Global Ship Lease Inc (GSL) 2011 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Global Ship Lease Q4 and full-year earnings conference call. At this time all participants are in listen-only mode. (Operator instruction). I must advise this conference is being recorded today, Wednesday the 14th of March, 2012. And I would now like to turn the conference over to your presenters today, Ian Webber, Chief Executive Officer; Susan Cook, Chief Financial Officer; and for the Q&A session, Chairman Michael Gross. Please go ahead.

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

I hope you have had a chance to look at the earnings release we issued earlier today and have been able to access through our website the slides that accompany this call.

As usual, on slides one and two, I want to remind you that the call today 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. And we also draw your attention to the Risk Factors section of our annual report on Form 20-F, which we filed last year in May. You can access this via our website or by the SEC's.

All of our statements are qualified by these and other disclosures in our public 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 and to the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning.

I would like to start by reviewing fourth-quarter highlights and then move on to discuss our fleet and charter portfolio. I will then make a few comments on the industry overall before turning the call over to Susan to comment on our financial results. Then after brief concluding remarks, we will open the call up for questions.

Slide three shows the Company's fourth-quarter highlights. During a volatile time for the containership industry, we continue to generate sizable and stable cash flows as a direct result of our business model and fully fund chartered fleet.

While Susan will discuss our financials later on, I note that despite a heavy drydock schedule for 2011, when fixed dockings were completed, we had achieved strong utilization of 98.3%. We also generated full-year revenue and EBITDA of $156.3 million and $103.7 million respectively.

During 2011 we continue to use our cash flow to delever our balance sheet for the benefit of shareholders. In the fourth quarter, we repaid $15.3 million in debt and for the year as a whole $49.2 million. Since we started paying down debt in the fourth quarter of 2009, we have reduced our debt by $115.4 million.

In November last year, due to declines in charter free asset values, since we passed our loan-to-value test as of April 30, we work with our lenders drawing on the strength of our predictable and stable business model to waive until November 2012 the loan-to-value test otherwise required by our credit facility.

As a reminder, even though asset values have virtually no impact on our operating performance, the covenants of our credit facility require that the ratio of outstanding borrowings under the facility up to the aggregate charter free market value of the secured vessels should not exceed 75%. By successfully and proactively waiving the loan-to-value test, we have insulated the Company and its shareholders from weakness in asset values, which have experienced further declines since we obtained the waiver.

Turning to slide four, which provides an overview of our fleet and charter portfolio, as you know, we own a fleet of 17 modern containerships now with an average age of just under eight years on a TEU weighted basis against an economic life of 30 years. All of our vessels are fully committed to long-term fixed-rate time charters, generating compacted revenues of approximately $155 million each year after a small allowance for unplanned offhire.

Our time charter fleet represents total contracted revenue of $1.2 billion with an average remaining charter term of 8.3 years on a weighted basis. We have minimal exposure to charter expires with only two vessels scheduled to come off charter in 2012 and then no further expirations until 2016, the end of 2016. But dates for the 2012 expirations are up to 90 days before or after the anniversary of the charter at the charter's option. This is an order to give the charter a flexibility in replacing the ship or whatever with a new ship if they choose not to renew.

Given the anniversary of the charters in question are December 19 and 20, the earliest expirations for us when we might receive the ships back will be September 20 and 21, and the latest would be March 19 and 20 of next year 2013.

While we are still six months away from the earliest possible expiration and we can't speculate on future rates, just to give you an indication, we can tell you that if we fixed the ships at today's stock market rate of approximately $8000 a day compared to our contractual rate, our current contractual rate of $28,500 a day, the effects on our 2012 EBITDA would be approximately $4 million down, which is about 4% 2011's EBITDA.

Slide five shows our financial record since we started operations in the first quarter of 2008. You can see that we generated stable revenue and EBITDA every quarter at least since the fleet expanded to its current size of 17 vessels toward the end of 2009. GAAP operating income in two quarters through Q4 of 2010 and Q2 of 2011, as we note on the slide and we discussed before, were negatively affected by impairment charges related to the purchase options of the two German vessels. Otherwise, that metric would also show a consistent pattern.

Our utilizations have also remained at or near 100%, ignoring planned drydockings.

Our stable financial and operating performance, which we believe underscores the strength of our business model and the stability it provides in a cyclical industry, despite the market volatility that we have seen in the last three or four years as indicated by the time charter index that we have shown at the top of the slide.

And now a few comments on CMA CGM, as you know, our customer and largest shareholder and the third largest container shipping company in the world. They have recently announced their full-year 2011 results. And whilst these are bound significantly on 2010's record year when they reported EBITDA of $2.5 billion and this decline is not surprising given the industry conditions, CMA CGM have outperformed most of their peers.

As you will no doubt have seen from their press release earlier -- or early last week, March the 7th, they reported full-year 2011 revenues of about $4.9 billion and EBITDA of $711 million on container volumes of just over 10 million TEU. And this volume represents an 11% volume growth, which is greater than the estimates of overall trade growth and the container load trades for 2011 of between 6.5% and 8%.

We can't speculate on CMA's current position or financial strength, but we do know that they've paid charterhire to us in full, albeit with some delays, ever since we got going as Global Ship Lease and particularly during the really difficult times of 2008 and 2009. And they have never thought to renegotiate the terms of any of our charters. Right now, as I speak you, one payment, which was due on the 1st of March, is outstanding.

Our terms of payment are in advance, so effectively having one payment outstanding today is looking at payments in arrears, which is another way that time charters can be negotiated.

Turning to slide six, which we used as a background for industry comments. We have also added by the way slide seven and eight, which are new to our presentation, which drilled down into the global fleet and the order book by vessel size.

Slide six shows the supply and demand fundamentals since 2000 together with world GDP growth and an index of the time charter market. This shows some -- much the same picture overall as in the previous quarters, and the forecast of demand growth exceed those for supply growth, and there, from a macro level, the industry should be okay for the next couple of years.

However, and as we have previously discussed, the current issue is an oversupply of very large containerships, mainly deployed in the Asia-Europe and Asia-Mid trades, which led to an erosion of freight rates in those trades during 2011. The consequence of which the relatively strong other mainly North-South trades and intra-Asia trades have not been able to offset.

That said, most recently the liner companies operating in Asia-Europe and Asia-Mid have all implemented substantial general rate increases with effect from March the 1st this year, in some cases more than doubling the prevailing freight rate from 500 or 600 TEU up to per TEU -- $500 or $600 per TEU up to maybe $12,000 or $14,000 per TEU.

The indications are that these general rate increases, GRIs, are holding and have experienced little if any erosion, which is very encouraging. Further increases are planned for the middle of this month and for the 1st of the April, and GRIs are also being implemented and planned for other trades.

There has been very little contracting of new buildings since Q3 of 2011, which should benefit the industry in time. The order book is relatively modest at about 28% of standing capacity. This compares to a 10-year average of around 40% and a peak at the end of 2008 of over 60%.

In the short-term, as you can see from the slide, how the time charter index has continued to decline, as an inefficient cascade of ships triggered by the delivery of a substantial amount of mostly very large new ships in Q2, Q3 of 2011 coincided with a displaced mainly mid-sized ships coming off charter in the seasonally slack end of Q3, Q4 2011.

Slide seven demonstrates that the fastest-growing trades are the North-South, Non-Mainline East-West trades and the interregional trades, notably Intra-Asia with growth rates of around 9% or so. These trades represent approximately 70% of global containerized trade.

Conversely, the main line, Europe-Asia, Asia-Mid trades and the transpacific trades grew at a more modest 3% to 5%. The fastest-growing trades use small- to medium-sized containerships, and turning to slide eight, we can see that this size segment, which makes up the vast majority of our fleet, Global Ship Lease's fleet, is proportionately underbilled with a relatively small order book. 2000 to 5000 TEU vessels represent only 18% of the order book when compared -- sorry, the order book for those vessels, 2000 to 5000, represents only 18% of the existing fleet and only 16% for 3000 to 5000 TEU vessels, 5% for 2000 to 3000.

As I mentioned earlier, it is difficult to speculate, and it would be wrong to speculate on charter rates. However, the fact that the growth in these trade lanes favoring these vessel segments exceeds supply growth by some margin bodes well for both charter rates and asset value recovery in due course.

Note that 15 of our 17 vessels are small to medium sized, including our two 4100 TEU vessels coming up for renewal at the end of this year. Regarding the latter, we will provide you with an update on market conditions and charter renewal prospects on our Q1 call in May.

If the general rate increases continue to hold and the further reposed GRIs are also successfully implemented, the liner company's financial performance should be much improved in 2012 over 2011. That said, there may well be certain shifts from time to time through the year, although the pain will be mostly felt in the short-term charter market. With our long-term charter model, we are largely insulated from such short-term volatility.

I will now turn the call over to Susan.

Thank you, Ian. Please turn to slide 10 for a summary of our financial results for the three months and year ended December 31, 2011.

Due to our fixed-rate contracts, we generated strong revenue of $39.7 million in the fourth quarter, down slightly from $40 million in the comparable period of 2010, mainly due to 12 days offhire, seven of which were for planned drydockings. Utilization in the quarter was 99.2%.

For the full year ended December 31, 2011, revenue was $156.3 million compared to $158.8 million in the year ago period, also due primarily to drydockings as, in the full year, there were 95 planned offhire days. Unplanned offhire was 11 days giving a utilization of 98.3%.

In 2010 there was no unplanned offhire and only three days of -- no planned, sorry. In 2010 there was no plan offhire and only three days of unplanned offhire.

Given our heavy drydocking schedule in 2011 and 2012, we expect that our results in 2013, 2014, and 2015 will be less affected by plan offhire. While we had six vessels complete their drydocking in 2011, we have seven scheduled completes in 2012, but only two in each of 2013 and 2014 and none in 2015. As the average cash cost of the 2011 drydockings was approximately $1.3 million with an associated reduction in revenue and reaching roughly [$0.3 million], there will be a substantial cash flow benefit in 2013 and 2014 compared to 2012 from five fewer drydockings.

Vessel operating expenses were $11.5 million for the fourth quarter of 2011. The average cost per ownership day was $7,333, up $11 or 0.2% on $7,322 for the rolling four quarters ended September 30, 2011.

For the 12 months ended December 31, 2011, vessel operating expenses were $45.5 million on average $7,336. Interest expense, excluding the effects of interest rate derivatives which do not qualify for hedge accounting for the three months ended December 31, 2011, was $5.1 million. During the fourth quarter, the Company's borrowings under its credit facility averaged $499 million, and with $48 million of preferred shares throughout the period, total average borrowings were $547 million.

For 2011 interest expense, excluding the effects of our swap, was $20.6 million. The Company's borrowings under its credit facility averaged $562.8 million during the year, including $48 million of preferred shares throughout the period.

The Company's derivative hedging instruments gave a realized loss of $4.8 million in the three months ended December 31, 2011, for settlements of swaps in the period at current LIBOR rates are lower than the average fixed rate.

Further, there was a $4 million unrealized gain to revaluation of the balance sheet position given current LIBOR and movements in the forward curve for interest rates.

For the year ended December 31, 2011, the realized loss from hedges was $19.4 million, and the unrealized loss was $0.9 million. At December 31, 2011, interest rate derivatives totaled $580 million against slowing rate debt of $531.6 million, including the preferred shares. As a consequence, the Company is overhedged, which arises from accelerated amortization of the credit facility debt, as well as not incurring additional floating rate debt, which had been anticipated to be drawn in connection with the originally intended purchases of the two vessels at the end of 2010.

$253 million of the interest rate derivatives all at a fixed rate of 3.4% expire mid-March 2013. Once these interest rate derivatives expire, we will be paying a floating rate based on LIBOR, enabling us to take advantage of what we expect to be a lower interest rate environment. As in LIBOR of, say, 0.5% the full-year benefit of the [$250] million swaps rolling off would be over [$7 million]. There will, of course, be an additional interest savings from lower overall debt as amortization continues.

Net income for the fourth quarter was $10.9 million, which includes a $4 million non-cash interest rate derivative mark-to-market gain. For the full year, net income was $9.1 million after the non-cash impairment charge of $13.6 million and a $0.9 million non-cash interest rate derivative mark-to-market loss. Normalized net income adjusted for the non-cash items were $6.8 million for the fourth quarter and $23.6 million for the year.

Slide 11 shows the balance sheet. Key items as of December 31, 2011 include cash at $25.8 million; total assets at $939.5 million, of which $890.2 million is vessel; total debt of $531.6 million, including the preferred shares; and shareholders equity of $334.2 million.

In addition, the balance sheet position of our interest rate swap was a liability of $45.3 million.

Slide 12 shows our cash flows. Main items to mention here are the cash provided by operating activities of $11.1 million in the fourth quarter and $74.8 million in the full-year 2011. Expenditure on drydocks, which was capitalized in the quarter, was $2.6 million, bringing us to a total capitalized drydock expenditure of $7.7 million through 2011.

Finally, as Ian mentioned earlier, we repaid $15.3 million of our credit facility in the quarter, giving us a $49.2 million reduction in debt over the year.

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

Thanks, Susan. To conclude and as summarized on slide 13, I would like to mention a few of the Company's strengths, which we believe will create shareholder value over the long term.

First, with $1.2 billion of contracted revenue over an average of 8.3 years, we believe we are largely insulated from the short-term volatility in the containerized shipping industry. We have only got two charters renewals in the next four years.

Second, we have no exposure to financing or refinancing risk until 2016, the end of 2016.

Third, we have got no purchase obligations and remain focused on using our sizable cash flow to aggressively reduce debt and improve our financial position. We are also actively focused on other ways of improving our capital structure, although we will only move forward if it makes sense for our shareholders.

Fourth, our customer, CMA CGM, has had for over 30 years operated successfully through the cycles and continues to perform on our time charter contracts. They strengthened their balance sheet early 2011, raising $1.4 billion of new capital via bonds and convertibles, and in a poor year, their results for 2011 were among the best in the industry.

Fifth, over the next few years, we expect our cash flow to be positively affected by the expiration of our interest rate derivatives, as Susan mentioned, as well as by a lighter drydocking schedule.

Finally, our stable and predictable business model, combined with our ongoing successful deleveraging of our balance sheet, is designed to create long-term value for shareholders. The Board continues to believe that the business model supports the delivery of dividends to common shareholders over the long term and remains committed to reintroducing a dividend when we are firmly in compliance with our loan-to-value covenants and can provide a sustainable payment.

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

(Operator instruction). [Zack Concasa], [DRV].

Good morning. A quick question for you. It looks like you guys had a pretty good stable quarter. You know it was more along the lines of CMA CGM, and it looks like they are going to be out trying to restructure some of their balance sheet and get amortization. I mean are there any options available to you guys to improve your capital structure that improve the likelihood that your LTV test in November is a success?

Well, as you know, there are two aspects to the loan-to-value ratio, one on its valuation and the other is really beyond our control. (technical difficulty) That is driven entirely by the market, although we do have very robust discussions with brokers throughout the valuation process so that we understand how they're coming out and why they are coming out with the numbers that they are.

The second part of the equation is the loan elements, which, on the face of it, is drawn debt. But we are able to net off cash that we've committed to the banks. And so to an extent, we can manage that number by paying down debt or committing more cash to the banks by putting it in the retention account. That only goes so far, and I'm not sure that we would want to finesse things too finely. But we'll have to see where we are nearer the time.

But, more broadly, I suspect your question is directed at overall capital structure, and I'm sure Michael will have something to say. But it is something that we are actively focused on. We look at many options. The capital markets are a little bit more active today than they were perhaps six months ago. The industry is feeling a little bit better about itself, mainly because of these general rate increases, although that affects far less the owners than it does operators. And it may be that we can do something, but we are only going to do anything if it is for the benefit of everybody.

And I would add to that I think you know we have definitely benefited from the fact that since this comes in public, we have accomplished significant deleveraging through the balance sheet. And from a total debt to EBITDA perspective, this Company is very conservatively capitalized and is benefiting, frankly, from a very low-cost capital structure given that it is totally financial flow and rate bank debt.

We have also seen that as we have had loan-to-value covenant issues in the past, the bank has been very cooperative and supportive because the Company has not missed a number since its inception.

Yes. That's great, and I agree. It is that the CMA CGM result seems to really take the counterparty risk that you guys -- that some people think that you guys have off the table now. So, that's all I had. So, thank you.

Ross Taylor, Somerset.

The loan-to-value is an industry standard, but it really does not seem to be an effective lending criteria for your guys' business model where some -- your assets are tied up over a long-term. Can you comment on the -- is there an ability to come in with new financing that might more accurately tie in to your business model?

And then secondarily, can we talk about the logic that was used in not selling one or two ships at the end of last year when you were looking at being kind of on the low end of the loan-to-value ratio that would have allowed you to put a dividend in since the value as calculated as I understand it is only based on the value of the ships ex the leases that come along with them? So you could have probably gotten a substantial improvement in value for those ships should you have sold them in the open market I would have thought.

Sure. Good questions. Firstly, can we do anything about our existing debt package? It would be very difficult to renegotiate covenants with our existing banks, and we did actually try it very aggressively a couple of years ago when we were -- or three years ago when we were first looking at loan-to-value breaches, and I can't tell you how much effort we put into explaining to the banks that our business model was completely independent of asset -- short-term asset values, but no dice I'm afraid. But this covenant package is pretty standard, certainly in the liner sector, and it is fairly standard among owners as well. Less standard I have to say among owners with long-term charter models like us, but certainly pretty standard in the short-term market.

So, secondly, are we able to refinance the existing facility with a new facility with more flexible terms, more suitable to a volatile industry, which really only is affecting us by virtue of asset values. I think again the answer is no.

The other terms of our credit facility are actually pretty good. I think we might have mentioned this on last call. We agreed a term to which we didn't actually ultimately proceed with at the end of last year with a number of banks, and the underlying terms of that were pretty much the same as we have today in our existing facility. So we think we are pretty much on market already.

As to asset sales, that is quite a difficult question to answer certainly in retrospect, and we certainly looked at whether it made sense to realize some cash from selling assets and paying down debt with the proceeds, which would be an obligation anyway. And the analysis was that it actually wouldn't do us much good, frankly, compared to where we were on loan-to-value. We would not be sufficient to get us the right side of loan-to-value with sufficient comfort to look at reinstating any sort of a dividend. Because we are very, very keen that when we do reintroduce the dividend, it is going to be sustainable, which means that we have got to have a lot of confidence in compliance with covenants for the foreseeable.

Okay. And, lastly, comments on you have the two ships that are coming up over the near term, coming off of lease. What are your thoughts on those should you -- the current lessor choose not to renew them, and do you want the current lessor to renew them?

Well, dollar for dollar we would like to start diversifying our customer base, and if we were able to let the ships to somebody else on sensible terms, then we might be inclined to do that. But there are efficiencies for renewing with the same charterer. There is absolutely no risk of downtime and offhire. We don't have any risk of having to reposition the vessel and paying for fuel that take it from the point where CMA redeliver it to where our new charterer might want to take the vessel on, and that can be significant.

We have got six months to go. We haven't started talking with CMA CGM or anybody else about these charters. The market today is weak, as you know. We hope for improvements over the next six months, and we will give you an update on our call in May.

Okay. Thank you very much.

Nathan Laffoon, Harbor Capital.

Just quickly a sort of macro question. I understand or at least from what I have read that Maersk has laid out some of their gigantic 18,000 TEU ships, and that when they ordered those and started to take delivery, it seemed to me that their goal was to take share in shipping and that there has been a total turnaround at Maersk for somebody finally saw the light and decided that profitability was more important than market share. Is that a fair statement? And if it is a fair statement, just industrywide is that a kind of a psychologically seminal turning point?

I can't really comment on another Company's operating strategy. But I agree with you Maersk has said that they want to get back to black as reported in the press, and they have also reaffirmed their trust in maintaining market share.

As to laying vessels off, the 18,000 TEU ships haven't been built yet, but we are aware that they have got one large ship that is laid up. That doesn't make a great deal of difference in context of the size of their fleet. We will just have to wait and see. They like everybody else have implemented general increases in the Asia-Europe, Asia-Mid trades, and a part of the industry's efforts to improve profitability. So that is really good news. I think you have to look at currently at the macro picture in the context of what the liner companies are doing to restore revenue levels across the piece, and let's hope that that continues.

Ian, thank you. One other thing. I assume that the banking climate, the lending climate and containers is tight, stringent or even not available as it is in wet or dry bulk. Do you foresee weaker hands being shaken out just in terms of possibly, I don't know, ships seized or people really not being able to -- that is further container owners not being able to succeed through this climate? And what, if any, effect would that have on us?

Well, taking your last point first, I think it won't have any affect on us at all, except indirectly if there were -- if there was a climate of more aggressive foreclosure by existing lenders, which is always possible -- we haven't seen it yet -- then there would be more ships in the open market, which would have a negative effect on charter rates and asset values. Which, as we've commented on, has no direct impact on our business other than through the loan-to-value multiple and charter rates from the two renewals at the end of the year.

The banking climate is certainly very tight. But there are a handful of banks who are still actively lending on new business mainly to existing customers with whom they have got great relationships, and I am pleased to say that we think that we have got good relationships with all of our banks. And one or two of our banks are among that handful who continue to sort of expand their portfolio rather than contract.

But I think the banking environment is really tough. It certainly isn't going to be the savior of the unfinanced order before of needing to refinancing existing packages. So we'll just have to wait and see what alternative sources of capital come into play. And that is where, as we've said before, Global Ship Lease with its listed paper and access to the US capital markets when the time is right has an advantage.

Yes. Okay. That's fine. That is all for me. Thank you.

(Operator instruction) Greg Gerst, Gerst Capital.

My call got garbled up a little bit when Susan was talking about the impact of the swaps coming off at March 2013. Could you repeat the impact of that, again?

If when the 253 million rolls off, if we assume a LIBOR of 0.5%, the effect is $7 million per annum roughly.

Okay. And that is the annual?

Yes.

What about any cash settlements, expenses assuming a 0.5% LIBOR?

Well, that will just run up until -- as we are today. We are having to pay the difference between the fixed-rate on these swaps of 3.4% and whatever market rate is. But when no there is no incremental cash settlement, when the swaps expire, they just die.

Okay. Got it. That's what I thought. And then you had said earlier, it is the two ships coming off higher went to spot rate [$8,000] today. That's $4 million negative on EBITDA annually. Is that right?

No, it was the impact on 2012, the maximum impact on 2012.

Okay. So what would be, if we look at an ongoing impact for those coming off at the end of (inaudible) in that $8,000?

Well, for every $5,000 or less, it is 365 days times whatever decrease in revenue the charter rate times 2. So if it's for every $1,000 off the charter rates, it's $700,000 off EBITDA.

Okay. And is there any reason to assume that CMA wouldn't terminate those charters in September as opposed to a later date?

Yes, they may want to get them in their service for the full period. Given charter rates are relatively low today, I think the pressure would be on them to redeliver early either to negotiate an extension of the charter at lower rates with us or to turn the ship back. And if they need tonnage like this, then take them -- take two new ships in the open market. But there will be operational reasons why they may need to keep the ships a month or two longer to complete some voyages or whatever. So we will have to wait and see, I'm afraid. It is entirely under your control.

Okay. And then on an ongoing basis going forward, you guys have been running with ARs somewhere in the $7 million range. And we see that jump to $13 million at the end of the year. What should we -- is this going to continue to be in the $7 million to $13 million range that now they are facing paying in arrears?

It is kind of difficult to forecast. But I would hope that we would be in the $7 million to $13 million range, yes.

Okay. That's it for me. Thanks.

There are no further questions at this time. Please continue.

Well, thank you, everybody, for listening to us, and we look forward to giving you a further update on GSL and the markets and our charter renewals in our first-quarter 2012 call, which will be in May. Thank you very much.

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