Global Ship Lease Inc (GSL) 2011 Q3 法說會逐字稿

Thank you for standing by and welcome to the Global Ship Lease Q3 2011 earnings conference call. Joining us on the call today are Ian Webber, Chief Executive Officer and Susan Cook, Chief Financial Officer. Michael Gross, Chairman, will join the call for the question-and-answer session after the opening remarks. You will be informed of how to ask a question at this time. Please go ahead, Mr. Webber.

Thank you. Good morning, everybody, and thanks for joining us today. I hope you've had a chance to look at the earnings release that we issued earlier this morning and been able to access via our website the slides that accompany this presentation.

As always, slides 1 and 2 remind you that today's call may include forward-looking information and 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 Safe Harbor section of the slide presentation.

And we also draw your attention to the risk factors section of our annual report on Form F-20, which we filed in May of this year. You can access this via our website or via the SEC's.

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 those forward-looking statements.

For reconciliations of the non-GAAP financial measures that we'll refer to during this call to the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release we issued this morning.

I would like to start by reviewing the third-quarter highlights, and I will then discuss our fleet and charter portfolio. I will make a few comments specifically then about the industry, although I'll talk about the industry throughout my comments. And then I will turn the call over to Susan who can discuss our financials, and then we will have Q&A.

Slide 3 shows the company's third-quarter highlights. Our conservative and stable business model once again serve the company well despite an inventory downturn and the uncertain global economic environment which presents so many challenges. With all 17 of our vessels operating on long-term fixed-rate time charters, we continued to achieve high utilization and generated stable and sizable cash flow.

For the quarter, we reported revenue of just under $39 million, down slightly on the third quarter last year, due mainly to 58 days of offhire in Q3 2011, with planned drydockings which covered four vessels in the quarter.

We previously discussed the impact of reduced revenue and increased costs from drydockings, which for regulatory reasons, must be undertaken every five years and are, in any case, essential to ensure that we have a well-maintained and reliable fleet.

EBITDA for the third quarter was $25.2 million, against $26.8 million in the third quarter of 2010. In addition to the planned drydockings, EBITDA was impacted by slight increases in crew costs from exchange effects as some crew are paid in euros, and more generally from wage increases which commenced during the third quarter of last year.

Normalized net income which excludes the non-cash marked to market loss on our interest-rate derivatives, which in Q3 this year was $6.1 million, so normalized net income was $5.2 million for the quarter against $6.2 million in the third quarter last year, the reduction being, again, mainly due to the effects of drydockings.

On a GAAP basis, we recorded a net loss for the three months ended September 30, 2011, of $900,000 compared to a loss in the prior period of $3.5 million.

During the third quarter, we continue to use much of our cash flow to pay down debt and, therefore, continue to strengthen our balance sheet for the benefit of shareholders in the medium and long term. Including repayments of $10 million in the third quarter this year and nearly $44 million year to date, we've reduced our debt by $100 million to $499 million since the fourth quarter of 2009.

As we have previously discussed, in November last year, we agreed with the sellers, two 4,250 TEU newbuildings which have charters to Zim attached, to terminate the company's obligations under the purchase contracts. And instead obtain options to purchase the vessels approximately one year later, which would have been due at the end of 2011. We did this in order to eliminate any risk of not being able to perform on the original obligations.

Crucially, we've secured optionality by negotiating the right but not the obligation to purchase these vessels a year later. And this, when we were negotiating the revised contract toward the end of 2010, was at a time when the container shipping industry was rebounding strongly, having seen a significant turnaround in fortunes since the depths of 2009.

The return metrics on these vessels compared favorably with other deals in the market at the time and expectations were that the market environment would continue to improve and finance would become more available through 2011.

However, as we know, the industry after a reasonable start to 2011 has, for the last couple of quarters, suffered a downturn due to the unstable global economic environment with weak growth, particularly in Europe and the US compounded by an excess supply of very large ships, which itself was filled by a spike in new deliveries, particularly in the second quarter of this year.

Sensible financing opportunities dried up. And as the purchase of the Zim vessels was always predicated on achieving a strong return for shareholders by acquiring them at not only an attractive price but also with finance on favorable terms, we decided not to exercise the purchase options.

Furthermore, by the end of Q2 2011, the returns on these vessels were -- no longer compared favorably with other deals we were seeing in the market. So now both of those options have been allowed to expire. And as you will recall in the second quarter, we took an impairment charge of $13.6 million relating to the options.

A further consequence of the current downturn in the containership market is that charter rates have declined, and for some asset categories, substantially, which has with some lag, as is normal, led to a decline in asset values. As you know, although our business model and operating performance is almost totally unaffected by asset values, our credit facility does contain a loan to value covenant, from which we have been obliged to obtain waivers in the past.

Following the expiry of the waiver we obtained in August 2009, loan-to-value, which is the ratio of outstanding drawings under the credit facility to the aggregate charter-free market value of the secured vessels -- this ratio cannot exceed 75%. We were below this level at the last test date of April 30, 2011, due to improved asset values through 2010 and the beginning of 2011, combined with our aggressive pay down of debt.

However, given the recent weakness in asset values and despite continuing to pay down debt, we anticipate the loan to value would exceed 75% of the next scheduled test date of November 30, and consequently, we have initiated proactive discussions with our bank group ahead of the upcoming test. We've made good progress in these discussions, and we are confident that we will successfully obtain a formal waiver before the end of November.

Discussions are ongoing, but we would anticipate that the terms of the waiver will be similar to those obtained in August 2009 when loan-to-value testing was suspended for a period; the margin was set at 350 basis points, up 50 basis points on the previous margin; amortization of the credit facility was by a quarterly sweep of cash in excess of $20 million; and dividends on common shares were suspended.

However, a great strength of Global Ship Lease is in the fleet of 17 containerships which are fully employed on long-term time charters with an average age of under eight years on a TEU-weighted basis against an economic life of 30 years. The long-term charters provide contracted revenue of approximately $155 million on an annual basis after an allowance of offhire. This generates approximately $100 million of EBITDA a year.

Furthermore, our fully time-chartered fleet has an average remaining duration on a weighted basis of over 8.5 years and generates total contracted revenue of over $1.2 billion.

Given the staggered expiration of our charters, which was a key element of our negotiation in the creation of Global Ship Lease, the first charter renewals are not until the end of 2012 and then only for two of our 17 ships, which today at a contracted rate of $28,500 a day each, represents approximately 13% of our revenue.

While we would not be able to renew at these levels today given the softness in the short-term charter market, the industry can recover rapidly, and the charter market may be quite different at least for vessels of this size, when we come to focus on renewals during the course of next year.

Turning to slide 5, I would like to highlight a historical performance by looking at several key metrics, which we believe underscores the fundamental strength of our business model and the stability it provides in a cyclical industry, which has gone through two significant down cycles in the last three years and one significant up cycle.

Since the beginning of 2008, we have grown our fleet from 12 to 17 vessels, enabling us to increase revenue, EBITDA and operating income. During this time, we have continued to produce consistent, predictable results through very different operating environments in the market, although GAAP operating income in two quarters has been affected due to the impairment charges we've been obliged to take on the Zim vessels.

As a direct result of our long-term charter strategy and well-maintained fleet, our utilization rates have also remained at or near 100% absent planned drydockings.

Now a few comments on CMA CGM, our customer and largest shareholder and the third largest container shipping company in the world. Their most recent public financial information was for the first half of 2011, where they generally outperformed the rest of the industry with, for example, over 9% volume growth and in EBIT margin of 8.1%. They also reported that they completed their plan to bolster their balance sheet by raising $500 million in convertible equity notes with the Yildirim Group and an aggregate of $945 million through two bond issues denominated in dollars and euros.

Whilst we can't speculate on CMA CGM's current position or financial strength, we can report that they've paid all charter hire due to us even during the challenging periods of 2008 and 2009, albeit with a delay sometimes, and they never sought to renegotiate the terms of these charters. Right now, payments are fully up to date, and there is no hiring outstanding.

Turning to the slide which shows the demand and supply fundamentals, slide 6, since 2000, together with world GDP and an index of the time charter market. This is updated from our last call in August but essentially shows the same picture.

The overall macro view for the industry looks good with forecast of demand growth exceeding that for supply growth. Further, not shown on the slide, the order book is relatively modest at around 30% of standing capacity, which compares to a five-year average of around 47%, and a peak at the end of 2008 of 60%. That order book anticipates to be delivered over the next two to three years.

So from a macro view, the industry ought to be making money as demand growth exceeds supply growth. However, and as I've mentioned before, and I'm sure you know, the current issue is an oversupply of very large containerships, mainly in the Asia-Europe trade, which has led to an erosion of freight rates in that trade, which the relatively strong fundamentals of the other mainly north-south trades has not been able to offset.

The perception of weakness -- and perception is very important in this industry --- is compounded by the fact that the order book is heavily weighted towards large ships, which, if delivered, and in the absence of decent trade growth in mainly the Asia-Europe trade lane, potentially increases surplus capacity in an already weak trade.

Not surprisingly -- and this in large measure has driven the softening of charter rates and asset values.

Not surprisingly, given the uncertain macroeconomic outlook and a constrained financing environment, new ordering has slowed considerably in recent months. This with a continuation of slow steaming is welcome.

However, we do expect tough times to continue for a while. In the meantime, our long-term charter model largely insulates us from the short-term volatility of the freight and charter markets, and we continue to pay down debt aggressively. I will now turn the call over to Susan.

Thank you, Ian. Slide 8 shows our financial results. We generated revenue of $38.7 million in the third quarter, down from $40 million in the comparable period of 2010, mainly due to 58 days offhire for planned drydockings four full vessels.

For the nine months year to date, revenue was $116.6 million compared to $118.8 million in the year-ago period, mainly due to the drydockings.

I would like to remind everyone that drydockings are one of the causes of modest variability in our revenue and they also impact our cash flow. Each vessel has to undergo a special survey, which includes the drydocking, every five years. For each drydocking, we lost 10 to 14 days revenue and incur on average around $1.2 million of drydock in associated costs.

We have one more drydocking scheduled to commence in 2011, making seven in total and six for next year, giving 13 in two years. In the following three years, we have only two in each of 2013 and 214, and none in 2015, with consequential earning and cash flow benefits.

Our utilization for the quarter was 96.2% versus 100% in the third quarter of 2010, where there were no offhire days. For the nine-month period ended September 30, 2011, there were 88 planned offhire days and six unplanned offhire days, giving utilization of 98% versus two unplanned offhire days and utilization of 100% for the 2010 period.

Vessel operating expenses were $11.8 million for the third quarter of 2011. The average cost per ownership day was $7,513, up $322 or 4.5% on $7,191 for the rolling four quarters ended June 30, 2011.

The increase is due to higher crew costs as a result of inflation and adverse exchange rate movements as some crude costs were denominated in euros, and this is coupled with higher insurance deductibles and costs expensed in the third quarter 2011 relating to drydockings.

For the nine months ended September 30, 2011, vessel operating expenses were $34 million or an average $7,337 per day compared to $30.7 million in the same period of 2010 or $6,612 per day.

Depreciation for the third quarter was $10.1 million, the same as the comparable period of 2010. For the nine months, depreciation was $30.1 million compared to $30 million in the 2010 period.

We incurred general and administrative costs in the third quarter 2011 of $1.8 million versus $1.9 million for the comparable period of 2010. G&A costs for the nine months ended September 30, 2011 were $5.6 million compared to $5.8 million for the comparable period in 2010.

Interest expense, excluding the effect of interest rate derivatives which do not qualify for hedge accounting, for the three months ended September 30, 2011, was $4.8 million. The company's borrowings under its credit facility average $509 million during the three months ended September 30, 2011. There were $48 million of preferred shares throughout the period, giving total average borrowings through the three months of $557 million. Interest expense in the comparative period in 2010 was $6 million, on average borrowings including the preferred shares of $601.1 million.

For the nine months ended September 30, 2011, interest expense, excluding the effect of our swaps, was $15.4 million compared to interest expense in the first half -- sorry in the first nine months 2010 of $17.9 million.

Interest income is not material. The company hedges its interest-rate exposure by entering into derivatives that swap floating-rate debt for fixed-rate debt. And this provides us with long-term stability and predictability to our 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 instrument gave a realized loss of $5 million in the three months ended September 30, 2011 for settlement of swaps in the period. Our current LIBOR rates are lower than the weighted average fixed rates.

Further, there was $6.1 million unrealized loss for revaluation of the balance sheet position, given current LIBOR rates and movements in the forward curve for interest rates. This compared to a realized loss -- a $4.1 million loss in the three months ended September 30, 2010 and an unrealized loss of $9.7 million.

For the nine months ended September 30, 2011, the realized loss from hedges was $14.6 million and the unrealized loss, $4.9 million. This compares to realized loss in the nine months ended September 30, 2010 of $12.4 million and an unrealized loss of $27 million.

At September 30, 2011, we had $580 million of outstanding interest-rate swaps at a weighted average rate of 3.59%, and with total market-to-market unrealized loss recognized as a liability on the balance sheet of $49.4 million.

As you know, unrealized marked to market adjustments have no impact on operating performance or cash generation. $253 million of the swaps expire in around 16 months time in mid-March 2013. We would anticipate that we will be over hedged until then unless we close out part of the position early or unless floating-rate LIBOR increases.

We reported a net loss for the third quarter of $0.9 million which includes the $6.1 million non-cash interest-rate derivative marked to market loss.

For the third quarter 2010, net loss was $3.5 million, owed to a $9.7 million non-cash interest-rate derivative marked to market loss.

Normalized net income adjusted for the non-cash items was $5.2 million for the third quarter 2011 compared to $6.2 million for the three months ended September 30, 2010. The reduction is mainly from the impact of drydockings and higher crew costs.

We present normalized net earnings in addition to GAAP measures as we believe it 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.

Slide 9 shows the balance sheet. Key items as of September 30, 2011 include cash of $38.6 million, total assets of $954.1 million, of which just over $900 million is vessels. Total debt of $547 million including the preferred shares, and shareholders' equity of $323.2 million. And, as I mentioned previously, the balance sheet position of our interest-rate swaps was a liability of $49.4 million.

I would now like to turn the call back to Ian for closing remarks.

Thanks, Susan. Before taking your questions on slide 10, I would like to reiterate a number of Global Ship Lease's strengths, that we believe will create value for shareholders over the long term.

First, with $1.2 billion of contracted revenue from the long-term fixed-rate time charters, our business model insulates us from the direct impact of the volatile freight markets and from the short-term challenges faced by the industry.

Second, during a time when we have no purchase obligations and no order book, we have significant strengthened our balance sheet over the last couple of years and will continue to use our sizable cash flow to pay down debt in order to create value. Today, $100 million of EBITDA supports $500 million of debt.

Thirdly, our customer, CMA CGM, has had over 30 years of operating successfully through the cycles and has continued to perform on our time charter contracts. Additionally, whilst we can't comment on their financial condition and prospects, they have, for sure, strengthened their balance sheet in 2011, raising $1.4 billion of fresh capital.

Lastly, on dividend, whilst the board has decided not to reinstate a dividend, pending discussions with the bank group and wanting to preserve the strongest possible sheet, given the generally fragile economic conditions and uncertain outlook for the sector, I would like to highlight our current thoughts on dividend policy.

Firstly, the board understands the importance of dividends and is committed to reintroducing a dividend when we are firmly in compliance with our loan-to-value covenants and the board determines that we are in a position to consistently distribute dividends to shareholders over the long term. And secondly, and most importantly, the board continues to believe that our business model supports the delivery of dividends to common shareholders over the long term.

That concludes our formal remarks, and I would like to hand back to the operator who can explain the Q&A process.

(Operator Instructions). Michael Demaray, Elevated Capital.

Good morning or good afternoon, everyone. I've got a few questions. First is for the credit amendment, I assume we will see a press release regarding that's -- once that's agreed to?

Yes, you will. Yes.

Okay. Kind of a longer-term question, is there a target debt level that the company believes is appropriate given the current fleet?

Well we've always had in mind the capital structure which is sort of 60% debt, 40% equity, which in normal times would be quite prudent. That said -- and I think that that is where certainly going forward if we were raising fresh capital to grow the business, we would be looking at that sort of a ratio.

That said, asset value -- we don't know where asset values are going to be, so that in large measure drives today, at least, decisions on capital structure given we've got a fleet which we bought for $1 [billion] three years ago, which is now not worth as much as that given loan to value sort of pressure.

So, the sort of short answer is no, we don't have a target asset value for the existing -- sorry, debt value for the existing business, but we would for new business.

Okay. So I mean -- I guess the reason why I asked the question in that form was because the -- just as you highlighted, it seems that the vessel values are sort of a moving target, so it seems like it's very difficult to say we have 60% debt on the fleet if the value of the fleet keeps moving around. So I'm just wondering if there's a lower bound that you think safely gets you into that 60%/40% target regardless of where vessel values go. Obviously they will move within some sort of a band.

That's a great question. This is Michael Gross speaking. I think if you think about this business model, we are very comfortable with the leverage we have, given that there is very limited CapEx in this business, our debt is low cost, and the cash flow, as has been -- [happens] as the data has come to the public has been incredibly predictable, month in, month out, given they are all long-term charters.

While the asset values are certainly relevant for purposes of our covenant with the banks, these are purely quarterly mark to markets, which we're all familiar with as investors, that while are interesting, are frankly not that relevant given that our ships are under long-term lease. And we have to live within our contracts, obviously, but we know how predictable the cash flows are. And that's frankly why the banks have actually been quite cooperative, even though on paper the loan to value has gotten us to fairly steep multiples.

Okay, great. You're obviously in an over swap position right now. That rolls off, can you remind me again, in 2013; is that correct?

Yes, there's a whole slug of swaps, $250 million, $300 million of them, that come off in the middle of March 2013, which if LIBOR continues at today's sort of levels, would give us an annual benefit of around $7.5 million.

Great. Thank you.

And then I guess one last kind of industry question. It seems like the panamax segment has gotten hit particularly hard. Maybe you can first of all maybe you can confirm that or deny that and then tell me how you see that kind of working off over time.

Yes that's a good observation, Michael. Yes, it has been hit particularly hard. As a consequence, a number of factors, but sort of the perceived wisdom is that it's as a result of the cascade of tonnage out of the Asia Europe trade lane into the smaller trade lanes following the delivery of these large ships, mainly in the second quarter of this year. And the sort of the lump has hit the panamax sector, and they have not -- because of the challenging times in the industry, they've not been able to find employment in the smaller trades. And, therefore, there have been a lot of panamax vessels coming up in the short-term charter market, which has led we believe to disproportionate weakness in charter rates and, therefore, in asset values for the sector.

However, a couple of observations. These ships -- the sort of 4,000 TEU ships that are work horses of the global fleet, they have a major role to play in the north-south trades, generally the smaller trades. They have a major role to trade in intra Asia. And all of those trades have been performing relatively well and [looks like to] perform relatively well in the future, absent further global economic shocks. I have to sort of caution my remarks like that.

Further, the sector, we believe, is potentially under built. The order book doesn't contain many vessels of this size. So we are rather hoping that with reasonable trade growth in these smaller trade lanes and a constrained growth in the panamax fleet, that the overall economics for these midsize ships will cause improvements in charter rates and asset values over the next sort of 12 to 18 months. But, that's going to follow I think a continuing period of weakness over the next two to three months until the industry sees how 2012 starts to develop in sort of February/March time.

Great. That's it for me. Thank you.

Steven Schuster, Bridge Street Asset Management.

Good morning, folks. First I would like to say I appreciate the participation of the Chairman on this call, and I would hope that that would continue into future calls.

I had a couple of different items. One is, if you can just clarify the conversations with the banks. Is one of the things being negotiated a deferral of the November 30 test? And we would have a regular test back on April 30, or similar to 2009, there was an 18-month period where there was -- we didn't have to take a test? If you could just elaborate on that, that would be helpful.

Steven, we're still discussing with the banks and we're making great progress. As I say, we expect to reach conclusion before the end of the month. And I think it would be wrong to go into much detail of what we're talking about and what the open items are. But we have a good template in existence for a waiver as I said earlier on the call of suspending testing for a period of time for an increase in margin etc. and a payment -- amortization of the debt by full sweep. We will make an announcement when it's done.

Okay. And then, I mean, yes, you guys are paying down debt, but given that the band that you've sort of described, 75% to 90%, it would seem as though with the available cash on your balance sheet, if you were to use that to amortize down the line further, that you might actually be in compliance. Is that off the table?

Well, we've taken that all into account in talking with the bank group. And you can over engineer this. And whilst -- and I'm not going to comment directly, but technically it might be possible to just about squeeze into compliance. We may not have enough working capital if we took all of the cash out of the balance sheet and committed to the bank group. It wouldn't give us any flexibility to absorb lumps and bumps in the future. And we have no idea where asset values are going to be in the next test. So we'd prefer to deal with a potential issue clearly and transparently with our banks so that everybody understands exactly where we are.

Okay. And then this is -- lastly, this is a housekeeping thing, but I have mentioned it before and I'd prefer not to mention it on this forum, but this is -- here it goes.

The compensation system that requires management to sell their shares every year doesn't really align management with the interest of shareholders. And I would really like to see that addressed for next year that we don't have to see management on -- regardless of where the stock is or what's going on, dump shares into the marketplace.

Well look, we will look into whether there are more tax efficient ways to handle that. Obviously this is a nuance of having a management team based in the UK. It happens, unfortunately, in most UK-based companies that when shares vest in order to pay taxes, that's what management does. We will look into whether there's any better alternatives.

All right. Thank you very much.

(Operator Instructions). Richard Reiss, Georgica Advisors.

Could you just remind me of -- remind us of the terms of the preferred? Who owns the preferred? What are the terms? Are you currently paying cash dividends on that?

There's $48 million of preferred that's all held by CMA CGM. They -- when we were negotiating the merger with Marathon, CMA agreed to defer $48 million of cash consideration and take this [measure] instead. It's paying LIBOR plus 200, so it's cheap money. The repayment or redemption isn't scheduled until the end of August -- or commencing the end of August 2016. And then it's redemption by $4 million installments approximately. So it's good long-term, cheap money. And yes, we are continuing to pay the dividend on it.

Thank you.

We have no more questions at this time. Please continue, Mr. Webber.

Great. Thank you very much. Thanks for joining us on the call. We look forward to updating you further on Q4 in the new year. Thank you very much.

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