Global Ship Lease, Inc. (GSL) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Global Ship Lease Q4, 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [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 been able to access the slides that go along with 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 all of these from 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. 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 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 fleets, charter portfolio and our strategy. After that, 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 will be glad to take your questions. Looking at slide three, 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 non-cash 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 current value of our vessels given the continuing adverse market conditions. Excluding the impact of this non-cash 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 from non-cash impairment consisting of the $63 million Q4 charge I have just mentioned and a charge in Q3 2016 triggered by the amendment and extension of two charters. Excluding these non-cash 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 are 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 reduced near term revenue grant us approximately three years of additional charter cover at our option. We also had a heavy schedule of regulatory dry dockings in 2016 with one hundred days on 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 our adjusted EBTIDA 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 out at the end of 2015 to $3.3 at the end of 2016. Notes that some $27.2 million of the bonds that we retired were retired following discussionary purchases in the open markets at an average price of just below $0.90 in 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 four shows an index of the spot charter markets 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 onto 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 accepting drydockings and thus as a result of our long term fixed rate contracts with reliable high quality counter parties, 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 the recent quarters direct or lows. Outside of proactive portfolio management regulatory drydockings and the relatively brief period of short term employment for two vessels that were disposed off in late 2015, our results here reflect the consistency and predictability resulting from our strategic practice of long-term contracts with strong counter parties and have demonstrable ability to manage high quality vessels in a way that maximizes their profitability or performance under those contracts. Slide five shows more details 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 a 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’ve built our charter portfolio with [Indiscernible] bars in order to ensure 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 years and one quarter denoted by the two likely 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. And 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; last 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 six, I’ll give a brief update on our primary account party, CMA CGM, which is the charter of 15 of our 18 vessels and continues to be our largest shareholder. We maintain an excellent working relationship with CMA CGM and mostly are a wholly independent entity. We realized 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 term 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 that capacity is chartered in and [Indiscernible] of 15 vessels which is part of that chartered in capacity represent about 4% of that total capacity. Our other charterer orient overseas contain lines, 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 seven, we have outlined our strategy for maximizing long term shareholder value. We remain open to pursuing acquisitions of quality assets with charters to high quality counter parties and which provide us from insulation from the volatility of the short term charter markets. This has always been a central components of our strategy and the two most experienced by 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 abilities to weather market downturns and to take advantage of an eventual recovery. And to this end, and as I’ve already mentioned we’ve opportunistically reduced our leverage through the year by buying back bonds in the markets and this will also remain part of our strategy going forward on the back of a stable long term cash flows and $639 million contracted revenue. I’d 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, formally the seventh largest container line collapsed with bankruptcy declared early this year. The hope is that Hanjin’s fate may serve as a useful wakeup call for all industry participants that unsustainable freight rates and our extensions spot market charter rates are just that unsustainable. Time will tell whether or not this lesson is sufficiently absorbed but as we would 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 of the midsized and smaller tonnage segments upon which Global Ship Lease continues to focus all 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 eight, 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 -- the facts that the starting point is one of oversupply with idle capacity as at February 20th 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 maybe improving with forward guidance from some lines taking a more positive turn 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 stand from a material improvement in supply and demand fundamentals. Consequently, we expect the 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 for trades themselves. The non-mainlane trades which as you can see from the charts on the right hand side of the slide collectively represent around 70% of global containerized trade volumes, the largest trade grouping into Asia generally tends to outperform as far as – goes the mainlane east west trades in 2016, a trend which is expected to continue. Notable exceptions to this or the Trans Pacific which has performed above trend in 2016 and into 2017 and some of our 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 nine shows that weak supply demand fundamentals have kept spot market charter rates under pressure. The right hand chart illustrates that spot rates for the ship size is captured by the various indices have converged on OPEX continuing trend discussed on the previous calls. And just to remind you, it is really only medium-size and smaller ships, no larger than 10,000 TEU or so that participate in the spot market. Large ships that are either on liner company's balance sheets being directly owned or remained subject to the long-term financing type charters that bought them into the market. As you would expect and can see from the left hand chart, weakness in sport market earnings also puts pressure on prices for second-hand 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 weeks near-term fundamentals are helpful for the industry's eventual recovery prospects as they capitalized 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 ideal ships are were lessor owned. This reflects a stress, the sector is under and despite scrap price volatility explains why record 664,000 TEU over three times the volume of 2015 was scrapped in 2016. By broker estimates 200,000 TEU or so were served have already been committed for demolition of 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. Our new ordering activity is also very limited. Most of the order book can bring big ships, while most of the scrapping continues to be focused on midsize and smaller vessels for which lessor ownership and specifically German KG ownership is disproportionately high. Turning to slide 11, you'll see from a chart at top left, the fleet segments below 8000 TEU, in other words mid-size and smaller tonnage have shown either net neutral or negative growth during 2016. Given the composition of the order book which had an overall order book to fleet ratio was 15.7% at end of 2016, while ratios for midsize and small segments ranged between 1.3% to 6.8%. We expect this momentum to continue and hopefully to accelerate. Over time, we should help improve supply-side prospects for the midsize and smaller tonnage segments upon which Global Ship Lease can focus. Slide 12 highlights the importance of midsize and small 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 who are around 10,000 TEU or less remain key to most tradelanes. While big ships are deployed in a handful of trades, most notably Asia to Europe and Middle East some pendulum around the world trades and the Transpacific. At the end of 2016 just over 1600 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 1300, still more than 80% were smaller than 2000 TUE. Slide 13 is an attempt to illustrate how the opening of the new Panama Canal locks in mid-2016 has impacted vessels 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, that is Transpacific. Meantime, average vessel size is tended to increase across the board except for couple of Middle East trades, but the most significant upsizing apparently on Pendulum Services upgrading ships at 11,000 to 13,000 TEU or larger. The chart at bottom left helps to put this in context by showing the number of ships deployed for our trade grouping. So, for example, big changes in vessel size took place on 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, few of such vessels are now transitioning the canal, and this has lead 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 is even slightly increased, suggesting that the new locks have triggered the rightsizing rather than the obsolescence to 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 midsize 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 containership in particular faced 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 the containership lessor's 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 investments in mid-size and smaller ship sizes combined with accelerated scrapping should tighten the supply of these vessel segments over time. These factors together with the continued demand for our tonnage and tradelanes representing around 70% 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 midsize 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 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’ll now pass the call over to Susan Cook to run through the financials.

Thanks, Tom. Please turn to slide 15 for 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 fill our 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 the 1st, 2016 as part of their extension. With 11 days of planned off hire for one schedule 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 a 100 cases scheduled off hire to six drydockings and any three-day of unplanned off hire. Vessel operating expenses were $11.2 million in the fourth quarter, down 8.4% from the prior year, due to few ownership days after the disposal 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, a $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% for net 2015 daily average. The reduction in both periods is mainly due to low improved 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 purchased of $18 million principal amounts of our 10% note in November 2016, and reduced interest on the note 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 were tied during 2016. Slide 16 shows the balance sheet. Key items as of December 31st include cash of $54.2 million, total assets of $776.3 million of which %719.1 million is vessels. Our total debt with $429.4 million, down $63.4 million since the end of last year as a result the notes retired I have just mentioned and amortization of our secured term loan. Net debt at the yearend was $375.2 million and shareholder’s equity of $328.9 million. Next slide, slide 17 shows our cash flows. The main items to mention in the last quarter 2016, our net cash provided by operating activities which was $27.8 million and purchased and cancellation $18 million principal of our notes for $16.1 million. I would now like to turn the call back to Ian for closing remarks.

Thanks, 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, while almost 10 years for now and we look forward to your continuing support. If you will 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 rates mainly long-term Time Charters with top-tier counterparties. These contracts provide us stable revenue and a high degree of visibility on cash flow over the next few years. We made progress by expanding two of our near-term charter expires during the course of 2016 and we continue to be open to additional opportunities to secure further installation from spot market on attractive terms. All of our ensuring as our operational performance and cost efficiencies yield the maximum possible value from the vessel's employment. We are particularly pleased with the 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 owners with significant near-term exposure to the spot market are poor. In the face of excess capacity likely to be exacerbated on more efficient use of the global fleet by liner operators. However we're 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 policies where we have Global Ship Lease focused. Finally, we focused our efforts on strengthening our capital structure and ensuring that we are well-positioned to whether the down cycle 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 bonuses at attractive prices, unloaded our net debt to last 12 months EBITDA four 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. From the phase they’re using our substantial and stable cash flows to delever on an opportunistic basis to maximize long-term shareholder value. With our prepared remarks concluded, we’d now be happy to take your questions.

Thank you. [Operator Instructions] And our first question comes from Mark Suarez from McQuilling Holding. Your line is open.

How you’re doing guys? Thanks for taking my question.

Hi, Mark.

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 speculates on the open market purchases in 2017, but clearly as I said in my prepared remarks, it remains a very good use of our investment capacity. As we’ve said before on the phase that we have true clear uses of service cash or capital, one is to retire debt, delever the balance sheets and improve our refinancing prospect that way. And the second is vessel acquisitions, which we would only undertake if they were economically justifiable and also strengthen 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 had two years to go before the bond force you. We certainly don't want to leave it until then to initiates a refinancing program and we continue to evaluate market opportunities to refinancing and further strengthening 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 their larger vessels, post Pannamax vessels specifically OOCL, do you still see opportunities in that space if you will to do some sales and leasebacks, charter-attached transaction and what sort of values are you seeing in the market today, vis-à-vis of course [till 2015]?

Yes. Mark, we do see opportunities to do similar transactions and indeed during the course of 2016 we actually look 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 are buying back bonds, we judge to be superior to the economics of selling and buying and leasing back containership, so it’s sort of a relative value play.

Okay. That’s it from me. Thanks for the answers.

Thank you.

Thanks, Mark

[Operator Instructions] And our next question comes from Nicholas Gower from Clarksons Platou. Your line is open.

HI. Good morning and thank you for taking my question. I guess just to keep on the topic of acquisitions, I guess how do you guys think about the sort of acceptable charter profile for a potential acquisition. Is it something that you’re going to sort of cognizant in terms of trying to extend that charter profile past the which area that 2019 notes or even further or I guess sort of how should we be looking looking at that?

Yes. I mean, in an ideal world, yes, if we’re looking at ship acquisition charter-attached ship acquisitions then are clearly having a charter run beyond the maturity of the most is credit enhancing, so that would per sure will be our objective.

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

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

Thank you. And then, I guess just one last question. I mean, there is still that a time before some of the charters in 2017 due roll off, but are 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 comments on the status of any negotiations where we may or may not be having. But also as a general observation, it’s -- in today's market, weak charter market its incredibly early to be having serious discussions charters [Indiscernible] potential for review or indeed with other charters if feeling is that the present charter is unlikely to want to extend. So we would have to give you a better or we would be in a better position to give you an update probably on our second quarter call.

Perfect. Well, that does it from me. I’ll turn it back over. Thank you.

Thanks very much.

Thank you. And our next question comes from [Indiscernible]. Your line is open.

Hi. Thanks for taking my question. Given the company’s strong cash flow during 2016, can you confirm that you’ve met the qualification for an excessive cash flow offer on the bonds for 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.

Great. Thank you.

Thank you. And I'm showing off any questions from our phone line. I would now like to turn the conference back over to Mr. Ian Weber from the closing remark.

Yes, thank you very much for taking part in this call. We look forward to providing you with an update on our first quarter results. And hope to meet with some of you as 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. You may all disconnect. Everyone have a wonderful day.