Global Ship Lease, Inc. (GSL) Q3 2016 Earnings Report, Transcript and Summary

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 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 the 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 2 of our 2,200 TE vessels, which amendments reduce our midterm exposure to the stock 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 are contributing a full quarter’s results to this year. The elimination of negative earnings from two vessels, which we scraped in December 2015 Aquarius and Orion, reduced operating costs and lower 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 our highly consistent earnings and cash flow track record, which is supportive by our strong asset utilization at 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 less. 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 overtime. 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 are referred well ’96 and ’97 built vessels, which had initial chances to CMA CGM up to September 2012. Consequently there were expressed to the spot markets and low earnings from 2012 until we sold them in late 2015. Aside from these two vessels we have remains 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 awaited 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 [indiscernible] charter expiries to ensure that we maintained 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 later extent through 2025 was two of our three vessels coming off charter kind of the other end of the spectrum. Two vessels coming -- two to 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. As an agreed rates which would if exercised extend of the charters on a Kumasi, and Marie Delmas to the end of 2020 as relates of $980,000 per day. Obviously, if the charter markets recover and the spot market earnings have greater than $980,000 per day we can allow this option to last and put the vessels to work in the spot market. In this way we’ve brought downside protection three years at $980,000 per day in a challenging markets while retaining the ability to benefit from the market recovery. Turning now to Slide 6, given the digital conditions in the broader markets, which have been brought into sharp focus by the favor 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 the approximately 70% of our revenue. First of all as many of you likely know, Global Ship Lease 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 the ship manager. While CFO is fully independent from CMA CMG, 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 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 spending in the global fleet, you will see in the upper left of this slide, but they have the third largest container ship fleets, which actually totaled 532 vessels at June 30, 2016, including the acquisition of APO. 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 tonnage, 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 charterer OOCL orient overseas contain lines, represents approximately 23% in our revenue on the three 8,000 TEU vessels which we’ve across over total month period from October 2014 under sale and lease back arrangements. OOCL ranks no 8 in the world by capacity, with some 98 vessels in their fleets. They are another first class partner and have also performed fully on their charters with us in its section. If you now move to Slide 7, we’ve outlined our strategy for GSL. We remain to open to perceive a growth opportunities in the mid-size and smaller vessel classes, if we can secure charter attached acquisitions, that we’re immediately cash generative with strong return matrix and let the credit enhancing by bolstering our charter portfolio with strong counter parties. We continue to peruse this avenue of growth patiently and opportunistically for growing 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 both below cost. And obviously we reduced further our ongoing interest costs by counseling those promise. Our stable long term contracting cash flows and this forward looking visibility to continues to support these efforts despite the current industry down turn. We will continue to seek opportunities certain to our financial and strategic position. In an environment where exited capital is constrains, we believe that we’re well position to take advantage of sensible and suitable opportunities that exist are photos with touch access. I’d now like to hand over to Tom for some comments on the market.

Thanks Ian. 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 forecast as the year has progressed. Geopolitical and socioeconomic uncertainty has been on the rise, marks 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 stevedore and charter owners. The ramifications of which are still playing out. The short-term paying and in some instances uplift, this has causing has been well documented in the press. However, Hanjin’s trials may also serve with the useful wakeup call for the industry those “unsustainable freight rates” and by extension stock market charter rates are just that, unsustainable. Time will tell whether or not this lesion is absorbed, but as we will argue in the next few slides a very challenging market in the short term, this price scrapping low ordering and potentially further consolidation may sow the seeds of recovery in the medium term. Our thesis is that midsized and smaller size segment upon which global shipping continues to focus hold the best prospects for such a recovery and it due course. Turning to Slide 8. Containerized trade growth in the first nine months of 2016 as remained weak with fully growth forecast now below 3.5%. Fortunately supply side growth is also down with 2016 growth forecast cost in the high ones to low twos with the heavy majority of this new supply coming from the largest best vessel segments. The expectation is the demand growth will outgrow supply growth this year and potentially also in 2017 is certainly a steep [indiscernible] 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 the latent oversupply with idle capacity as of mid-October, standing at 7.6%. Turning to the liner operators, although some carriers enjoyed a short-term boost to liftings and freight rates [Indiscernible] cargo was rerouted, the line effect expect to continues to face volatile and challenging [technical difficulty].

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 had some this before. Container trade growth in the first nine months of 2016 has remained week with full year growth forecast now below 3.5% fortunately supply side growth is also down with 2016 growth forecast and 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, the lifting’s freight rates as [indiscernible] cargo was rerouted the line effect continues to face volatile and challenging times, especially in the main trades such as Asia and Europe. Grow prospect on the other hand in non-mainline 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 Asia for somewhat better. These non-mainline trades are typically serviced by mid-size smaller tonnage the focus of our fleet and the power growing 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 that converts 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 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 the appetite for new orders. That brings us neatly to Slide 10, where you can see the 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 less or owned. This reflects the stress the sector is under and despite scrap price volatility explains why 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 scrap in the whole of 2015. Another useful metric the class E scraps today is in 2016 equates to around 75% of new capacity delivered from the yards during this same period. Flowingly [ph] most of the new deliveries were big ships, while most of the scrapping continues to be focused on mid-sized and smaller vessels which lessor ownership and specifically German KG ownership is disproportionately high. So we’re in fact looking at negative net fleet growth and most fleet segments below 8,000 TEU, we expect this momentum to continue and move fully accelerate helping to improve supply side prospects of 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 when you [indiscernible] when reading if 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 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 may be 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 are already seeing some of 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 peaks at 60% in 2007, has fallen below 20% over the last few years. As the industry has recalibrated ordering activity to lower growth expectations. And traction 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 3.1 million TEU order during the same period of 2015. This has pushed the orderbook-to-fleet ratio at September 30 this year down 16.3%, the lowest level we’ve seen since at least of start of 2000. More significant for Global Ship Lease as the smaller chart on the right hand side demonstrates, small and mid-size vessels are underway presented in new orderbook with order to fleet ratio the segment is below 10,000 TWU and the 1.6% to 7.5% range. So to conclude this section, I'd like to underline the following points. 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 containership vessels 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 investments in mid-size and smaller ship sizes, combined with accelerated scrapping, should tighten the supply of these vessel segments going forward. These factors together with the continued demand for such tonnage in the trade lanes representing around 70% 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 charter coverage, industry leading counterparties and continued 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 pass the call over to Susan Cook to run through the financials.

Thanks, Tom. 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 increase level of off-hire from regulatory dry docking during the quarter and loss of revenue after the sale of our two oldest vessels in late 2015, largely was offset by increased revenues related to the third vessel we acquired from OOCL. With 38 days of planned off hires, for the three schedule 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 schedule 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. KI terms of as of September 30, 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 yearend 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 shareholder’s 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 with 8.9 million in the third quarter and the purchase and cancellation of the $5 million principle of note for $4.5 million. I would now like to turn the call back to Ian for closing remarks.

Thanks, Susan. 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 earlier expiring charters, three 2020 entirely at hire option. Bringing our contracted revenue to $680 million over a weighted average period of 4.2 years. As such, we will continued 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 a 35% or so, whilst also diversifying our charter portfolio through the inclusion of our 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 meets our highly selective criteria. Any such growth would have to be credit enhancing. Simultaneously, our ready liquidity gives us the opportunity to pursue proactive delivering of our balance sheet by buying back our bonds at attractive prices. We’ve made progress on these fronts 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 refinancing 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 leads record levels of scraping 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 markets, but also by being well positioned to thrive in the eventual recovery. That concludes prepared remarks and 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.

Thanks for the question. We don’t set a 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 to just under $7,000 per day. And cost obviously varies from vessel-to-vessel, but it's not a bad proxy to seize 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 9,800 we will be making 2,800.

[Operator Instructions]

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