Capital Product Partners L.P.
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Thank you for standing by and welcome to the Capital Product Partners Third Quarter 2013 Financial Results Conference Call. We have with us Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of the Partnership. 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 that this conference is being recorded today, on Thursday, August 31, 2013. The statements in today’s conference call, that are not historical facts, including our expectations regarding developments in the markets, our expected charter coverage ratio for 2013 and 2014 and expectations regarding our quarterly distribution may 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 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 completeness of the forward-looking statements. We make no prediction or statements about the performance of our common units. I would now like to hand over to your speaker today, Mr. Lazaridis. Please go ahead, sir.

[Ioannis E. Lazaridis:]

Thank you Graf 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. On October 21, our Board of Directors declared a cash distribution of $0.2325 per common unit for the third quarter of 2012, in line with the management's annual distribution guidance. The third quarter common unit cash distribution will be paid on November 15 to unit holders of record on November 8, 2013. The Partnership’s net income for the quarter was $33.2 million including a $24.8 million gain from the bargain purchase related to the purchase value of the three 5,000 TEU container vessels, both in September as the fair value of the vessels and their attached time charters exceeded their purchase consideration. The Partnership's operating surplus for the quarter amounted to $25.8 million, was $3.9 million higher than the $21.9 million for the third quarter of 2012. Common units coverage for the quarter stood slightly above one times as the three 5,000 TEU containers only joined our fleet towards the end of the third quarter and two of our Suezmax vessels had to undergo their first vessel survey due resulting to a large number of days in off hire and significant operating expenditures. In August, the Partnership issued 13.7 million common units at $9.25 per unit raising $126.6 million in gross proceeds. In September the Partnership entered into a new senior secured credit facility of up to $200 million led by ING Bank. The net proceeds of the issue together with $75 million draw-down from our senior secured credit facility and part of our cash balances were used for the acquisition of three container vessels with 12-year charters with Hyundai Merchant Marine for an aggregate price of -- purchase price of $195 million. We have recently announced that we will extend the bareboat charters of three of our Product Tankers to BP Shipping in direct continuation of their present charters. In addition, we fixed the Product Tanker Avax for one-plus-one year time charter to BP Shipping and we have entered into charters for M/T Apostolos and Anemos 1 both with our sponsor, Capital Maritime. In October 2013, the Partnership has entered into two separate agreements with non-affiliated third parties to acquire 2013 built eco-Type medium range product tanker to be renamed M/T Aristotelis and to sell the 2008 built M/T Agamemnon II. As of the end of the third quarter the average remaining charter duration of our charters stood at 8.9 years with approximate charter coverage of 98% for the remainder of 2013 and 79% for 2014. Revenues for the third quarter of 2013 were $42.7 million compared to $38 million in the third quarter of 2012, the increase mainly as a result of the Partnership's increased fleet size and improving employment day rates for certain of the Partnership's vessels. Total expenses for the third quarter were $30.7 million compared to $26.9 million in the third quarter of 2012, the increase mainly as a result of the increased fleet size of the Partnership. The vessel operating expenses for the third quarter amounted to $13.9 million for the commercial and technical management of our fleet compared to $11.3 million in the third quarter of 2012. General and administrative expenses for the third quarter amounted to $2.1 million, which include a 0.8 million non-cash charge related to the Partnership's Omnibus Incentive Compensation Plans. The Partnership's Omnibus Incentive Compensation Plan is now fully vested and the non-cash charge is not expected to be incurred in the coming quarters. As discussed in the third quarter of 2013, the Partnership reported a gain from bargain purchase of $24.8 million related to the purchase value of the three Additional Container Vessels which were all acquired by the Partnership on September 11, 2013. Total other expense, net for the third quarter of 2013 amounted to $3.6 million, compared to $3.8 million for the third quarter of 2012. After taking into account the $4.5 million preferred interest in net income attributable to the unit holders of the $20.9 million Class B Convertible Preferred Units outstanding as of September 30, 2013, the result for the third quarter was $0.35 net income per limited partnership unit. Moving on to slide three, 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. Adding certain non-cash items back to net income we have generated approximately $25.8 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 $21.3 million, which translates into just above one time common unit coverage. We expect common unit coverage to improve in the next quarter as we will enjoy a full quarter's contribution from the three additional container vessels acquired by the partnership on September 11, while the issue of the $13.7 million common units took place in August and we expect no major drydocks due as we had in the third quarter. On slide four, you can see the details of our balance sheet. As of September 30, 2013, the Partners' capital amounted to $804.5 million, which is $230.7 million higher than the Partners' capital as of December 31, 2012, which amounted to $573.8 million. This increase primarily reflects the gross proceeds of approximately $126.6 million from the issuance of 13.7 million common units in the third quarter, the issuance of the 9.1 million Class B Units, which raised gross proceeds of approximately $75.1 million in the first quarter, combined with the payment of $63.3 million in distributions since December 31, 2012 and the net income for the nine months period ended September 30. As of September 30, 2013, the Partnership's total debt has increased by $126.3 million to $584.7 million, compared to total debt of $458.4 million as of December 31, 2012, as a result of the loan advances under the Partnership's credit facilities during the nine months period ended September 30 in connection with the acquisition of the five 5,000 TEU Container Vessels acquired in 2013. Overall our balance sheet remains strong with a net debt to capitalization of 36.2% and with Partner's capital representing 56.6% of our balance sheet. Turning to slide five, the Partnership acquired on September 11 three 5,000 TEU eco-Type, wide beam, energy efficient newbuilding container vessels built in 2013 at Hyundai Heavy Industries for a total consideration of 195 million from our sponsor Capital Maritime & Trading. All three vessels are employed under a 12 year time charter employment to Hyundai Merchant Marine at a gross rate of $29,350 per day. The charters commenced shortly after the delivery of the vessels to Capital Maritime during the first half of 2013. Turning to slide six, the acquisition of the three containers was finance from the net proceeds of the issuance of 13.7 million common units and the drawdown of $75 million from our senior secured credit facility of up to $200 million led by ING Bank. The new credit facility of up to $200 million is non amortizing until March 2016 with a final maturity date in December 2020. It carries a rate of LIBOR plus 350 basis points and a commitment fee of 100 basis points. The remaining amount under the credit facility is available for funding of up to 50% of charter free value of product tankers and Post Panamax containers vessels. Turning to page seven, you can see our fleet profile. The Partnership's fleet is comprised of 18 product tankers, seven Post Panamax container vessels, four Suezmax tankers and one Capesize bulk carrier. It has more than tripled since our IPO in 2007. The average fleet age stands at 5.7 years compared to more than nine years for the industry average. The young age and high specification of our fleet as well as our all major qualifications for long-time employment of our Sponsor and the extensive networks and the relationships with charters and liners have distinct competitive advantages for the Partnership especially today's markets with a increased focus on safety, security, efficiency and financial strength. As you know Capital Maritime, our Sponsor is one of our more important charters and as a courtesy not an obligation it has provided us with certain interim balance sheet information to help investor assess its financial profile. Capital Maritime & Trading is a private, profitable diversified shipping company. Having sold a large number of vessels in the last few years, including some vessels to CPLP it currently owns five tanker vessels, all trading in the spot market or spot related charters. Capital Maritime has also a presence in the drybulk and container markets through the ownership of two handy bulkers and two 1,700 TEU container. The average age of its fleet is approximately five years. Capital Maritime boasts a very strong balance sheet with a low leverage. At the end of the first half of 2013 total assets amounted to close to $1 billion and total stockholders' equity stood at approximately 62% of the total assets. Its current debt, its current net debt as a percent of the market value of its vessels is approximately 23%. Capital Maritime is in the midst of a substantial newbuilding program with many ordered vessels being delivered in the coming three years. During 2015, it will take delivery of three latest eco-Type design, wide beam 9,100 TEU container vessels built by Hyundai Heavy Industries, with increased reefer capacity, high specification and optimized [possible saving]. In addition Capital Maritime will take delivery of six high specification eco medium range chemical product tankers during the period of 2015 through to the first half of 2016, built by Samsung. The vessels have been equipped with new more efficient electronic engines optimize bow and high lines and as well as equipped with energy saving devices in order to achieve maximum energy efficiency as well as to minimize their environmental footprint. On the operating side, the main design has been enriched with a number of operational excellence to give the vessels and the future charterers maximum trading flexibility. Capital Maritime holds an option to build another four sister vessels at Samsung for delivery in the fourth quarter of '16 and the first quarter of '17. Capital Ship Management our technical managers enjoys an excellent operational safety and environmental track record and is recognized by tanker drybulk and container charterer as well as suppliers and shippers worldwide Capital Ship has also a very strong reputation on the technical expertise it builds when building new vessels, a very important factor in our performance over the years, as Capital Maritime have taken delivery of more than 40 tanker container and dry bulker newbuildings over the past 10 years. Capital's onshore and offshore personnel have long experience in the segments we operate, has a retention ratio of our crews, a key performance indicators for charterers worldwide is above 90%. Our officers have been successfully rated by all major charterers and we have received the accreditations by all the insurance by Lloyd's register for our systems and procedures. The overall relationship with Capital Maritime as described about provides significant benefits for CPLP as it allows CPLP to be to maximize vessel employment and take advantage of growth opportunities while maintaining cost low without compromise to safety and the environment. Turning to slide eight, we are pleased to have extended the bareboat employment of three of our product tankers to BP Shipping. The three vessels will extend their charters with BP Shipping for an additional 18 to 36 months in direct continuation of the previous bareboat charters at a revised day rate of between 6,750 to 7,000 dollar per day per vessel after the completion of the current charters in 2014 and 2015. BP Shipping has the option to extend the duration of each of these charters for up to a further 12 months either as bareboat charters at a bareboat rate of $7,250 per day for the optional periods if declared or on-time charter basis during the optional periods at a time charter rate of $14,250 if declared. If all options were to be exercised, the employment of the vessel would extend to April 2017 and 2018. The rates for each vessel are described in detail in our press release. The M/T Avax was chartered in October 2013 to BP Shipping for a minimum charter term of one year. BP Shipping has the option to extend the charter for an additional 12 months at a gross day rate of 15,600 a day. The vessel's actual earnings under the new charter at $14,750 gross per day until May 2014 and $14,800 gross per day between May and October 2014, as the new daily charter rate includes compensation that Capital Maritime will pay to the Partnership for the vessel's early redelivery in accordance with the terms of the charter party agreement with Capital Maritime. Also the M/T Apostolos extended its charter with our sponsor, Capital Maritime, by a period of 14 to 18 months at a gross rate of $14,850 per day, which is $850 per day higher than its previous employment day rate. The charter is expected to commence in October 2013 and the earliest redelivery for the M/T Apostolos is expected to be December 2014. The M/T Anemos I entered into a new charter with our sponsor, Capital Maritime, for a period of 14 to 18 months at a gross rate of $14,850 per day, which is $150 per day higher than its previous employment day rate. The charter is expected to commence in November 2013 and the earliest redelivery for the M/T Anemos I is expected to be January 2015. Turning to slide nine, we have agreed to acquire an eco-Type chemical product medium range tanker to be renamed M/T Aristotelis built in 2013 at Hyundai Mipo Dockyard in South Korea and to sell the medium range M/T Agamemnon II built 2008 at STX Shipbuilding & Offshore. Both transactions are with two separate non-affiliated parties. We expect the M/T Aristotelis to be employed on a period time charter for $17,000 gross per day for 18-24 months with Capital Maritime when delivered. Currently, the M/T Agamemnon II is on a time charter to Capital Maritime at a gross rate of $14,500 per day until March 2014. The acquisition of M/T Aristotelis will be funded by proceeds from the sale of M/T Agamemnon and approximately $6 million from the Partnership's cash balances. We expect the transaction to be completed in the fourth quarter of 2013. As a result of the two transactions we improved the age and employment profile of our fleet at a small premium and we acquired the vessels that meets all the latest environmental regulations. At the same time, M/T Agamemnon which is being sold was due its first special survey in the coming weeks at cost that we don't -- not have to incur any longer. Turning to slide 10 and taking into account the recent acquisitions of the three 5,000 TEU container vessels, the expansions of the three medium range tankers on bareboat to BP and the new picture of M/T Avax, Apostolos and Anemos, the average remaining charter duration is 8.9 years. We have 11 vessels that will see their charters expire over the coming 12 months, nine of which are product tankers. Period fixtures in the product tanker market continue to improve and we expect to take advantage of the attractive fundamentals of the product tanker market, the increased activity in terms of period fixtures as well as the better period market to secure favorable employment for these vessels. Turning to slide 11, we will review the product tanker market developments in the third quarter of 2013. Spot earnings for the third quarter were at higher level than a year ago but overall weaker when compared to the second quarter of 2013, while rates out of the U.S. Gulf were on average strong during the quarter the Atlantic was weaker due to the declining European refinery utilization, the lack of arbitrage opportunities and seasonally weaker gasoline imports to the U.S. The product tanker period market remained active with an estimated 56 fixtures in the third quarter of 2013, as charterers continue to take advantage, to take period coverage at higher rates on the back of expectations of an improving spot market. Period rates have continue to strengthen reaching their highest level since July 2009. Analysts expectation regarding overall demand for product tankers is estimated at 4.8% for 2014, which is a higher rate of demand compared to the 4.1% growth expected in '13 as the structural changes in the refinery industry and the increased exports from the U.S. Gulf are expected to result in increasing long haul product movements and increased vessel utilization. On the supply side, net fleet growth of product tankers for 2014 is forecasted to be in the region of 3.5%. The product tanker order book continued to experience slippage year-to-date as approximately 21% of the expected medium range and handysize tanker newbuildings were not delivered on schedule. In addition, the MR order book seems to have stabilized with most product tanker shipyard capacity booked until the mid of 2016. We believe that the current MR product tanker order book at 14% of the total fleet in combination with the demand fundamentals and the order book slippage should positively affect spot and period charter rates going forward. On to slide 12, and the product tanker market prospects analysts expect that product tanker market fundamentals have benefit from the shale oil and gas production boom in the states. U.S. oil production is expected to continue to increase from $9.1 million a day in '12 to 11.9 million barrels a day in 2019 according to the IEA. As a result, U.S. based refiners have now access to cheap natural gas and discounted crude which has dramatically increased their competitiveness and have help the U.S to turn one of the largest net exporters of oil products. Year-to-date U.S. oil product exports are estimated by the EIA at an average of $3 million barrels per day compared to $1.9 million barrels per day in 2010 and only 0.9 million barrels per day in 1991. Currently we see increased oil product exports of middle distillates of as well as gasoline to Latin America, West Africa and Europe while Latin America is expected to be the major outlet for U.S. gasoline exports due to its growing population, gasoline subsidies and lack of investments in refining. Overall this trend is highly beneficial for the product tanker market as with additional backhaul in the transportation trade is becoming increasing important driver for product tanker utilization rates. This is a special advantages for MR as the bulk of U.S exports are lifted by MR product tankers, as you can see from the bottom graph of the slide. Turning to slide 13, we discuss the Suezmax Tanker market, which is the only crude market exposure we have. The Suezmax spot market remained at seasonally low levels as increased vessel supply continued to put downward pressure on rates combined with the decreased U.S. oil imports and lower Libyan oil productions. The IEA forecast of global demand growth for 2013 has been revised upwards at 1 million barrels per day for 2013, ramping up to 1.1 million barrels per day in ' 14 as the macroeconomic backdrop improves. Suezmax tanker deadweight demand is expected to grow by a solid 4.1% for the full year 2014 on the back of increasing market share for Suezmax on traditional Aframax routes and increased Indian refinery crude oil imports on the back of growing refinery capacity. On the supply side, analysts expect 2013 to be the last year of rapid net fleet growth and 2014 net fleet growth of 2.3% to be below Suezmax's demand growth. The total Suezmax order book now stands at 11.3%, the lowest in percentage terms since 1997. Slippage continues to affect tonnage supply, it is on the increase as approximately 35% of the expected Suezmax's newbuilding year-to-date were not delivered on schedule. Industry analysts expect the slippage and cancellation rates to increase going forward due to the historically weak spot market, soft shipping finance environment and the downward pressure on assets values. Finally given the market backlog, very few Suezmax orders have been placed over the last 12 months which should help improve the demand supply picture going forward. Turning to the final slide we believe that common unit distribution coverage is well supported going forward as the Partnership has good revenue visibility as 79% of the 2014 days are fixed and the remaining duration of charters stands at 8.9 years following the recent container acquisitions and charter renewals. The product tanker market fundamentals remained positive as the dislocation of refinery capacity and increased U.S oil exports positively affect product tanker demand going forward. The Partnerships' shorter term and staggered employment strategy for our product tankers positions us well to capture improving product tanker period rates as a number of our product tankers charters expire over the next 12 months. The Partnerships may potentially grow its unit coverage through accretive acquisitions in the product in container market. And finally the Partnership boasts of a strong balance sheet and liquidity and have no newbuilding commitments. Finally I would like to reiterate our commitment to the $0.93 per unit annual distribution guidance going forward and to the continued the enhancement of our financial flexibility and distribution coverage in order to pursue growth opportunities and force a pathway to distribution growth. And with that I am happy to answer any questions you may have.

[Operator:]

Thank you sir. (Operator Instructions). And your first question today come from the line of Jon Chappell from Evercore Partners. Please go ahead.

[Jonathan Chappell:]

Thank you. Good afternoon Ioannis.

[Ioannis E. Lazaridis:]

Hi Jonathan how are you?

[Jonathan Chappell:]

Very well. Thank you. Hope you are as well. Thanks very much on the Capital Maritime input, that was very helpful. It sounds like that are a lot of potential eco vessels both in the container and the MR side, that could eventually end up the CPLP fleet but it also sounds at least on the MR side delivery is kind of '15, '16 and '17. So as you think about that and as other transactions that you completed or will complete this quarter from third party, do you think that in the meantime Capital can take delivery of their new vessels as you continue to do these types of transactions that you just pulled off?

[Ioannis E. Lazaridis:]

Look Jonathan certainly the transaction we did this quarter and we expect to complete later this quarter it was a unique transaction. We are very happy with the vessel, we have both we are very happy with the price of the vessel we have sold and the financing arrangement went very well as effectively we did not use any money from our existing facility or from our new facility but instead we use the proceeds of that sale. So to that end, if we find other similar transactions and we can put together a similar structure, yes so we will be looking to do something before we have the opportunity to look into the program of Capital Maritime.

[Jonathan Chappell:]

And would you want to use the same type of replacement structure where you are kind of modernizing the fleet as opposed to adding to fleet?

[Ioannis E. Lazaridis:]

We will be looking at both.

[Jonathan Chappell:]

Okay. And then the last time we spoke in the second quarter call, you made mention you have been very clear about the sustainability of the distribution but then also talked about the potential to expand and based on the way that you set up in the product tanker market it's obviously I quote a little bit but general directions been in the positive manner. Do you expect that you are going to kind of digest these, both the containership transactions and then this recent swap of the MRs and kind of just wait for the product tanker market to improve before there is any boost to the distribution or do you think you may be more aggressive [on the] conditions is the way to kind of get back quicker?

[Ioannis E. Lazaridis:]

Look we have said that for distribution growth going ahead it depends on a number of things such as the distribution coverage it has been improving for a while now. It depends on the product tanker rates we can get and also for how long we can fix the product tankers that are coming up. And also I think we will be looking into the replacement capital expenditures and having said that following the OSG settlement I think this has been addressed to an extent. So subject to these factors we would be looking to our distribution and in the meantime as we have said before certainly we would like to look more into acquisitions going forward and opportunities such as I mentioned earlier the five containers we bought year-to-date along with the fact that we have put financing in place at least for the debt element. That means that we have the necessary firepower as factored by a strong balance sheet as well to execute if we find something accretive.

[Jonathan Chappell:]

All right. Understood. Thank you Ioannis.

[Ioannis E. Lazaridis:]

Thank you.

[Operator:]

Thank you. (Operator Instructions). Your next question comes from the line of Justin Yagerman from DB. Please go ahead.

[Taylor Mulherin:]

Good morning. This is Taylor Mulherin on for Justin.

[Ioannis E. Lazaridis:]

Hi Taylor how are you?

[Taylor Mulherin:]

Good. How are you?

[Ioannis E. Lazaridis:]

I am okay.

[Taylor Mulherin:]

So you guys have talked in the past about keeping some of your product vessels in shorter time charters and those are coming up in the next, let's say 12 months. So I am curious sort of what your perspective is on, at what point you start to look for longer charters, whether it's a point on the calendar or specific rate environment that would get you more aggressive in the sense?

[Ioannis E. Lazaridis:]

As you have seen for instance with the motor tanker Avax we have fixed with B.P for one plus one with the second year being a rate of $15,600. So that gives an impression of rates that we would be looking for second year. Certainly the market has firmed, the period market is much stronger and we have seen many more fixtures than before. So certainly compared to year ago and even compared to earlier this year we have a much better market in period for product tanker. So at this point we have maintained this one year, one and half year fixture duration and I think that the handle has to be higher than '15 in order to go for a little longer.

[Taylor Mulherin:]

Okay. Great. It's helpful. And then one follow up about the acquisition comments. Do you have any sort of preference between the product in container market or is it really just that you are agnostic toward it and whatever provides a better value, and I guess I am trying to get sense of which market looks more attractive to you at the moment?

[Ioannis E. Lazaridis:]

The most important criteria in Taylor in making acquisition is how we improve our distribution coverage, so that's the number one criteria. We have managed to execute a number of container transactions recently because of the charters that are available in the market and now we have a number of vessels that are sponsor-built which are of very high specification and potentially, commercially very attractive. So to that end, I think that if and when they get fixed we'll certainly look at them and I think given the newbuilding program of our sponsor that offers a very important growth path for us going ahead given the size of it.

[Taylor Mulherin:]

Okay. I appreciate your time. Thank you.

[Ioannis E. Lazaridis:]

Thanks.

[Operator:]

Thank you. (Operator Instructions). There seems to be no further questions, I would like to pass the floor back to Lazaridis for any closing comments. Thank you sir.

[Ioannis E. Lazaridis:]

Thank you everybody for finding the time and I am always available, me and my colleague Jerry Kalogiratos in case you would like to discuss any of the third quarter results further. Thank you very much.