omar. No, I think it has been important as we have communicated in the past to complete this acquisition cycle before we start considering what we do next. And again, today is a very premature discussion as the Board considers where we go from here and how we grow the Partnership into the future. But, as just high level thoughts, obviously, growth is not being pursued for growth’s sake. But, when you look at our peers, especially those on the LNG side, we believe that by further growing the Partnership’s fleet and becoming among the largest two-stroke LNG vessel owners in the public domain, it is possible that over time, we can achieve more investor visibility, liquidity and what is also the end goal here, a better equity valuation.

So, in my prepared remarks, as you say, this is just an outline of the LNG Carrier order book of Capital Maritime. This is a big order book that’s well in excess of $3 billion in terms of charter-free fair market value today. Of course, as you pointed out, there is also the distinction. They are about five vessels that either have or are very close to securing employment. And that would be an average charter duration of seven years, which is, I think, quite attractive. Importantly, I think for the Partnership, this is an interesting segment, and we see this as a multiyear up-cycle, especially for vessels like this, that is two-stroke vessels. I think this is supported by the increasing commodity supply, and we have seen the FIDs taken this year.

But energy security considerations that have played also a very important role over the last couple of years and I expect them to remain at the forefront. And of course, the role of that LNG is expected to play as a transition fuel to net zero, which, of course, in turn is expected to spur long-term demand for the commodity. So, I think, there is a multiyear up-cycle with regard to demand for LNG and hence, also LNG vessels. And then you also look at the dynamics of the LNG fleet. This is quite unique, I think, in shipping in terms of how the technological advances have changed the unit freight cost over time. And then you look at the advantage that the two-stroke vessel brings compared to a TFDE or even more important, the steam vessel. And then you think also about the emissions especially in the framework of ETS or carbon levy.

And you can see also that there will be a very interesting vessel supply environment. And this is — this type of demand-supply dynamics, you don’t, I think, necessarily see in other segments. But, as far as CPLP is concerned, the segment is very interesting, varies access to drop-downs, but the question will be how we fuel this potential further expansion. Our cash position as of the end of the first half of this year amounted to about $105 million. We expect good cash generation going forward, and we have a number of unencumbered vessels on the balance sheet, which could be liquidity levers. In certain cases, in the past, as you know, we have also used our equity as a currency for such transactions, which could also be helpful in larger acquisitions.