Capital Product Partners L.P.
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Thank you for standing by ladies and gentlemen and welcome to the Capital Product Partners Second Quarter 2015 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer and 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 Thursday 30, of July 2015. The statements in today's conference call that are not historical facts, including our expectations regarding developments in the markets, the expected use of proceeds from the offering of our common unit, feet development, our ability to pursue growth opportunities, our expected charter coverage ratio for 2015 and expectations or objectives regarding our quarterly distributions and annul distribution guidance, maybe 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 to the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units. And I would now like to hand the conference over to your speaker today, Mr. Jerry Kalogiratos. Please go ahead, sir.

[Jerry Kalogiratos:]

Thank you, Jenny and thank you all for joining us today. As a reminder we will be referring to the support slides available on our website as we go through today's presentation. On July 23, 2015, our Board of Directors declared a cash distribution of $0.2365 per common unit and $0.21775 per Class B unit for the second quarter of 2015, which represents an increase of about $0.20 compared to the common and Class B unit distribution for the first quarter 2015 and the total increase of about $0.40 since the beginning of the year. The second quarter common unit cash distribution will be paid on August 14 to unit holders of record on August 7. The second quarter Class B unit distribution will be paid on August 10 to unit holders of record on August 3. The partnerships operating surplus for the quarter amounted to $31.7 million, which is $4.8 million higher than the $26.9 million of the second quarter of 2014. Common unit coverage for the fourth quarter 2014 stood at one times, due to the dry-docking and related off hire for three of vessels during the quarter. We expect that the full impact of the two drop down vessels we took delivery towards the end of the second quarter and the recent charter renewals at higher rates should help improve the unit cover that’s going forward. Four of our vessels who’s charters entail a profit share element generated $2 million in profit share revenue on the back of a strong growth and product spot market environment since the beginning of the year. In June 2015 we took timely delivery of two additional dropdown vessels, one Eco-Flex, Wide Beam 9000 teu container ship and one Eco-MR product tanker, both with long term charters attached, which represents the second and third vessels in the series of five drop down vessels we agreed to acquire in 2014. Moreover, during the quarter the partnership secured period employment and extended time charter contracts for four of its vessels, all at increased rates. As a result of the new charters and as of the end of the second quarter 2015, the average remaining charger duration of our charters stood at seven years with approximately charter coverage of 93% for 2015 and 74% for 2016. As most of our remaining charger expirations in 2015 relate to product tankers, we expect to be well positioned to take advantage of the improving market condition in this segment. As previously announced, during the second quarter ’15 the partnership successfully completed the issuance and sale of 14.6 million common units at a public offering price of $9.53 raising net proceeds before offering expenses of $133.3 million. In conjunction with the offering, we entered into amendments to three of our credit facilities providing for repayment of approximately $116 million under this three facilities, the deferral of further scheduled amortization payments until the fourth quarter of 2017 and the extension of the final maturity for two of our largest facilities to the fourth quarter of 2019. Turning to slide two, revenues for the second quarter of 2015 were $54.5 million compared to $74.4 million in the second quarter of 2014. The increase is mainly a result of the improving employment day rates for certain of the partnerships vessels, the increased size of the partnerships fleets and the $2 million in profit share and by four of the partnerships vessels. It is worth mentioning at this point that we had a total of 54 days of off hire in the second quarter of ’15 due to the dry-docking of certain of our vessels. Total expenses for the second quarter of 2015 were $35.6 million compared to $35.5 million in the second quarter of ’14. Vessel operating expenses for the second quarter of 2015 amounted to $17.7 million, which is $0.9 million higher than the $16.8 million in the second quarter of 2014. The increase reflects by primarily the increased fleet size of the partnership and expenses related to the dry docking of the M/T 'Avax', M/T 'Akeraios' and M/T 'Agisilaos'. General administrative expenses for the second quarter of ’15 amounted to $1.3 million compared to $1.6 million in the second quarter of 2014. Total other expense net for the second quarter of 2015 amounted to $4.8 million compared to $4.2 million in the respective quarter of 2014. The increase reflects the lower other expense incurred in the second quarter of 2014, mostly due to the reimbursement of certain expenses related to the redelivery of the Motor Tank 'Assos' and Motor Tank 'Atrotos' from their charterers in that quarter 2014. The partnerships net income for the second quarter of ’15 was $14.1 million or $11.1 million after taking into account the preferred interest in net income attributable to the Class B unit holders and the GP interest; that is $0.09 per common unit. Moving on to the next slide, you can see the details of our operating surplus calculations that determine the distributions to our unit holders 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 $31.7 million in cash from operations before accounting for the Class B preferred unit distribution. After adjusting for the Class B unit distribution, the adjusted operating surplus amounted to $28.9 million. Common unit coverage for the second quarter was at one times as three of our vessels were dry docked during the quarter. In the third quarter of 2015 we anticipate to have an additional two dry dockings taking place. However we expected the full impact of the two drop down vessels we took delivery towards the end of the second quarter and the recent charter renewals at higher rates should help improve the unit cover going forward. On slide four you can see the details of our balance sheet. As of June 30 the partners’ capital amounted to $972.3 million, which is $99.7 million higher than the partners' capital as of the end of 2014, which amounted to $872.6 million. The increase was mainly a result of the partnerships equities in April 2015, which raised net proceeds before operating expenses of $133.3 million. As of the end of the second quarter, the partnerships total debt has decreased by $46.2 million to $531.7 million compared to total debt of $577.9 million as of year-end 2014 following the prepayment of approximately $116 million under three of our credit facilities and $2.7 million loan amortization under one of our other credit facilities. Separately we partly financed with $72.4 million of debt from the partnerships senior secured credit facility with ING Bank, the acquisition of the Motor Tank Active which was delivered at the end of the first quarter; the Motor Vessels CMA CGM Amazon which was delivered on June 10 and finally the Motor Tank Amadeus which was delivered at the end of the second quarter. Overall, our balance sheet remains strong with a net debt to capitalization of 26.5% and with partner's capital representing 62.7% of our total assets. On slide five you can see that our fleet is well diversified predominately between product tankers and container vassals and is built at top tier yards and at high specification. At the bottom right you can see that the average fleet age stands at 6.6 years compared to 9.8 years for the industry average with 2.4 million deadweight capacity. Turning to slide six, we are pleased to have secured new time charter employment and extended period contracts for a total of four of our product tankers during the quarter, at an average increase of $1,150 per day, as the partnership continues to take advantage over the current favorable rate environment in the product and crude tanker markets. Furthermore and as previously announced, the Motor Vessels CMA CGM Amazon, the second drop down vessel was delivered to the partnerships in mid-June and commenced its five year charter with CMA CGM. The vessel is earnings 39,250 gross per day over the period. At the end of the quarter the Motor Tank Amadeus [indiscernible] was delivered to us and commenced its year time charter with Capital Maritime at $17,000 gross per day plus 50/50 profits share settled biannually. It is important to note that for seven of the 12 vessels fixed year-to-date, we have secured employment for two years longer. In addition, we have reduced the number of vessels that belong to Capital Maritime from 13 out of the total fleet of 30 vessels from June 30, 2014 to nine out of 33 currently in our fleet, thereby reducing our exposure to Capital Maritime and further diversifying our customer portfolio. Moving to slide seven and taking into account the new charters, the average remaining charter during is seven years. We have six product tankers, two Suezmax tankers and two containers that will see their present charters expire over the next 12 months. Excluding the vessels for which our charters hold options to extend, our MRs are currently fixed at an average of $16,000 versus the current one to two year period rate of between $18,000 to $19,000 per day. The two Suezmax’s that are coming off charter in March and April 2016, are currently fixed at an average rate of $30,000 versus the current one to two year period market of $33,000 to $35,000 per day. Moving on to slide eight, we view unit product tanker market development in the second quarter of 2015. MR product tanker spot rates continue to improve in the second quarter of ’15 with earnings for the sector averaging above $20,000 per say for the third consecutive quarter and at the highest level since the third quarter of 2008. Growing global oil demand and high refining margins in both Asia and Europe have been supporting refined product movements. In the Atlantic, product tankers generated strong returns in the spot market on the back of increased product imports into the U.S. East Coast, which are estimated to have increased by 20% in the first half of ’15 compared to the same period last year. Concurrently, exports from the U.S. Gulf remain close to record levels during the second quarter, contributing the strong sentiment to the market. East of Suez, firm naphtha demand and refinery capacity additions, including the start-up of our Aramco's Yanbu refinery and the expansion of the Ruwais refinery in the UAE, further increased miles for product tankers. The product tanker period market remained very activity during the second quarter with rates rising to the highest level since the first quarter of 2009 in response to the improvement in spot freight rates. The bargain spot product tanker market is expected to further support period rates and activity going forward. On the supply side, the MR product tanker order book has declined over the last month, currently standing at $14.3 million of the current fleet as the ordering activity for MR tankers has slowed significantly over the last 12 months. Highlighting the slowing contracting activity, only seven orders have been placed in the first half of the year compared to 66 for the full year of 2014 and 261 in 2013 as most quality CPLs have exhausted their capacity throughout 2016 and early 2017. Concurrently the order book continues to experience slippage during the first half of ‘15, as approximately 42% of the expected MR and handy sized tanker in new builds were not delivered on schedule. Turning to slide nine, the Suezmax spot market maintained a positive momentum with a market registering the strongest second quarter since 2009. The record Chinese grew the imports in multi-decade highs in oil production and have stimulated Suezmax tanker demand. On the supply side, increased long-haul voyages from the Atlantic to the Far East have seen ships remove from the position lease for longer time, thus tightening them as availability. A positive development that is also supported by the minimal year-to-date fleet growth. As a result of the strong spot markets period rates have increased to their highest point since the first quarter of 2009. According to the IEA, world oil demand is set to grow by $1.4 million barrels to $94 million barrels in 2015. Industry analysts expect Suezmax tanker deadweight demand to expand by 2.4% for 2015 compared to projected fleet growth of 1%. At the same time the Suezmax tanker order book 2018 corresponds to 18.1% of the current fleet, but slippage year-to-date remains high at 40%. Turning to the last slide, slid 10, we have increased the partnerships distribution for the second quarter of 2015 by spot $0.20 to $0.2365 per common unit and $0.21775 per Class B unit after having increased the first quarter distributions by the same about earlier in the year. Looking ahead, we aim to fulfill our stated distribution growth objective of 2% to 3% per annum for the foreseeable future, by erasing the common and preferred distribution by the same amount every quarter as in the past two quarters. Our distribution guidance is supported by the positive effect of the full year contribution of the contracted dropdown vessels delivered year-to-date and to be delivered by the first quarter of 2016. It is important to note that our distribution guidance does not take into account any further acquisitions. At the same time we enjoy a strong balance sheet and as discussed any further rate improvement can help us build further our distribution coverage and support our distribution objective ahead. Finally, we continue to hold the right of first refusal on the 6 MR product tankers currently under construction by Capital Maritime, in addition to other accretive transactions that we can choose from our sponsor or the wider shipping markets. And with that, I’m happy to answer any questions you may have.

[Operator:]

Thank you very much indeed sir. [Operator Instructions]. And your first question from Bank of America/Merrill Lynch comes from the line of Ken Hoexter. Your line is now open, sir.

[Ken Hoexter:]

Great, good morning. Hey Jerry, on the new distribution policy, I just want to understand that a little bit deeper. When you said it doesn’t include acquisitions are you planning on accelerating around acquisitions or is that a steady irrespective of acquisition?

[Jerry Kalogiratos:]

The distribution guidance is steady respective of the acquisitions. It is based on the five drop down vessels we agreed to acquire in the third quarter of last year and as you know, we have taken successful delivery of three out of the five. Any additional drop downs or growth in our asset base could be a reason to potentially revise our distribution guidance upwards.

[Ken Hoexter:]

Yes, understood. Thank you. So as you now have migrated away from Capital Maritime dropping from the 13 down to nine and even with an enlarged fleet, what are your thoughts on counterparties going forward in this rising market. Do you look to move away from Capital Maritime into more of the market or is that kind of a comfort zone that you have now at that level?

[Jerry Kalogiratos:]

Capital Maritime as you know is an active player in the spot markets. They have an extensive spot platform and they have chartered vessels over the partnership now for a number of years. They have been also at points that the period market has been less liquid. They have provided more liquidity for us in terms of period coverage and that’s why you have seen us fixing a little more with the Capital Maritime. Now that we’ve seen the increased liquidity in both, let’s say the Suezmax and more importantly the product tanker market, we will continue to fix with both Capital Maritime and other parties and in the end it is very much depends on what is available and what is the highest bid at the time.

[Ken Hoexter:]

Okay, thank you for that. And last question just on the rates, I guess that you’re seeing as you see these accelerating rates. You did mention on the container side you had slides on the product and Suezmax, but you noted a couple of containers are coming up for renewal. Can you walk us through you views on the market there and then I’ll come back on the product side after that?

[Jerry Kalogiratos:]

Well, the charters of the two containers hold a number of options for another three years for these vessels, but still as you know the container market, especially in the post Panamax segment is quite liquid. So far post Panamax vessel supply remains limited and all new builds for 2015 and 2016 have found deployment. On the other hand, we are in the midst of the usual summer dull period if you want off season and we will need to see how this year’s Christmas peak will affect the charter market. We yet need to see a few more fixtures in that segment in order to better understand where this market is, because unlike the lets say tanker or dry bulk market, they have much fewer fixtures. But recently we have seen fixtures anywhere between $25,000 to $28,000 for similar kind of vessels.

[Ken Hoexter:]

Wonderful! And then just to wrap up on the product side. Given the spike in rates that we’re seeing more recently, I got that was a great walk through on slide eight in terms of kind of the progression of long term rates. Are you seeing stronger activity in terms of your bid for upcoming renewals?

[Jerry Kalogiratos:]

Sure. As the spot rates are very strong, many charterers including your usual suspects, the oil majors, the traders, they are trying to get unit coverage. Owners who enjoy the very strong sport earnings and are increasingly more optimistic about the future, they refuse to fix period and as a result you have seen a charter that’s not only a bit higher, but also for a longer period. So recently you have seen for example traffic [indiscernible] 2006 build MR for two years at $18,000 or Cargill for 12 months at 18.5. Having said that, the one year period mark, it is very much spots dependant and position dependant. So if you’re giving away good front haul voyage, the charterers will pay even more. So there is definitely a lot of activity and demand and I think the positive thing and as you have seen from our fixtures is that we have been able to find more interest for longer fixtures than one year at this point.

[Ken Hoexter:]

Wonderful, Jerry. I appreciate the thoughts and insight.

[Jerry Kalogiratos:]

Thank you.

[Operator:]

Thank you very much indeed. And now from UBS Securities you have a question from Spiro Dounis. Your line is now open sir.

[Spiro Dounis:]

Hey, good morning Jerry and congratulations on the recent promotion.

[Jerry Kalogiratos:]

Thank you, Spiro. Good morning to you.

[Spiro Dounis:]

Just wanted to touch on the six right of first refusal assets real quick. Just wondering if you can give us any color on whether those assets, those vessels have started to have been I guess been chartered. I know they start to deliver I believe at the end of the year and if they haven’t been chartered yet, just any timing around that, if you can offer anything.

[Jerry Kalogiratos:]

Well, one of the six vessels has been fixed. The rest are still unfixed and they very much depend on Capital Maritime as to what they tend to do with these vessels. So there is not much to add from this perspective. But in any case I think we have to focus in taking delivery of the already contracted dropdowns going forward and when and if we can do an accretive transaction and assuming that these assets find proper employment we will also look at them.

[Spiro Dounis:]

Okay, that makes sense. And you mentioned at the end of your prepared comments there that I guess you could start looking at maybe acquisition opportunities outside of Capital Maritime. I was just wondering maybe you’d offer some guidance on what that might look like. Could you maybe do a sale leaseback type structure where you’re buying from one of your customers and leasing back to them or would you be able to buy something on the water and then fix it yourself?

[Jerry Kalogiratos:]

Well, we’re pretty open to any opportunity and we are always scan the markets for opportunities, but obviously whatever we do has to be accretive, so there is nothing specific that we have in mind, but to the market, as you know the S&P markets are quite liquid and quite sizable. So we always look at opportunities, but the prime criteria needs are obviously accretiveness at this point.

[Spiro Dounis:]

Okay, that makes sense. And just one last one – in terms of I guess financing future growth, obviously unit price is probably not where you want it to be today and I guess other options there maybe levering up a little bit more than you’ve done in the past and with the stronger balance sheet now I suppose you’d be more easily able to do that and I would imagine at better terms too. And I guess another option is maybe hitting a preferred market to the extent its open. I’m just wondering how your thinking about financing future growth. Broadly speaking I realize you can’t be that specific.

[Jerry Kalogiratos:]

Well, with regard to leverage, which is one part that I can probably answer is that we will continue to aim for 50/50 going forward or at least something in that range. So I don’t expect it to deviate a lot from that. With regard to other opportunities we are of course open, but there is nothing specific that I can comment at this point.

[Spiro Dounis:]

Got it. I appreciate the color Jerry. Take care.

[Jerry Kalogiratos:]

Thank you, Spiro.

[Operator:]

Thank you very much indeed, sir. Now from Bank of America/Merrill Lynch, we now have a question from the line of Shawn Collins. Your line is open sir.

[Shawn Collins:]

Great. Jerry, can you hear me?

[Jerry Kalogiratos:]

Hi Shawn.

[Shawn Collins:]

Okay, great, great. Hey good morning, good afternoon. Thanks for taking my question. Hey Jerry, I just wanted to ask, what kind of rate difference are you observing in the market between Eco design, MR’s versus traditional MR’s. Can you comment on that?

[Jerry Kalogiratos:]

Sure. You have seen a number of fixtures and to be perfectly frank, this has differed a lot and this has also to do with the period duration, the position of the vessel, as well as the so called first or second generation Eco or when they were fixed, because as you can imagine the premium was different a year ago compared to what you see recently. As a rule of thumb I would say that today expenses are up around $1,000, maybe $1,500, but again it very much depends on other factors such as duration and position.

[Shawn Collins:]

Okay, great. That’s helpful and somewhat in context with the past, kind of maximum differential of almost $3,000. Just a second question; Asian shipyards have recently been in the news of large financial losses. I know you have strong relationships with the yards and are working with them for a long time. Do you expect any potential consolidation or capacity rationalization or the change in the landscape of major shipyards?

[Jerry Kalogiratos:]

That’s an interesting question Shawn. I think we will see some consolidation and you have seen various shipyards in the news who are expected to take, to consolidate other smaller shipyards that have issues, that have had financial issues now for some time. I think in a way this has been positive now for some time for the industry and the rehabilitation process that some of these shipyards have gone through. It means that they have been out of competition. So as the banks that control them have deterred them from taking orders below cost, and especially on the MR product tanker side, we have seen product tanker ordering remain at the bay and this has been definitely positive for supply. At least three shipyards in Korea that billed MRs have had financial issues. So I’m not sure to what extent we will see capacity rationalization, but definitely what is happening in Korea is good for the supply side.

[Shawn Collins:]

Okay, great. That’s helpful Jerry. Just my last question and I know you and I have touched upon this offline before, but I just wanted to touch upon the Greek volatility and the social and political situation there. I just wanted to ask, is this having any operational impact on your business and if you can just comment on that please?

[Jerry Kalogiratos:]

Sure. As you know capital products is an international Maritime MLP and its registered under the laws of Marshall Islands and as such is not subject to Greek corporate tax. It controls vessels that sail under the Liberian or the Marshall Islands flag and they operate worldwide. Commercial management as well as technical management of these vessels is done by capital ship management who have corporate headquarters in Perouse, but the management is also affected by their other international offices in New York, London, Costanzia in Romania, as well as Singapore. So there is very little actual exposure to Greece. In terms of the financial side, as you know our business is U.S. dollar based. We charter our vessels to international companies and all our debt facilities are with international consortia led by the likes of HSH, Credit Agricole and ING. We have immaterial balances, cash balances with the Greek banks, so there has been very little impact that the partnership has failed from the Greek crisis.

[Shawn Collins:]

Great. That was helpful Jerry. Thank you for the time and insight.

[Jerry Kalogiratos:]

Thank you.

[Operator:]

Thank you very much indeed. And now your next question from Raymond James comes from the line of Ben Brownlow. Your line is now open.

[Ben Brownlow:]

Hey, good morning Jerry.

[Jerry Kalogiratos:]

Good morning Ben.

[Ben Brownlow:]

Just as a follow up, on the distribution growth which is pretty steady and I know your implying I guess two-tenths of $0.001 sequential increase on the third quarter. With that annual growth target, that is within the annual growth target of 2% to 3% that you said, but its trending towards the low end of that 2% and just now that you have your quarter of three drop downs flowing through the increase in re-charter rates locked in for several tankers, I would expect to higher coverage ratio in the third quarter. Just why not get us a slightly more aggressive stance in our distribution growth?

[Jerry Kalogiratos:]

I think that you will find that the distribution growth by the end of the year compared to year end last year is just – and if you assume its about $0.20 increase. It’s just above the 3% growth and so hopefully we will end up on the upper end of our guidance. But overall I think the idea very much remains that the distribution growth guidance that we gave is tied to asset growth. Effectively the incremental cash flow expected from the drop downs will support this distribution growth for the foreseeable future. Now as you say the charter rates have been increasing and this will definitely help us build our distribution coverage and reserves and in the long term this will also underpin this distribution guidance. Don’t forget that our balance sheet is quite strong, so that should help us use this proceeds either as a cushion for a rainy day or potentially as a equity for acquiring more assets.

[Ben Brownlow:]

Great, thank you. And then just two quick ones on the expense side. Can you quantify the dry docking expenses in the second quarter and you touched on dry docking schedules for the third quarter; if you could just repeat that. And then G&A dropped off a little bit sequentially from the first quarter and year-over-year. Any color there?

[Jerry Kalogiratos:]

On the dry docking total cost expense for the second quarter where it was about $1 million and had to do with the dry docking of three of our vessels. We have another two vessels dry docking in the third quarter. That is the Cape Agamemnon and the Motor Tanker Atrotos would not expect any other dry dockings unless we find that there is an opportunity to dry dock a vessel ahead of its time, depending on position mostly. So that’s it on the dry docking. With regard to 2016 and with regard to special surveys in 2016 and after that we have five scheduled for 2016, two MR product tankers, two Suizmax’s and one 8,000 DU container and another three in 2017. So finally on the SG&A we had a small reduction compared to last year as last year we had increased expenses on the back of the IDR reset and certain expenses related to that.

[Ben Brownlow:]

Great, thank you for the color.

[Jerry Kalogiratos:]

Thank you.

[Operator:]

Thank you very much indeed sir. [Operator Instructions] There appear to be no further questions; therefore I shall pass the call back to you for closing remarks. End of Q&A

[Jerry Kalogiratos:]

Thank you all for joining us today and please do not hesitate to contact me if you have any further questions. Thank you.

[Operator:]

And with many thanks to our speaker today, that does conclude the conference. Thank you all for participating and you may now disconnect. Thank you, Mr. Kalogiratos.

[Jerry Kalogiratos:]

Thank you, Jenny.

[Operator:]

All the very best. Bye-bye.

[Jerry Kalogiratos:]

Thank you. Bye-bye.

[Operator:]

Bye-bye.