Capital Product Partners L.P. (CPLP) on Q2 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by, and welcome to the Capital Products Partners Second Quarter 2021 Financial Results Conference Call. We have with us Mr. Gerry Kalogiratos, Chief Executive 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. I must advise you that this conference is being recorded today. The statement 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.
Gerasimos Kalogiratos: Thank you, Valerie, 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. The Partnership's net income for the second quarter of 2021 was $35.4 million or $10 million excluding a gain of $25.4 million from the sale of the CMA CGM Magdalena in May 2021 compared with a net income of $8.7 million for the second quarter of 2020. Our Board of Directors has declared the cash distribution of $0.10 per common unit for the second quarter of 2021. The second quarter cash distribution will be paid on August 10th to common unitholders record on August 3rd. The Partnership's operating surplus for the second quarter was $23.5 million or $15.2 million after the quarterly allocation to the capital reserve. In addition, and as stated, we concluded on May 17th, the sale of the CMA CGM Magdalena. Since the launching of the unit repurchase plan on February 19th and as of June 30th, we repurchased approximately 331,200 common units at an average cost of $11.65 per unit. Finally, the Partnership's charter coverage for 2021 and for 2022 stands at 92% and 85% respectively, while the remaining charter duration corresponds to 3.9 years. Turning to slide three, revenues for the quarter were $39.8 million compared to $36.6 million during the second quarter of 2020. The increase in revenue was primarily attributable to the increase in the size of our fleet following the acquisition of three Panamax containers in February 2021, and a decrease in the net amortization of time-charters acquired together with certain of our vessels. The increase was partly set off by the decrease in the average daily charge rate and by the vessels in our fleet. And they say look, the CMA CGM Magdalena in May 2021. Total expense for the quarter were $25.6 million compared to $22.7 million in the second quarter of 2020. Voyage expense for the quarter increased to $2.2 million compared to $1.3 million in the second quarter of 2020. As currently, our sole dry bulk vessel, the Cape Agamemnon trades into dry bulk spot market.
Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session.
Gerasimos Kalogiratos: Hello. I'm not sure I can hear you.
Operator: We will not take our first question. Please go ahead. Your line is open.
Randy Giveans: Hey, this is Randy Giveans from Jefferies. Can you hear me?
Gerasimos Kalogiratos: Hi, Randy. Yes, I can hear you now. How are you?
Randy Giveans: Hey, Gerry, doing well? How's it going?
Gerasimos Kalogiratos: Not bad.
Randy Giveans: All right. I guess couple questions, just looking at your fleet, right. One is the Cape Agamemnon kind of plans for that, obviously, the asset value keep rising on Cape sizes. And then secondly, any updated timing or thoughts around drop down, so are you be looking LNG or kind of staying in the container ship family?
Gerasimos Kalogiratos: Thank you, Randy. So with regard to the Cape, as I said in my prepared remarks, I think waiting this out has paid off. We have seen definitely an increase, a pickup in asset prices for Capes, I think the Cape Agamemnon, you can safely say has seen over the last 12 months a pickup in value of more than $10 million. Looking at the forward curve and dry bulk fundamentals, I think there's still strength in that. So, we want to see how the next month or so offers. If we see additional strength at charter market, hopefully that will translate into an even higher price and we would be definitely very much alert, if we had to take advantage of that market. So we are still being opportunistic, so far it has paid off. But it is very much to the forefront of our mind to at some point divest of this asset. It is -- and the reasons behind that is that it's dry bulk vessel, if you want little bit outside what we have been doing so far. But importantly, it's more difficult to secure long-term charters for a vessel like that. Of course, this might change, we have seen things that we have never seen before with the container market. So never say never. So that's one thing. With regard to drop downs, we are definitely working on that. We are sitting in on a very comfortable if you want to call it that liquidity position and we want to take advantage of that. And we are working towards having a plan for acquisitions going forward. Just to give you an idea, per forma for the sale of the other vessel as of June 30, our liquidity will increase to approximately $160 million. That is of course, before taking into account any cash relating out balances after paying out distributions going forward. If you want to use recommended reserves, and our operating surplus as a proxy for additional costs for the next quarter that was $13.3 million, if you adjust this for the sale of the Magdalena, you can I think comfortably come up with a number close to $170 million as of liquidity as of quarter end for the third quarter. Just as a side note, our market cap today is $220 million. So effectively, you're getting the rest of our fleet plus the associated cash flows for 450. Anyway, setting this aside with -- this means that we will have a word test, let's say of close to $150 million. I think we would focus first on the LNG carriers, simply because these vessels are in the water and they can generate returns from day one, and this is something that we are looking at very closely. In addition, these are brand new vessels. So they will take the box, that is very important to us to bring down the average age of our fleet. They are very environmental friendly. And to make this a little more tangible, not just use the generic word, terminology, it will actually bring down the carbon intensity of the fleet. And this is, as I said, very important, as well as the other emissions that we have been looking at in terms of the partnership. And estimating an EBITDA of $18 million to $20 million per vessel, it could be quite significant. I think by innovating the debt, we potentially could complete two or three acquisitions just with internally -- with our own liquidity, maybe plus some incremental capital. And again, just to give you a bit sense of the relative magnitude, I said EBITDA $20 million per vessel when our first half 2021 EBITDA excluding the gain from sale amounted to $53 million. So that's quite significant. Now, if we can source external capital going forward, including preferred equity or debt instruments as well as other primarily non-dilutive securities, we will endeavor to complete a larger acquisition. But I think with our liquidity position, we can deliver a significant growth in the short term and hopefully we will have more news in the coming weeks, if not months.
Randy Giveans: And then yes, I guess, in terms of other uses of cash, you've done a little bit on the share or the unit buybacks. Can you discuss that kind of timing and scale? How you came up with that number? Is it just daily trading liquidity kind of constraints? And then in terms of the distribution, clearly, you have a lot of room to pay more as an MLP, but you decided not to, I guess, prepare for further dropdowns. So can you talk on those two items?
Gerasimos Kalogiratos: Sure. As far as the unit buybacks, we have set program of $30 million. We have set a program within the allowed parameters to buyback units. And since inception of the program, I think that was February 19. We have acquired 353,200 common units at an average cost of 11.7 per unit. So, we have spent approximately 4.1 million. I think, given the size of our buyback program and the liquidity of the stock. And if you see this combined with our company unit distribution, we are well on track. As far as the unit buyback program is concerned, no dividend increases, for example, you know, as we have discussed at this juncture, I think it's a better way to return capital to unitholders. That is of course, in addition to our stated common unit distribution policy. We are getting two birds with one stone that is we are returning capital to unitholders, but at the same time, we are taking advantage of the dislocation between our NAV and our equity valuation. So, I think it's a good way to do that. Your second question, Randy.
Randy Giveans: Just about the distribution, I guess -- at current levels, I guess, I understand and I agree that you should prioritize unit repurchases over distribution increases, especially at the discount unit price levels.
Gerasimos Kalogiratos: Yes. Look, I think we will try to balance returning capital be it through distribution during the buybacks with growth. In the end, you have also to look at the longer-term, we have to make sure that we replenish our asset base, many of our vessels come off charter in 2024, 2025, some of them will be reaching. Also, they are fourth special survey anniversary, who knows how the market is going to be by then. And in the end also value dislocations, value gaps like the one we are experiencing, tend to close more efficiently by…
Operator: Sir, your line keeps cutting at.
Gerasimos Kalogiratos: Hello. Hi. Sorry.
Operator: Please continue.
Gerasimos Kalogiratos: So, yes, there seem to be some issue. I don't know Randy, where did you lose me?
Randy Giveans: Something about you're going to buy back 20 million of units this month.
Gerasimos Kalogiratos: No. I did not say that. Sorry. So I was so – but I might have been wishful thinking. So I was saying…
Randy Giveans: You get a balance sheet, unit buybacks with distributions and currency of the cash position, dropdown opportunities. I think that's the two things.
Gerasimos Kalogiratos: I was really saying that you have to do both because in the end value gaps, like the one that we are experiencing today. And from past experience also with other companies, they don't just close with unit buybacks, I think larger companies, larger market gaps liquidity in the trading of the shares are typically is also a good way to close value gaps. So I think we have to balance both, that is returning capital to unitholders, but also growing the fleet.
Randy Giveans: Got it. All right. Well, that's it for me. Thanks so much.
Gerasimos Kalogiratos: Thanks, Randy. Good to talk to you.
Randy Giveans: You too.
Operator: Thank you. We'll now take our next question. Please go ahead.
BenNolan: Hey, Gerry. This is Ben Nolan. Hopefully, you can hear me okay. I'm on my cell here, but…
Gerasimos Kalogiratos: Hi, Ben.
BenNolan: Yep. Hey, good. So I wanted to dig in a little bit more. First of all, you pretty thorough as a company. I wanted to dig in a little bit more on, and certainly sound, you made it abundantly clear that LNG is sort of the priority more so than the containerships. And I think in your prepared remarks, you said that it was your view that, or Capital’s view that LNG is been an inflection point. I was hoping that maybe you could just dig in a little bit more into that sort of fundamental investment thesis. What gives you confidence that LNG is at index an inflection point, is that the right way?
Gerasimos Kalogiratos: Okay. Sure. Can you hear me?
BenNolan: Yes,
Gerasimos Kalogiratos: Yes. Good, good. So firstly, with regard to the containers, I think these are really very suitable assets for us. The only reason that I think we will look at the LNG first is that they are in the water and they can deliver returns, but it is something the containers with the long-term contracts to Hapag, I think that could be very nice assets for CPLP as well, but that's something that we can look at subsequently. Now with regard to LNG, so I think that's also where our relationship with Capital Maritime is quite useful, because we get the unique advantage point, if you want of all main commercial shipping markets that is container standards, boulders and LNG carriers. And, offsetting the obvious not all markets move together, and different opportunities arise in different markets. Our business model is that of assets that have medium to long term charters in place. So we always pursue cash flow visibility and tangible operational transactions. Now, when you look at the LNG market, it does look as if it's at the turning point. And we have seen the charter market improve rapidly over the last few months and the LNG industry enjoying very strong prospects. That is, I mean, you can look at the long term fundamentals and we can that's maybe a whole different call. But you can do look at LNG production, which I know that you look at very closely and this is expected more or less to double over the next 15 years, 20 years. There is demand in the Fareast and Southeast Asia, which is growing quite rapidly as LNG replaces coal in the energy mix, which leads to higher turmoil demand. And LNG remains probably a very real and viable alternative to reduce carbon emissions both onshore and offshore. You have seen how LNG has been more demand in Europe as carbon taxes carbon credits have been increasing in price. And I do think as a regular regulatory process becomes stronger, we expect LNG demand to increase in the short to medium term. And at the same time, we look at the supply of ships at the order book is almost everything is spoken for specific charters or projects. There is increasingly very little space in CPR, because they are -- because other segments are competing predominantly containers at the larger extent also tankers and new building prices are coming up very quickly. We have seen an uplift in asset values across but also for LNG carriers and as a function of that. And of course, underlying demand for the market is also increasing. And finally, as far as we are concerned, there was if you want an issue, an investment determined in the past, when it came to LNG, which was technology propulsion and cargo containment technology, I think that has now reached a plateau there is no, there no visible technological change in the near future that of course improvements that will happen all the time. But that gives us confidence about the useful life of assets. And finally, as I said earlier on, because we do think that admissions is going to be a very important matter going forward, not just because of the wider ESG discussion, but also because it can be will be -- you will be able to translate later that into a financial gain or loss, if, for example, you have much older, inefficient ships. LNG's can meaningfully improve the environmental footprint of CPLP. And it's a real technology, it's a viable technology. It's a tested technology that we all know. And there are many other competing technologies or alternatives on paper, but all of them are still in the remote future when it comes to seeing long-haul commercial vessels propulsion.
BenNolan: Okay. Well, always appreciate that. And then, just to remind, I think we had talked about this last time or some point, how are you thinking about the multiple was it nine, I have something like that where you feel appropriate capital outlay or cost of capital relative to your other alternatives?
Gerasimos Kalogiratos: That I think is something that will be determined by the discussion between the Board and Capital Maritime accounts committee in the Capital Maritime time. Of course, LNG carriers tend to have longer useful life than your average container, dry bulk vessel. So you tend to see slightly higher multiples, but I think we'll be able to have more color on that, after there has been an agreement on know the transaction.
BenNolan: Okay. And then lastly, you outline these assets, and I think as the memory serves that only in past you acquired assets from the sponsor here. But big world by ships out there, do you think there's any possibility at all looking for assets outside of the sponsors in portfolio?
Gerasimos Kalogiratos: For sure, and we are very much alert to opportunities outside Capital Maritime. But it's not necessarily easy to find what we're looking for that is assets with long term charters when and especially a seller that is willing to wait for our process to complete. So, they are -- there advantages to having a pipeline of assets from Capital Maritime. In addition, I mean, we have been looking at -- for example, secondhand acquisitions in the container market. But there we find that, it is difficult to come to terms with residual risk, I think in a way of residual risk is being undervalued at this point, because we do not know the exact impact of the new regulatory regime. And I think that, especially for older vessels, we might have a much higher depreciation going forward. So, it's not an easy market, drive both market has seen also prices increase quite rapidly. So it is -- and it's a very fast moving market.
BenNolan: Yes. I agree. And it's good to hear you say that, I think you and I share similar views there in the market maybe is not appropriately looking at residual value risk fully and running near-term opportunities for long risk. All right. I appreciate it. Thanks, Gerry.
Gerasimos Kalogiratos: Of course.
Operator: Thank you. This was our last question. I would now like to hand the floor back to Gerry Kalogiratos for his closing remarks. Please go ahead, sir.
Gerasimos Kalogiratos: Thank you all for joining us today. Wishing you a great weekend.
Operator: Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you for participating. And you may now disconnect.
