Global Ship Lease Inc (GSL) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Global Ship Lease first-quarter 2012 conference call. This call is being recorded.

Joining us on the call today are Ian Webber, Chief Executive Officer, and Susan Cook, Chief Financial Officer. Following their prepared remarks there will be a Q&A session. Instructions will follow at that time.

I will now turn the call over to Mr. Webber. Please go ahead, sir.

Thank you. Good morning, everybody, and thank you for joining us today. As ever, I hope you have had a chance to look at the earnings release which we issued earlier this morning and also been able to access via our website the slides which accompany the call.

Slides one and two 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 of the Company's control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the safe harbor section of the slide presentation.

We also draw your attention to the risk factors section of our annual report on Form 20-F, which we filed on April 13 this year and 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 to the most directly comparable measures calculated and presented in accordance with GAAP you should refer to the earnings release that we issued earlier today.

I would like to start by reviewing the first-quarter highlights, then move on to discuss our charter portfolio, including the two vessels that come off-charter later this year. Then, after some comments on the industry overall, I will turn the call over to Susan to talk about our financials. Finally, after brief concluding remarks, we will open the call up for questions.

Slide three shows the Company's first-quarter highlights. Our fleet generated strong financial results for the quarter based on high levels of utilization, with all 17 of our vessels continuing to be secured on long-term fixed-rate time charters. We achieved revenue of $38.4 million and an EBITDA of $25.2 million during the quarter when we completed three of seven drydockings scheduled for 2012.

Taking into account these drydockings, our fleet utilization was 97% for the quarter, which is a direct result of our long-term fixed-rate charter business and our well-maintained fleet. Further, with three out of our seven planned drydockings for the year now complete, we expect to see improved utilization for the remainder of 2012.

We continue to strengthen our balance sheet by utilizing our free cash flow to pay down debt, $11.8 million in the period, for a total debt repayment of $127.3 million since August of 2009. As before, we have no purchase obligations and the maturity of our credit facility remains August 2016.

Slide four provides a clear picture of the stability of our business model with a historic look at our quarterly financial results. Since our operations began in the first quarter of 2008 the industry has seen considerable volatility as evidenced by the Timecharter Rate Index at the top of the page. Despite the cycles of the market, Global Ship Lease has continued to generate consistent financial results.

There has been very little fluctuation in revenue, EBITDA, or operating income before impairment charges since our fleet expanded to 17 vessels in the third quarter of 2009. Our utilization has been consistently near 100% with any noticeable change due primarily to planned offhire days for scheduled drydockings.

Slide five provides an overview of our fleets and our charter profile, which supports are consistent and stable financial performance. Our fleet of 17 container ships is relatively young with an average weighted age of 8.1 years against an economic life of 30 years.

Consistent with our risk-averse business model, all of our ships are chartered out on long-term fixed-rate time charter contracts with an average remaining charter term of 8.1 years on a weighted basis. In total, this represents $1.2 billion of contracted revenue.

Over the next four years we have minimal exposure to charter explorations. As you can see in the bar chart, we have only got two vessels scheduled to come off-charter before the end of 2016. The earliest possible expiration dates for these two charters are September 20 and 21, 2012, and the latest dates are March 19 and, 2013, at the option of the charterer.

Given the contract rate of $28,500 per day, it's above today's spot markets, we would expect redelivery sooner rather than later in this period. We have recently begun to discuss the possibility of renewals for these charters with CMA CGM, although it is too early to go into any detail.

I would note, however, that although spot charter rates remain low, we have seen some modest improvement since our last earnings call, middle of March, when I indicated that prevailing rates were approximately $8,000 a day. Recently in the market comparable ships to these two have been fixed at rates of approximately $10,000 a day, and we believe the trend will continue to be modestly upward.

If we were to charter these two vessels at today's prevailing market rates, $10,000 or so, they would between the two of them generate annualized EBITDA of about $1.4 million versus approximately $14.8 million under the existing charters. However, any negative cash impact on 2013 from renewing at lower rates would largely, if not totally, be offset by the positive effect of the expiry of $253 million worth of interest rate swaps in March 2013 and from five newer fewer planned drydockings in 2013 than in 2012.

Slide six is new. The top half of the slide shows the significant improvement in freight rates out to China, particularly on the trades into the Mediterranean and into Northern Europe as the liner companies have successfully implemented a series of general rate increases commencing March 1, 2012. Although the main focus to date for freight rate increases has been on these Asia-Europe trades, rate increases are also being implemented successfully on the Trans-Pacific and selected other trades around the world.

Liner operator financial performance in Q1 2012, as reported so far, has been poor due to two low freight rates which haven't benefited from the GRIs I just mentioned and from seasonally lower volumes. However, as a consequence of these GRIs and as volumes build into the seasonally stronger period, all other things equal, we would expect liner companies' financial performance to improve from Q2 this year.

The lower half of the slide shows on the left the development of bunker prices over the last 10 or 11 years and on the right the evolution of slow steaming from mid-2008 when bunker prices started their significant upward trend. You can see that the average speed of the world's merchant fleet continues to decrease. We believe that slow steaming in a high fuel cost environment is here to stay, and remember that slow steaming absorbs capacity.

Just turning to CMA CGM, we can't speculate on the current position of financial strength given they haven't issued any financial statements or press releases on results since the freight rates began to improve. However, to remind you, although their full-year 2011 results were significantly down on 2010's record year due to industry conditions, they outperformed pretty much all of their peers reporting full-year 2011 revenues of nearly $15 billion on a EBITDAR of $711 million on volumes of just over 10 million TEU, which represented an 11% volume growth above the average of 7.6 being the estimated trade growth for 2011.

They continue to pay out charter hire in full, albeit with a delay, and have never sought to renegotiate the terms of the charters. Right now as we speak our two periods of hire are outstanding.

Slides seven, eight, and nine you have seen before and look at overall supply and demand, sub analyzing into the main trade lanes and into vessel size categories. The picture remains generally the same as in the last couple of quarters.

Slide seven showing supply and demand fundamentals since 2000, together with world GDP growth and an indexed time charter market. This continues to suggest that in the medium-term outlook for overall supply and demand is favorable. Forecasted demand growth continue to exceed those for supply growth although compared to previous quarters the gap is narrowing.

That said, there continues to be an oversupply of very large container ships, which tend to be deployed in the Asia-Europe and the Asia-Mediterranean trade lanes, and that oversupply caused the significant downward pressure on freight rates in 2011. Against this backdrop it's encouraging that the recent substantial general rate increases in these trades, in some cases more than doubling and even trebling previous freight rates, are holding.

Furthermore, you can see from the time charter index at the top of the slide that charter rates in the spot market are beginning to inch up.

Slide eight shows that the fastest-growing trades are in the North-South Non-Mainline arterial trades and in inter-regional trades, such as Intra-Asia, with growth rates of approximately 9% or so. Collectively, these trades represent around 70% of global containerized trade and tend to use small and midsized container ships, a segment that we are particularly interested in as our vessels are largely in this category with 15 of our 17 ships being small to midsized, including the two ships which come up for renewal towards the end of this year.

Slide nine provides an overview of the composition of the existing fleet and the order book. It's worth highlighting that at 25% the ratio of the order book to existing fleet capacity is as at its lowest level since May 2003. In addition, the data suggests that the midsized segment is proportionately under built with a relatively small order book. For example, 2,000 to 5,000 TEU vessels represent only 18% of the order book while accounting for 38% of capacity on the water today.

Given the forecasts of growth in the trades favoring small to midsize vessels and the limited forecast supply growth, we remain hopeful for improved charter rates and asset values for our fleet in due course.

Before turning the call over to Susan I would like to remind you that last year we negotiated and agreed a waiver with our lenders until November 30, 2012, from the loan to value test which would otherwise be required under our credit facility last November and also at April 30 this year. The covenant says that our ratio of outstanding borrowings to the aggregate charter free-market value of the secured vessels cannot exceed 75%.

We continue to reduce our debt on a quarterly basis, but will need to see an improvement in charter free-market values over the next few months, otherwise a further waiver or other relief might be required. However, the next test is still over six months away, the industry is very volatile, asset values and charter rates can improve dramatically over short periods of time, and we simply can't predict where assets will be in October/November. It's also important to remember that asset values have no impact on our operating performance.

I will now turn the call over to Susan.

Thank you, Ian. Please turn to slide 11 for a summary of our financial results for the three months ended March 31, 2012.

With all of our vessels operating on our fixed-rate contracts we generated revenue of $38.4 million in the first quarter, impacted primarily by 48 days off-hire which reflect three planned drydockings, partially offset by 17 additional ownership days owing to 2012 being a leap year. This result is down slightly on revenue of $39.1 million for the comparative period in 2011 in which there were only three days of planned off-hire.

Utilization for the first quarter 2012 was 96.8% versus 99.8% in 2011. During the first quarter we completed three drydockings and have four more scheduled to be completed in 2012. However, we only have two in each of 2013 and 2014 and none in 2015. With a lighter drydocking schedule our results over the next three years will be less affected by planned off-hire days.

Vessel operating expenses were $11.7 million for the first quarter of 2012. The average cost per ownership day was $7,535, up $199, or 2.7%, on $7,336 for the rolling four quarters ended December 31, 2011. The increase is mainly due to planned increased spend on maintenance.

Interest expense, excluding the effect of interest rate derivatives, which do not qualify for hedge accounting, for the three months ended March 31, 2012, was $5.5 million. During the first quarter the Company's borrowings under its credit facility averaged $483.6 million and, with $48 million worth of preferred shares throughout the period, total average borrowings were $531.6 million.

The Company's derivative hedging instruments gave a realized loss of $4.5 million in the three months ended March 31, 2012, for settlement swaps in the period as current LIBOR rates are lower than the average fixed rate. Further, there was a $2.6 million unrealized gain for revaluation of the balance sheet position given current LIBOR levels and movement in the forward curve for interest rates.

At March 31, 2012, interest rate derivatives totaled $580 million against floating-rate debt of $519.8 million, including the preferred shares. As a consequence, the Company is over-hedged, which arises from accelerated amortization of the credit facility debt as well as not incurring additional floating-rate debt which had originally been anticipated to be drawn in connection with the purchase of two 4,250 TEU vessels at the end of 2010.

$253 million worth of the interest rate derivatives, all at a fixed rate of 3.4%, will expire March of 2013. Whilst these interest rate swaps expire we will be paying a floating-rate based on LIBOR on the unhedged portion of our debt, enabling us to take advantage of what we expect to be a lower interest rate environment. In addition, there will be an interest savings from lower overall debt and amortization continues.

Net income for the first quarter was $8 million, including the $2.6 million non-cash interest rate derivatives mark-to-market gain. For the three months ended March 31, 2011, net income was $10.8 million, including a $5 million non-cash interest rate derivative mark-to-market gain. Normalized net income, adjusted for the non-cash items, was $5.3 million for the three months ended March 31, 2012, and $5.9 million for the comparable period.

Slide 12 shows the balance sheet. Key items at the quarter end include cash at $30.1 million; total assets of $937.5 million, of which $883.8 million is vessels; total debt of $519.8 million, including the preferred; and shareholders' equity of $342.3 million. In addition, the balance sheet position of our interest rate swaps was a liability of $42.6 million.

Slide 13 shows our cash flow. Main items to mention here are cash provided by operating activities of $8 million in the first quarter. Capitalized expenditure on drydockings in the quarter was $1.5 million. Finally, as Ian mentioned earlier, we have repaid $11.8 million of our credit facility in the quarter, giving us $127.3 million reduction in debt since commencing amortization of our credit facility balance in Q4 2009.

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

Thanks, Susan. I will conclude our remarks with slide 14, which summarizes our strong position to provide shareholder value over the long term.

First, the operating environment for the liner operators, including CMA CGM, our customer, is improving from substantial freight rate increases. Second, our business model based on long-term fixed-rate time charter contracts insulates us from short-term volatility. We have got contracted revenue of $1.2 billion over an average of eight years on a weighted basis and have got only two charter renewals in the next four, four-and-half years.

Third, with no debt maturity until 2016 and no purchase obligations or commitments, we have no near-term exposure to financing or refinancing risk. Fourth, we continue to pay down debt with our sizable cash flow to significantly reduce our debt and strengthen our balance sheet. Fifth, although we do have exposure to the two charter expiries later this year, we have fewer drydockings scheduled over the last next three calendar years -- 2013, 2014, and 2015 -- and with a significant proportion of our interest rate derivatives expiring early in 2013 there will be a beneficial effect to our cash flow over the next coming years.

Finally, we continue to work to support our equity value for the benefit of our shareholders by aggressively paying down debt and maintaining a stable and predictable business model. We believe that this will enable the Company to reintroduce a dividend payment when we are firmly in compliance with our loan-to-value covenant and are able to provide sustainable dividends over the long term.

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

(Operator Instructions) [Zach Pancratz], [D.R. Zed].

Good morning, Ian. I just had a quick question on the rate that you gave. You said they had moved from $8,000 per day to $10,000 per day on similar ships, the two that are coming off contract late 2012.

Yes, that is right.

And is that $10,000 per day is that based on a one-year charter?

It was six months, I think.

So essentially, you guys wouldn't be looking to do, or maybe you would, a six-month lease? But essentially if you guys did a longer term lease with CMA CGM you would be getting a much higher rate than that $10,000 per day if you did, say, a nine- to 12-year like you have normally done?

Let me answer that in a slightly different way. I don't really want to get into specifics on these two ships.

Normally when the market is soft, as it is today, fixings of relatively short periods of time -- six months, nine months, maybe a year. When the market is very firm then fixings in the spot market tend to be for longer periods of time -- two, three, maybe four years. Ordinarily I would expect us, in a market like it is today, to renew or extend or re-charter for a relatively short period of time.

I am just trying to get a sense of the sensitivity that you said, from $14.8 million to $1.4 million. If you guys did do something longer term it would probably be higher than that $10,000 which makes the $1.4 million kind of your low case scenario.

It could be. The math is reasonably straightforward, but I think, as we said last time, for every $1,000 change in charter rate for these two ships that is $700,000 of revenue and EBITDA in a year. Longer-term charter rates tend to be lower than shorter-term charter rates because they are less risky is all I would say.

And then, as far as asset prices are, are you seeing anything out there? We are getting a little bit tick up in the charter market. Obviously that would be a positive sign for asset prices.

I know the S&P market is pretty dry right now. Are you guys seeing anything out there that points to a better environment for asset prices?

You are absolutely right. Ordinarily, you would expect a stronger charter market to reflect an improved asset values, although there is normally a lag. We are seeing improvements in the spot rates, although it's not terribly dramatic as that chart on one of the slides in the presentation indicated. It's sort of trending upwards rather than going upwards in any dramatic fashion.

There are very few real willing buyer/willing seller S&P transactions at the moment. Most transactions are distressed for whatever reason. The exit of the Malaysian carrier MISC, which was announced back-end of last year, and their disposal of a dozen or so owned vessels in the market is a bit a fire sale and has caused some disruption.

But if charter rates continue to improve then, yes, we would expect over time asset values to improve as well.

Okay. Then my last question would be probably for Michael. What type of scenario is the Board looking at from an LTV perspective? Obviously your debt amortization is accelerating on a percentage basis.

Looking at the Clarkson's Secondhand Price Index, prices right now are only about 10.6% higher than the troughs of 2009. Are you guys kind of putting -- what type of level of asset prices are you guys looking at to the point where you are comfortable with the LTV, say, at 75%, with the debt being paid down going into the end of 2012 and 2013?

I am afraid Michael is not on the call. He couldn't make it today, although he will join our calls in the future.

That is a really difficult question to answer because, as you know and as we said last time, there are two elements to the loan-to-value ratio -- the loan part and the value part. We don't do a great deal about value. We can at the margins do something about the loan element. A big-ticket change to the loan element would be raising capital and repaying debts to bring the outstanding balance down.

We do actively look at the capital markets. We do look at every and all opportunity to raise capital, but we will only proceed if it's in shareholder's best interests. As to when or what level of asset valuation would we require for the Board to be comfortable reinstating a dividend, which may be the thrust of your question, we have not had that debate. It's moot at the moment.

I am just looking at it the cash flow that you guys have -- and if asset prices went nowhere until the end of 2012, if they remained flat, just based on your debt amortization I mean you guys should be able to reach that 75% level by the end of 2012. And then if you do get asset prices a little bit higher then obviously that is in your favor.

But I am just trying to get a sense of are you guys looking at an LTV of like 60% to not only get the interest expense savings but also it gives you more comfortability on the dividend? The reason I ask this is not only would it be a big positive for Michael Gross' stoke, owning 20% of the Company; CMA CGM would also benefit from the dividend.

But you look at the charter, other of your peers in the market, I mean they trade at a significant premium on a price to NAV, those that pay a dividend versus those that don't.

Sure. We understand all of that, Zach. I can only reiterate what we have said on previous calls that the Board and management is committed to reintroducing a dividend just as soon as possible. We need to be firmly in compliance with that loan-to-value test because we want a dividend to be sustainable for the long term. We don't want to turn it off and turn it on; that would be very bad for the stock I would suggest.

I did say in our prepared remarks earlier that notwithstanding paying down debt we will need to see an improvement in asset values over the next few months for us to pass loan to value at the end of November this year. Now that may well happen. The market, as we know, is very volatile and asset values, charter rates, freight rates can respond very positively and very quickly.

But as things stand right now, as I have said, we will need to see asset values improve.

Okay, thank you. Great quarter and best of luck.

Thank you.

Chris Snyder, Sidoti & Co.

Good morning or I guess good afternoon over there. Just has there been any recent transactions that we can kind of look at to see what the prices of these vessels are kind of trending at or current price?

Not that we would consider comparable.

Okay. All right, that was --

As I said, you got these fire sale assets out of the Malaysian carrier, some German owners are selling very small feeder ships to clear out their books, so to speak. There is not a lot of comparable transactions at the moment.

Okay. All right, thank you.

(Operator Instructions) Jay Harris, Goldsmith & Harris.

Ian, who are your significant bank lenders?

There are seven banks in the facility; I will try and get them in order of participation -- DND, SMBC, a Japanese bank, ABN Amro, Citi, KFW, which is German, Bank of Scotland, and HSH. Seven banks, all, at least historically, traditionally strong shipping banks that understand the sector.

Given the turmoil in -- sovereign debt turmoil in continental Europe, do you think we have any exposure?

No, I don't.

Okay, thank you.

There are no further questions at this time. I now hand the conference back to Mr. Ian Webber. Thank you.

Thanks, everybody, for listening. Thank you for your questions. We look forward to giving you a further update on the Company, particularly on the charter renewals, for our second-quarter call which will be in August. Thank you.

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