Global Ship Lease Inc (GSL) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Global Ship Lease first-quarter 2010 conference call. This conference call is being recorded. 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. Introductions will follow at that time. I will now hand the call over to Mr. Ian Webber. Please go ahead, sir.

Thank you. Good morning, everybody, and thanks for joining us today. I hope that you've had a chance to look at the earnings release, which we issued before the market opened this morning and have been able to access the slides which accompany these prepared remarks. The slides are available through our website.

Just on those slides, slides 1 and 2 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 the presentation. And we also draw your attention to the Risk Factors section of our updated annual report filed on Form 10-QF, which we filed in December last year, which you can also access via our website or via the SEC.

All of our statements today are qualified by these and other disclosures in our reports filed with the SEC. And we don't undertake any duty to update forward-looking statements.

We will refer to non-US GAAP measures, financial measures, during our remarks, and they are included in the press release. And for reconciliation of those non-GAAP measures, please see the press release. It's also available as is all of our public material via our website.

I would like to start by reviewing the first-quarter highlights. I will then cover our fleet and charter portfolio, comment on CMA CGM and the industry overall, and then turn the call over to Susan to comment more specifically on our first-quarter financials. After that, we will open the call up for questions.

So slide 3 shows the Company's first-quarter 2010 highlights. During the quarter, we once again showed strong operating performance. We only had two days of unplanned off-hire out of a total of 1,530 days of ownership, achieving almost 100% utilization.

This results in the main from every single vessel in our 17-vessel fleet being fixed on long-term fixed-rate time charter contracts throughout the year -- I'm sorry, throughout the quarter.

Compared to first quarter last year, we grew both revenue and cash flow as a result of acquiring the 17th vessel in August 2009 achieved on a 12-year charter at $34,000 a day.

Specifically, we reported revenue of $39.2 million for the first quarter 2010 compared to $35 million for the previous quarter in 2009 -- first quarter 2009. $3 million of the increase is for the additional vessel, and the remainder is from lower off-hire in 2010 compared to 2009.

For the quarter, we generated $17 million of cash, an 11% increase compared to the $15.3 million generated in the first quarter 2009. Again, the increase is mainly from the earnings of the 17 ship CMA CGM Berlioz, offset by increased interest from incremental borrowing to finance at that vessel's purchase, and from the higher margin which applied from August 2009, when we amended the credit facility.

For the quarter, normalized net earnings were $8.2 million or $0.15 per A and B common share. This excludes a $4.9 million non-cash interest rate derivative mark-to-market loss or charge which we book in the quarter.

Including this non-cash charge, GAAP net income was $3.3 million or $0.06 per A and B share.

The $8.2 million of normalized net earnings compares to an equivalent figure of $6.8 million in first quarter 2009.

We continue to focus on controlling operating costs while maintaining the vessel's operating efficiency, as exemplified by the low off-hire in quarter one. The first quarter represents the seventh consecutive quarter that we have maintained vessel operating expenses under the cap amounts set out in our ship management agreements.

We also continue to focus our free cash flow on aggressively paying down debt. Since amending our credit facility in August 2009, we paid down $15 million of debt as required by the amendment, resulting in a reduced debt balance of $584 million as of March 31, 2010.

We are committed to continue to strengthen our financial position and currently expect to repay an additional $79.5 million over the next 12 months, which would bring the debt down to $505 million in total at 31 of March 2011.

By successfully amending the credit facility, we've also mitigated loan to value covenant concerns and thus protected the Company from short-term volatility and asset values, effectively through until the end of April 2011, which is the next scheduled test of the loan to value covenant.

Moving to slide 4, with the addition of CMA CGM Berlioz to our fleet, we've expanded our contracted revenue streams, and our fleet now consists of 17 modern container vessels, all of which are secured on time charters with an average remaining term of nine years. The average age of the fleet on a weighted basis is 5.6 years out of a total economic life of 30 years.

Importantly, we have no charter renewals until the end of 2012, at which time two of our 17 ships' charters expire, representing 13% of our current daily revenue. And thereafter, our next renewals are not until 2016.

Since November 2008, we've taken delivery of five vessels, spanning the size of our fleet and accordingly growing our own annual revenue by nearly 60% to approximately $155 million per year. In total, our current fleet represents contracted revenue over the duration of the time charters of $1.5 billion.

There are no changes to report with regard to the two vessels we are contracted to purchase in the fourth quarter other than to remind you that the planned delivery date of the first unit has fallen back from October to early December. We continue to explore various avenues to resolve these commitments for which we currently do not have [the] finance.

In the meantime, last week, CMA CGM, our current sole customer and 45% shareholder, noted in a press release that as the trading environment for container shipping improves with firmer volumes and rates, they expect first-quarter 2010 EBITDA to be $380 million positive compared to an EBITDA loss of $667 million for the full year of 2009.

The improved operating performance has no doubt contributed to them being able to catch up on charterhire payments, and I'm pleased please to say that we are now receiving charterhire more promptly. Indeed, as of today, we are only due hire which was payable on May 1. And we understand that payment of this installment is on its way. We remain in close contact with CMA CGM to monitor our receivable position.

All of that said, we understand that CMA CGM continued to explore a potential financial restructuring with their lenders to address their short- and medium-term financing requirements and that they also continue to have discussions with the shipyards on the order book. We are not directly involved in any of these discussions and can't possibly speculate on the outcome of CMA's negotiations with its lenders and the shipyards.

Finally, before handing over to Susan, I would like to provide some context on the industry as a whole. 2008 and particularly 2009 were extremely challenging for the container shipping industry for both liner operators and shipowners. The liner companies lost billions of dollars, and many, together with the owners, restructured their financings.

However, net fleet growth in 2009 was significantly less than expected at around 6% rather than the original 14% that was expected at the beginning of the year. This reduction was a function of both increased scrappings and some rejigging of the order book with deferrals, cancellations and conversions into other types of ship.

With slow steaming and some layoff, supply has been further constrained. In 2009, however, demand contracted by at least 9% the first year, as I said in our last earnings call, but the industry has seen negative growth.

In contrast, however, our 2010 year-to-date demand is showing signs of strong recovery. And CMA CGM and other liner companies are reporting stronger financial results, reflecting improved volumes and freight rates.

And in addition, reduced surface capacity and with stronger demand and subsequent firming and spot charter rates and asset values, particularly for larger vessels over around 4,000 TEU, have contributed to a welcome though still fragile improvement in industry dynamics.

To illustrate, on the charter rate point, at the beginning of this year, a 4,250 TEU vessel, if you could find employment for it at all, was being fixed at $6,500, $7000 a day. In the last week of April, so 10 days ago or so, four vessels of this size were fixed for 12 months at just under $20,000 a day. And although this is still somewhere below historic average charter rates for this class size, which are maybe just over $30,000 a day, it's a substantial improvement and very welcome to see.

Despite the continuing improvement in the operating environment, the industry still faces significant challenges, particularly financing the order book, as capital remains constrained. And there continue to be concerns about the size of the order book, which represents roughly 30% of today's standing capacity.

In terms of what supply might increase by through 2010, estimates vary critically depending upon the individual consultants' assessments of the deferral of orders from '10 into '11. But it looks as if, the consensus at least, is that supply growth through 2010 will be less than demand growth. The consensus for demand growth is around 8% to 9%. And supply growth, particularly if you factor in the effect of slow steaming, should be less than that.

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

Thank you, Ian. Turning to slide 6, we present our financial results, which relate to our time charter business only.

For the quarter ended March 31, 2010, we recorded revenue of $39.2 million, up 12% from revenue of $35 million in the comparable period of 2009. The increase reflects accretive revenue from CMA CGM Berlioz, the 17th vessel in the Company's fleet to be secured on a fixed-rate long-term time charter in August 2009.

During the first quarter 2010, there were 1530 ownership days, up 6% on 1440 days in the comparable period of 2009. With no dry-dockings in the quarter, and only two unplanned off-hire days, we obtained utilization of 99.9%. This represents an improvement from 97.6% in the first three months of 2009, which had 34 unplanned off-hire days.

Vessel operating costs, which include crew costs, lubricating oils, fares and insurance, were $9.6 million for the first quarter, or on average, $6,269 per ownership day.

This is an 11% reduction from the $7,076 average daily cost in Q1 2009. The decline is primarily attributable to lower crew costs from modest reductions in manning levels and the installation of alpha lubricating equipment on several vessels, which is reducing consumption of lubricating oil.

Vessel operating expenses remain lower than the capital amount specified in Global Ship Leases ship management agreement.

Depreciation for the three-month period was $9.9 million compared to $8.8 million in the same period in 2009. The increase reflects the effect of the purchase of CMA CGM Berlioz in August 2009.

We incurred general and administrative costs of $1.8 million in the three months ended March 31, 2010, including a $0.3 million non-cash charge for stock-based incentives against $2.1 million for the comparable period in 2009, including $0.7 million non-cash charge for stock-based incentives.

Interest expense, excluding the effect of interest-rate derivatives which do not qualify for hedge accounting, for the three months ended March 31, 2010 were $5.9 million, on average borrowings under the credit facility of approximately $586 million.

Following a $4.1 million repayment in February 2010, the Company's borrowings under its credit facilities were reduced to $584.1 million. There were also $48 million preferred shares throughout the period.

Interest expense in the comparative period in 2009 was $4.7 million based on average borrowings, including the $48 million worth of preferred shares at $590.1 million in the quarter.

We have hedged most of our interest-rate exposure by entering into derivatives that swap floating-rate debt to fixed-rate to provide long-term stability and predictability to cash flow. 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 increment expenditure account. The change in the fair value, primarily from movement in the forward curve for interest rates, caused a $9.3 million loss in the three months ended March 31, 2010.

Of this amount, $4.4 million was realized for settlement of swaps in the period, leaving a $4.9 million unrealized loss for revaluation of the balance sheet provision.

This compares to a $2.3 million gain in the three months ended March 31, 2009, of which $2 million was realized loss and $4.3 million on realized gain.

At March 31, 2010, the total marked to mark unrealized loss recognized as a liability was $34 million. Our interest-rate swap strategy reduces risk, and the mark-to-market adjustments have no impact on operating performance for cash generation.

We reported net earnings of $3.3 million for the first quarter of 2010 or $0.06 per Class A and B common share. In the comparable 2009 period, we reported net gain of $11.2 million or $0.23 per share.

Normalized net earnings, which adjusts for mark-to-market movements, were $8.2 million or $0.15 per class A and B common share for the first quarter of 2010, which excludes the $4.9 million non-cash interest rate derivative mark-to-market loss.

For the comparable period in 2009, and excluding a $4.3 million marked-to-market again, we reported normalized net income of $6.8 million or $0.13 per share. 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 distributions on common shares.

We generated $17 million in adjusted cash from operations in the first quarter of 2010 against $15.3 million in the comparable 2009 period.

However, given the amendment to our credit facility, no common dividend can be declared or paid until the later of November 30, 2010 or when the loan to value falls to 75% of the loan. Once the Company is able to review its ability to pay dividends to its shareholders, the Board's directors will review its policy.

Slide 7 shows the balance sheet. The key items as of March 31, 2010 include cash at $41.4 million; total assets of $1 billion, of which $952 million is vessels in operation; current portion of long-term debt of $79.5 million; and shareholders' equity of $331.1 million.

As I mentioned earlier, the balance sheet position of our interest-rate swaps was a liability of $34 million.

Slide 8, which you may be familiar with from our past presentations, summarizes the credit facility. The loan to value maintenance covenant has been waived up to and including November 30, 2010 with the next test scheduled for April 30, 2011. Amounts borrowed under the amended credit facility bear interest at LIBOR plus the fixed interest margin of 3.5% until November 30, 2010, of which time the margin will be between 2.5% and 3.5%, depending on the loan to value ratio.

In connection with the amended credit facility, all under [drawn] commitments, totaling approximately $200 million, were canceled in August 2009, and our dividend has been suspended. We are essentially using our cash flow progressively prepaid borrowings under the credit facility. However, we can review the common dividend when loan to value is at or below 75%, at which point the prepayment of borrowings becomes fixed at $10 million a quarter.

Additionally, in conjunction with the amended facility, CMA CGM has agreed to the further commencement of redemption as the $48 million in preferred shares that it holds until August of 2016, which is the final maturity of the credit facility. The Company has also agreed to retain its current holdings of Global Ship Lease common shares until at least November 30, 2010.

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

(Operator Instructions). Greg Gerst, Gerst Capital.

A quick couple questions. In the example you gave, I missed it. What size were the ships? You gave an example where it went from $6,000 a day to $20,000.

The Panamax -- $4,250.

Okay. So if I look at your scheduled ships, the closest one in size are the Sambhar and the America at 40, 45 TEU. I think today those are on charter for $25,000 a day. Is that correct?

Yes.

Okay. So were -- it looks like spot rates are up to just being to like 20% discount to what you guys are for that long-term charter. Is that the right way to think about that or to state it?

Yes.

Okay. So it kind of brings me to the next question then. The appraisals -- and I'm sorry if I missed this in your commentary. But wondering, it seems like you should be pretty close to a point where it would be worth going out and starting to get some appraisals again and see where you are on the LTV.

Yes, let me talk about appraisals. There is actually no opportunity under the credit facility for us to get early appraisals and go for the bank agreement and claim relief even if we got to [75%] loan-to-value earlier than April 30 of 2011.

We haven't had a formal appraisal for some considerable time. They cost money, and we haven't needed to.

The sale and purchase market for vessels is becoming more liquid. There are more transactions. But it's still not at the same sorts of volumes as 2007, 2008. But what we have been able to see from the transactions that are being reported is an improvement in selling price, purchase price. And we can do buying that there have been sort of 30%, maybe 40% increases to vessel value since Christmas.

Where that puts us exactly, we're not sure. We won't speculate on where we are valuation-wise or loan-to-value wise. But what I can say is that with a further $80 million of debt being paid down over the next 12 months, having a debt balance of around $500 million at the end of March 2011, with hopefully a continuation of improvement in asset values, then clearly the prospect of us being able to come back to a more normal loan to value ratio by the time the waiver expires is much improved.

Your first comment, I think I am going to have to re-review the LTV clauses. You said you can't, even if you wanted to, you couldn't go get an appraisal, and even if it puts you at, within compliance, that you are still prohibited from paying dividends until that April date?

Well, I don't want to get into a sort of legal analysis because we will get it wrong I'm afraid. But the basics are that we are unable to pay a dividend before April 1 -- sorry September -- sorry, November 30, 2010 or when loan to value gets to 75%, whichever is the later.

Whatever is --

Now, what I would have to -- Greg, I would have to go back and check exactly what the credit facility says about that period between December 1, 2010 and April 30, 2011.

Okay, all right.

But my recollection is that the first loan to value test that the banks are obliged to take into account is effective April 30, 2011.

Okay. I guess we'll both have to go look at it because that's not what -- I was -- my fuzzy recollection was that once that loan to value drops below a certain amount, you guys can restart. And I didn't recall reading that you couldn't even get an appraisal until that 2011 date. So I guess we'll both have to re-review that.

The Zim ships, they got pushed back to December. Is that correct?

One of them was always scheduled for December. The first one was due in October, and she's been pushed back to December.

Okay. Can you kind of comment on who prompted that and why you guys would agree to do that?

The relationship regarding the building is between the sellers of the ships to us and the shipyard. We have no contractual relationship with the shipyard. So providing it within the terms of the shipbuilding contract, we have no right to be consulted unless [the loan] objects. We understand that it's purely as a result of scheduling at the shipyard and nothing untoward. And clearly it gives us more time to sort out the situation anyhow.

When you say -- because I've looked at that shipyard, [YBJ], and without -- looking at their recent presentations, I'm not really convinced that they should or would have a problem delivering those ships on time. I guess what I'm getting at is, and I guess you don't have the answer -- was it an agreement between Rick Merz and YBJ to push that back just due to financial reasons? Or I guess -- I know your answer. You can't comment.

But I guess in your contracts, though, in buying from that second party there, what outs do you have as far as if that delivery day gets delayed?

It's back to back with the shipbuilding contract. So providing the delivery date complies with the shipbuilding contract, then our purchase contracts remain in place.

Okay. I guess I'll have a follow-up for it. Because I thought the norm in the industry was if it's delayed by 30 days or so, then that's a breech.

Well, there will be an agreed window for delivery by the builder to the owner, the German owner. Now whether it's 30 days, 60 days or 90 days or 180 days, it's down for negotiation. And I can't comment on exactly what it is.

Okay.

But it's not uncommon for ships to be built slightly ahead of schedule or a little behind. They're complicated buildings [projects]. And although this is an experienced yard, delays do occur. It could be nothing to do with the yard. It could be a delay in expected delivery to them of say the engine. I don't know.

Right, right. Okay. That's it for me. Thanks.

Michael Demaray, Elevated Capital.

Apologies in advance, I think my line might be slightly bad. But I just wanted to ask you, Ian or Susan, to comment on what you're hearing from the banks in terms of, have you seen any change in attitude? And then specifically, are they making any distinction between those owners who have contracts in place and those who do not? And what are the attitudes towards each of those types of owners?

Interesting question. Actually quite difficult to answer. We have a great relationship with that bank group and lots of support from them.

They are a bit reticent about talking about how they regard all of their various customers or even categories of customers, borrowers in other words. And it's quite difficult to get a read on how they view new financings, existing financings, charter free assets, charter attached assets in today's environment.

For sure, they are pleased that the industry is recovering and that the operators are generating cash. But, there remains a substantial order book which is unfinanced post-delivery. Construction finance is -- there's more construction finance in place, but it's not fully covered.

And it remains very tight. The banking sector generally is looking to reduce its exposure to the container shipping sector, not increase it. And individual banks, particularly in Europe and particularly within Germany, individual banks have their own sort of bigger picture problems which color their approach. So it's impossible to generalize, other than to say debt financing secured on these types of assets, whether there's a charter in place or not, remains difficult, but clearly if there is a charter, particularly a long-term charter with a financially secure, if that's the right expression, counterparty, it ought to be easier to finance those assets than charter free assets.

Okay. Now I guess one thing that I've kind of anecdotally seen is the willingness and ability to provide financing coming out of Asia. I understand that your banks are mostly out of Europe. Have you given any thought to having discussion with banks in Asia or do you believe that -- I guess most of the owners that are getting the Asian financing are Asian themselves, because that would seem to make sense. What are your thoughts on that?

You're right. Asia represents a source of finance, as does Europe, as does the US. And specific on these two ships, we're looking at all sorts of different options, which I'm not able to comment on specifically. But for sure we're looking to Asia as well. And there is an advantage in that these are two ships being built in China.

Right, okay, great. And I guess the last thing is, there have been -- recently CMA CGM came out and said that they would be willing to walk away from some new build orders that they have and sacrifice their progress payment deposits. And one thing I guess we've been wondering about is, as these -- as time goes on and new build orders haven't been placed, maybe you can give some color as to what are some of the dynamics that are going on, specifically for some of these ships that were ordered later. Are the progress payment deposits going to be lower for those ships?

In other words, less progress payments have been made so it's easier for owners who have ordered those new builds to walk away because they are a lesser sum. Is that the right way to think about that?

Not necessarily. I mean every contract is different, obviously. But in my experience, most shipbuilding contracts have got an obligation on the owner to pay a certain amount of the purchase price irrespective of whether they take delivery or not. Rather like we have contractual protection in our purchase agreement designed to limit our exposure should we not be able to buy these two ships to just sacrificing the deposit. But the shipyard, against receiving a firm order, will want a commitment from the owner to pay a certain amount of the purchase price irrespective.

Okay.

Though, clearly, if you've got a contract and building hasn't started and you pay maybe only the installment due on signing of the contract, the financial decision is possibly more straightforward to walk away than if you paid 60%, or you've got a bank behind you that has paid 60%, which is more likely.

Right. Okay. Well, that's good information. Thank you.

(Operator Instructions). [Nathan LaFrue], [Trevor Side Capital].

Thank you for taking my call. Looking -- just curious. The first two vessels we have coming off charter would look to be the Aquarius and the Orion. And, that's out in 2012. I guess it's fair to say that you couldn't reemploy those at similar rates today if they are charter expired shortly.

How is it that you go about -- can you talk a little bit about when and how you start thinking about re-charters out in the future; how you sort of work with a firming market and stuff like that? Am I being clear?

We wouldn't worry about this until 2012 at all. This is a dynamic industry. It's very much immediate. And it is highly unlikely that we would be able to secure employment for these ships sort of nine months, let alone a year, ahead. So the middle of 2012, we would start looking at this seriously.

And, obviously, the first thing that we would do is assess with CMA CGM our current charter and whether they wanted to roll over the charters. They may do it. I don't know. Couldn't possibly speculate on something that's going to happen in end of 2012 and 2013.

But other than that, we know most of the major operators that we would be pleased to charter to were also very well connected with the ship broker community who have got their own networks. So in a way it's like rental agencies or real estate agencies. But there are lots of intermediaries who would be interested to help us find employment for the ships for a fairly modest commission.

Thank you. I appreciate it.

Just following up on one of Michael's questions, on the Asian finance, do I understand you to say -- it seems to me that you talk about having good relationships with your current bank. Is there any -- if you were to pursue financing in Asia for the Zim ships, did I understand you to say that that is not an issue with your current relationships; that that wouldn't impact any relationships you currently have?

I'm sorry if I gave that impression, but I certainly didn't intend to.

And further it wouldn't cause a problem for our present bank group. But for sure, I don't think it would. I think that they would be delighted if we were able to expand on our banking relationships.

All right.

But we are looking at all the realistic options in the present circumstances to secure financing for these two units.

All right. And just one final thing for a slow brain, net me out for your hedges, what effectively is the interest rate that you end up paying on your current borrowings?

Well, under our -- the $580 million worth of stocks we have in place, it's locked in at all our borrowings at an effective rate of 3.59%. So, if there are movements we are protected against those.

Plus the margin, which is 350 basis points at the moment. So the all-in rate is just over 7%.

That's what I'm looking for. So it's plus 350.

Yes.

That's it for me. Thank you. Good quarter.

Greg Gerst, Gerst Capital.

Sorry, I'm sure you see my name and you cringe. Following up on part of the last question, if the Zim ships were delivered later this year, and you were able to raise capital for those, I'm looking at the loan to value or the loan modification clauses. In here it says you've got to take 25% of any additional capital to prepay borrowings under the existing facility. Does that mean that if you get -- whether your existing banks or primarily new banks -- anything you raise for the Zim ships you're going to have to raise an additional amount to cover that -- the prepay on the borrowings?

I think in those circumstances, Greg, we would talk to our bank group.

Okay. Thanks. That's it.

There are no further questions registered. Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your line. Thank you.

Thank you, everybody. We look forward to talking to in August about second quarter.