Global Ship Lease Inc (GSL) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Global Ship Lease Q2 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference will be recorded.

I would now like to introduce your host for today's conference, Mr. Ian Webber, Chief Executive Officer of Global Ship Lease. Please go ahead.

Thank you very much. Good morning, everyone, and thank you for joining us. Hopefully, you've been able to look at the earnings release that we issued earlier today and also been able to access the slides that accompany this call.

The normal warnings, Slides 1 and 2 reminds you that the call today may include forward-looking statements that are based on current expectations and assumptions and are, by their very 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 most recent Annual Report on Form 20-F, which is for 2015 and which was filed with the SEC on April this year. You can obtain this form annual report via our websites or via the SEC's.

All of our statements -- excuse me -- all of our statements today 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 reconciliation 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 this morning, which is also available on our website.

As usual, I'll begin with a brief review of our results for the second quarter followed by an overview of our fleets' charter portfolio and our growth strategy. After that, Tom Lister, our Chief Commercial Officer, will provide an update on the market and Susan Cook, our CFO, will give financial highlights. Then after some brief concluding remarks from me, we would, as always, be happy to take your questions.

Turning to Slide 3, we once again generated stable predictable earnings in the quarter with our full fleets, 18 vessels continuing to service long-term fixed rate time charters with strong counterparties.

Revenue for the quarter was $41.3 million with a reported net income of $6 million and normalized net income of $5.6 million. This excludes a gain which we made on the purchase and subsequent cancellation of $4.2 million of our bonds.

Our normalized net income was up significantly at $5.6 million compared to the $2.9 million in the prior period. This increase is due mainly to the contribution of the third OOCL vessels which we bought last autumn and the elimination of negative earnings from the two vessels which we scrapped last December last year and further from reduced operating costs where we have a particular focus just now.

Adjusted EBITDA was just on the $29 million, at $28.8 million. As just said, we retired 40 - sorry -- $4.2 million principal amounts of our 10% notes which we purchased in what is a very thin open market during the second quarter. And this debt reduction follows the purchase and cancellation of $26.7 million principal amount of notes in the first quarter under the tender offers which were requirements of the terms in our bond.

Improved earnings and reduced outstanding net debt have lowered our net debt to last 12 months adjusted EBITDA from four times, 4.0 times, at the end of 2015 and 3.5 times as of June 30 this year. All things equal, that ratio should continue to improve.

Turning to Slide 4, the points that I would like to emphasize here is the high degree of consistency and predictability in our results. As our long-term fixed rate charters of high quality of operations yield consistently high cash flows from quarter to quarter and year to year.

Given our business model, historic variations in our results from quarter to quarter or year to year have been closely tied to our acquisition of the three vessels from OOCL on three-year sale and leaseback transactions since late 2014. The disposal of our two oldest vessels in late 2015 and the incidents of periodic which is essentially every five years for each vessel corresponding to the anniversary of their build dates, periodic regulatory dry-dockings when vessel is out of services, and thus not earning revenue for approximately two weeks each time.

In this second quarter 2016, we have three vessels in dry-dock. One of which was almost completed and hangover into July by a couple of days. Those three ships between them accumulated 51 days of planned off-hire.

I'm pleased to say that all of our charters continue to perform and we remained fully insulated from the spot markets through that lease late 2017 as you can see in more detail on Slide 5. This is our charter portfolio with 4.3 years of weighted average remaining contract coverage and as I mentioned, a zero exposure to the spot charter markets until at least late 2017.

These contracts amount to just over $700 million of fully locked-in revenues. And as you can see, charter portfolio has staggered expires to ensure that we don't have excessive exposure to renewals at any one point in the cycle noting that the charter for our larger ship which has the highest day rates, the CMA CGM Thalassa, the charter of that ship runs through 2025. I would also emphasize that most of our vessels coming off charter towards the end of 2017 are among our smallest and lower earning charters.

Turning to Slide 6, we've outlined the strategic vision for the company, this is consistent quarter on quarter. Moving forward, we continue to focus on growing our fleet of mid-sized and smaller vessels in a prudent, patient, and opportunistic manner maintaining our focus on immediately accretive multiyear charters and high quality counterparties and further diversifying our charter portfolio where possible, adding new customers to our customer list.

We also look to identify opportunities to enhance our capital structure which is supported by our long-term contracted cash flows. As we've done in the past, we'll continue to actively manage our balance sheet by seeking to decrease our cost of capital, maintaining financial flexibility, and deleveraging on an opportunistic basis.

In addition, we'll continue to look to utilize our strong balance sheet, stable business model and proven access to capital along with our current immediately available liquidity to see attractively priced immediately accretive vessel acquisitions particularly as the ongoing market downturn continues.

With that, I'd now like to hand over to Tom Lister for some commentary on that market.

Thanks, Ian. Broadly speaking, market trends have continued in line with those discussed on our Q1 earnings call albeit against the backdrop of heightened uncertainty in the wake of the UK's Brexit referendum, the national, regional and global implications of which remained unclear.

On July 19th, the IMF released an update to its world economic outlook highlighting this uncertainty and downwardly adjusting growth forecast accordingly. So near-term risks to global growth and trade remain weighted to the downside, underscoring the value of our strong chart contract coverage. However, we expect industry fundamentals particularly for the smaller and midsized ship segments upon which GSL is focused to improve in the medium term.

So turning to Slide 7, containerized trade growth in the first half of 2016 has remained weak with full-year growth forecast now below 4%. Fortunately, supply side growth is also down with 2016 growth forecast in the high ones to mid-2s. The expectation demand growth will outgrow supply growth this year and potentially also in 2017 is certainly encouraging. However, it's important to note that the starting point is one of latent oversupply with idle capacity close to 5%. We'll come back to this later in the presentation.

Meantime, the liner industry continues to face challenging times with the early peak season disappointing especially in the mainlane trades. However, as you can see from the chart at the bottom right of the slide, growth prospects in non-mainlane trades which collectively represent around 70% global containerized trade volumes, the largest trade group being Intra Asia are better, although still somewhat lackluster. These non-mainlane trades are typically serviced by mid-size and smaller tonnage as the focus of our fleet.

Slide 8 shows that the weak near-term fundamentals have kept spot market charter rates under pressure. The right-hand chart illustrates spot rates for shop sizes captured by the various indices are at or around OpEx continuing the trend discussed on the previous earnings call.

And just to remind you, it is really on median size or smaller ships, those no larger than 10,000 TEU, that participate in the spot charter market. Larger ships drive around liner companies' balance sheets being directly owned more are subject to long-term financing type charters.

As you would expect, you can see on the left-hand chart, weakness in spot market earnings also puts pressure on prices for second-hand ships. Although painful, these weak near-term fundamentals are helpful to the industry's medium-term prospects. They catalyze increased scrapping.

That brings us to Slide 9 where you can see the scrapping activity is indeed on the rise. As of mid-July, usually a period of seasonally higher utilization, idle capacity stood at around 4.7%, most of which about 85% by number of ships with lessor rather than liner company owned.

This reflects the stress the sector is under and despite scrap price volatility explains why at least 300,000 TEU was scrapped in the first half of 2016. This is more than three times the volume sent the breakers during the first half of 2015 and over one and a half times for the whole of that year.

We expect this momentum to continue and hopefully accelerate. All scrapping activities to date have been focused mid-size and smaller tonnage for which lessor ownership is disproportionately high helping to tighten supply side prospects for these size segments going forward.

Slide 10 highlights the importance of mid-size and smaller tonnage which are the segments upon which Global Ship Lease continues to focus to the industry. The main chart shows the average ship size and maximum ship size deployed in the two dozen trade lane groupings which constitute global container trade.

The point here is that mid-size and smaller ships, i.e., those 10,000 TEU or less, are key to most trade lanes while really big ships are deployed only a handful of trades most notably Asia, Europe and the Transpacific. At the end of 2015, between 1,500 and 1,600 ships or approximately 30% of the global fleet were deployed in a single trade grouping, Intra-Asia. Of these 1,500 to 1,600 vessels, only 11 were larger than 5,200 TEU while nearly 1,300, so more than 80%, were smaller than 2,000 TEU.

By the end of this year, the impact on vessel deployment of the new Panama Canal Locks which opened in late June will be clearer, but we're already seeing some of the old Panamax tonnage being displaced by vessels of 6,500 to 9,000 TEU.

Slide 11 looks at how the global container fleet has evolved since 2000. One of the main takeaways for this slide is that the order book-to-fleet ratio which is the red line cutting through the middle of the main chart which peaked today over 60% in 2007, has since fallen below 20% as the industry has recalibrated to a lower growth paradigm.

Indeed, with new building contracting activity slowing further during 2016, the ratio at end June had fallen as low as 17.5%, more significantly for Global Ship Lease as a smaller chart on the right-hand side demonstrates smaller mid-sized vessels are underrepresented in the order book with order book-to-fleet ratio segments below 10,000 TEU in the 2.4% to 7.9% range.

So to conclude this section, I would like to underline the following points. One, the world in general in container shipping in particular face significant challenges and uncertainties in the near term.

Two, in our industry, we believe that containership lessors with significant near-term exposure to the spot market will face particular challenges which, in turn, we expect to drive increased scrapping, which is good, and generate purchase opportunities, also good.

Point three, pressure on liner companies themselves may generate attractive set of leaseback opportunities which are particular interest to us. Four, limited new building investments in mid-size and smaller ship sizes combined with accelerated scrapping should tighten the supply of these vessel segments going forward.

These factors, together with the continued demand for such tonnage in the trade lanes representing around 70% containerized trade and tending to show the most robust growth, suggest favorable prospects for mid-sized and smaller ships in the medium-term.

Five, since our Q1 call when we talked some liner consolidation and emergence of the new mega alliances, CMA CGM has completed its acquisition of NOL. Hapag-Lloyd and UASC have announced their intent to merge and the alliances have continued to take shape. We see these developments as positive to the industry as they should enhance stability and discipline over time.

Finally, six, with our charter coverage, industry leading counterparties and continued focus upon mid-size and smaller tonnage, we believe Global Ship Lease is well positioned to weather the challenges of the near term and build value over the medium and long term.

With that, I'll pass the call over to Susan Cook to run through the financials.

Thanks, Tom. Please turn to slide 13 for a summary of our financial results for the three months ended June 30, 2016. We generated revenue of $41.3 million during the second quarter, up $0.3 million from revenue of $41 million in the comparative 2015 period.

As an increased level of off-hire from regulatory dry-docking during the quarter and loss of revenue after the sale of our two oldest vessels in late 2015 largely offset the increased revenues related to the vessels supplied for OOCL. With 51 days of planned off-hire for scheduled dry-docking and two days of unplanned off-hire, utilization was 96.8%.

Our vessel operating expenses were $11.3 million, down 10.7% from the prior year period. Importantly, average costs per ownership day during the quarter of $6,909 was $418 left per day or 5.7% lower than last year's second quarter mostly due to lower unit prices on lubricating oil, reduced insurance costs on renewals and from the timings of repairs and maintenance.

Interest expense at $11.1 million was down $0.7 million on the interest in the comparative 2015 period primarily related to our purchase and cancelations of a portion of our outstanding 10% notes with $4.2 million of notes purchased in the current quarter and $26.7 million as a result of the tender offer in the previous quarter. We also recognize an associated gain on the purchase in the current quarter of $0.5 million.

The next slide, Slide 14, shows the balance sheet. Key items as of June 30, 2016, includes cash at $50.3 million, total assets $883.4 million of which $828 million is vessels. Our total debt was $457.2 million down by $35.5 million from the yearend with net debt at $407 million, and shareholders' equity of $407.5 million.

The next slide, Slide 15 shows our cash flows. The main items to mention here are net cash provided by operating activities at $27.2 million in the second quarter, and as previously mentioned, the purchase and cancellation of $4.2 million principal of our notes to discount.

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

Thank you, Susan. If you'd like to turn to slide 16, I'll briefly summarize and then we can move on to Q&A.

Our internal fleet remains chartered to high quality counterparties through at least late 2017 providing us with total insulation from the current market depression and ensuring that we continue to benefit from stability and predictability of our long-term cash flows.

We've got contracted revenues just of $700 million over a weighted average remaining duration of 4.3 years. Our consistent operational performance and long-term contracted cash flows positioned us well to seize attractive opportunities that exist in a depressed container shipping market for a vessel owner with a strong balance sheet and proven access to capital.

We are willing and able to make investments at this point in the cycle and as such, we can continue to engage in discussions with potential counterparties regarding future fleet growth opportunities having already added more than 35% to our run rate adjusted EBITDA through the three charter-attached vessel acquisitions from OOCL since we initiated that growth strategy.

We will, of course, remained disciplined and pursue only those opportunities that meet our strict criteria and support long-term value creation to our shareholders. I'd also reiterate here that we're focused on immediately accretive charter-attached transactions and not distressed assets that are either laid up or seeking employment in the spot charter market.

We expect that the negative near-term prospects for such vessels will continue to contribute to higher than normal levels of vessel scrapping which in tandem with the low levels of new vessel ordering will help drive our industry towards balance.

We'll also continue to pursue capital structure enhancements on an opportunistic basis as we did by purchasing and subsequently cancelling the $4.2 million of our outstanding notes in the second quarter and which will help to bring our net debt to adjusted 12 months EBITDA on a trailing basis from four times at the end of 2015 to 3.5 times as of June 30 this year. We have no significant refinancing requirements until 2019.

By following this strategy we've outlined here to which we've been committed for some little while, we believe that Global Ship Lease is well positioned to seize opportunities in the current market environment to utilize our strong balance sheet, reputation as a high quality vessel owner and our access to growth capital to create long-term value for our shareholders.

With that, that concludes our prepared remarks and we will be happy to take your questions, so if I turn the call back to the operator.

Thank you. (Operator Instructions). And our first question comes from Phil Larson with Millstreet Capital. Your line is open.

Hi, guys. Congrats on a solid quarter. I was just wondering, have you repurchased any notes subsequent to the end of the quarter?

Well, you'd have to wait and see when we report Q3. I would say the market is very thin and also, actually, for the month of July, we're in a close period. So it's actually fairly easy for me to say, no, we haven't because to do so would have broken our insider trading policy.

Fair enough. And then the other question I had, I was wondering if you could give us a little more color on vessel acquisitions. Are you seeing a lot of opportunities? Are you getting close on anything?

Well, I'll turn the question over to Tom after a couple of remarks. I mean, we would never discuss or speculate on specific opportunities. We do have some active files that we're working on as we always do. But with that, maybe Tom could comment on the quantum and type of opportunities that we see.

Sure. Certainly, we are seeing in terms of perspective deal flow more activity in the sector. I can give you a stat for the number of sales that we have actually seen take place in the markets during the first half of this year and the opposite to that has run about 74 ships have changed hands and that's in addition to the sort of acceleration scrapping activity that we've seen. So we are seeing additional opportunities bubble up. But to sort of reiterate the remark Ian made during this prepared comments, we can afford to be rather highly selective and rather patient in making sure that we go after the right deals that meet our return criteria.

Okay. Great. Thank you.

Pleasure.

Thank you. (Operator Instructions). Our next question comes from Mark Suarez with McQuilling Holdings. Your line is open.

Good morning, guys. Thanks for taking my question here.

Hi, Mark.

Maybe we can start with the sort of -- I have a couple of macro of questions to you, Tom. I know you mentioned liner consolidation. We have seen a lot of financial distress lately as you well know with some of the Koreans. Do you expect this trend to continue and do you see there a risk to have a cascading effect with some of the other larger liner companies? I know that CMA CGM is in a very good position here, but I'm wondering outside of that, do you see increased risk as we go through 2016?

Well, that's a huge question, Mark, which we can't answer other than indirectly. Yes, you're right in passing. We are pleased to have two quality liner majors as our customers and our charters, as I say, continue to perform, we have no risk on charter or anything like that, very different to the Korean situation that you mentioned.

The liner sector as parts of the ownership sector is under pressure, continuing pressure. However, the sector has gotten used to this environment and has been able to survive in large measure for the last eight years or however long it has been since the downturn. And many people's balance sheets are much stronger than they were as both have got more prudent and, yes, perhaps little more disciplined in ordering of ships. And more controlled in the way that they are prepared to stretch their balance sheet to support further investments.

Can we or anybody rule out causalities in the liner sector? Well, no. And what effect would that have on the industry; obviously, as a disaster for the individual company concerned and its workforce. But it would introduce the potential for a little more discipline perhaps particularly on vessel ordering. But in the near-term, the ships are still there. So the capacity is still there.

But you have seen over the last dozen years, 20 years, quite lot of consolidation on the ownership sector -- sorry, in the liner sector, the operator sector which remains somewhat fragmented.

Just broadening it slightly, consolidation in the ownership sector, historically hasn't been very much of that the advantage of doing so are less clear. And there would be some synergy saving on the operation side perhaps the biggest benefit from bigger is better on ownership side is access to capital. Maybe there will be some consolidation on that side of our industry as well. Well, we have to wait and see.

Mark, just to add Ian's comments, as the industry is under some pressure at the moment, one potentially positive outcome of that for companies such as Global Ship Lease is that liner companies look to manage their fleet resources and their balance sheet and their liquidity needs and what comes out of that often is, for example, sale in lease-backed transaction which are our bread and butter.

Right. And so that was going to be sort of my second question that you laid in. Have you seen in fact that increase in sales leasebacks, inbound calls going to you guys or you can maybe explore those opportunities as you -- you need to see those some of that balance sheet being in a little bit more pressure than in the past with some of these liner companies.

Well, I think as Ian has said, we have various open files. And I wouldn't really want to add anything more to that at this stage.

Okay. And then maybe specifically on your fleet. I've noticed obviously we talked about this in the past in terms of the geared between 2,000 and 3,000 vessels. I know that you are going to have four of those ships come up for renewal in 2017 third quarter, and I'm wondering if you have a good view of what those vessels are going out for in terms of weight for those particular route, I'm guessing those vessels are employed in Intra-Asia. Is that correct?

No. They are not actually. They are sort of East Africa, some of them. But to answer your question, we have got a reasonable idea about what these ships would earn in today's market. But they don't come open for another well over a year. And we wouldn't start or engage in a discussion with the charterer in this case CMA CGM in the ordinary course until a few short weeks before the normal expiry of those charters.

And as Tom said and we've said before with a modest order book, with accelerated rates of scrapping and with the general shortage particularly of geared vessels in the mid-size and smaller sector we would hope for an improvement in charter rates on today's level.

Okay. And I guess my last question relates to your vessel operating expenses, I've noticed it's actually come down, I guess, over the past two quarters on a year-over-year, I'm wondering is that a reasonable run rate to sort of assume as we go forward. And on the SG&A, I also saw significant drop on that overhead cost and I'm wondering if that's also good run rate or you feel that that's going to bounce back as we move to the second half?

Yes. I said in my remarks that we are focusing extra effort. I mean we always love to control cost but we've [look] specifically at operating costs, in a top operating environment, it's what you would expect to a management team to do. And we've been able to realize savings on insurance renewals which by and large we've been doing over the last half dozen years anyway.

We've also save some money on crew costs by changing the mix of crews. And some of the reductions in operating cost is probably really tough, is very tough to tell down through the timing of repairs, auxiliary engines, generators, for example. And then furthermore, compared to last year, we have disposed of the Orion and Aquarius, our 4000 [knot] TEU vessels which were relatively expensive to run because they were much older and slightly difficult ships to run. So there is a mix [effect] as well.

Is today's level indicative of the rates going forward? I hope so. And I wouldn't be at all surprised if the rate nudged up a little due to timing effect of major repairs or maintenance. But I think directionally, we continue to strive to reduce those costs.

On SG&A overhead which is relatively modest on a quarterly basis? It doesn't take much of change in level of activity. For example the incurrence of legal fees for whatever reasons whether it's aborted projects or whatever, up or down to change the relative cost from quarter-to-quarter which is running at between $1.5 million and $1.7 million.

Okay. Appreciate the color, guys. Thanks for your time as always.

Yes. Going forward actually operating costs and overhead might benefit modestly from the Brexit effect. Our revenue is all US dollars and we use those dollars to buy sterling and euros and for some crew costs and most or much of our overhead cost. Obviously with the stronger dollar relative to the pound and euro, it costs fewer dollars to buy those currencies and that's a near-term positive effect on our results. Pretty modest but worth observing.

Sure. Understood. Thanks.

Thank you. I am showing no further questions at this time. I'd like to turn the call back to Mr. Ian Webber for any closing remarks.

Thank you very much. Thanks for listening. Thank you for your questions. And we look forward to giving our further update late October, early November on our third quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.