Global Ship Lease Inc (GSL) 2011 Q1 法說會逐字稿

Welcome to the Global Ship Lease Q1 2011 earnings conference call. At this time all participants are at a listen-only mode. There will be a presentation followed by a question-and-answer session (Operator Instructions)

I must advise you that this conference is being recorded today Monday May 16, 2011. I would now like to hand the conference over to your speaker today Ian Webber. Please go ahead sir.

Thank you very much. Good morning, everybody, and thank you for joining us today.

I hope you have a chance to look at the earnings release that we issued earlier this morning and have been able to access via our website the slides that accompany this call. Slides one and two 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 which are 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 filed on September 16, 2010 which you can access 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-GAAP financial measures to which we will refer during this call, for the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning which is also available on our website.

I'd like to start by reviewing first-quarter 2011 highlights. We will then discuss our fleet and charter portfolio. I'll make a few comments on the industry overall before turning the call over to Susan to comment on our financials. In the normal way, we will then take questions.

Slide three shows the Company's first-quarter highlights. During the quarter, our fleet of 17 vessels all out on long-term time charters continued to perform as expected showing strong utilization and generating almost maximum revenue and therefore sizable cash flows.

For the first quarter we reported revenue of $39.1 million compared to revenue of $39.2 million in the equivalent quarter last year. The slight increase in revenue is due to three days off hire for a planned drydocking in quarter one of 2011 which commenced on March 28.

For the first quarter, we reported EBITDA of $26.2 million against $28.3 million in first quarter 2010. Normalized net earnings were $5.9 million for the quarter excluding a $5 million non-cash interest rate derivative marked to market gain.

This compares to normalized net income of $8.2 million for the first quarter 2010 excluding a non-cash marked to market loss of $4.9 million. On a GAAP basis, net income for the three months ended March 31, 2011 was $10.8 million compared to $3.3 million in the prior year period.

The decline in EBITDA which falls through to normalized net earnings is due to increased vessel operating costs quarter on quarter. This is due to two principal factors.

Firstly after two years or so of zero inflation, crew wages came under pressure during the first half of 2010 as the industry recovered. As such, crew wages have increased by 6 or 7% from about the third quarter of 2010. So that is included in quarter one 2011 results.

Secondly, spend on repairs and maintenance was up on the comparative period due to the combined effects of increased purchasing in 2011 in advance of scheduled drydocks and because spend in first quarter of 2010 was disproportionately low. We caught up on that underspend early in 2010 throughout the rest of the year.

Despite increases in vessel operating expenses in the quarter, the first quarter marks the 13th consecutive quarter that we have maintained vessel operating expenses under the cap agreements in our ship management and associated contracts. Returning to our credit facility and loan-to-value, as containers trade recovered through 2010, asset values have increased significantly since the beginning of that year and today around long-term average levels.

This improvement together with aggressive paydown of some $80 million of debt since August 2009 has had a favorable effect on our loan-to-value ratio which was below 75% at the last test date of April 30, 2011. The next test with updated vessel values is not due until the end of November 2011, some six months away.

We're very pleased with this development which benefits the Company in a number of important ways. First we'll save approximately $2.5 million in the next year as the interest margin paid on borrowings will decrease by 0.5% from 3.5% to 3%. Secondly, the cash (inaudible) mechanisms of prepaid borrowings no longer applies and prepayments become fixed at $10 million per quarter. Finally, the Company has committed to pay dividends to common shareholders.

On dividends, we continue to believe that our business model supports the delivery of dividends to common shareholders over the long term. The Board understands the importance of delivering a return over the long term to common shareholders.

In evaluating the Company's dividend policy as they did when considering the results for the first quarter, the Board will continue to take into consideration a broad range of factors to ensure that we're able to meet the objective of distributing sustainable dividends to shareholders over the long term and also to be able to grow the Company.

Taking into consideration expectations as to financial performance including cash flow and factors such as growth opportunities that capitalize on the industry's strong fundamentals including our options to purchase the two 4250 TEU vessels, one in December of this year and one in January next, as well as the upcoming loan-to-value test in November which I have just referred to, the Board decided that it was premature to resume a dividend payment just now. They made the prudent decision to conserve cash and further strengthen our balance sheet. The Board will continue to evaluate the dividend policy on a quarterly basis.

Turning to slide four, as you know, our fleet consists of 17 modern containerships with an average age of just over seven years on a TEU weighted basis at March 31, 2011 against an economic life of 30 years. All vessels are committed to long-term fixed-rate time charter contracts with contracted revenue after an allowance of three days (inaudible) per vessel. This generates approximately $155 million on an annual basis.

With an average remaining term of close to eight years left on our charters or more than nine years on a weighted basis, our fleet represents a total contracted revenue stream of $1.3 billion. Please note that the first charter renewals are not until the end of next year and then for only two of our 17 ships.

Additionally at the bottom of the page you see the two 4250 TEU vessels which we have the option to purchase. These are on fixed time charters as well at $28,000 a day each, generating a further $20 million in revenue in the year and EBITDA between the two of them of around $15 million.

At the time of our options to purchase the vessels, they will each have a minimum of six years remaining on their charters which represents approximately $120 million of additional contracted revenue. Now a few words on CMA CGM, our customer, largest shareholder and the third largest containershipping company in the world.

As I mentioned on the fourth-quarter conference call in March, in January of this year, CMA CGM had received an investment of $500 million from the YILDIRIM Group of Turkey which strengthened their balance sheet and secured their investment plans. In April, the end of April, CMA CGM successfully completed an upsized offering of US dollar and euro denominated high-yield bonds raising approximately $930 million.

Along with these two capital raises, CMA CGM as I talked about on the last call have reported strong results for 2010. They reported revenue of some $14.3 billion, up 36% on 2009 and EBITDA for that year of 2010 was $2.5 billion compared to an EBITDA loss of $700 million in the round for 2009.

Consistent with my comments over the past few quarters, charter hire is being paid regularly and currently we have one period of hire outstanding from May 1, 2011 amounting to approximately $6.4 million. We expect to receive this imminently, potentially later on today.

I'd like now to review the current fundamentals of the containershipping industry. Slide five shows supply and demand fundamentals from the year 2000 together with world GDP growth and an index of the time charter market updated from the equivalent slide contained in our fourth-quarter call and four more recent forecasts of growth in both supply and demand for 2011 and 2012.

The general picture which I presented on the last call hasn't changed. Supply and demand growth fundamentals are positive were the industry for this year and next with trade growth outstripping the increases in the capacity of the global container fleet.

Plus at a macro level, supply/demand dynamics should be favorable for the industry particularly when you take account of slow steaming which absorbs further capacity. And we're continuing -- sky high oil prices and bunker prices, the economics of slow steaming remain compelling.

While there has been some ordering of new vessels in 2011, a pickup on previous years, the order book is still under 30% of standing capacity compared to a peak of 60% or so at the end of 2008. Idle capacity which peaked at 12% at the end of 2009 is still less than 2% today.

All that said, as I indicated last time, we were seeing seasonal weakness in Q4 and 2010 and at that time early in Q1 of 2011 where freight rates have softened a little. That has continued but nevertheless, most carriers who have reported results for the first quarter of 2011 have generally performed better within the equivalent period in 2010.

Indeed Maersk have reported significantly improved earnings, over $400 million, in Q1 of 2011 against approximately $170 million in Q1 of 2010. However, there continues to be nervousness in the industry as despite relatively strong volumes, our freight rates seem under pressure.

This nervousness carries over into the charter market and also affects asset values where charter rates and vessel values have been essentially flat for the last few weeks. Our credit markets remain tight although more banks appear to be open for new business than a few months ago.

This combined with our capability as a US-listed company to access public capital markets encouraged us in our commitment to seek opportunities to capitalize on what we believe are stronger industry fundamentals and to grow the business. As always, we will remain focused on preserving our financial strength and flexibility over the long term.

I will now turn the call over to Susan.

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

For the quarter ended March 31, 2011 we achieved revenue of $39.1 million, down slightly from $39.2 million in the comparable period of 2010 owing to three-day off-hire for a planned drydocking that began on March 8, 2011. For the first quarter of 2011, there were 1530 ownership days, the same as the comparable period of 2010.

The three unplanned off-hire dates during the quarter gives the utilization of 99.8% versus 99.9% utilization in the first quarter of 2010 when there were two days of unplanned off-hire. Vessel operating expenses which include cost of crew, lubricating oil, spares and insurance or $11 million for the three months ended March 31, 2011.

The average cost per ownership day was $7218, up $205 or 2.9% on $7013 for the rolling four quarters ended March 31, 2011. The increase is due to higher crew costs mainly as a result of inflation plus increased spend on supplies, partly in anticipation of scheduled drydockings.

The first-quarter 2011 average daily cost was up 15.1% from the average daily cost of $6269 for the comparative period in 2010 due to increase crew costs and spend on supplies and partly as a consequence of disproportionately low spend in Q1 2010. Overall, we expect costs in 2011 to be higher than in 2010 due to wage inflation, the effects of the stronger euro as a proportion of our costs are euro denominated and higher maintenance spend associated with [the certain] drydocking scheduled for 2011.

Vessel operating expenses continued to be lower than the capped amount specified in Global Ship Lease's ship management and associated agreements. Depreciation for the three months ended March 31, 2011 was $9.9 million, the same as the comparable period of 2010. We incurred general and administrative costs in the first quarter of $1.9 million compared to $1.8 million for the third quarter 2010.

Net interest expense excluding the effective interest rate derivatives which do not qualify to hedge accounting were $5.6 million of the three months ended March 31, 2011 based on the Company's borrowings under the credit facility that averaged $532.8 million. Additionally there were $48 million of preferred shares during the period, giving total borrowings of $580.8 million.

This compares with interest expense of $5.9 million in the first quarter of 2010 where average borrowings including the preferred shares this was $634.3 million. Interest income for the first quarter was not material.

The Company hedges its 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 Company's derivative hedging instruments gave an [$0.2 million] gain in the three months ended March 31, 2011. Of this amount, $4.8 million was realized loss for settlements of swaps in the period and $5 million with an unrealized gain for revaluation of the balance sheet position, reflecting movement in the forward curve for interest rates.

This compares to a $9.3 million loss in the three months ended March 31, 2010 of which $4.4 million was a realized loss and $4.9 million an unrealized loss. At March 31, 2011 the total marked to market unrealized loss recognized as a liability on the balance sheet was $39.5 million.

Net income for the three months ended March 31, 2011 was $10.8 million including a $5 million non-cash interest rate derivative of marked to market gains. For the three months ended March 31, 2010 net income was $3.3 million including a $4.9 million non-cash interest rate derivative marked to market loss. Normalized net income was $5.9 million for the first quarter of 2011 compared to $8.2 million for the three months ended March 31, 2010.

We believe believe that normalized net earnings is a useful measure with which to assess the Company's financial performance as it adjusts for the effect of non-cash other items. Slide eight shows the balance sheet.

Key items as of March 31, 2011 include cash at $28.5 million, total assets $972.1 million of which $913.4 million is vessels in operation, the current portion of long-term debt of $40 million being four quarters at the now fixed repayment of $10 million per quarter and shareholders equity of $335.5 million. And as I mentioned previously, the balance sheet position of our interest-rate swaps was a liability of $39.5 million.

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

(Operator Instructions) Michael Demaray, Elevated Capital.

Good morning, Ian, Susan. My first question is regarding what you are seeing in the financing markets.

Can you tell me -- Ian, you mentioned things are still tight. I've seen a number of deals occurring, can you tell me kind of what -- just generally what you are seeing in terms of where people are loathed to lend or where they are happy to lend and kind of what the rates look like?

Sure, it's actually quite a mixed picture actually. One extreme there are traditional shipping banks who are still closed for business and are likely to continue to be closed for new business for a while. I'm thinking about some of the banks in Germany.

At the other end of the extreme, there are banks who seem extremely keen to write genuinely new business. And, as you'd expect, the terms that seem to be talked about in the markets are less generous than they used to be.

But we're seeing activity, looking at the balance ratios of 60 to 70%, margins about the same as we are paying today at 3 to 3.5 maybe, profiles of the underlying debt maybe 12 to 15 years or so, maybe a bit longer. But the really important thing is there is more activity there which we would hope to be able to capitalize on in due course.

It seems there are some owners who have been able to issue publicly traded debt, not amortizing first lien debt. Have you guys been monitoring that market and what are you seeing there in the non-bank lending?

We keep a close eye on all the appropriate markets for us which obviously is both public and private. As we're a publicly listed company, we have that huge advantage over private owners in that we can access the public markets with a whole range of instrument that's available from straight equity through to hybrids and high-yields. And there certainly has been activity in the high-yield sector as CMA CGM has most recently exhibited. We've seen first lien deals, we've seen second lien deals, we've seen unsecured. So we keep an eye on the whole range.

In the container market, I know that in some (inaudible) markets the tankers, they're seeing some non-deliveries of vessels. So even though the order book says that there are -- a certain number of ships are going to be delivered, a lot end up not being delivered. Are you still seeing that in the container market where people are pushing off orders or people are taking delivery?

By and large, people are taking delivery. Tankers is sort of where we were a couple of years ago now. (inaudible) spot rate is poor etc. etc., so they are suffering.

So it is another (inaudible) the balance sheets are being squeezed and financing isn't as available as it was. And that's a very different container sector nowadays.

But people are still bringing on the container side. People are still being very cautious about placing orders. There have been some well-publicized orders for 18,000 TEU containerships but beyond that, not a huge amount of activity and certainly no to our knowledge speculative ordering of tonnage.

John (inaudible)

Yes, will you disclose the loan-to-value calculation in the most recent valuation?

No, we're not going to disclose the exact ratio. The important thing is that we've passed the test. We're under 75%.

That said, we're closer to 75% than 65% which is the threshold at which we get a further 50 basis point benefit on our interest rate margin. And as I said on our sort of prepared remarks, next valuation isn't until the end of November, six months away.

We'll have paid down another $20 million of debt by then [and the low] we have no way of knowing exactly what values are going to do over the next six months time. We're less than 75% today and asset value seems to be remaining flat.

So I was under the strong impression that there are several conversations with management that once you were under the 75%, a dividend would be reinitiated in some form. Why the change in direction? I'm pretty sure it has to do with why the stock is down 11% as we speak right now. Because I think a lot of other investors felt the same way.

Well, I I hope I didn't give anybody the impression that there would be immediately reinstatement of the dividend when we passed loan-to-value because I'm not in the business of speculating. (multiple speakers) to what I said on the call, and we do understand the importance of providing a return to shareholders both in terms of income and capital appreciation.

And we continue to believe the business model we follow, long-term chartering of containerships and the time charter to generate sizable and predictable cash flow supports the payment of a dividend in due course. Look, we know that folks were looking forward to receiving a dividend and the Board considered this extremely carefully when they looked at the first quarter's results prior to the earnings release.

And they did take into account all the sorts of factors that I mentioned, anticipating cash flow, particularly taking into account we've got seven drydockings coming up this current year. We've got another six next year.

All of those cost money and reduce cash that's available for distribution. And we continue to have debt repayment obligations as well which clearly when we came to the market back in August of 2008 we weren't anticipating.

But more importantly, there are growth opportunities for the Company. We bought a [pretty cooked] purchase of these two 4252 vessels which would add as I said $15 million of EBITDA in a full year.

They're therefore cash accretive at that level. That's another $0.32 per share of cash being generated at the EBITDA line. And the Board is concerned to preserve financial flexibility to be able to take advantage of growth opportunities when they arise and currently has decided to continue with the previous policy in effect of not paying a dividend.

So are we -- when the Company was born, it was born as an income-producing vehicle for the shareholders. Are we -- can we deduce from what you're saying that the Company is now changing its strategy, focusing more as a growth company then?

We always had the strategy for growth. That was a key part of the message that we were --

The first strategy was to be a dividend -- a high-yielding piece of paper for equity investors. The equity investors have been patient while the industry has gone through a very difficult time period. So you know frankly, the stock price is reflecting that disappointment, Ian. I think you guys have to be aware of that.

We understand that.

Lastly then, did you guys report NAV as of 3/31?

On the basis of market value?

Right.

No, we don't disclose market value of assets.

(Operator Instructions) Keith Rosenbloom, CARE Capital Group.

Thanks for the discussion, Ian. Could you give us a perspective on what the long-term financing strategy for the Company is?

You're obviously seeing some growth potential here, everyone in the industry is. You have got a situation here where you've got investors who are in the A shares who have an accrued dividend.

Obviously you can't initiate a dividend to all investors until you catch up on that dividend. At the same time, you want to grow.

It would seem that the only way to get all this done is to do a large refinancing. Maybe you could just walk us through conceptually where you see the Company a year from now in terms of the its growth prospects and how it's going to get there.

Sure, it's a very broad question and I'm not going to be able to be particularly specific as I hope you'll understand. But in our passing loan-to-value was a really important step for us.

And as I said on the call in March when we were talking about Q4, at that stage, it was wasn't clear that we were going to be able to. But we have passed loan-to-value. We're below 71%.

We do not have to ask our bank group for any further concessions. And furthermore, where we were never worried about this, CMA CGM has raised $1.4 billion of new capital with their bond and the YILDIRIM investment. That really should deal with any lingering concerns folks might have about counterparty risk and remind people that CMA have honored their contracts with us ever since day one through the worst downturn industry has ever seen and they remain a 45% shareholder in the Company.

Our industry fundamentals are good. We're seeing plenty of buying opportunities. And as I said, we've got this pre-baked deal on the two Panamax vessels which the economics of which look quite compelling right now.

It's not to say that something better might not come up. And we know that to grow and to be able to resume dividends, we need new capital.

And we keep all of the options under review, and that new capital would most likely given we're a shipping company and an asset finance vehicle be a combination in due course of both private debt, mortgage debt and capping in the public markets be it high yield or some sort of equity-based capital in due course, we can't do all of this in one go and likely we're going to have to proceed cautiously. But we are determined to grow the business to generate incremental cash flow, operating cash flow which will allow us either to continue to grow the business or to pay dividends or both.

What about the concept of renegotiating the current bank agreements towards -- to the point that was asked two questions ago where we're seeing a lot of debt amortization in the marketplace that is more [bullet oriented] than having to pay $10 million a quarter of principal repayments?

Sure, this credit facility was originally non-amortizing for five years. So prepayments weren't going to start until 2013.

And that gave us the substantial free cash flow that is available for -- would have been available to support the high dividend payout model that [John Rice] has talked about a couple of questions ago. We are in a completely different place now. You can't get non-amortizing bank debt period in this sector. So it's difficult to see what we could renegotiate this existing facility to that would provide significant benefit.

What about just taking it out with a different form of debt, maybe paying a higher yield but having better cash flow characteristics? Is that not available too?

That's possible but if we're paying -- ignoring the swaps, we are paying sort of 4%, sub 4% on this bank debt and refinancing it with say $500 million of high-yield at the sorts of rates that CMA achieved, 8.5 or 8.75; it doesn't sound very sensible but it is some thing we have looked at.

Michael Demaray, Elevated Capital.

Ian, I just want to ask a follow-up given John Rice's question. It seemed like the Board had to make a decision between accumulating capital to use as an equity payment for the ZIM ships or making dividend payouts today. Would you say that is a fair characterization?

Not completely fair, no. The Board recognized that there are multiple uses for cash. Retaining cash in the business for growth is one, paying a return to equity is another.

If you look at our cash position at the end of the quarter, we had what, $28 million of cash. Now that's a useful cushion but it's not massive.

And we want to make sure as we've said that we retain as far as possible financial strength and flexibility so that we can deal with all eventualities. So we're taking into account not only existing cash but future cash flow as well as we are anticipating for the next 12 months or so. So the Board weighed all of those factors up in determining dividend.

I guess putting on my analyst hat here, if I look at my your cash on the balance sheet now of $28 million and I assume you're going to generate what you have been generating historically given that you have fixed-rate contacts and you have a $10 million mandatory amortization, that gets you to somewhere just shy of $60 million on the balance sheet come December of this year which is approximately 40% of the purchase price of the ZIM ships.

So I'm trying to figure out obviously as an analyst what you guys are thinking in terms of executing the options and what the dividend potentially will look like. And I know you can't speculate as to what they may or may not be in 2012, but it seems to me -- can you give us any visibility on whether that was kind of the calculus going into this decision or -- because right now I think we just have an understandably vague description of the decision from you, but I think it would be helpful to shareholders maybe to understand a little bit more the why that we're being asked to wait a little bit longer for the dividend which I mean at $0.32 a share of cash flow -- or EBITDA, that's very attractive, I agree with you. But I think it just helps us a little bit to process a little bit more, to understand.

Unfortunately there isn't a great deal more than I can say. Don't forget in your analysis of available cash to include the effects of these drydockings (multiple speakers)

How much is that again? Help me understand.

There are seven this year, six next year in 2012.

And what will those come to (multiple speakers)

We've said that on average a drydocking costs about $1.2 million each. So that is -- I agree with your analysis about the $60 million. That's what we've sort of said we generate.

Out of that, you've got to take $40 million debt repayment and you've got to pay for drydockings as well. So on a run rate basis, that doesn't leave a massive amount available for dividends, ignoring cash in the balance sheet which is why -- it's one of the imperatives behind our strong desire to grow so that we increase the amount of distributable cash that's available for distribution.

And just for the ZIM ships, it seems like there's $20 million annually of revenues that come out of those and then you said about $5 million of operating expenses. Is that correct? And aside from that, you have minimal costs for some lubricants or drydocking (multiple speakers) otherwise that (multiple speakers)

$20 million of revenue, $5 million of operating costs, a touch of increased overhead but not much EBITDA, shade over $15 million in a full year for the two ships together.

Alright, thank you. That's helpful.

Jeff Kone, Wall Street Capital.

It's been covered, thank you.

There are no further questions at this time. Mr. Webber, please continue.

Thank you, thanks, everybody, for listening. We look forward to talking to you on our second-quarter results later in the year. Thanks very much.

That does conclude our conference for today. Thank you for participating. You may all disconnect.