Global Ship Lease Inc (GSL) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Global Ship Lease Q4 2016 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Ian Webber, Chief Executive Officer of Global Ship Lease. Sir, you may begin.

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

As usual, Slides 1 and 2 remind 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 recently -- our most recent annual report on Form 20-F, which is for 2015, and was filed with the SEC on April 15, 2016. You can obtain all of these 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 refer during this call, to the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release we issued this morning, which is also available on our website at www.globalshiplease.com.

For today's presentation, I'll begin with an overview of our fourth quarter and the full year 2016. I'll then provide some color on our fleet, our charter portfolio and our strategy. After that, our Chief Commercial Officer, Tom Lister, will discuss the current container shipping market environment and developments in the industry; followed by our Chief Financial Officer, Susan Cook, who will provide an overview of our financials. I'll then return for a brief summary, and then we would be glad to take your questions.

Looking at Slide 3, you can see our usual earnings overview. All of our charters continue to perform as expected, generating stable cash flows throughout the quarter and the year. Our revenue for the quarter was $41.4 million and for the full year was $166.5 million.

Due primarily to a noncash impairment charge of $63.1 million across four vessels during the fourth quarter, we reported a loss of $55.1 million for that quarter. The $63 million impairment charge resulted from our review at the end of the year of the carrying value of our vessels, given the continuing adverse market conditions. Excluding the impact of this noncash impairment charge, our normalized net income for the fourth quarter was $6.1 million.

For the full year, we reported a net loss of $68.2 million, which includes a total of $92.4 million for noncash impairment, consisting of the $63 million Q4 charge I've just mentioned and a charge in Q3 2016 triggered by the amendment and extension of two charters. Excluding these noncash impairment charges, our normalized net income for the year was $22.4 million.

Our normalized results for the full year are improved from their 2015 levels as a result of the full year contributions of the OOCL Qingdao and the OOCL Ningbo, both of which were acquired during the course of 2015. The sale of Ville d'Aquarius and Ville d'Orion late in 2015 also relatively helped improve our net income as they lost money overall in 2015.

Furthermore, our operating cost, our daily operating costs were down some 4.6% in 2016 at $6,936 per day. These were benefits and the benefits to our 2016 result were partly offset by amendments to the charters of Marie Delmas and Kumasi, the amends and extends that we agreed back in Q3 of 2016. These reduce near-term revenue but grant us approximately three years of additional charter cover at our option. We also had a heavy schedule of regulatory drydockings in 2016 with 100 days off-hire for the dockings compared to only one such docking in 2015 for nine off-hire days.

Our adjusted EBITDA for the fourth quarter 2016 was $28.6 million. And for the full year, adjusted EBITDA was just under $115 million at $114.7 million.

During the year, we also retired $53.9 million of our bonds and $9.5 million of other debt. This reduces our net debt-to-EBITDA ratio from 4.0 times at the end of 2015 to 3.3 times at the end of 2016.

Note that some $27.2 million of the bonds that we retired were required -- were retired following discretionary purchases in the open market at an average price of just below $0.80 -- sorry, $0.90 on the dollar. This gave rise to a net gain of $2.9 million on these transactions. The remainder of the retirement of bonds was as a result of the excess cash flow offer, which we were obliged to make early in the year at a price of $102.

Slide 4 shows an index of the spot charter market for the last five years at the top of the slide. The index has been consistently low due to the excess of capacity in recent years. Tom will come back on to this. Notably, the index has trended down in the last year or so.

Our performance is summarized at the bottom of the slide. As you can see, we've maintained a near perfect utilization rate, excepting drydockings, and thus, as a result of our long-term fixed-rate contracts with reliable high-quality counterparties, we've enjoyed very steady and predictable earnings and cash flows over a long period of time despite the continuing weakness in the spot market that has seen rates reduce in recent quarters to record lows.

Outside of proactive portfolio management, regulatory drydockings and a relatively brief period of short-term employment for two vessels that were disposed of in late 2015, our results here reflect the consistency and predictability resulting from our strategic focus on long-term contracts with strong counterparties and a demonstrable ability to manage high-quality vessels in a way that maximizes their profitability and performance under those contracts.

Slide 5 shows more detail on our 18 vessel charter portfolio. As of December 31, 2016, we had a weighted average remaining contract duration of 4.0 years as well as full insulation from the spot market through at least late 2017. In total, we have approximately $639 million of contracted revenue spread over those four years, giving us a great deal of forward visibility.

As you can see from the blue bars on the right-hand side of this slide, we built our charter portfolio with staggered expiries in order to ensure that our exposure to any specific part of the cycle is limited. We further strengthened our contract coverage during 2016 by securing options to extend two charters for up to three and a half -- sorry, up to three years and one quarter, denoted by the two light blue boxes outlined in red on two vessels that were scheduled to come off charter later this year.

These options covering consecutive periods of approximately one year each through to the end of 2020 give us the ability to either maintain insulation and downside protection at the rate of $9,500 a day or opt out in order to participate in the market recovery. My apologies -- it's $9,800 per day.

I'd also like to note that our highest paying charter for the 11,000 TEU CMA CGM Thalassa extends through to 2025, whilst two of our three vessels coming off charter in late 2017, later this year, the Delmas Keta and the Julie Delmas, are among the lowest earning vessels in our fleet.

Turning now to Slide 6. I'll give a brief update on our primary counterparty, CMA CGM, which is the charterer of 15 of our 18 vessels and continues to be our largest shareholder. We maintain an excellent working relationship with CMA CGM. And whilst we are a wholly independent entity, we realize a significant benefit from this close connection to one of the leading players in the container shipping industry, in both terms of scale and profitability.

CMA CGM has consistently fulfilled all charter obligations throughout our history, including during the most severe downturn ever experienced by the industry.

As you can see, from the upper left part of this slide, CMA CGM fleet remains the third largest in the world, with an on-the-water fleet of approximately 2.1 million TEU, including from the acquisition of APL. Over 60% of their capacity is chartered in. And our 15 vessels, which is part of that chartered in capacity, represent about 4% of that capacity -- of that total capacity.

Our other charterer, Orient Overseas Container Line, OOCL, ranks number eight in the world as of the end of 2016 by capacity, with almost 100 vessels in their fleet. They are also a top quality liner company and partner for GSL, fully performing on their charters.

On Slide 7, we've outlined our strategy for maximizing long-term shareholder value. We remain open to pursuing acquisitions of quality assets with charters to high-quality counterparties and which provide us from insulation from the volatility of the short-term charter market.

This has always been a central component of our strategy, and the tumult experienced by a certain container industry participant in recent quarters only underscores the importance and value of this emphasis on proactive risk management.

We also remain focused on further cultivating a strong balance sheet that supports our ability to weather market downturns and to take advantage of an eventual recovery. To this end, and as I've already mentioned, we've opportunistically reduced our leverage through the year by buying back bonds in the market, and this will also remain part of our strategy going forward on the back of our stable long-term cash flows and $639 million contracted revenue.

I would like to now hand over to Tom Lister for some comments on the market.

Thanks, Ian. While our fleet has remained fully employed on term charters, 2016 has been a tough year for the industry. Uncertainty weighs upon the macroeconomic environment, geopolitical backdrop and consequently, upon trade fundamentals. 2016 saw, among other things, the Brexit referendum and the U.S. presidential election. In 2017, elections will be held in a number of European countries, the results and ramifications of which are impossible to predict, but which may potentially lead to an increase in protectionism and a weakening of the cohesion of trade blocks, such as the EU and NAFTA.

In the second half of 2016, Hanjin Shipping, formerly the seventh largest container line, collapsed, with bankruptcy declared early this year. The hope is that Hanjin's fate may serve as a useful wake-up call for all industry participants that unsustainable freight rates and, by extension, spot market charter rates, are just that, unsustainable.

Time will tell whether or not this lesson is sufficiently absorbed, but as we will argue in the next few slides, a very challenging market over the next year or two, particularly for owners, with high scrapping, low ordering and potentially further consolidation in the liner sector, should hold the seeds of eventual recovery for those owners who can hang on through this protracted downturn.

Our thesis is that the mid-sized and smaller tonnage segments, upon which Global Ship Lease continues to focus, hold the best prospects for such a recovery. But it will take time. In the meantime, the spot charter market remains under significant pressure, as do asset values.

So turning to Slide 8. Containerized trade growth in 2016 was 3.5%, up from just 2.2% in 2015. Meanwhile, supply-side growth fell from the 7% to 8% mark in 2015 to around 1% in 2016. Current expectations are that demand growth should exceed that of supply during 2017.

All of this is encouraging, but it does mask the fact that the starting point is one of oversupply, with idle capacity as at February 20 standing at around 350 ships for a total of over 1.4 million TEU, roughly 7.1% of the global fleet.

Turning to liner operations. Results published so far underline the fact that 2016 has been a challenging year for the sector. However, there are tentative signs that things may be improving, with forward guidance from some lines taking a more positive tone than has been the case for a while.

We believe this cautious optimism is based on greater pricing and capacity management discipline, combined with an expectation that ongoing consolidation and the new mega-alliances will unlock savings through scale and network efficiencies. Unfortunately, it does not stem from a material improvement in supply and demand fundamentals. Consequently, we expect a bifurcation in the market, with potential improvement for the liner operations, while spot market exposed tonnage providers will continue to be challenged by excess supply, with the corresponding downward pressure on charter rates and asset values.

Looking now at the trades themselves. The non-mainlane trades, which as you can see from the chart on the right-hand side of the slide, collectively represent around 70% of global containerized trade volumes, the largest trade grouping being Intra-Asia, generally tends to outperform, as far as growth goes, the mainlane East-West trades in 2016, a trend, which is expected to continue. Notable exceptions to this are the Transpacific, which has performed above trend in 2016 and into 2017 and some of the North-South trades, which underperformed last year. As you may know, the non-mainlane trades are typically serviced by mid-size and smaller tonnage, the focus of our fleet.

Slide 9 shows that weak supply/demand fundamentals have kept spot charter -- spot market charter rates under pressure. The right-hand chart illustrates that spot rates for the 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 10,000 TEU or so that participate in the spot market. Larger ships are either on liner companies' balance sheets, being directly owned, or remain subject to the long-term financing type charters that brought them into the market.

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. Indeed, one industry analyst recently reported in the press, has estimated that over 30% of the global containership fleet and up to 85% of the Panamax fleet is currently worth no more than scrap on a charter-free basis.

Although painful, these weak near-term fundamentals are helpful to the industry's eventual recovery prospects, as they catalyze increased scrapping and dampen lines and owners' appetite for new orders.

This brings us to Slide 10, where you can see that scrapping activity is indeed on the rise. At the end of 2016, idle capacity stood at 344 ships and over 1.4 million TEU. Roughly 85% of these idle ships are -- or were lessor owned. This reflects the stress the sector is under and despite scrap price volatility, explains why a record 664,000 TEU, over three times the volume of 2015, were scrapped in 2016. By broker estimates, 200,000 TEU or so have already been committed for demolition sale in the first two months of 2017. Strikingly, this is almost double the volume of new capacity that has so far been delivered in 2017, and new ordering activity is also very limited.

Most of the orderbook's comprised of big ships, while most of the scrapping continues to be focused on mid-size and smaller vessels, for which lessor ownership and, specifically, German KG ownership is disproportionately high.

Turning to Slide 11. You'll see from the chart at top left that fleet segments below 8,000 TEU, in other words, mid-sized and smaller tonnage, have shown either net neutral or net negative growth during 2016. Given the composition of the orderbook, which had an overall order book to fleet ratio of 15.7% at end 2016, while ratios for the mid-size and smaller segments ranged between 1.3% and 6.8%, we expect this momentum to continue and, hopefully, to accelerate. Over time, this should help improve supply-side prospects for the mid-size and smaller tonnage segments, upon which Global Ship Lease continues to focus.

Slide 12 highlights the importance of mid-size and smaller tonnage to the industry. The main chart shows the average ship size and maximum ship size deployed in the two dozen or so tradelane groupings which constitute global container trade. Point here is that mid-size and smaller ships, in other words, those of around 10,000 TEU or less, remain key to most tradelanes, while the big ships are deployed in only a handful of trades, most notably, Asia to Europe and Middle East; some pendulum, or around the world trades; and the Transpacific.

At the end of 2016, just over 1,600 ships or approximately a third of the global fleet, were deployed in a single trade grouping, Intra-Asia. Of these, only 12 were larger than 5,200 TEU, while over 1,300, so more than 80%, were smaller than 2,000 TEU.

Slide 13 is an attempt to illustrate how the opening of the new Panama Canal locks in mid-2016 has impacted vessel deployment patterns. As you can see from the chart at the top of the slide, maximum vessel size has increased on some tradelanes but decreased on others, like the Transpacific. Meantime, average vessel size has tended to increase across the board, except for a couple of Middle East trades, with the most significant upsizing apparently on pendulum services upgrading ships of 11,000 to 13,000 TEU or larger.

The chart at bottom left helps put this in context by showing the number of ships deployed per trade grouping. So for example, big changes in vessel size took place on the pendulum trades, but the number of vessels actually deployed on those trades is rather limited.

From the chart at bottom right, you can see the impact of the new canal locks on old-style Panamax vessels. Unsurprisingly, fewer such vessels are now transiting the canal, and this has led to increased idling and, of course, record scrapping of Panamax tonnage. On the other hand, deployment of Panamax capacity on trades which do not transit the Panama Canal has remained stable at about 2 million TEU. Or in fact, it's even slightly increased, suggesting that the new locks have triggered the rightsizing rather than the obsolescence of the Panamax fleet.

But the broader point here is this. Despite some vessel upsizing, which has been a characteristic of the industry since its inception, our mid-size and smaller tonnage narrative remains intact.

So to conclude this section, I'd like to underline the following points. Number one, the world in general and in container shipping, in particular, face significant challenges and uncertainties in the near term, and there may be some divergence in the fortunes of liner companies and tonnage providers during that time. Point two, and this follows on from the above, 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.

Point three, limited new building investment in mid-size and smaller ship sizes, combined with accelerated scrapping should tighten the supple of these vessel segments over time. These factors, together with the continued demand for such tonnage in tradelanes representing around 70% of containerized trade and tending to show the most robust growth, suggest to us that the most favorable prospects of recovery over time will be for mid-size and smaller ships.

Finally, point four, although we acknowledge that three of our existing charters expire within 2017 and a further two within 2018, we believe that with our overall contracted charter coverage, industry-leading counterparties and continued focus upon mid-size and smaller tonnage, Global Ship Lease is comparatively well positioned to weather the challenges of the near term and build value over the medium and long term.

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

Thanks, Tom. Please turn to Slide 15 for a summary of our financial results for the three months ended December 31, 2016. We generated revenue of $41.4 million during the fourth quarter, down $2.6 million from revenues of $44 million in the comparative 2015 period due mainly to fewer ownership days following the sale of Ville d'Aquarius and Ville d'Orion in fourth quarter 2015, and the effect of reduced charter rates for the Marie Delmas and Kumasi from August 1, 2016, as part of their extensions.

With 11 days of planned off-hire for one scheduled drydocking completed in the quarter and one day of unplanned off-hire, utilization was 99.3%.

Revenue for the full year 2016 was $166.5 million, up by $1.6 million on the prior year. During full year 2016, we had 100 days of scheduled off-hire for six drydockings and only three days of unplanned off-hire.

Vessel operating expenses were $11.2 million in the fourth quarter, down 8.4% from the prior year period due to fewer ownership days after the disposable of the two vessels in the fourth quarter 2015 and also, importantly, from reduced average cost per ownership day, which was $6,771 for the quarter, $186 less per day or 2.7% lower than last year's fourth quarter.

For the full year, average daily costs were $6,936, down $333 or 4.6% from their 2015 daily average. The reduction in both periods is mainly due to low crude costs and reduced insurance premiums on renewals, together with the elimination of the relatively high costs related to operating the two vessels sold in Q4 2015.

Interest expense in the quarter was $9.5 million, down $3 million on the interest in the comparative 2015 period, primarily due to a $1.9 million gain on the open market purchase of $18 million principal amount of our 10% notes in November 2016 and reduced interest on the notes following repurchases.

Just to remind you, in previous quarters, $26.7 million of notes were purchased as a result of the tender offer in March 2016, with a further $4.2 million being purchased in May and $5 million in August, making a total of $53.9 million principal amounts of notes retired during 2016.

Slide 16 shows the balance sheet. Key items as of December 31 include cash at $54.2 million, total assets of $776.3 million, of which $719.1 million is vessels. Our total debt was $429.4 million, down $63.4 million since the end of last year as a result of the notes retired I have just mentioned and amortization of our secured term loan. Net debt at the year-end was $375.2 million and shareholders' equity of $328.9 million.

Next slide, Slide 17, shows our cash flows. The main items to mention in last quarter 2016, our net cash provided by operating activities, which was $27.8 million, and purchase and cancellation of $18 million principal of our notes for $16.1 million.

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

Thank you, Susan, and given this is your last earnings call before you step down as our CFO, I'd like to take a moment to thank you for everything you've done for GSL over the last, well, almost 10 years now, and we look forward to your continuing support.

Thank you.

If you'll now turn to Slide 17, I'll give a brief summary, and then we can move to your questions. Our fleet is fully employed on fixed rate, mainly long-term time charters with top-tier counterparties. These contracts provide us with stable revenue and a high degree of visibility on cash flow over the next few years.

We made progress by extending two of our nearer term charter expiries during the course of 2016, and we continue to be open to additional opportunities to secure further insulation from the spot market on attractive terms, all the while ensuring that our operational performance and cost efficiencies yield a maximum possible value from the vessels employment. We are particularly pleased with a reduction in daily operating costs during 2016.

Whilst, as Tom suggested, liner companies may show improved performance in 2017, partly as a result of better cost structures following corporate consolidations and a major reshaping of the alliances. The prospects for owners with significant near-term exposure to the spot market are poor, in the face of excess capacity, likely to be exacerbated by a more efficient use of the global fleet by liner operators.

However, we are encouraged by the clear steps that are being taken by the industry through record levels of scrapping and minimal new vessel orders to bring the market towards equilibrium, particularly in the mid-size and smaller vessel classes, where we at Global Ship Lease focus.

Finally, we focused our efforts on strengthening our capital structure and ensuring that we are well positioned to weather the downcycle and to take advantage of value-generative opportunities as they arrive.

In 2016, we reduced our debt substantially, including by opportunistic open market purchases of our bonds at attractive prices, and lowered our net debt to last 12 months EBITDA from 4 times at the end of 2015 to 3.3 times at the end of 2016. We intend to continue to make progress on this front prima facie using our substantial and stable cash flows to delever on an opportunistic basis and maximize long-term shareholder value.

With our prepared remarks concluded, we'd now be happy to take your questions.

(Operator Instructions) And our first question comes from Mark Suarez from McQuilling Holdings. Your line is open.

Just to go back on the recent repayment of the bonds, I'm wondering what your expectations are for 2017 and how your talks are going regarding the refinancing of the bond that expires in 2019.

Well, we're not going to speculate on open market purchases in 2017. But clearly, as I've said in my prepared remarks, it remains a very good use of our investment capacity. As we've said before, on the face of it, we have yet two clear uses of surface cash or capital. One is to retire debt, delever the balance sheet and improve our refinancing prospects that way. And the second is vessel acquisitions, which we would only undertake if they were economically justifiable and also strengthened our credit position. How 2017 will turn out is really difficult to tell. We did, of course, have to make our excess cash flow offer, which will absorb $20 million of our cash.

On a refinancing, I mean, we have two years to go before the bond falls due. We certainly don't want to leave it until then to initiate a refinancing program. And we continue to evaluate market opportunities to refinance and further strengthen the balance sheet as and when they arise.

Okay. And in terms of potential acquisitions, I know that over the past two years, you've been looking at some of the larger vessels, post-Panamax vessels, specifically OOCL. Do you still see opportunities in that space, if you will, to do some sales leasebacks, charter-attach transactions? And what sort of values are you seeing in the market today, vis-a-vis, of course, 2015?

Yes. Mark, we do see opportunities to do similar transactions. And indeed, during the course of 2016, we actually looked very closely at a number of transactions. However, the relative economics, at least during 2016, when the bonds were trading in the high 80s and low 90s, the relative economics of buying back bonds, we judged to be superior to the economics of selling and -- or buying and leasing back containerships. So it's a sort of a relative value play.

(Operator Instructions) Our next question comes from Nicholas Gower from Clarksons Platou. Your line is open.

I guess, just to keep on the topic of acquisitions, I guess, how do you guys think about the -- sort of an acceptable charter profile for a potential acquisition? Is it something that you're going to be sort of cognizant in terms of trying to extend that charter profile past the maturity of the 2019 notes or even further? Or I guess, sort of how should we be looking at that?

Yes. I mean, in an ideal world, yes. If we're looking at ship acquisitions, charter-attached ship acquisitions, then clearly, having a charter run beyond the maturity of the notes is credit enhancing. So that would, for sure, be our objective.

And then sort of, I guess, any guidance on a potential sort of targeted LTV that you guys would be comfortable with for the financing on a potential acquisition?

It will very much depend upon the nature of the asset and the nature of the acquisition. So for example, certain assets would be acquired on an unlevered basis. Others, contingent upon the age, size, liquidity of the asset and the length of the charter, would be able to support modest leverage.

And then, I guess, just one last question. I mean, there still is a bit of time before some of the charters in 2017 do roll off, but have you sort of begun any discussion around potentially renewing the charters for those vessels or potentially finding a new charter party?

As a general matter, we wouldn't comment on whether -- on the status of any negotiations we may or may not be having. But also, as a general observation, it's, in today's market -- weak charter market, it's incredibly early to be having serious discussions with charterers about a potential for renewal or, indeed, with other charterers if our feeling is that the present charterer is unlikely to want to extend. So we would have to give you a better -- or we will be in a better position to give you an update probably on our second quarter call.

And our next question comes from Joel Ojdana from Balyasny. Your line is open.

Given the company's strong cash flow during 2016, can you confirm that you've met the qualifications for an excess cash flow offer on the bonds per the indenture? [And so] when do you anticipate making that offer?

Yes, we have met the qualifications, so the offer will be at the maximum of $20 million. And we should be launching that offer in the next two or three weeks.

Thank you. And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Mr. Ian Webber for any closing remarks.

Good. Thank you very much for taking part in this call. We look forward to providing you with an update on our first quarter's result and hope to meet with some of you at or around the Deutsche Bank conference in New York later on this month. Thanks very much.

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