Global Ship Lease, Inc. (GSL) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Global Ship Lease Fourth Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [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. Mr. Webber you may begin.

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 have been able to access the slides that accompany this call. As usual, slides one and two remind you that the call may include forward-looking statements that are based on current expectations and assumptions and are by their very nature, inherently uncertain and outside 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, which on Form 20-F, which is for 2014 and was filed with the SEC in April 2015. You can obtain this via our website or via the SEC’s. All of our statements 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 in accordance with GAAP, you should refer to the earnings release that we issued this morning, which is also available on our website at www.globalshiplease.com. I'd like to start today's call by reviewing the fourth quarter and the full year 2015 and also provide an overview of our fleet and our strategy. After some comments on the container shipping industry and the vessel acquisition environment from Tom Lister, our Chief Commercial Officer, Susan Cook our Chief Financial Officer will give you an overview of our financials. Then after some concluding remarks from me, we would be happy to take your questions. Turning to slide three, we achieved record earnings in both fourth quarter and for the full year 2015, driven primarily by the addition to our fleet over the last 18 months or so of the three ships purchased from and chartered back to our Orient Overseas Container Line charters back for three years each. These include OOCL Tianjin in October 2014 then the in Qingdao in March 2015 and most recently Ningbo in September 2015. Now with these three vessels contributing in full to the fourth quarter and approximately two ship years to the full year's earnings our revenues for the fourth quarter were $44 million and just under $165 million for the full year. We've also during the year focused even more closely on operating costs with average cost per vessel per day in 2015 of $7,269, down 6.6% or $509 on the $7,778 in 2014. The reduction is equivalent to approximately $3.4 million annually. Consequently, adjusted EBITDA was $30.3 million for the fourth quarter and $108.8 million for the full year. As you know we also sold our two oldest vessels the 1997 built Ville d'Orion and the 1996 built Ville d'Aquarius in the fourth quarter, for combined net proceeds of just over $9 million. 90% of these net proceeds have been offered to our note holders in accordance with the terms of the indenture, combined with the excess cash flow offer. That offer continues to be outstanding with the remaining 10% of the net proceeds from the sale of these two vessels reducing the drawings under our $40 million revolver. In addition to eliminating all exposure to the spot market from these sales during a time when spot charter rates have deteriorated significantly and the near term outlook is uncertain, these disposals also relieve us of the need for significant near term capital expenditure, both for the five-year regulatory drydockings and also some vessel specific work. Additionally, given the severity of latest cyclical market downturn, compounded by seasonal weakness and significantly uncertain near term prospects, which we'll come back to later in this presentation, our Board of Directors has made the difficult decision to suspend payment of the quarterly dividend to our common shareholders. In the current environment and given the trading level of our public debt, the Board deemed it prudent to retain capital to allocate towards actively deleveraging our balance sheet. And at the same time, we believe the increasing levels of distress in our sector will likely yield increasing opportunities to pursue further vessel acquisitions on attractive terms for those owners including GSL with the balance sheet and financial capacity to pursue them. In this way we believe that we can put Global Ship Lease into the strongest position, not simply to persist through the current market downturn, but to grow stronger and create real long-term value. Moving to slide four, you can see that our results have continued to be strong and consistent, growing in line with our acquisition of the three vessels from OOCL, despite the significant weakening of the charter markets over the course of 2015, the red line on top of the page. Incidentally to-date, we have achieved at least the $9.4 million of annual EBITDA per vessel that we anticipated for each of the three OOCL acquisitions. We also continue to experience near 100% utilization levels excluding regulatory drydockings, which we had only one in 2015. As our charters perform as planned and our vessel availability has remained solid. Our long-term charter model is built to withstand market volatility and our decision to sell our two oldest vessels has insured that we have no direct exposure to the spot market, whatsoever over the next 18 months or so. Our earliest expirations are not until late 2017. This is shown on slide five, where you can see our charter portfolio, 100% fixed at least until late 2017. As of December 31, 2015 we have $791 million of contracted revenue, which is spread out over a weighted average remaining contract duration of 4.8 years. As I mentioned a moment ago we've got no charters coming off until late 2017, giving us substantial visibility on cash flows. Our staggered expiry schedule from that point on ensures that we are not overly to the spot market at any particular point in this cyclical industry. Note also that most of the late 2017 charter expiries are on some of our lower earnings vessels. On slide six, we have laid out our strategic vision for the company, which centers around accretively growing the fleet with high quality vessels, chartered on a long-term basis to top quality counterparties, all while actively managing our costs and our balance sheet to ensure that we achieve the greatest benefit from our charters and our best position to seize attractive opportunities. In addition to focusing on immediately cash accretive longer term charters, we also continue to look for opportunities to diversify our portfolio of charterers, our customers with additional top tier names. We've proven our ability to do this by extending our relationship with OOCL and fully intend to continue, so to do. We're also focused on enhancing our capital structure whenever the opportunity arises to do so; currently capital markets are not supportive for our sector. But we have had success in recent years in accessing multiple forms of non-dilutive capital, both public and private to fund accretive growth whilst also lowering our cost of capital. Similarly as I mentioned earlier, our board has made the decision to focus our capital allocation on deleveraging our balance sheet and on growth by continuing to pursue attractive acquisition opportunities that meets our investment criteria. On deleveraging we've made progress on this already, notwithstanding an increase in net debt since December 31, 2014 as a result of drawing on our $40 million revolver and entering into the new $35 million credit facility, both to fund vessel purchases. The ratio of net debt to adjusted EBITDA reduced from 4.6 times for 2014 to 4 times for 2015. The tender offer scheduled a more to outstanding for $27 billion or so, of notes scheduled amortization of other debts and opportunistic debt reduction by buying bonds in the market. We should expect further improvement in this ratio through 2016. In the current market environment, which is marked by significant depression in charter rates and asset values, we believe that increasing opportunities may arise to utilize our cash flow to make highly attractive investments that will position us well for the longer term. I'd now like to hand over to Tom Lister for some commentary on the market.

Thanks, Ian. It will surprise none of you to hear that the macroeconomic environment and overall market sentiment deteriorated very materially in the fourth quarter of 2015 with the decline accelerating into 2016. The speed of deterioration has wrong-footed governments, central banks and economic forecasters, indeed it's understood that the IMF is already anticipating a downgrade to the growth forecasts published in its World Economic Outlook only in January. Risks to global growth and trade are weighted to the downside and key areas of uncertainty include commodity prices, China's growth prospects, the outcome of U.S. elections and the future of the EU, the world's largest trade block. On slide seven you will see this challenging backdrop has had a knock on effect on containerized trade. Estimated volume growth for 2015 is now around 2.3%, the lowest since 2009 and this may well be marked down further as Q4 data firms up. Weakness was most concentrated in the mainlane trades with Asia Europe head haul volumes contracting by an estimated 3.7%. Demand growth in non-mainlane trades, which collectively represent around 70% global containerized trade volumes and a service mainly by mid-size and smaller tonnage was better, but still below expectations, particularly for north, south trades involving Latin America. Turning to slide eight, you can see that the line of sector faced a challenging second half for 2015. Despite various general rate increase initiatives or GRI's, as you all note from the charts, on the left freight rates have come under intense pressure. In fact according to Maersk, the world's largest liner operator, freight rates have reached all-time lows. Although, not all liner results are yet in for Q4 and full year 2015, the downward momentum on operating results shown in the chart on the right probably reflects the stated sector. Slide nine, shows that rates in the time charter market have also come under pressure. The right hand chart illustrates the spot rates for the ship sizes captured by the various indices have converged on operating expenditure or OpEx. As you can see from the left hand chart, prices for the secondhand ships are also falling as a result of downward pressure on spot market earnings and deterioration scrap prices. Distress among owners with significant exposure to the spot market is increasing as is the number of distressed sale and purchase candidates appearing in the market. Turning to slide 10, you can see that scrapping activity is also increasing. As demand has fallen, idle capacity has climbed and now stands at around about 6%. Although scrapping in 2015 was lower than in previous years, it is revealing that around 25% of the capacity that went to the breakers did so in a single month, December. We don't have the numbers for February yet, but around 50,000 TEU was scrapped in January 2016, suggesting continued scrapping momentum. All scrapping activities to-date have been focused on mid-sized and smaller tonnage. Furthermore, spot market charter tonnage which is predominantly composed of midsize and small vessels is most exposed to scrapping risk. Over 60% of the 2000 to 5100 TEU fleet have chartered suggesting that further supply side attrition in these segments in likely. Slide 11 looks at how the global containership fleet has evolved since 2000. The main chart shows that fleet and vessel upsizing has continued with average vessel size more than doubling from around 1,750 TEU in 2000 to over 3,600 TEU by the end of 2015. However, it also shows that the order book defeat ratio, which peaks at over 60% in 2007 has since fallen to around 20% as the industry recalibrates to a lower growth paradigm. More significantly for Global Ship Lease, as the smaller chart on the right hand side demonstrates, small and mid-size vessels are underrepresented in the order book, with order book to fleet ratio for segments below 10,000 TEU in the 5.6% to 7.5% range. According to Howe Robinson a shipbroker after scrapping the fleet below 5,500 TEU actually contracted by 26,000 TEU in 2015. This is good news for these segments in the medium term. Turning now to slide 12, you can see the breakdown of the containership fleet by size segment and vessel age. Essentially, the darker the column, the younger the corresponding fleet segment and vice versa, hence the 12,000 plus TEU segment is the youngest, with an average age of 3.5 years, while the sub 1300 TEU segment is the oldest with an average age of 14.6 years. Generally, the fleet segments for mid-sized and smaller ships tend to be composed of older tonnage, than most of the larger vessels. This is a function of global fleet upsizing over time together with asymmetric investment weighted towards larger vessels. Also the German KG environment, traditionally a key source of capital for funding mid-size and smaller tonnage has been largely inactive since 2008. Under-investment in mid-size and smaller ships leads to aging fleet segments within which competition from new generation tonnage is rather limited – reducing fleet renewal and obsolescence risk for these ships. In the mean, downward pressure on oil and consequently fuel prices has reduced the competitive appeal of eco tonnage, lowering the incentive for line of companies and owners to invest in same. Slide 13 is the final market related slide. The main chart shows the average ship sizes and maximum ship sizes deployed in around two dozen trade lanes. The point here is that mid-size and smaller ships in other words both are 10,000 TEU or less are 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. Almost 1,600 ships or close to 30% of the global fleet are deployed in a single trade grouping, intra Asia, of these only 11 are larger than 5,200 TEU, while over 80% are smaller than 2000 TEU. So to conclude this section, I would highlight the following. One, the world in general and container shipping in particular face significant challenges and uncertainties in the near term. Two, in our industry we believe the brunt of these challenges will be borne by containership vessels with significant near-term exposure to the spot market, which in turn we expect to trigger both increased scrapping and distressed purchase opportunities. Three, limited newbuilding 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 the lion's share of containerized trade and showing the most robust growth, suggest favorable prospects for midsized and smaller ships in the medium-term. Finally, four, with our charter coverage 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. I will now pass the call over to Susan Cook to run through the financials. Susan?

Thanks Tom. Please turn to slide 15 for summary of our financial results for the three months ended December 31, 2015. We generated revenue of $44 million during the fourth quarter, up $7.2 million from revenues of $36.9 million in the comparative 2014 period with the increase being mainly from the effect of our fleet expansion and reduced offhire from regulatory drydockings and idle time. We had one day of unplanned offhire in the question and 13 days idle time for Ville d'Orion and Ville d'Aquarius immediately prior to their disposals for overall utilization of 99.2%. There were only seven days unplanned offhire in 2015 with the single regulatory drydocking at the start of the year 2015 annual utilization was 99.6%. Six drydockings are planned for 2016. Vessel operating expenses in the quarter were $12.2 million, $0.4 million lower than the prior year period. Importantly, the fourth quarter average daily costs at $6,956 per day are down over 10% compared to the same period last year. Mainly due to lower crew and insurance costs. For the full year, average daily costs are $7,269, down $509 or some 7% from the 2014 daily average. The reduction is mainly due to crude costs and reduced insurance premiums on renewals. Our interest expense in the quarter was $12.4 million, up $0.6 million from the same quarters 2014 due to increased borrowings for the purchase of vessels. Net income for the fourth quarter, was $6.2 million and this compares to a net loss of $0.9 million for the three months ended December 31, 2014. For full-year 2015, net loss was $31.9 million, after the $44.7 million non-cash impairment charge. Normalized net income was the same as reported net income for the quarter and for the full year adjusted for the non-cash impairment charge was $12.8 million. The next slide, slide 16, shows the balance sheet. Key items as of the end of the quarter include cash at $53.6 million, total assets of $904.9 million of which vessels represent $849.6 million. Debt of $489.7 million, which includes our bond, the $40 million revolving credit facility and drawing this under the $35 million secure turnaround and shareholders' equity at $396.8 million. Slide 17 shows our cash flows, the main points to mention here are net cash provided by operating activities at $28 million in the fourth quarter. As cash provided by investing activities was $9.3 million, primarily the net sales proceeds for Ville d'Aquarius and Ville d'Orion. I would now like to turn the call back to Ian for closing remarks.

Thank you, Susan. If you'd like to turn to slide 18, I'll briefly summarize, before taking your questions. We've increased our fourth quarter adjusted EBITDA by some 35%, compared to the prior period, through the acquisition of the three OOCL vessels, each of which was immediately chartered back to OOCL on the 36 month to 39 month charter. These three acquisitions added between $113 million and $123 million to our contracted revenue and over $28 million to annual EBITDA. Following the sales of our two oldest vessels, which had contributed only minimally to our revenue in recent years and negligibly to our EBITDA, our entire fleet is chartered through at least late 2017 with an average remaining contract duration of 4.8 years and some $791 million in contracted revenue. This gives us significant insulation from the near term spot market and enables us to continue generating cash despite the significant and current depression in the market. We'll continue to pursue opportunistic enhancements to our already strong capital structure in order to ensure that we are best positioned for long-term growth and value creation. We successfully reduced our cost of capital and have largely eliminated restricted maintenance covenants. Our notes which can be called from April of this year, don't fall due until 2019. Whilst net debt has increased from December 31, 2014 to part fund growth, the ratio of net debt to adjusted EBITDA has reduced from 4.6 times for 2014 to 4 times for 2015. As I said earlier, we expect this trend to continue in 2016. We're in a position to utilize our strong balance sheet and cash flows to aggressively pursue debt reduction and/or fleet growth in the current environment of substantially depress the valuations and stress in the sector. In this difficult market, our financial strength and access to capital when conditions are supportive make us well-positioned. We firmly believe that this plan of action will put us in the best position to continue creating long-term value by utilizing the strengths of our strategy to seize value creative opportunities for the benefit of our shareholders. With that, we'd now be happy to take your questions.

[Operator Instructions] And our first question comes from the line of Charles Lorthioir from Northlight. Your line is open.

Thank you very much. I've got a question regarding the asset sales in Q4 and I may have - I mean, I didn't actually hear correctly what you've said. But did you use some of the proceeds to buy back some of the existing bond or this is something that will happen in Q1. Or the comment that you are making was referring to the option that you have to or the obligation that you have to paydown some of the existing bond.

Happy to clarify that for you. Sorry if I was unclear on the call. In this context, we have two obligations under our indenture. Firstly, the sort of regular way annual excess cash flow offer to buy back $20 million of bonds or use $20 million to buyback bonds. Then secondly, if we sell assets that are pledged to security to the bond and these two vessels were, we have to use a portion of the net proceeds to paydown revolver, which shows in the same collateral package, about 10% of the net proceeds and the remaining 90% of the net proceeds are offered to our bondholders. Therefore the combined offer which we made a couple of weeks ago and which runs through until March the 14th is for approximately $28 billion, $9 million of net proceeds - I'm sorry $8 million of net proceeds after paydown the revolver and $20 million excess cash flow, hopefully that clarifies.

Okay, great. And that process you said will add in March '14?

Correct. The offer is made at 102, which as required under the indenture.

Great. And then the obligation to make an offer at 102 that's something that you will have to do as well in the second quarter of 2016.

Well, we have to do it within 120 days of year-end and we have already done it. It's part of, we've made a tender offer for $28 million of bonds and that is made of two parts, it is made of the $20 million annual excess cash flow offer and $8 million from the proceeds of the sale of these two ships.

Okay, so this is not coming in addition to the offer that you would have - usually you'd have to make in the second quarter? I guess, what I'm trying to understand is if these are two separate --

We have make an offer to buyback upto $20 million of bonds within 120 days of the year-end, it's not the second quarter, it happened to be the last year.

Okay, good enough.

But that offer has been made and is outstanding.

Right, okay. Got it.

Combined it with the $8 million proceeds.

Okay and that clarifies. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Michael Ronzio with Morgan Stanley. Your line is open.

Hi, thanks for taking my question. I think just by way of my own opinion I think given the difficult market decisions that the board made the right decision with regards to the dividend. My question relates to any sort of restrictions or constraints that you may be under from a deleveraging perspective based on your various loan covenants outstanding. Are there any specific restrictions or constraints of your ability to say buyback bonds in the secondary market or paydown bank loans as you wish?

No, in the practical sense there aren't any restrictions. Obviously, the bonds are publicly traded securities, so we have to be mindful of insider trading and trading with non-public material but that is the same for any public security.

Okay, thanks very much.

[Operator Instructions] Our next question comes from the line of Phil Larson with Millstreet Capital Management. Your line is open.

Hi, guys. Congrats on the good quarter and good year. Just a couple of quick questions for me. Have you repurchased any bonds in the open market?

Not yet. No, we are apart from anything else, we're into close period.

Yeah, but it sounds like you're probably planning to definitely, given the not yet, right.

Correct. I have to say the market is quite thin, but bonds do come up and it’s certainly in our active intention to --

It's good to hear. And then just the other question for me with the scheduled drydockings for 2016. Can you give us an idea of how many of offhire that would turn into?

Yeah, it's between sort of 10 and 12 days per drydrocking, so 60 to 70 in total for the six ships and the other part of that equation, which you haven't asked is the cash cost [indiscernible] our history is that on average a drydocking costs us $1.3 million for yard bills and supplies, paint all of that sort of stuff.

Okay, thank you. That's very helpful. That's all for me.

Thank you. Our next question comes from the line of Mark Suarez with McQuilling Holding. Your line is open.

Just to go back on the dividend decision, I know that obviously we've seen a very challenging macro environment and the ability to save cash in an environment where you can maybe use that to buy more vessels. Obviously refinance the debt at some point, especially as you get into the core option period here. I'm wondering if you can maybe walk us through your decision between eliminating the dividend completely and maybe significantly reducing the dividend. Sort of you can walk us through why would you just completely eliminate vis-a-vis just reducing dividends, saving some cash there.

Thanks Mark. This was a really tough call. In the summer last year, the opportunities for us to use a relatively scarce capital and cash were fundamentally only to, dividend to support the equity price, I'm not going to go back on what we've said previously. But dividends are small; the equity prices will allow us to potentially raise equity down the track sometime and growth. With the massive shift in global economic sentiments and confidence and also our economic performance driven by Chinese slowdown, commodity prices, collapsing oil prices et cetera, et cetera. A couple of other opportunities that presented itself, presented themselves to us buying back bonds being the most obvious, buying back equity potentially as well. So the board took this decision extremely seriously and took time over make this decision, to make sure that we were doing the right thing strategically for the benefits of all of our shareholders. Given the significant weakening in our bond price, actually in a very short period of time towards the end of 2015 seem to be pretty obvious to us that we should maximize the resources available to delever, if we are able to buy bonds in market, that today sort of levels in the low 70s. We're making up really superior return on that investment and its guaranteed as well. We think we are reasonably confident of assessing investment opportunities in ships, but there is a residual value to a ship investment. Here we've got near certain returns in buying back paper. So that study in large measure drove the board in making a decision to maximize internal resources by reducing the dividend completely.

Okay, so that's kind of what was I getting at. It seems to me like maybe the decision was multi-driven on the fact that you have an opportunity now deleverage the balance sheet quite significantly vis-a-vis, the challenging macro environment. I understand that you have the seen the squeeze in Panamax rates. But at the same time, you have fairly good contractual revenues and courage if you will. So it seems to me that it's more of an opportunity here to deleverage the balance sheet the balance sheet as opposed to a signaling that the macro environments will get that bad, they could not potentially recover by the time we get to 2017 and 2018. Would that be a fair assessment?

Yeah, kind of, it certainly is a significant opportunity for us right now. Up until say, late November or early December, our bonds were trading close to par or above par and they're now in the low 70s as I say, so there's a massive decline and that does represent an opportunity. We remain convinced of the thesis that charter rates and asset values for mid-size and smaller tonnage will recover in the mid-term. As Tom said, the order book is under control, at least for mid-size and small. In fact, it's insignificant for mid-size and smaller tonnage. Scrapping rates we expect to be significant during the quarter this year, driven by near-term economic hardship. And if the scrapping rates continue at the current level or at least the January, we're in for a record year of scrapping 600,000 TEU. All of that, it's terrible for the individual owner, but it's good for the industry overall. And with that we contend to drive a recovery in asset values and charter rates in the out years, '17/'18 et cetera.

Then I guess on that sort of line of thinking I know you guys talked about potentially seeing an increased number of distressed opportunities and I'm wondering you've actually indeed seen the number increase if you are actually seeing more maybe attached opportunities you can go towards as you see some of these cash going forward. If you can maybe touch on what segments you see, create [ph] opportunity here to be accretive in nature.

I think Tom is probably best positioned to answer that, Mark.

Sure.

Thanks, Ian. Hi, Mark. Okay, so what we're seeing in terms of sale and purchase activity in the market. I would say if you look at the first nine months or so of 2015 and compare the sale and purchase activity in that period to the same period of the previous year, activity was up by a little over 20%. However going into fourth quarter as the market became increasingly disrupted, I would say that there was a growing bid offer spread between sellers and buyers. That bid offer spread is still there, but we're seeing it narrow more in favor of the buyers and I would say that in terms of opportunities, they continue to be in the mid-size and smaller tonnage upon which we're already focused and would expect to continue to focus going forward.

Okay, great. I appreciate the insight guys. Thanks for your time as always.

You're welcome.

Thank you. And we have a follow-up question from the line of Charles Lorthioir with Northlight. Your line is open.

I guess, it will be helpful if there was any guidance that you could provide us in terms of OpEx for 2016. Obviously the fleet has grown, if there is any comments or number that you could share with us for modeling assumption. Thank you.

Well, I'll give you the sort of standard answer to that question which is look at our actual OpEx for either the full year 2015 or for the last quarter 2015. On an average basis, which was something like $7,200 per day and just inflated by 1% or 2%, which is certainly our experience of underlying cost inflation in operating costs. And then multiply by the number of vessel ownership days, which currently is 18 ships times 365.

But can you say on average the OpEx is $7,200 per day.

It was, it's in our operating - it's in our earnings release it was $7,269 through 2015.

Okay, so we should assume plus 1% to 2% inflation cost in '16. Thank you very much.

Welcome.

Thank you. And that concludes our Q&A session for today. I would now like to turn the call back over to Ian Webber for any closing comments.

Thank you for your questions. We look forward to talking to on our Q1 2016 results. Thank you.