Global Ship Lease Inc (GSL) 2016 Q3 法說會逐字稿

Good morning, everybody, and thank you for joining us. I hope you've been able to look through the earnings release that we issued earlier today and been able to access the slides that accompany this call.

As usual Slides 1 and 2 remind you that the call 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 most recent Annual Report on Form 20-F, which is for the year 2015, and was filed with the SEC in April 15, 2016. You can obtain this on our Web Site or via the SEC's. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. And we don't 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 in accordance with GAAP, you should refer to the earnings release that we issued this morning.

As usual, I'll begin today's presentation with an overview of our results for the third quarter of 2016, followed by a review of our fleets, charter portfolio and growth strategy. After that, Chief Commercial Officer, Tom Lister will provide an update on the container shipping industry. And Susan Cook, our Chief Financial Officer, will give financial highlights. I'll then return for a brief summary after which we'll be happy to take your questions.

Turning to Slide 3, we continued to generate stable cash flows from our long-term fixed rate time charter with strong counter parties. Our revenue for the quarter was $41.2 million and after non-cash impairment charge $29.4 million we posted a net loss of $23.7 million.

The U.S. GAAP impairment test, which gave rise to that charge was triggered by the amendments to extend the charters on two of our 2,200 TE vessels, which amendments reduce our midterm exposure to the spot market, as entirely at our option, we can expand these charters potentially to the end of 2020 compared to the late 2017 previously.

Excluding the effect of our non-cash impairment, our normalized net income was $5.2 million for the quarter up from $3.6 million in third quarter 2015, with the increase due to the contribution about third of OOCL vessel purchased in September 2015 contributing a full quarter's results to this year.

The elimination of negative earnings from two vessels, which we scrapped in December 2015 -- Aquarius and Orion -- reduced operating costs and lowered interest cost resulting from redeeming some $36 million nominal value of our 10% bonds. These purchases were made year-to-date in 2016. Adjusted EBITDA for the quarter was $28.1 million.

Turning to Slide 4, I'll point you as usual to the bottom half of the slide where you can see our highly consistent earnings and cash flow track record, which is supported by our strong asset utilization, our long-term fixed rate charters and high quality financially sound counter parties.

This spans an increasing contrast with the top half of the slide, where you can see wide swings in the broader time charter index, which is representative of the spot markets and which is currently close to if not actually at, all-time lows.

The variations that do exist in our results overtime are related to our three charter attached vessel acquisitions commencing October 2014, which obviously adds revenue and earnings to our business; from cost savings which we generate over time; from the regulatory dry docking schedule, which takes each ship out of service to 10 days to 15 days every five years and therefore reduces revenue and our explosive to the spot markets on the two vessels which I referred to earlier - the '96- and '97-built vessels, which had initial charters to CMA CGM up to September 2012.

Consequently, they were exposed to the spot markets and lower earnings from 2012 until we sold them in late 2015. Aside from these two vessels we have remained fully and quite intentionally insulated from the broader market throughout our entire history.

Slide 5 shows more detail on our 18 vessel carter portfolio, all of which continue to perform as anticipated. With the weighted average remaining contract duration of 4.2 years and no exposure to the spot market through late 2017, we have approximately $680 million of contracted revenues and considerable forward visibility. We have staggered charter expiries to ensure that we maintain a limited exposure to renewals in any one particular period.

And you'll noticed that our highest paying charter for the 11,000 TEU CMA CGM -- the latter extends through 2025 -- was two of our three vessels coming off charter -- kind of the other end of the spectrum. Two of the three vessels coming off charter in late 2017. But Delmas Keta from the Julie Delmas are among the lowest earnings vessels in our fleet.

You will also see in the two horizontal red boxes the extension periods that we secured for the two vessels previously coming off charter at the end of next year. We now have three successive options of approximately 1 year each from September 17 through to the end of 2018 for calendar year 2019 and calendar year 2020 at an agreed rate, which would if exercised extend of the charters on a Kumasi and Marie Delmas to the end of 2020 at a rate of $9,800 per day.

Obviously, if the charter markets recovers and the spot market earnings are greater than $9,800 per day we can allow these options to lapse and put the vessels to work in the spot market. In this way we've got downside protection -- three years at $9,800 per day in a challenging markets while retaining the ability to benefit from a market recovery.

Turning now to Slide 6, given the difficult conditions in the broader markets, which have been brought into sharp focus by the failure of Hanjin, the Korean carrier, I'd like to take a moment to discuss on our principal counsel party -- CMA CGM -- and why we take comfort from having them as charterer for 15 of our 18 vessels. These charters incidentally represent approximately 70% of our revenue.

First of all as many of you likely know, Global Ship Lease's relationship with CMA CGM back to our founding as a spin off from their business part of their fleet and they continue to be a crucial partner in our business -- not only as our largest shareholder at some 44% to 45% of the equity -- but also as our main charterer and ship manager.

While GSL is fully independent from CMA CGM, we maintain a strong working and strategic relationship with them. They've fulfilled all of their charter obligations to us since we were formed in 2007, about a year before becoming public in August of 2008. Which period represents the worst, i.e., the deepest and the longest, cyclical down turn our industry has even seen. Our charters continue to perform despite this turmoil.

Looking at CMA CGM's standing in the global fleet you will see in the upper left of this slide that they have the third largest container ship fleet, which actually totaled 532 vessels at June 30, 2016, including the acquisition of APL. We at GSL contribute 15 of its 532 vessels.

CMA CGM's market position, the scale, economics, the way they run the business and their early investments in larger unit cost efficient tonnage are some of the reasons why they have been able to consistently outperform the industry, as you can see in the lower left chart.

Our other, charterer, OOCL -- Orient Overseas Contain Lines -- represents approximately 23% of our revenue on the three 8,000 TEU vessels which we've honored over a 12 month period from October 2014 under sale and lease back arrangements. OOCL ranks number eight in the world by capacity, with some 98 vessels in their fleet. They are another first class partner and have also performed fully on their charters with us since inception.

If you'll now move to Slide 7, we've outlined our strategy for GSL. We remain to open to pursuing growth opportunities in the mid-size and smaller vessel classes, if we can secure charter attached acquisitions that are immediately cash generative with strong return metrics and that are credit enhancing by bolstering our charter portfolio with strong counter parties.

We continue to peruse this avenue of growth patiently and opportunistically foregoing potential acquisitions that do not meet our strict criteria. We also continue to actively manage our balance sheet where opportunities exist to decrease our cost of capital, strengthen our financial flexibility and to delever on attractive terms.

To this end we bought a further $5 million nominal value of bonds in the market in the third quarter, posting a $475,000 gain as they were bought below comp. And obviously we reduced further our ongoing interest costs by counseling those promised.

Our stable long term contracting cash flows and forward looking visibility continues to support these efforts despite the current industry down turn. We will continue to seek opportunities to strengthen our financial and strategic position. In an environment where access to capital is constrains, we believe that we're well positioned to take advantage of sensible and suitable opportunities that exist and are for those with such access.

I'd now like to hand over to Tom for some comments on the market.

While our fleet has remained fully employed on long-term contracts, 2016 has been a tough year for the overall industry, to put it mildly. The macroeconomic backdrop has been challenging with super national bodies such as the IMF, OECD and WTO marking down growth forecasts as the year has progressed. Geopolitical and socioeconomic uncertainty have been on the rise, marked among other things by turmoil in the Middle East, the Brexit referendum and the ongoing presidential election in the U.S.

In the third quarter, we've seen a meltdown of Hanjin Shipping, formally the seventh largest container line. This has put pressure on related parties throughout the supply chain from cargo interests to stevedores and charter owners, the ramifications of which are still playing out. The short-term pain -- and in some instances uplift -- this is causing has been well documented in the press.

However, Hanjin's travails may also serve with the useful wakeup call for the industry about "unsustainable freight rates" and by extension, spot market charter rates are just that -- unsustainable. Time will tell whether or not this lesson is absorbed, but as we will argue in the next few slides, a very challenging market in the short term, as high scrapping, low ordering and potentially further consolidation may sow the seeds of recovery in the medium term.

Our thesis is that midsized and smaller sized segments -- upon which Global Shipping continues to focus -- hold the best prospects for such a recovery in due course. But it will take time.

Turning to Slide 8. Containerized trade growth in the first nine months of 2016 has remained weak with full year growth forecast now below 3.5%. Fortunately, supply side growth is also down, with 2016 growth forecasts in the high ones to low twos with a heavy majority of this new supply coming from the largest vessel segments.

The expectation that demand growth will outgrow supply growth this year -- and potentially also in 2017 -- is certainly a step in the right direction. However, and as we pointed out from the previous call, it's important to note that the starting point is one of latent oversupply with idle capacity as at mid-October standing at 7.6%.

Turning to the liner operators, although some carriers enjoyed a short-term boost to liftings and freight rates as Hanjin cargo was rerouted, the line effect continues to face volatile and challenging times -

Ladies and gentlemen, please standby. Sir, you may begin.

Our apologies for that; I don't know what happened. We'll start with Tom on Slide 8 of the presentation.

Right. Thanks, Ian. Apologies if you've heard some this before. Containerized trade growth in the first nine months of 2016 has remained weak with full year growth forecasts now below 3.5%. Fortunately, supply side growth is also down, with 2016 growth forecasts in the high ones to low twos with a heavy majority of this new supply coming from the largest vessel segments.

The expectation that demand growth will outgrow supply growth this year -- and potentially also in 2017 -- is certainly a step in the right direction. However, as we pointed out in the previous call, it's important to note the starting point is one of latent oversupply with idle capacity as of mid-October standing at 7.6%.

Turning to the liner operations. Although some carriers enjoyed a short term boost to liftings and freight rates as Hanjin cargo was rerouted the line effect continues to face volatile and challenging times, especially in the mainlane trades such as Asia and Europe.

Growth prospects on the other hand in non-mainlane trades, which, as you can see from the chart on the right hand side of the slide, collectively represent about 70% global containerized trade volumes -- the largest trade grouping being intra-Asia as somewhat better. These non-mainlane trades are typically serviced by mid-size smaller tonnage, the focus of our fleet and of our growth strategy.

Slide 9 shows that the weak near term fundamentals have kept spot charter rates under pressure. The right-hand chart illustrates spot rates for ship sizes captured by the various indices have converged on OpEx continuing the trend discussed on previous calls. And just to remind you, it is really only medium sized and smaller ships no larger than 9,000 or 10,000 TEU that participate in the spot charter market. Larger ships are either on Liner Company's balance sheet being directly owned or are subject to long-term financing type charters.

As you would expect and can see from the left-hand chart, weakness in spot market earnings also puts pressure on prices for secondhand ships. Although painful, these weak near term fundamentals are helpful to the industry's medium term prospects if they catalyze increased scrapping and also down from the lines and owners' appetite for new orders.

That brings us to Slide 10, where you can see that scrapping activity is indeed on the rise. As mentioned earlier at mid October, idle capacity stood at 7.6%, amounting to nearly 400 ships and over 1.5 million TEU. 87% of these idle ships are lessor owned.

This reflects the stress the sector is under -- and despite scrap price volatility -- explains why over 0.5 million TEU -- or 144 ships -- were scrapped in the first nine months of 2016. By broker estimates, 126,000 TEU or so have been committed for demo sale in the last 30 days alone. This is striking, particularly when compared to scraping activity last year.

Year-to-date 2016, the industry has already scrapped almost three times the capacity scrapped in the whole of 2015. Another useful metric, the capacity scrapped to date in 2016 equates to around 75% of new capacity delivered from the yards during this same period. Tellingly, most of the new deliveries were big ships, while most of the scrapping continues to be focused on mid-sized and smaller vessels, for which lessor ownership -- and specifically German KG ownership -- is disproportionately high.

So we're in fact looking at negative net fleet growth in most fleet segments below 8,000 TEU. We expect this momentum to continue and hopefully accelerate, helping to improve supply side prospects for the mid-size and smaller tonnage segments upon which Global Ship Lease continues to focus over the medium term.

Slide 11 highlights the importance of mid-sized and smaller tonnage in the industry. The main chart shows the average ship size and maximum ship size deployed in the two dozen trade lane grouping, which constitutes global container trade. The point here -- despite what you may intuit when reading of the tonnage cascade -- is that mid-sized and smaller ships, i.e., those 10,000 TEU or less, remain key to most trade lanes, while the really big ships are deployed in 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 by ship number -- 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 maybe 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 locks -- which opened in late June will be clearer -- but we're already seeing some quote-unquote, old Panamax tonnage, being displaced by vessels of 6,500 to 9,000 TEU. Unsurprisingly, this is accelerating scraping of old style Panamax tonnage; indeed the youngest vessel to go to the break room this year has been a ten year old Panamax.

Slide 12 looks at how the global container fleet has evolved since 2000. One of the main takeaways from the slide is the orderbook-to-fleet ratio -- which is the red line cutting through the middle of the main chart which peaked at 60% in 2007 -- has fallen below 20% over the last few years as the industry has recalibrated ordering activity to lower growth expectations.

Contraction has continued to slow materially during 2016. New orders placed during the first nine months of the year amounted to a little under a 230,000 TEU. Contrast that with over 2.1 million TEU ordered during the same period of 2015. This has pushed the orderbook-to-fleet ratio at September 30th this year down 16.3% -- the lowest level we have seen since the lease at the start of 2000.

More significantly for Global Ship Lease -- as the smaller chart on the right hand side demonstrates -- small and mid-size vessels are underrepresented in new orderbook. Containership lessors with significant near-term exposure to the spot market will face particular challenges, which, in turn, we expect to drive increased scrapping.

Three, pressure on liner companies themselves may generate attractive sales and lease back opportunities, which are of particular interest to us.

Four, limited new building investment 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% of containerized trade intending to show the most robust growth -- suggest us with the most favorable prospects for recovery over time will be for mid-size and smaller ships.

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

I'll now pass the call over to Susan Cook to run through the financials.

Please turn to Slide 14 for a summary of our financial results for the three months ended September 30, 2016.

We generated revenue of $41.2 million during the third quarter, down $1 million from revenue of $42.2 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 was largely was offset by increased revenues related to the third vessel we acquired from OOCL.

With 38 days of planned off-hires, for the three scheduled drydockings completed in the quarter -- of which one was commenced in the second quarter and no unplanned off-hire -- utilization was 97.7%. We have one drydocking scheduled for fourth quarter for a total of six in the full year.

Vessel operating expenses were $11.8 million, down 7.7% from the prior year period due to 6% fewer ownership days after the disposal of two vessels in fourth quarter 2015 and also importantly from reduced average cost per ownership day, which was $7,103 for the quarter -- $130 less per day -- or 1.8% lower -- than last year's third quarter.

Interest expense was $11.1 million, down $1 million on the interest in comparative 2015 period, primarily related to our purchase and cancellation in this year of $35.9 million of our outstanding 10% notes. $26.7 million of notes were purchased as a result of the tender offer in March 2016. And $9.2 million of the notes were purchased in the open market, $5 million of which was in August.

Slide 15 shows the balance sheet. Key terms of as of September 30th, 2016 include cash at $48.8 million, total assets of $844.6 million, of which $791.5 million is vessels. Our total debt was $450.3 million, down $42.4 million since the year-end from a combination of the note purchases I've just mentioned and regular amortization of our secured term loan. Net debt at the end of the quarter was $401.5 million. And shareholders' equity of $383.9 million.

The next slide, Slide 16, shows our cash flows. And main items to mention here the net cash provided by operating activities was $8.9 million in the third quarter and the purchase and cancellation of the $5 million principle of notes for $4.5 million.

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

If you would like to turn to Slide 17, I'll give you a brief summary and then we can move to your questions.

Our long-term charters with high quality counterparties in CMA CGM and OOCL give us full insulation through late 2017 from the current downturn and the uncertain near term outlook. Indeed, we've expanded two of our earliest expiring charters through 2020 entirely at our option, bringing our contracted revenue to $680 million over a weighted average period of 4.2 years. As such, we will continue to receive stable predictable cash flows despite the generally distressed market.

Since the inception of our growth strategy in 2014, we've increased our EBITDA by 35% or so whilst also diversifying our charter portfolio through the inclusion of OOCL. We believe that additional relatively small scale immediately accretive charterer tax growth opportunities exist in the markets. And our steady cash flows and access to grow capital position us well to seize on those opportunities if and when they meet our highly selective criteria. Any such growth would have to be credit enhancing.

Simultaneously, our ready liquidity gives us the opportunity to pursue proactive delevering of our balance sheet by buying back our bonds at attractive prices. We've made progress on this front by reducing net debt to EBITDA ratio from four times at the end of the 2015 to approximately 3.7 times at the end of third quarter, 2016.

We have no material refinancings until 2019 and we have largely eliminated both restrictive maintenance covenants and short-term debt, enabling us to focus our efforts and capital on strengthening the Company for the longer term.

As a current severe downturn continues to lead record levels of scrapping and very limited levels of new vessel ordering, particularly in the mid-size and smaller segments where we focus, we believe that our strong financial position, consistent high quality operations and strategic approach that we've outlined here are what enabled Global Ship Lease to maximize value for our shareholders, not only by demonstrating resilience and stability in a challenging market, but also by being well positioned to thrive in the eventual recovery.

That concludes prepared remarks. We would now be happy to take your questions.

(Operator Instructions)

And we have a question from the line of Phil Larson, with Millstreet Capital Markets. Your line is open.

I was just wondering if you could tell us -- on the two vessels that you extended the charters on, what kind of margins will we be getting on those at this $13,000 per day and $9,800 per day rates?

We don't split down on our result by vessel publicly, at least, but you can get an idea of the result by looking at those charter rates and the operating costs, which on average for our business and year-to-date are just under $7,000 per day.

And costs obviously vary from vessel-to-vessel, but it's not a bad proxy just to use the average. So against the $13,000 charter rates and our $7,000 OpEx, we're making a $6,000 gross margin, if you want to look at it that way. And I guess at $9,800, we will be making $2,800.

(Operator Instructions)

And I am not showing any further questions at this time. I would now like to turn the call back over to Mr. Ian Webber for any closing remarks.

Thank you very much for listening. We look forward to talking with you again in 2017 on our fourth quarter results. And, finally, apologies again for the glitch on the communications. Hopefully that didn't disrupt the call too much. Thank you.