Global Ship Lease Inc (GSL) 2010 Q2 法說會逐字稿

Good day and welcome to the Global Ship Lease Q2 2010 earnings conference call. Today's conference call is being recorded.

On the call today is Mr. Ian Webber, Chief Executive Officer, and Ms. Susan Cook, Chief Financial Officer. There will be an opportunity to ask questions after the presentations, of which instructions will be provided.

At this time, I'd like to turn the call over to your host, Mr. Ian Webber. Please go ahead, sir.

Thank you very much. Good morning, everybody, and thank you for joining us today. I hope you've had a chance to look through the earnings release that we issued earlier this morning and been able to access the accompanying slides to this call via our website.

Turning to those slides, on slides one and two, I'd 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 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 Safe Harbor section of the slide presentation.

We also draw your attention to the Risk Factors section of our annual report on Form F-20, which was filed on May 18 of this year. You can access this via our website or via the SEC's.

All of our statements are qualified by these 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 non-US GAAP financial measures to which we will refer during this call to the most directly-comparable measures calculated and presented in accordance with GAAP, you should refer to the press release that we issued this morning, which is also available via our website.

I would like to start by reviewing second-quarter highlights. I will then cover our fleet and charter portfolio and make some remarks on the industry overall, before turning the call over to Susan, who will comment on our financials. After that, as the operator said, we will open the call up for questions and answers.

Slide three shows the Company's second-quarter 2010 highlights. During the quarter, Global Ship Lease posted strong financial and operating results and further strengthened its balance sheet. Specifically, we generated record revenue, as all of our 17 vessels were employed on long-term, fixed-rate time charter contracts with no off-hire days, achieving 100% utilization.

Consequently, for the second quarter, we reported revenue of $39.6 million, representing a 9% increase over the $36.2 million generated in the second quarter of 2009. And for the quarter, we generated cash of $16.4 million, which is an 11% increase compared to the $14.8 million generated in the equivalent quarter last year.

The increase in revenue and cash flow during the second quarter 2010 is mainly as a result of the addition of our 17th vessel, the CMA CGM Berlioz, which we added to the fleet in August last year, with the cash generated from this vessel, partly offset by increased interest expense from the incremental borrowings to finance her purchase and a higher interest margin, which applied from August 2009, when we amended our credit facility in the light of industry-wide loan-to-value concerns.

For the second quarter, normalized net earnings increased to $7.5 million or $0.14 per A and B common share compared to $6.1 million in the prior period. The increase again reflects the addition of the 17th vessel to our fleet.

Normalized net earnings, just to remind you, excludes the mark-to-market adjustment of $12.5 million non-cash charge on our interest rate derivatives. Including this non-cash charge, the US GAAP net loss that we reported was $5 million, or $0.09 loss per A and B common share. The $5 million reported net loss compares to reported income of nearly $23 million in the second quarter of 2009, which includes almost $17 million of mark-to-market gain.

During this second quarter, we continued to focus on controlling operating costs, while maintaining our vessels' operating efficiency, as exemplified by the 100% utilization. Second quarter 2010 represents the eighth consecutive quarter that we've maintained vessel operating costs at less than the capped amounts set out in our ship management agreements.

We continued to deploy our free cash flow to aggressively pay down debt. Since amending our credit facility about a year ago, we've paid down $46 million, giving a reduced debt balance of $553 million as of June 30, 2010. We will continue to strengthen our financial position and currently expect to repay a further $60 million over the next 12 months, which would bring the debt down to just under $500 million, ignoring any effects of the two ships which we are contracted to purchase in the fourth quarter of this year and about which I will speak shortly.

As a reminder, our success at amending the credit facility last August has enabled the Company to mitigate loan-to-value covenant concerns and protect Global Ship Lease from short-term volatility in asset values, effectively through until the end of April 2011, which is the next scheduled test of loan-to-value under the covenants.

With asset values improving because of the industry recovery, again, which I will comment on later, by as much as 75% since the beginning of the year for some vessel sizes, and with aggressive payment down of debt, we are beginning to reach more normalized levels of loan-to-value.

Moving on to slide four, which shows our fleet. With the addition of the CMA CGM Berlioz, which is trading on a 12-year charter at a fixed $34,000 a day, we've expanded our contracted revenue stream to approximately $155 million on an annual basis. The fleet consists now of 17 modern container ships, all of which are secured on time charters, with an average remaining term of 8.5 years. The average age of the fleet is just over six years on a weighted basis 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 charters expire, representing approximately 14% of our current daily revenue. After 2012, our next renewal isn't until 2016, and in total, our current fleet represents contracted revenue of about $1.4 billion over that eight-year period.

There are no changes to report with regard to the two vessels that we are contracted to purchase in the fourth quarter, and these remain unfinanced. Both vessels are now scheduled for delivery in December of this year.

The lending environment remains challenging, with most institutions seeking to reduce rather than increase exposure to the sector. However, this situation is a significant focus for management, and we continue to explore a number of alternate avenues to resolve these commitments.

Turning to CMA CGM, our customer and 45% shareholder, I'm sure many of you continue to read the speculation about CMA CGM's financial restructuring, in particular, our comments on the [on-off spaces] possible equity injection. We are not part of the process. We know more than has been written -- know no more than has been written in the press. We can't comment on what has been written in the press. We can't offer any particular insight.

I hope you understand that we can't speculate on the outcome of any discussions that CMA CGM may be having with its lenders or potential investors. But naturally, we continue to monitor closely the overall situation as it affects us.

That being said, CMA CGM has reported significantly improved actual results and prospects for 2010 on the back of the global recovery. They estimate first-quarter 2010 EBITDA of $380 million, which is pretty much a 180-degree change from a Q1 2009 EBITDA loss of $260 million.

We are receiving charter hire regularly and much more promptly than in the early part of the year. We've been paid hire for July, and right now have approximately $6 million outstanding for the two weeks commencing August 1. We expect to receive this shortly, and remain in close contact with CMA CGM to monitor our receivables.

Before handing over to Susan, I would like to comment on the industry as a whole. We all know that 2009 was an extremely challenging time for the container ship sector. 2010 has been a different story, as the industry has demonstrated significant strength as it's recovered. Supply and supply growth has been constrained through slow steaming, layoffs, deferral and cancellation of orders. Demand has picked up globally, with forecast that 2010 will be up maybe 10% on 2009, which itself showed an unprecedented 9% contraction on 2008. The idle fleet today is estimated at about 2% compared to over 12% at the turn of the year.

In the face of improved fundamentals, supply and demand being much more in balance and looking to be in balance, if not some excess of demand through 2010, our vessel charter rates in the spot market have increased hugely. And as an example, Panamax vessels, 4250 TEU vessels, are recently being fixed at around $24,000 a day, up from perhaps $7,000 a day at the beginning of the year. That is if those ships could find employment at all. So it's a massive increase. Nevertheless, a little way short of the long-term average spot rate for this class of ship, which is perhaps $30,000 a day. As I mentioned before, asset values have also increased, in some classes by up to 75% from the beginning of the year.

Liner companies reporting dramatically improved results, most notably our own customer, CMA CGM, particularly those liner operators with significant exposure to the principal trade lane, east-west trade lane in Asia/Europe.

Our balance sheets are being repaired, albeit slowly, either organically from improved results or structurally or both from arrangements made with investors and lenders.

There is increased confidence from market commentators that the recovery we've seen in the last couple of quarters in containerized trade has been for sustainable reasons and not just as a result of restocking.

While we are encouraged by strengthening industry fundamentals, I think it would be very unwise to declare victory just yet. Concerns remain regarding the economic robustness of a number of developed countries, particularly in the euro zone, albeit that they are not massive consumers of containerized cargo.

The order book, although down from a peak of over 60% of standing capacity 18 months ago or so, remains challenging at about 27% of standing capacity, and quite a lot of that still has to be financed. As I said, lenders by and large are seeking to reduce, not increase, exposure. Alternate capital from private equity and other largely private sources is more active, but so far has only made a marginal difference.

These challenges also present opportunities. The container ship leasing model has been stress-tested during the downturn and has proved to be resilient. Finance is in short supply, an operator's ability to take assets directly onto their balance sheets is curtailed. Thus, the demand for our product is increased.

We remain fully committed to resolving our outstanding purchase obligations, and once the sky clears around CMA CGM, we believe that as a transparent publicly-listed company with access to the US capital markets, we will be well-positioned to source funding and resume growth.

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

Thanks, Ian. Turning to slide six, we present our financial results. For the quarter ended June 30, 2010, we achieved record revenue of $39.6 million, up 9% from revenue of $36.2 million in the comparable period of 2009.

Revenue for the six months ended June 30, 2010 was $78.8 million, an increase of 11% on $71.2 million for the comparative period of 2009. The increase reflects revenue from the CMA CGM Berlioz, the 17th vessel in the Company's fleet to be secured on a fixed-rate, long-term charter in August 2009.

During the second quarter of 2010, there were 1547 ownership days, up 6% on 1456 days in the comparable period of 2009. With no dry-dockings and no off-hire days, we attained utilization of 100% for the quarter. This compares to four or five days in the second quarter of 2009 and utilization of 99.7%.

Ownership days for the six-month period ended June 30, 2010 was 3077 compared to 2896 in the same period in 2009, an increase of 6%. We had just two unplanned off-hire days during the period versus 38 in the previous year, as utilization rose to 99% from 98.7%. Both three- and six-month periods in 2010 benefited from the additional vessel in our fleet.

Vessel operating expenses, which include crew costs, lubricating oil, spares and insurance, were $10.2 million for the second quarter, or, on average, $6,565 per ownership day, which is a 9% decrease from $10.5 million, or $7,217 per ownership day, in the second quarter of 2009. The decline is primarily attributable to lower crew costs from slightly reduced manning levels and lower lubricating oil consumption from slow steaming and the installation of alpha-lubricating equipment on a number of vessels.

For the six months ended June 30, 2010, vessel operating expenses were $19.8 million, or an average $6,418 per ownership day. This compares to $21.2 million of vessel operating expenses in the 2009 comparable period, or an average of $7,331 per ownership day.

Depreciation for the second quarter of 2010 was $10 million, which compares to $9 million in the same period of 2009. For the six months ended June 30, 2010, depreciation was $19.9 million versus $17.8 million in the same period of 2009. Again, both periods of 2010 include the effect of the purchase of CMA CGM Berlioz in August 2009.

We incurred general and administrative costs in the three months ended June 30, 2010 of $2.1 million, including a $0.3 million non-cash charge for stock-based incentives, versus $2.4 million for the second quarter 2009, which included a $0.9 million non-cash charge for stock-based incentives.

G&A costs for the six months ended June 30, 2010 were $3.9 million, including $0.6 million non-cash charge for stock-based incentives. And this compares to $4.6 million for the comparable period in 2009, including a $1.6 million non-cash charge for stock-based incentives.

For the three months ended June 30, 2010, interest expense, excluding the effect of interest rate derivatives not qualifying for hedge accounting, was $6 million, and based on the Company's average credit facility borrowings of $584.1 million during the second quarter.

As at June 30, 2010, borrowings were $553.1 million, following repayment of $31 million at the end of the month. Additionally, there were $48 million of preferred shares during the period. This compares with interest expense of $5.6 million, based on average borrowings, including preferred shares of $590.1 million in the second quarter 2009.

For the six months ended June 30, 2010, interest expense, excluding the effect of interest rate derivatives, was $11.9 million. The Company's borrowings under its credit facility averaged $585.2 million during the first half of 2010. There were $48 million preferred shares throughout the period.

Interest expense in the first half of 2009 was $10.2 million, based on average borrowings, including preferred shares, of [$590.1] million in the period.

Interest income for the three months ended June 30, 2010 was $60,000, and this compares to $163,000 in the second quarter 2009. For the six-months period, interest income this year was $95,000 versus $305,000 in the comparable period of 2009.

We have hedged the majority of our interest-rate exposure by entering into derivatives that swap floating-rate debt for fixed-rate debt to provide 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 at each period-end, with any change in the fair value being booked to the income and expenditure account.

The change in fair value caused a $16.4 million loss in the three months ended June 30, 2010, reflecting primarily movements in the forward curve for interest rates. Of this amount, $3.9 million was a realized loss for settlements of swaps in the period and $12.5 million was an unrealized loss for revaluation of the balance sheet position. This compares to a $13.9 million gain in the three months ended June 30, 2009, of which $2.8 million was a realized loss and $16.7 million was an unrealized gain.

For the six months ended June 30, 2010, the total loss from derivative hedging instruments was $25.7 million, of which $8.3 million was realized and $17.3 million unrealized. This compares to a total gain in the six months ended June 30, 2009 of $16.1 million, of which $4.8 million was a realized loss and $21 million was an unrealized loss.

We reported a net loss of $5 million for the second quarter of 2010, or a $0.09 loss per Class A and B common share. This compared to a net gain of $22.8 million, or $0.42 per Class A and B common share in the 2009 quarter.

For the six-month period, we reported a net loss of $1.7 million, or a $0.03 loss per common share, versus net earnings of $33.9 million, or $0.63 per share, in the same period of 2009.

Normalized net earnings, which adjusts for mark-to-market, was $7.5 million, or $0.14 per common share, for the first quarter of 2010, which excludes the $12.5 million non-cash interest rate derivative mark-to-market loss. For the comparable period in 2009, excluding a $16.7 million non-cash interest rate derivative mark-to-market gain, we reported normalized net income of $6.1 million, or $0.11 per share.

Normalized net earnings for the six months ended June 30, 2010 was $15.7 million, or $0.29 per common share, excluding the $17.3 million non-cash interest rate derivative mark-to-market loss. This compares to normalized net earnings of $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.

In the second quarter of 2010, we generated adjusted cash from operations of $16.4 million versus $14.8 million in the 2009 period. We generated adjusted cash from operations of $33.3 million in the six months ended June 30, 2010, which compares to $30.1 million in the same period in 2010.

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

Slide seven shows the balance sheet. Key items as of June 30, 2010 include cash at $31.3 million; total assets just over $1 billion, of which $942.7 million is vessels in operation; current portion of long-term debt of $60.3 million; and shareholders' equity of $326.5 million. The balance sheet position of our interest-rate swap was a liability of $46.4 million.

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

(Operator Instructions) [John Reese,] Deprince, Race & Zollo.

Good morning or afternoon or evening -- I'm not sure of the time zone. But Ian, a question for you. In the press release, you state that on that dividend paragraph that any dividend to the common shareholders, that you cannot declare until the later of November 30, 2010 or -- but you don't see any other date -- and when the loan-to-value is at or below 75%. Does that mean that you could possibly revisit it at the November 30, or is it going to wait until the valuation takes place in April?

The way it is set up in the amended credit facility is that we have to wait until the end of April before we are entitled to submit revised valuations and calculate loan-to-value. Now, it is always open to us to go to the bank group earlier, but at the moment we don't plan to do that.

Okay. Could you do a loan-to-value calculation earlier than April?

We can do, but we don't have a right to have the bank group look at it.

What is the -- and this is my last question -- what is the IRR on your new purchases? And you said that at this point in time, you intend to try and go ahead with them, but you don't have the financing. Can you give me a little clarity on that?

Well, the IRR sort of hits the targets that we set out way back a couple of years ago when we sort of brought the Company to the market on a sort of unlevered basis, about 8% or so.

In terms of the financings, as I said, the environment is particularly challenging, continues to be challenging, although there is some sort of signs of movement. Banks are looking a little bit more actively at lending, but the flood gates are still pretty much shot.

There is interest in helping us. We are pursuing a number of different avenues. I think at this stage, it is premature to comment on any particular initiative that we might be following.

(Multiple speakers) those vessels, as we've said before, each of them we expect to generate some EBITDA of $7.5 million or so, $15 million between the two of them, in a full year.

Asset values are improving. There is generally more confidence about the sector. The counterparty -- the charter counterparty, Zim, has gone through a financial restructuring of its own back in November 2009. So everything is looking much healthier, but there is a way to go.

Okay. Thank you.

Michael Demaray, Elevated Capital.

In your script, you said, Ian, that 4,000 TEU ships were fetching about $24,000 a day. Recently on the C-SPAN call, Gerry Wang said that 8,000 TEU ships were fetching about $50,000. If these numbers are correct, then by my math, this kind of puts us at an equivalent rate to GSL's current charters. Is that correct?

No, it is -- well, it is a little below our current charters. The Zim ships are the most directly comparable there, 4250 TEU. The agreed charter rate for them is $28,000 a day. And the spot market today is about $24,000, maybe a bit more.

So the spot market is still a little under where we are. We don't have any really big ships, 8,000 TEU ships. I mean, the nearest comparable ship to a 8,000 TEU that we've got is our large ship, the Thalassa, at 11,000 TEU, which is contracted at $47,000 a day. There isn't really a spot market for 8,000 TEU ships that we know of, so it is a bit difficult to draw comparisons.

All right. Well, I guess I was looking at the America and the Sambhar. They look like they are at $25,000 a day, so $24,000 is a little bit under, but --.

Yes, but it's getting there, it's getting there, which is great. I mean, it is a very positive sign and we are much encouraged by it.

Okay, great. And then you mentioned there is some private equity capital in the market. Can you tell us -- or have you seen any of the terms, and what do they look like in terms of the supply in capital versus what the banks have historically offered?

Well, we are in a different ball game now. As I said, the private capital, be it sort of private equity or private individuals, is making an appearance in the container sector, not for the first time, but there is a bit more of it than perhaps we've seen before. But it is only making a marginal difference. I'm thinking some of the joint ventures that have been announced, Euromar, where it's a private equity player partnering a shipowner, ship operator, and some of the Greek shipowners have got into the container space.

In terms of returns, no, we've not been in the hurly-burly of negotiating any of this stuff, so we can't directly comment. But our understanding is that private equity is looking for its normal returns of 20% plus.

Okay. And some people are getting financing out there, we are seeing. Can you maybe distinguish -- are there -- is there a reason why banks would supply financing to, say, [Denous], who recently announced their lowered interest spread, and also to fund their order book?

Is it because banks are in a situation where if they don't fund those order book situations, then things become very problematic, and there is not a good way out? So for instance, with GSL, there is the potential $15 million deposit liability. Is it the banks are -- why is the banks are supplying some capital to some people and not to others?

I understand why you are asking the question. It is a good question. But it is really difficult for us to comment on what other companies have been able to negotiate with their banks and what the incentive is for either borrower or lender to come to an agreement. But my guess is there has to be an element of least worst options sometimes in all of this.

Okay. All right. Well, thank you. That's it for me.

(Operator Instructions) Greg Gerst, Gerst Capital.

Most of my questions have been answered. Just a couple nitpicky follow-ups. On the Zim ships, I noticed the delivery dates now are estimated in December. Could you tell us what the delay has been for that?

Yes, I was looking back on my notes. I think we mentioned this last time. It is nothing untoward. And we are not -- although we are involved in monitoring the construction process, we don't have primary responsibility for it, because it is the seller of the ships to us that is contracted with the yard and is doing the [base] supervision. You know, we are clearly closely monitoring it.

We understand that it is just simply due to scheduling at the yard, which remains quite busy. And there is no issue about technical quality or parts or machinery being missing or anything like that. So it is nothing to worry about.

Okay. I forget whether I asked this before. Is there a deadline date for when that delivery would be considered late and would affect contractual arrangements?

Yes, there will be. There is always a drop-dead date -- or there is normally a drop-dead date in the shipbuilding contracts. But it is quite a long way out. So I doubt -- or for sure if a December delivery date is maintained, there is no compromise of the contract.

Okay. And in terms of your -- following up a little bit on Michael's questions -- in terms of your -- I'm sure you had conversations with banking groups, maybe not formal, but informal conversations on your plans for refinancing. Are you getting feedback from them that you guys -- just they're not going to do anything until the CMA situation gets resolved? Or can you give me any color on that, what the banks would tell you as far as when you can really move ahead and look at a refinancing?

We actually haven't talked specifically to any banks about refinancing existing borrowings, because we don't think that would be productive at this stage. Now, what we are really focused on is resolving the two German ships and the purchase obligations there. And we do have two counterparties in that equation, one CMA CGM, and two, Zim, both of whom we've sort of commented on in the prepared remarks, and both of whom are in far better shape than they were six or nine months ago.

But CMA continues to have ongoing discussions, as we understand it, to resolve its own financing issues. And most of our banks also lend to CMA CGM, and they are probably much more aware of the detail than we are.

I guess my -- on the financing, not just getting terms where you can resume a full dividend, things of that sort, but really to your commentary earlier that you guys are -- could be in a position to take advantage of opportunities. Are you -- given your limits in your financing today, are you missing out on opportunities, is kind of where I am going. And if you had the financing today, could you be taking advantage of new opportunities to grow?

Well, I think we probably could if we had finance today. I think if you look at the volume of (inaudible) purchase transactions that are being conducted in the market, they are still limited. And there are some spectacular transactions to do if you can move quickly, and particularly if you've got a very close relationship with, say, a shipyard or whatever.

I think next year, probably, 2011, when we've got through and put to bed a very good 2010 for the industry and the banks have got through that year as well and closed out and looked at their December 2010 balance sheet, I think 2011 is looking much more optimistic for a resumption of growth. And obviously, in the context of ourselves, by then, we would hope to have resolved the German vessels. And we would hope that CMA CGM's position is much more clear.

Okay, thanks.

As that is all that time we have for questions today, I will now turn the call back over to Mr. Ian Webber for any additional or closing remarks.

Thank you very much for joining us today. We look forward to talking to you again in November on our third quarter. Thank you very much.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.