Global Ship Lease Inc (GSL) 2009 Q2 法說會逐字稿

Welcome to the Global Ship Lease second-quarter 2009 conference call. This call is being recorded.

Before we begin please note that there will be a slide presentation accompanying today's conference call. That presentation can be obtained from Global Ship Lease's website at www.GlobalShipLease.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 the opening remarks. Instructions will follow at that time.

I would now like to turn the conference over to Ian Webber. Please go ahead.

Thank you and good morning, everybody, and thanks for joining us today. Hopefully, you found the presentation on our website under Investor Relations Presentations.

Turning to slide one and two of that presentation, I would like to remind you that today's call may include forward-looking statements that are based on current expectations and assumptions and are by their very nature inherently uncertain and outside the Company's control.

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, our Form F-1 filed on September 20, 2009, and in our 20-F filed at the end of June 2009 which you can access via our website or via the SEC's. All of our statements today are qualified by those and other disclosures in our reports filed with the SEC. We don't undertake any duty to update forward-looking statements.

For reconciliations of the non-US GAAP financial measures to which we will refer during the call to the most directly comparable measures calculated and presented in accordance with US GAAP you should refer to the press release that we issued this morning which is available on our website.

I would like to start by reviewing second-quarter 2009 highlights including some comments on our credit facility. I will then review our fleet and charter portfolio before turning the call over to Susan, who will comment on financial performance in the second quarter. After that we will open the call up for questions.

Slide the three shows the second quarter's highlights. During continuing challenging times for the container ship industry and the global economy, our long-term time charters continued to perform as expected with low off-hire and charter hire payments up to date. With our entire 16 vessels fleet left on non-cancelable time charters with an average remaining term of 10 years, we are pleased to have once again posted strong and stable revenue and cash flow for the quarter.

We continue to focus on prudently controlling operating costs without putting the vessels at risk and maintained vessel operating expenses under the cap amount, which is set out in our ship management agreements. This is the fourth consecutive quarter that we have maintained expenses under the cap amount. Specifically, in the second quarter we recorded revenue of $36 million, which includes $11 million from the four ships we bought in December 2008.

Cash flow available for distribution was a shade under $15 million, approximately the same as first quarter, which is exactly what we would expect given our stable, largely contract-based business model. Normalized net earnings excluding a $17 million non-cash interest rate derivative mark-to-market gain was $6 million in the quarter or $0.11 per A and B common share. Including the non-cash gains, we reported US GAAP income of $22.8 million or $0.42 per share for the second quarter.

Now to the credit facility. We announced on July 31 that we have agreed with our lenders to extend our general waiver or standstill for loan-to-value tests until the end of August pending conclusion of a longer duration amendment to the credit facility, which is necessary as a result of declines in charter-free market values and container ships. As we have said, the Company was initially required to submit vessel valuations during April for a loan-to-value testing as at the end of April and previously received a waiver from these loan-to-value tests until the end of July, July 31, 2009. So we have extended that by one further month.

We continue to work diligently and with urgency with our bank group to finalize an amendment to the credit facility to cover loan-to-value and also facilitate the purchase of our 17th ship, the CMA CGM Berlioz from CMA CGM. This acquisition would be cash accretive to our business.

While we believe that we are in the latter stages of the process of agreeing an amendment with the bank group and hope to be able to announce in the next two to three weeks, I would like to note that lenders have become much more conservative when it comes to container shipping sector as of late and the final negotiations are still ongoing. The timetable may also be impacted by the vacation season.

Meanwhile, as part of the standstill agreement, we won't declare or pay any dividends to common shareholders during the standstill period and we will pay a margin of 275 basis points over LIBOR on our standing borrowings. Our Board will review the dividend policy once an amendment to the credit facility has been agreed with the bank group.

Turning to slide four, this slide shows our fleet of 16 ships on the water and the three to be delivered; all are modern, well-maintained, high-quality container ships. Their average age is only 4.5 years out of a total economic life of 30 years. Charter coverage of today's fleets is an average of 10 years, as I have mentioned, with annual revenue of around $143 million.

A modern, well-maintained fleet is important to achieve high levels of utilization and also assists in rechartering at the expiry of current charters, although for us the only renewals that we have in the next seven years are at the end of 2012 and those on only two vessels. Our strategy of committing our vessels to fixed-rate, long-term time charters continues to serve us well. Importantly, all of our contracts continue to perform as expected and, as I have mentioned, charter hire is up to date.

As we have noted on past calls, we took delivery of four vessels in December 2008 which accomplished important objectives of growing our fleet and the contracted revenue stream. The four vessels add approximately $45 million in annual revenue and increase our total contracted revenue to approximately $1.6 billion. With the delivery of these vessels we have increased therefore our contracted revenue stream by 47%, grew our TEU capacity by 64%, and extended our average time charter term from eight years to 10 years.

In addition, as these ships are relatively young, we have reduced the average age of the fleet from seven years to 4.5 years.

As can be seen from the chart, the boxes in the top right-hand corner of slide four, and as I have mentioned we are scheduled to take delivery of an additional vessel during the third quarter of 2009 which will be chartered to CMA CGM for 12 years at $34,000 a day. This is the CMA CGM Berlioz. This would further grow our contracted revenue stream to $1.8 billion. The purchase remains contingent on finalizing an amendment to our credit facility which I discussed a moment ago.

Finally, before handing over to Susan, I would like to say a few words on the industry overall. The container shipping industry is undoubtedly suffering the biggest downturn perhaps in its 50-year history. The publicly-held liner companies that have reported results for Q1 and Q2 have shown substantial declines in year-over-year revenues and substantial net losses.

However, it does seem that there has been some improvement recently in volumes and freight rates, most importantly on the main Asia Europe trades. But these rate improvements are from very low levels and further significant increases are required for a return to decent earnings. The third quarter is normally the strongest in this industry as a result of increased shipments ahead of the December festive season. This year the third quarter may be further stimulated by increased levels of global economic activity or at least no further deterioration that some commentators are reporting.

Further, the very active capacity management we have seen by the liner companies in returning chartered ships to owners at the end of their charters, deferring delivery of newbuilds, and in some, but not all, cases laying off vessels will have an increasing affect both in reducing their costs of operating their fleet and also tightening up supply to add some tension to the supply/demand balance and further put upward pressure on freight rates.

The spot charter market, however, is seeing further downward pressure on rates and it's the spot owner sector of the industry -- that is not a sector that we operate in -- that is going to feel increasing pressure.

I would now like to hand over to Susan who will review the financial results for the quarter.

Thank you, Ian. I would first like to mention that the comparative financial information for the three months ended June 30, 2008, is prepared under predecessor accounting rules and includes the results of operations of two 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 predecessor and the Global Ship Lease business models are not comparable.

Further, there was significant changes to the Company's legal and capital structure arising from the merger with Marathon, which completed on August 14, 2008, and which resulted in the Company being listed on the New York Stock Exchange. Our capital structure changed significantly. Accordingly, due to these changes, only selected comparative information will be presented on today's call and be included in the earnings release. As time goes by we will have more meaningful and directly comparable prior period data to discuss.

With that said, turning to slides six we present our financial results. For the quarter ended June 30, 2009, we recorded revenue of $36.2 million, up 58% from revenue of $22.9 million in the comparable period of 2008. In the first six months of 2009 we reported revenue of $71.2 million, up 59% from $44.8 million for the prior-year period.

The increases in the three- and six-month period reflect firstly the purchase of four additional ships in December 2008 which earn an average charter rate of over $30,000 per day, well above the $22,500 average daily charter rate for the previous fleet of 12 vessels. And secondly, some increases in charter rates in August 2008.

During the three months ended June 30, 2009, we owned and operated 16 vessels. There were 1,456 ownership days in the second quarter with only four unplanned off-hire days giving us utilization of 99.7%. Compared to the prior year period second-quarter ownership days rose 33% from 1,092 days in 2008. Unplanned off-hire decreased from seven days last year and utilization increased from 99.4% in 2008.

For the six-month period this year there were 2,896 ownership days with 38 unplanned off-hire days. Fleet utilization for this period was 98.7%. This compares to 12 unplanned days out of 2,159 in the first six months of 2008, which represents a consistent year-on-year utilization of 98.7%.

Our vessel operating costs for the second quarter, which include crew costs, lubricating oil, spares, and insurance, were $10.5 million or on average $7,200 per ownership day, up 2,000 (sic) from $7,076 the previous quarter and up 15% from the average daily cost of $6,246 for the comparative period in 2008. We reported $6.8 million in vessel operating costs -- I am sorry, vessel operating expenses in the three months ended June 30, 2008.

For the six-month period ending June 30 the operating expenses were $21.2 million with an average cost of $7,331 per ownership day. This compares to $14 million in vessel operating expenses associated with the time charter business in the comparative period or $6,477 per ownership day.

Vessel operating costs during the quarter and the six-month period were affected by higher crude costs compared to 2008 and by the incremental average costs of the four larger vessels that joined the fleet in December 2008 including, for example, higher lubricating oil consumption from the larger main engines. Direct vessel operating expenses are capped under our ship management agreement and we have maintained the average actual cost below the cap for the previous four quarters.

Depreciation for the three-month period was $9 million compared to $4.8 million in the same period in 2008. For the six-month period depreciation was $17.8 million against $9.6 million in 2008. Both the three and six-month periods include the effects of the purchase of the four additional vessels at the end of 2008.

We incurred general and administrative costs in the three months ended June 30, 2009, of $2.4 million against $1.2 million for the time charter business in the comparable period in 2008. In the six-month period general and [admin] costs were $4.6 million compared to $1.8 million in 2008. G&A in 2009 is significantly higher than 2008 when the Company was not listed being then a wholly-owned subsidiary of CMA CGM. A substantial part of the variance is a non-cash of $0.9 million for stock-based compensation for Q2 2009 and $1.6 million for the first half.

Net interest expense, excluding the effect of interest rate derivatives which do not qualify for hedge accounting, for the three months ended June 30, 2009, was $5.4 million and based on the Company's borrowings under its credit facility of $542.1 million and also $48 million in preferred shares throughout the quarter. Net interest expense in the comparative quarter in 2008 was $6.3 million based on borrowings of $578 million and this included a loan of just over $175 million from the then shareholder throughout the quarter.

In the six-month period net interest expense was $9.9 million based on total borrowings of $590.1 million compared to $14.2 million net interest expense for the comparative period in 2008 based on the total borrowings of $578 million throughout the comparative period. This was adversely affected by substantially higher prevailing interest rates in the first quarter.

We have hedged all of our interest rate exposure by entering into derivatives that swap our floating rate debt to fixed rate to provide us with long-term stability and predictability to cash flows. As these hedges do not qualify for hedge accounting under US GAAP the outstanding hedges are marked to market each period end with any change in the fair value being booked to the income and expenditure account.

The change in the fair value from movements in the forward curve for interest rates caused a $13.9 million gain in the three months ending June 30, 2009. Of this amount a $2.8 million charge represents settlements of swaps during the period leaving a $16.7 million gain in the unrealized revaluation of the balance sheet position. This compares to a $5.2 million gain in Q2 of 2008, of which a $0.1 million charge was realized and $5.3 million gain was unrealized.

For the six months ended June 30, 2009, the reported gain was $16.1 million of which $4.8 million charge was realized and $20.1 million gain was unrealized. In the comparative period in 2008 the reported gain was $5.2 million, of which $0.1 million charge was realized and a $5.3 million gain was unrealized. Our interest rate swap strategy reduces risk and the mark-to-market adjustments have no impact on operating performance or cash generation and do not affect the Company's ability to make distributions to shareholders.

Including the non-cash charges we reported net income of $22.8 million for the second quarter or $0.42 per class A and B common share. For the three months ended June 30, 2008, we reported net income of $7.7 million. For the six-month period, including non-cash charges, we reported net income of $33.9 million or $0.63 per class A and B common share. Our 2008 net income for the six-month period was $8.3 million.

Normalized net earnings, which adjust for mark-to-market, was $6.1 million or 0.11 per class A and B common share for the second quarter of 2009, which excludes the $16.7 million non-cash interest-rate derivative mark-to-market gains. For the six-month period normalized net earnings were $13 million or $0.24 per class A and B common share excluding the $21 million non-cash interest rate derivative mark-to-market gain. 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 non-cash and other items which do not affect the Company's ability to make distribution on common shares.

Slide seven shows the balance sheet. The key items as of June 30 include cash at $40.7 million, vessel deposits on $15.9 million on the ships to be purchased by the end of 2010, total assets stands at $966.1 million, of which $889 million is vessels in operation, and shareholders equity of $318.2 million. The balance sheet position of our interest rate swaps is a liability of $26.1 million.

Before opening up the call to questions I know that the Company generated $14.8 million in cash available for distribution in the second quarter. For the six months ended June 30, 2008, $13.1 million was generated. However, as Ian said earlier, we have agreed with our lenders that we will not declare or pay any dividend to common shareholders during the waiver period noted above. In addition, the Board of Directors will review the dividend policy once an amendment to the credit facility has been agreed upon with the bank group.

I would now like to hand over to the operator who will explain the Q&A process.

(Operator Instructions) [Fernando Grouse], [EchoSystem].

Good day. First off, I would like to congratulate management on yet another stable cash-generating quarter. I understand (inaudible) business model, but still it's always nice to see the stability.

Could you comment on CMA CGM's financials for the second quarter? I know that in the first quarter with the way the industry is they burned through quite a bit of cash. Could you comment on their liquidity, how comfortable you are with that, and if the cash burn rate has slowed down?

Thanks for the question. I can't really comment for two reasons. Firstly, I have not seen second-quarter financials and, secondly, to the extent we get financial information it's on a confidential basis. CMA CGM, as you know, is a privately held French company and doesn't make its financial results public.

But I sort of can refer you back to the comments I made earlier about the industry and all of the carriers that are quoted or a part of quoted groups have published poor results for Q1 and a few have published results for Q2, which were also poor. So undoubtedly the industry is under pressure. And it's not helped right now by bunker price, fuel prices going up a little bit.

But freight rates are moving up, they are moving in the right direction. It's difficult to tell exactly because people, again, don't publish this information. But some of the general rate increases that have been put in place, particularly in Asia and Europe earlier in the year, have held and the carriers have retained more of that increase than perhaps they were originally expecting. And there are further increases in the pipeline.

That is going to be helped, as I implied earlier, by capacity management, ship capacity management and artificially redistricting supply by laying ships up and redelivering spot charter ships to charter owners at the expiry of charters. And that will be helped by the rescheduling of deliveries of brand-new ships out of shipyards. So I am sorry, but I can't answer the question specifically.

I definitely understand. Let me move on to next question I have then. I understand it's difficult to get accurate prices in this market for the ships, except that -- well, not except, but I saw in one of the SEC filings that if ship values were received you guys believe that the LTV value would be above 100%. Is there anyway you can narrow that down some for us, your best estimate? Would it be 110%, 150%, 200%?

We haven't had the fleet valued recently. It costs us to get valuations and right now we don't need valuations to comply with credit facilities so we are saving money. We have always maintained a position that we won't speculate on market values, which are particularly opaque at the moment anyhow especially for the larger vessels at the sizes that we have got. Fundamentally that is because there has been zero sale and purchase activity and so benchmark prices haven't been established. Therefore, brokers are extrapolating, which we don't think is wholly appropriate.

We continue to believe, however, that if we were to get valuations then loan-to-value would be likely above 100%, and hence we are in discussion with a bank group. Frankly, it doesn't matter if it's 110%, 120%, or 130%. If it's over 100%% we need to talk to our banks for relief.

Right. Let me give you a question you can answer then.

Maybe after this question we could move on to somebody else.

Yes, sir, no problem. You have put a significant down payment towards the incoming ZIM ships in late 2010. If ZIM -- I know they are having trouble -- goes bankrupt what happens to that down payment if you have to cancel the ship-buying contract? Do you get it back?

Well, ZIM actually is irrelevant to the deposit. We have two contracts -- we have a contract to buy the ships from the German owner and that is where we have placed the [50]% deposit. And then separately, once the ships are delivered to us, the charters for ZIM come into play. So hypothetically if ZIM isn't around then we still buy the ships from the German sellers and use the deposit. The only case where we would get the deposit back is if the sellers of the ships default.

Okay, great. Thank you very much.

[Michael de Marie], Global Ship Lease.

So just really quickly, if the Berlioz closes in in Q3, I am assuming that the contract length will be the same and then we will just push back the exploration. Is that correct?

Yes.

Okay. Great. Then just briefly on the industry, you have talked about the rate increases that have come online recently and also some that are coming up. Does that get the liners back to a breakeven do you think or no?

Michael, I don't know. The trade that is talked about most is Asia Europe and to a lesser extent the trans-Pacific. They are the sort of trades that people focus on, although between the two of them they are important representing 20%, maybe 25% of bulk container trade. That means there is another 75% out there.

It's very, very difficult for us as an owner leasing ships to currently one charter party, having no financial information on the industry to speculate on how much of a freight rate increase is required to return the carriers to profitability. But as I suggested on the call, I think it's going to have to be significant on Asia Europe trans-Pacific. But it may be that the other trade lanes recover faster and can bail out the weaker performing sectors.

Okay. All right, that is it for me. Thank you.

(Operator Instructions) [David Funnell], Monroe Capital.

I have got two quick questions -- one is on hull insurance. If we were to lose a ship via marine casualty what valuation basis would be used to settle the claim?

We have agreed to specific values with our insurers that if there was a total loss or a total destructive loss then prima facie we would receive that amount back in insurance proceeds.

Excellent.

And those agreed values are based on a market value of the ships from some little while ago with small uplift, so we are very well covered.

Good. One other thing, there were two interesting banking transactions in the dry bulk space over the last couple of months. In one a charter prepaid a substantial amount of their charter commitment and the owner bundled that cash with some of their own to pay down the bank line, and then a few weeks ago a bank agreed to revise LTV to book value. Do either of those transactions offer a resolution to the issue we have here?

Well, I am not aware of the details of the first one, at least as I am thinking quickly here. I guess I can only speculate that the charterer pays some sort of penalty for canceling the balance of the charter to the owner and the owner determined to use it to pre-pay debt. That is not our case at all. We don't want any of our charters to be canceled. We are a long-term charter company here and we want those charters to continue to turn.

On loan-to-value and how you measure it, it has been in Global Ship Lease a big debate for two years about how you determine market value of ships which have got contracts in place, charter contracts in place. But it is actually, although it's not unknown it is very unusual to have bank facilities which base covenants on charter attached valuations or book values. So we are saddled with charter-free market values.

Thank you.

(Operator Instructions)

It sounds, operator, like there are no more questions.

That is correct.

Great. Thank you for listening to us. We will give you an update on the credit facility as soon as it's fixed. We will issue a press release on that and I look forward to talking to you again for our third quarter in November. Thank you.

Thank you. That does conclude today's conference call. We thank you for your participation.