Global Ship Lease Inc (GSL) 2009 Q1 法說會逐字稿

Welcome to the Global Ship Lease first quarter 2009 conference call. This call is being recorded. Before we begin, please note that there is a slide presentation accompanying today's conference call. That presentation can be obtained from the Global Ship Lease website at www.globalshiplease.com. That is g-l-o-b-a-l-s-h-i-p-l-e-a-s-e.com. Joining us on the call today are Ian Webber, Chief Executive Officer, and Susan Cook, Chief Financial Officer. We will conduct a question-and-answer session after opening remarks. Instructions will follow at that time. I will now the turn the call over to Ian Webber. Please go ahead, sir.

Thank you. Good morning, everybody, and thanks for joining us today. Firstly I apologize for the slight delay in the start of the call while we got the presentation up on the website. Hopefully you have been able to find it. It is at the foot of the presentations page in the investor section. Slides one and two of that presentation has the forward-looking statements caveat, so I would like to be remind everybody on this call that we, that the call may include forward-looking statements that are based on current expectations and assumptions and are by their nature inherently uncertain and outside the control of the Company.

Actual results may differ materially from these forward-looking statements due to many factors including those described in the risk factors section of our registration statement format filed on September 23 of 2008, which you can also access by our website or by the SEC's website. All of our statements are qualified by those and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements. For reconciliations of the nonUS GAAP financial measures to which we will refer and the reconciliation to the most directly comparable measure calculated and presented in accordance with US GAAP is included in the press release also available on our website. I would like to start by reviewing the first call for 2009 highlights including comments on our credit facility. I will then review our expanding fleet and chart portfolio before turning the call over to Susan after comments on our first quarter financials. After that we will open the call up for Q&A.

Slide three shows first quarter 2009 highlights. During the quarter, Global Ship Lease once again performed as expected, generating strong revenue and predictable cash flow as we continue to successfully implement our time chartered business model of operating all of our vessels on long-term contracts. During a challenging time for the global economy, we are pleased to have achieved revenue, earnings and cash flow growth for the first quarter. Our performance is a direct result of the Company's growth. We added four ships to our fleet in 2008 and to the fact that all of our assets have fully contracted on long-term charters which have continued to perform as anticipated even during these unprecedented times. All charter hire is up to date.

We continue to focus on prudently controlling operating costs without putting the vessels at risk by cutting back on maintenance and maintained operating expenses under the cap amount which is set out in our ship management agreements. Specifically, in the first quarter, we recorded revenue of $35 million which includes $11 million from the four ships which we bought in December 2008, and this revenue generated cash available for distribution of $15.3 million. This equates to $0.28 per share for quarter or $1.14 annualized. And given yesterday's closing stock price of $1.83 represents -- that stock price represents a multiple of 1.6 times cash flow. Normalized net earnings was $6.8 million or $0.13 per A&B common share, this excluding a $4.3 million noncash interest rate derivative mark-to-market gain. Including this noncash gain, we reported GAAP net income of $11.2 million or $0.21 a share for the quarter.

During the quarter we also paid the fourth quarter 2008 dividends of $0.23 a share. That was paid on March 5th to the class A and class B common shareholders of record February 20. Now the to the credit facility. There are tremendous challenges in the ship valuation environment just now. This is exemplified by the fact that many ship brokers are currently not offering valuations for a number of reasons, including that the market is too thin, transactions which are being done are generally for smaller ships, there haven't been any new orders for many months and finance generally isn't available for new projects. The sales that have occurred, and which helped set the so-called market value might have had a willing buyer, but it is difficult to see that the sellers were particularly willing given the low prices that were achieved. As a result, many brokers don't believe that they can fairly assess market value.

In our view, this not a satisfactory base upon which to assess loan to value covenant compliance. And consequently as a pre-emptive measure against potential issues in our credit facility which was negotiated in a more normal environment in early 2007, we announced last month that we had agreed with our lenders to wave for two months the requirement to submit updated vessel valuations and undertake the loan-to-value test, which would otherwise have been due as at April 30, 2009. As part of the waiver agreement, we will not declare or pay any dividend to common shareholders during the two month period, and we will pay a margin of 275 basis points over LIBOR on our debt. Our Board of Directors will review the dividend policy once an amendment to the credit facility has been agreed with the bank group. We are in active discussions with our lenders and remain committed to working with them to finalize amendments to the facility by June 30, to cover both loan to value and also to facilitate the purchase of our 17 ship the CMA CGM Berlioz which were due to buy from CMA CGM in July 2009. The acquisition of this ship is cash accretive and therefore will improve cash for distribution per share.

Turning to slide four which is familiar to most of you I'm sure, it shows our fleet of 16 ships on the water and the three to be delivered, all are modern, well-maintained high quality container ships. The average age is only 4.5 years, out of an economic life of 30 years. Charter coverage of today's fleet is an average of 10 years with annual revenue of around $143 million. So that's $1.4 billion of contracted revenue of today's fleet. Global Ship Lease's strategy of committing its vessels to fixed rate long term time charters continues to serve the Company and its shareholders well. Of note, none of these will be up for charter renewal until the end of 2012, four years away at when only two of the 19 ships come off contract. Importantly, all of our contracts continue to perform as expected and all charter remains current.

We continue to maintain a strong relationship with our current charterer, CMA CGM, who is also a significant shareholder in the Company. And whilst operating conditions are extremely difficult for companies, just now due to reduced demand for consent of shipping, exposing excess supply, we believe CMA CGM is well positioned with a strong management to draw on our more than 30 years of corporate operating history to successfully navigate the Company through this challenging environment. As an example, CMA CGM has significant operational flexibility with its fleet of container ships. It has approximately 400 vessels in its fleet, of which 100 are owned and 300 are chartered including our 16. This leaves only 280 ships that CMA CGM are chartering from companies other than Global Ship Lease, and well over half of these charters, 180, expire or expired during 2009, given CMA CGM significant flexibility to reduce capacity by returning ships to owners as contracts expire.

Alternatively, our CMA can benefit in the current low spot charter rate environment should they decide to renew the charters to maintain their line of shipping services rather than return the ships to owners. As a major shareholder in Global Ship Lease, we believe CMA CGM's economic interest continue to be aligned with ours and they continue to have a vested interest in our success. As we noted on the fourth quarter call, we took delivery of four vessels in December last year which accomplished important objectives of growing our fleets and our contracted revenue stream. The four vessels add some $45 million in annual revenue and increase our total contracted revenue to around $1.4 billion, $1.5 billion. With a delivery of these vessels we increased our contracted revenue by nearly 50%, and grew our TEU capacity by 64%, and extended our average time charter coverage from eight years to 10 years. In addition, the average age of the fleet reduced from seven years to 4.5 years. Still on slide four, the graph in the top right hand corner, and as I previously mentioned, we are scheduled to take delivery of an additional vessel in the third quarter 2009, in fact in July, which will be chartered to CMA CGM for 12 years at $34,000 a day growing our contracted revenue stream to approximately $1.8 billion. We also have two further ships to come at the end of 2010.

As I mentioned earlier, we are currently in the process of working with our lenders to amend the credit facility in a manner to enhance our financial flexibility and help position the Company to finance the acquisition of the Berlioz, the 17th ship. Now a few words on our fleet profile. The majority of our vessels are small to medium size container ships between 2,000 and 5,000 TEU, giving our fleet significant flexibility in terms of potential deployment. This is important due to our expectation that much of the new capacity that will come online from the shipyards in 2009 and beyond is for larger ships, about 9,000 TEU. whilst these vessels provide significant economies of scale to operators because of physical and operational limitations they can typically only be used in two trade lanes, which is Asia/Europe and the transPacific, both of which look to underperform in the near and possibly medium term. Some 45% of today's order book is for ships of this size over 9,000 TEU and this segment of the global fleet could triple over the next two to three to four years. It is our view that for the may be a particular excess a very large container ships for longer than we might see in the smaller ship sizes. As a result of this dynamic, we believe that our fleets of mainly mid-size vessels positions us extremely well for renewals as our ships can be used on a large number of trade lane including the generally more resilient north/south routes.

In addition to the attractive vessel size, eight of our vessels are geared meaning they can have on boards cranes which gives them the ability to load and unload themselves, and therefore they can be deployed in trade lane without well developed port infrastructure such as those serving emerging nations. We believe these factors substantially increase our flexibility for renewing charters when the time comes, although just to remind you, this isn't until the end of 2012. Before turning the call over to Susan, I would like to note that whilst near term conditions remain challenging for minor companies, container shipping continues to show good potential over the long term to achieve high compound annual growth rates once the global economy improves and today's excess ship capacity is absorbed. Further, Global Ship Lease remains unaffected by the currently depressed spot market as our contracts are fixed price with no opportunity to renegotiate or terminate early, and have an average remaining term of approximately 10 years with no vessel coming off charter for renewal in the next three years. Each of our contracts is performing with all payments, charter payments on time, and the fleet continues to generate strong revenues and predictable cash flows. I would like to hand over the Susan, who will review the financial results for the quarter.

Thanks, Ian. I would first like to mention that financial information for the three months ended March 31st, 2008, is prepared under previous accounting rules and includes the results of operations of some of the vessels which we purchased in January 2008, when they were owned by CMA CGM and operated in CMA CGM's business of earning revenue from carrying cargo. The previous asset and Global Ship Lease models are not comparable. Further, there were significant changes to the Company's legal and capital structure, arising from the merger with Marathon which completed on August 14th, 2008 and which resulted in the Company being listed on the New York Stock Exchange. Accordingly, due to these significant changes, only selective comparative information will be presented on today's call as included in the earnings release. As time goes on we will have more comparable and meaningful prior data to discuss.

With that said, turning to slide six, we present our financial results. For the three months ended March 31st, 2009, we recorded revenues of $35 million, up significantly from revenue of $21.8 million from the comparable period in 2008. This is due to purchase of four additional ships in 2008 and the fourth quarter effects of the two ships we bought in January of 2008. During the first quarter, there were 34 unplanned off-hire days out of 1,440 ownerships days, representing utilization of 98%. In the comparable period in 2008 there were 1,067 ownership days, with 15 planned off-hire days for dry docking and four unplanned days, also representing utilization of 98%. Vessel operating expenses for the first quarter which includes crew costs, lubricating oil, spares and insurance, were $10.7 million. Excluding $0.5 million of nonrecurring insurance related charges in the period, the average cost for ownership day was $7,076 million. This is an increase of 3% approximate from the average daily cost of $6,873 for the last quarter of 2008, and up 5% from the average daily cost of $6,714 for the comparative period in 2008.

These increases were primarily due to higher crew costs and particularly to the incremental average cost of the four larger vessels that joined the fleet in December 2008, including for example higher lubricating oil consumption. Direct vessel operating expenses are capped under our ship management agreement. The average actual cost for the first quarter was below the cap for the third straight quarter. Depreciation for the three months ended March 31st, 2009, was $8.8 million which includes the effect of the purchase of the four vessels in December 2008, and this compares to $4.8 million in the same period in 2008. We incurred general and administrative costs in the quarter of $2.1 million versus $0.7 million in the comparable period in 2008. At that time the Company was not listed and was a wholly-owned subsidiary of CMA CGM. A substantial part of the variance is a noncash charge of $0.7 million for stock-based compensation.

Net interest expense excluding the effects of interest rate derivatives which do not qualify for hedge accounting, for the three months ended March 31st, 2009, was $4.5 million, based on the Company's borrowings under its credit facility of $542 million and also on $48 million preferred shares throughout the quarter. Net interest expense in the comparative 2008 period was $7.9 million based on borrowings of $578 million throughout the quarter at significantly higher prevailing interest rates. We have hedged all of our interest rate exposure by entering into derivatives, but swap our floating rate debt to fixed rate to provide us with long-term stability and predictability in the cash flows. As these hedges do not qualify for hedge accounting under US GAAP, the outstanding hedges are mark to market each period end and any change in the fair value is booked to the income in the expenditure account. The overall change in the fair value was a $2.3 million gain for the three months ended March 31st, 2009, reflecting the increase in LIBOR and movements in the forward curve for interest rates. Of this there was $2 million charge representing settlements of swaps in the period leaving a $4.3 million gain in the unrealized balance sheet position.

Our interest rate swap structure reduces risk and the mark to market adjustments have no impact on operating performance or cash. Including the noncash charges, we reported net income of $11.2 million for the first quarter or $0.21 per class A and B share. Normalized net earnings which adjust for mark-to-market was $6.8 million or $0.13 per class A and B common share for the first quarter of 2009. The $4.3 million noncash interest rate derivative mark to market gain for the first quarter is excluded. We believe that normalized net earnings is a useful measure with which to assess the Company's financial performance as it adjusts for the effects of noncash and other items which do not affect the Company's ability to make distributions on common shares.

Moving on to slide seven, showing the balance sheet. The key items as of March the 31st, includes cash at $25.4 million, current assets of $32.1 million, vessel deposits of $15.8 million on the ships to be purchased by the end of 2010, total assets of $959.4 million, of which $898 million was vessels in operation, and shareholders funds of $294.5 million. The balance sheet position of our interest rate swaps was a liability of $42.7 million. Slide eight shows the cash available for distribution which was $15.3 million in the first quarter, which is consistent with expectations. I'd now like to hand over to the Operator, who will explain the Q&A process.

Thank you. The question and answer session will conducted electronically. (Operator Instructions) And we will pause for just a moment to give everyone an opportunity to signal for a question. And our first question comes from Michael Demaray from Elevated Capital.

Morning, Ian, morning, Susan.

Morning, Michael.

Let's see, I was wonder if you could help us best understand managements priorities, given all of the different thing that is require capital from the dividends to close the vessel acquisitions to redeeming the preferred coming down the road. Can you help us understand how you are looking at all of those things?

Sure. Yes, there are a few moving parts here. The first priority for us is to agree further waiver or solution regarding loans of value for the bank group. And at the same time discuss with them opportunities for financing the purchase of the Berlioz, the 17 ship in July. We believe that purchasing the ship was in the interest of the company. It is cash accretive, improves cash distribution, cash flow per share. And it is also going to help support and strengthen the relationship with our customer CMA CGM. Depending upon the outcome of those negotiations, we have got debt to service which is clearly a priority, we have also got dividend as you say, cash flow equity, and you are right, there is a preferred share in the structure.

And whilst still talking with the bank group and it is difficult and would be wrong to speculate as to exactly how things are going to turn out. But, the Board is fully involved, clearly, in all of this, is very well aware of the needs to be able to pay dividends, even if from time to time market conditions dictate that reducing or suspending dividends may be appropriate. That's about as much as I can say at the moment.

Okay. Great. I guess kind of a bigger picture question is, I mean lease rates are obviously low on the spot market today, but do you anticipate that there will be profitable opportunities going forward with ship, vessel sales you can purchase and release in future? If you see those opportunities out there, is that the type of thing that you would go out and try to raise additional capital to do, or is it you are not even thinking about that at this point?

Well, we do think about it for sure. We continue to believe that Global Ship Lease is a great vehicle for growth in the medium to long-term and potentially the short term although that is less easily the to see how we can bring that. By the short term I mean six to nine to 12 months, but it is not impossible. It is not impossible to dream. There have been very, very few ship sail and purchase transactions. The only deals that have been done so to speak are deals that were contracted a year or two, three years ago in regard to new buildings that were ordered two or three years ago, and financing was put in place and charters were put in place. And clearly those were concluded in a totally different market.

So right now there isn't much of a benchmark as to what can or cannot be achieved. But this industry is essential will to global economy. It is vital to the global economy. It is going to go through a bit of a tough time, there is going be an excess of ship supply. But that will regularize in due course, and operators and owners are going to want to expand their fleets again. And in the meantime, both operators and other owners are going need capital to finance themselves only because they have got commitments or because their trading performance is not as good as it was and they need cash this quarter balance sheet.

And if we can access capital then we believe that there are going to be accretive opportunities for us to buy ships at the bottom or toward the bottom of the market and earn a commensurate chance to return for a period of time on a fixed rate time charter, and then take advantage of the improving charter rates over the medium to longer term when initial charters might come up. So we remain committed to growth. We believe that there will be opportunities to grow in the medium term and certainly in the long term.

Great. And then I guess one last question is related to [zem], I know they have a very large order book relative to their current fleet size. Have you heard at all from them about your particular contract, and then can you remind us how that particular deal is structured?

No, we have not heard from them at all.

Okay.

The ships come at the end of 2010. It is quite a long way off. I know it will get to us quite quickly but nonetheless it is quite a long way off. Our priority is sorting out the current situation with our bank group right now. The way the contracts or the way the transaction is structured is that a German owner has a contract with a Chinese shipyard to build these two ships, and that German owner originally had a charter in place with [zem]. We have agreed to buy the ships after they are completed so that the German owner is paid the yard. So we have agreed to buy the ships when the ships are completed and delivered from the German owner for approximately $155 million for the two of them. And the charter will will come into effect between us, Global Ship Lease and [zem].

All right. Well, thank you both, and keep up the great work.

Thank you.

(Operator Instructions) Our next question comes from David [Fennel] from Monroe Capital.

Good morning.

Hello.

Hey, guys, pretty calm results in rough seas. So thanks.

Thank you.

I have got a question about the base dividend. In the F1 it is unclear as to whether that is a floor.

No, it is not a floor at all. It depends on what context you are talking about, but there are some subordinated shares in our structure, the class B shares.

Yes.

And to an extent the $0.23, I suppose, is a floor in the context of those shares, if we are declaring dividends of less than $0.23 approximate per quarter then the B shares don't get them.

Right.

The A shares $0.22.

Right. And if a dividend is not declared on the A shares, is that dividend then in arrearage for the A shares?

I'm sorry. That dividend is what?

Is -- do those A share dividends go into arrearage so that they are ultimately paid, or --

I am not -- we can't pay dividends to the B shares until any arrearage on the A shares is made good.

Right. And is that arrearage $0.23 per quarter?

Yes.

Thank you. One other quick item, 34 days of off-hire, was that a single vessel or was that multiple vessels involved?

It is multiple vessels, but primarily two. One ship was in dry dock for some repairs, that and some associated repairs was 18 days, and then one ship had a sick crew member and had to deviate to go to a different port off its regular route to land the guy in hospital, and that was seven days.

Okay.

Otherwise, it's spread around the fleet.

Okay. Thank you very much.

And we have no further questions. I would like to turn the conference back over to you, Mr. Ian Webber.

Well, thank you. Thanks for listening. We look forward to talking to you in three months time.

And that does conclude today's conference. Thank you for your participation.