Global Ship Lease Inc (GSL) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Global Ship Lease Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

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

As usual, the first 2 of those slides remind you that today's 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 2016, and which was filed with the SEC on April 12, 2017. You can attain this via our website or by 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 this morning.

Today's presentation will follow the normal format. I'll provide an overview of our results for the quarter, our fleet and our charter portfolio and our strategy. After that, Tom will discuss the wider shipping -- the container shipping market and provide an overview of our financials. I'll then return for brief-summary remarks, and would be then glad to take your questions.

Turning to Slide 3. Our fleet was fully chartered through the quarter, generating operating revenue of $40.3 million, net income of $6.8 million, and adjusted EBITDA of $28.1 million.

On Slide 4. As usual, I would draw your attention to the contrast between the performance of the containerships spot charter market, which is the graph at the top of the page, the red line, indicating how that spot market moves, and the stability of our earnings, which we show in the lower half of the slide.

Additionally, I'd also like to point to the significant strengthening in the charter market since the start of the year. Tom will discuss this more.

While seasonal and other factors, which Tom will also discuss in detail a little bit later, have caused some moderation recently, we remain encouraged by the underlying supply/demand fundamentals that have contributed to this upward movement in the charter market. And we believe that these fundamentals are most promising for the mid-sized and smaller vessel classes where we focus.

It remains to be seen whether overall progress can be sustained for the long term, but we believe the manifest tension in the market is cause for cautious optimism.

As for Global Ship Lease's results, with full charter coverage, we have closely controlled costs and have delivered high levels of vessel utilization this quarter as in previous quarters, leading to very stable financial results over time.

Slide 5 shows more detail on our 18-vessel charter portfolio. As of June 30, we had an average weighted remaining contract duration of 3.5 years, 3.5 years, and approximately $557 million of contracted revenue.

Our mainly long-term staggered charter portfolio ensures that we not only have a high degree of forward visibility, but also that we are not overly exposed to renewals at any particular point in the cycle.

To this point, while you can see that most of our vessels have multiple years of remaining contract cover, we do have 3 vessels coming off their current charters later this year.

It's important to note that 2 of these vessels are among the lowest-earning vessels in our fleet. And whilst the current market certainly isn't anywhere near peak levels, the overall environment is substantially more appealing than even at the beginning of this year.

Additionally, you'll notice that our high-paying charter for the 11,000 TU CMA CGM Thalassa at $47,200 per day runs through to late 2025.

Turning to Slide 6. I'll give you a brief update on our main counterparty, CMA CGM, which is the charterer of 15 of our 18 vessels, and is also our largest shareholder.

CMA CGM has consistently outperformed the wider industry, and we're proud of our strong long-term relationship with this premier player in the container shipping world.

They have consistently fulfilled all charter obligations through our 10-year history, which overlaps the most severe and extended downturn that the industry has experienced.

As you can see, in the upper left of this slide, CMA CGM's on-the-water fleet remains the third largest in the world amounting to some 2.3 million TEU, including from the acquisition of APL.

Approximately 3 quarters, 75% of their capacity is chartered in, with the 15 GSL vessels representing just under 3% of CMA CGM total capacity. We believe that we're among the largest providers of tonnage to CMA CGM by vessel number.

Our other charter, Orient Overseas Container Line, OOCL, another premium name in the industry, has recently announced a merger with COSCO Shipping that would see the combined entity becoming a top 3 liner company by TEU capacity. Assuming this consolidation moves forward as anticipated, we expect TSL to have both the #3 and the #4 liner companies as our customers.

On Slide 7, we've outlined our strategy for maximizing long-term shareholder value. In keeping with our core philosophy of pursuing stability and consistency in cash flow and earnings, we strongly emphasized proactive risk management through our long-term contracts as well as in the assessment of any potential acquisition opportunities, which would need to be immediately cash generative and involve the vessels employment with a high-quality counterparty.

Our financial results over the years demonstrate our commitment to these principles.

We continue to evaluate opportunities to proactively enhance our balance sheet through both deleveraging and opportunistic refinancing of our 10% notes. Whilst these notes don't fall due until April 2019, some 18 months away, we will continue to look for opportunistic refinancings, moving forward only as such time as we find terms to be sufficiently attractive and supportive of the GSL strategy. This was exemplified by our recent approach to the bond market, which ultimately we suspended as we were not able to price the transaction on terms acceptable to us.

We were encouraged, however, by investor feedback and continue to evaluate ways forward.

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

Thanks, Ian. Since our Q1 earnings call, the development of the macroeconomic backdrop has been encouraging. In their July update, the IMF described a firming recovery. And although they hold their global GDP growth forecast for 2017 steady at 3.5%, up from 3.1% in 2016. They notch up their 2017 growth forecast for global trade in goods and services from 3.8% to 4%.

Furthermore, they note the upside potential of a stronger and more sustained cyclical rebound in Europe, where political risks have diminished. But as always, they also cautioned that downside risks remain.

In container shipping, 2017 has shown marked improvement on 2016. Cargo volumes have firmed, idle capacity is down, charter rates and asset values are up and supply/demand fundamentals are moving in the right direction. Indeed, our thesis is that the industry is at a point of positive inflection, particularly for mid-size and smaller vessels. And over the next few slides, we will provide data to support that contention.

So turning to Slide 8. Industry fundamentals are improving, particularly for mid-size and smaller tonnage. Containerized trade growth of around 5.1% is projected for 2017, and growth in demand is expected to exceed that of supply during 2017 and 2018, continuing a trend established in 2016.

Excess supply remains a consideration, but idle capacity has trended down significantly.

As you can see from the charts on the right-hand side, non-mainlane trades collectively represent around 70% of global containerized trade volumes, with intraregional trades, most notably Intra-Asia, forming the largest and fastest-growing slice of that pie.

As you know, these trade groups are of particular relevance as they tend to be served mainly by mid-size and smaller tonnage, which continues to be the focus of Global Ship Lease.

Slide 9 focuses on the forces shaping supply-side dynamics, namely the forward order book, idle capacity and scrapping activity, all of which have continued to have a positive, in other words, downward impact on the supply of mid-size and smaller tonnage.

As you can see from the charts, vessels below 10,000 TEU continue to be underrepresented in the order book. Order book-to-fleet ratios for mid-size and smaller tonnage range from 0.5% to 6.1%, against 13.1% from the fleet as a whole and almost 40% for larger vessels.

Ordering activity remains limited, with under 60,000 TEU ordered during the first half of 2017, contrast that with around 200,000 TEU ordered in the first half 2016, and over 1.3 million TEU in the same period of 2015.

Meantime, idle capacity has trended down significantly, hitting around 2.6% by the end of June. Over 295,000 TEU was scrapped in the first half of 2017, up slightly on the same period in 2016. And as you will recall, 2016 was a record year for containership demolition. As ever, scrapping activity was concentrated in the mid-size and smaller tonnage segments.

However, I should note that logically enough scrapping momentum slowed in the second quarter as idle capacity reduced and market tension improved, pushing rates up in the spot charter market. Broker estimates suggest that less than 10,000 TEU of capacity was scrapped out during June.

Slide 10 puts recent fleet developments in the longer-term perspective. There are various takeaways from the top chart. First, global fleet growth tends to be concentrated in the larger vessel sizes, and there's nothing new about this. Second, the sector has absorbed its legacy order book and is adjusting to a lower-growth paradigm. Third, speculative ordering, which drove order book-to-fleet ratios north of 60% in eve of the global financial crisis in 2007, is extremely limited. By the end of 2016, the order book-to-fleet ratio had fallen to 15.7%, the lowest level for at least 17 years. It has since fallen further to 13.1%. And as we have already noted, the ratios for mid-size and smaller tonnage are lower still.

The chart at the bottom slide speaks to the fact that all fleet segments below 8,000 TEU showed either net neutral or net negative fleet growth during the first half 2017, continuing the trend of 2016. This translates to improving fundamentals while the growing likelihood of the supply-side squeeze for the mid-size and smaller fleet segments.

This brings us to Slide 11, where you can see a sharp uptick in the index of spot market charter rates and asset values. After a long challenging period, the sector looks to be at a point positive inflection. It won't all be smooth sailing, of course. There will be some choppiness along the way, driven by both structural and seasonal factors. The spot market charter rate index, at June 30, 2017, was up 24% on year-end 2016, despite slight softening during the latter part of the second quarter.

As referenced during our Q1 earnings call, there was increased chartering activity around the launch of liner operators new mega alliances in April. This catalyzed a steep increase in spot market charter rates, which in our view, brought forward the rate recovery curve. Put another way, had the new alliances not been launched, we would have anticipated a less steep recovery curve supported by improving fundamentals. As the new alliance networks bed in, and the charter market comes down during the usual summer low, rates are correcting towards what we would regard as a more normalized recovery curve.

But the direction of travel remains clearly positive, and this is also reflected by firming asset values, with the secondhand price index up 28% during the first half of 2017.

Slide 12, you've seen before. Vessel deployment patents will have evolved since year-end, particularly since April, and we will update the analysis once the new alliance networks have stabilized. Nevertheless, the thrust of the message is unchanged: Mid-size and smaller ships remain key to most trades, particularly to the large groupings of non-mainlane and intra-regional trades, such as Intra-Asia.

This point is highlighted further on the next couple of slides, the first of which, Slide 13, maps the global sailings of big containerships, both at 10,000 TEU and up, over a 30-day period in the second quarter.

Slide 14, on the other hand, maps the sailings of sub-10,000 TEU vessels, in other words, the mid-size and smaller containerships we've heard [spot] over the same period.

A picture speaks a thousand words, and the deployment flexibility and the breadths and depths of global coverage of small and mid-size containerships is really quite striking.

So to conclude this section, I would like to underline the following points:

One, the macroeconomic backdrop, trade dynamics and overall industry sentiment appear to be improving, although as ever, downside risks remain.

Two, containership in fundamentals continue to improve, particularly for mid-size and smaller vessels, with demand growth outstripping supply growth in 2016, and forecast to do so again in 2017 and 2018. The starting point is still one of excess supply, but idle capacity of 2.6%, down from around 7% at year-end, shows things are moving in the right direction.

Three, mid-size and smaller containerships remain a fundamental relevance to global container trade, especially to the non-mainlane and intraregional trades that collectively represent around 70% of global volumes.

And finally, four, spot market charter rates are back in cash flow accretive territory. And asset values, while still close to cyclical lows, are firming significantly.

In short, while still acknowledging the inherent volatility of the sector, we believe container shipping is at a point of positive inflection. Furthermore, we remain convinced that the recovery prospect is strongest to mid-size and smaller tonnage.

Moving now onto the second quarter financials, starting on Slide 16.

First, revenue and utilization. We generated revenue of $40.3 million during the second quarter, down $1 million from revenues of $41.3 million in the comparative 2016 period. This decrease is due primarily to reduced revenue, as a consequence of the lower for longer amendments to the charters of Marie Delmas and Kumasi effective August 1, 2016, offset by fewer off-high days in the quarter compared to prior year period, mainly due to fewer regulatory drydockings. Utilization was 97.4%, despite the grounding of a vessel that has since been fully repaired and returned to service.

Vessel operating expenses. Vessel operating expenses were $10.9 million in the second quarter, down 4.1% from the prior year period. Importantly, the average cost per ownership day fell $274 per day, or 4%, to $6,635 per day.

Interest expense. Interest expense in the quarter was $11 million, down $0.1 million on the interest in the comparative 2016 period, primarily due to a lower principal amount outstanding on the notes.

Net income. Net income for the second quarter was $6.8 million as compared to $6.0 million in the second quarter of 2016, driven primarily by reduced interest expense, reduced depreciation and reduced operating costs, partially offset by lower operating revenues.

The balance sheet. So slide 17 shows the balance sheet. And key items as of June 30, include cash of $59.4 million; total assets of $766.4 million, of which $704 million are vessels; our total debt was $396.9 million, down $23 million since the end of 2016; net debt was $337.5 million; and shareholder's equity was $342.5 million.

Cash flows. So slide 18 shows our cash flows. And here, I'd highlight that net cash provided by operating activities was $27.9 million in the second quarter compared to $27.2 million in the same period last year.

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

Thanks, Tom. If you'll now turn to Slide 19, I'll give a brief summary and then we can move on to questions.

Our charters have all continued to perform, as we provide top-class counterparties with consistently high-quality performance. We maintained close control of costs, resulting in stable, predictable cash flows and earnings.

As Tom has discussed, the underlying drivers that we have long been focused on: minimal ordering of new vessels in the mid-size and smaller vessel classes, elevated scrapping levels and continued growth in international containerized trade, particularly in the non-mainlane trades, most reliant on our size of vessels, have driven a meaningful strengthening of the charter market in 2017.

While the ultimate sustainability of this charter market improvement remains to be seen, and with the majority of our fleet continuing on their long-term fixed rate contracts for multiple years, there is much to be encouraged by in the recent display of positive tension in the market.

Finally, our long-term contracted cash flows put us in a position where we can actively pursue enhancements to our balance sheet. Having reduced our net debt to adjusted EBITDA ratio from 3.3x, as of March 31, 2017, to 3.1x at this most recent quarter in June 30, we'll continue with these efforts, whilst also continuing to look for attractive opportunities to proactively refinance our outstanding 10% notes.

At the same time, it's important to keep in mind that we have no material refinancing obligations until April 2019. And we are thus able to approach any opportunity in a measured and disciplined manner, proceeding only at such time as we believe that we can achieve terms that support our long-term strategic goals.

With that, we would now be happy to take your questions.

(Operator Instructions) Our first question comes from the line of Howard Bloom with UBS Financial Services.

As the fleet continues to be out on lease, it obviously also ages. What's your view about acquiring ships to replace or augment your fleet as time goes on in terms of the average age of the ships that you have in your fleet?

Yes. I mean, it's evident that we have assets that have an ultimate values for life. We work on 30 years. The average age of our fleets is around 12.5. That is, as it happens, very consistent with the average age of the global fleet for this size of vessel class, as very old ships have been scrapped out. And more importantly, as there have been limited numbers of new deliveries as investment in used containerships has been towards the larger sizes. And that's shown on Page 23 of the slide deck, in the appendix, where you can see it graphically. Yes, we are open as we have been, as we always have been, to potential acquisition opportunities. It's one of the uses of our cash, as we've discussed before. The other potential or the other principal opportunity or use of cash today is delevering. We focus mainly on delevering through 2016. And that [time] continues to be our focus in 2017. But we look out for immediately cash-accretive opportunities to add vessels to our fleet, providing they come with charter-attached with their quality counterparty.

Do you think we should anticipate acquisitions in the coming 12 months?

I wouldn't really want to speculate, but we are open-minded.

(Operator Instructions) Our next question is from the line of Nicholas Gower with Clarksons Platou Securities.

So if we look at, I guess, the fleet, and you touched upon in the call, there's a few vessels that roll off beginning, and I would say, September, it sounds like of 2017. As we think about sort of the extension of those charters and sort of looking beyond that period of time, have you guys been in discussions with CMA CGM or OOCL on those particular assets yet or sort of how should we be thinking about those?

Yes, thanks for the question. It's very much the same answer that we've given on recent calls to this. We've had preliminary discussions with both OOCL brokers and with CMA CGM direct. But it's really too early before the renewals are due for those discussions to be classified as serious. And that's a function of today's market, it's generally the case that when the market is soft, owners and charterers don't engage much before 3 or 4 or maybe 5 weeks before the potential delivery -- redelivery of the ship, and that's exaggerated today in the middle of 2017 as charterers, the liner companies wait to see how their reconfigured fleets are post the launch of the alliances that Tom mentioned, settle down. So we really wouldn't expect to engage with CMA CGM on the 2 2,200 TEU vessels until mid-August maybe, and OOCL a little later.

Okay. And then I guess just to follow on that. On the Kumasi and the Marie Delmas, the 2 vessels that GSL has the extension option for, for those particular assets, is there a certain period of time that you would need to notify CMA CGM to extend those?

Yes. And we will be extending those vessels.

Okay. And then just one final follow-up question. There was -- just looking through the results, in other words, it seem like there was one vessel that was ran aground in late March, I believe, and was offhire for about 27 days for repairs and things of that nature. For that particular asset, have sort of all the repairs have been made? And sort of, will you guys be covered from that from an insurance perspective?

Yes, absolutely. Unfortunately, these kind of incidents happen. Our record's pretty good, but we did have a grounding, as you say. It was 25 off days, a little higher. The repairs have been carried out. The vessel is back in service, as Tom said. And the principal cost of the repairs were covered by the insurance. We have to prepare a deductible, but otherwise, the bill is paid by insurers.

Okay. And which asset was that again, just for my reference?

Well, it was 1 of the 2,200 TEU vessels. It's actually (inaudible)

I'm not showing any further questions. I'll now turn the call back over to Ian Webber.

Great. Thank you very much for listening, and we look forward to giving you a further update on GSL following the third quarter. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.