Global Ship Lease, Inc. (GSL) Q1 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Global Ship Lease First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this 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. Please go ahead sir.

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 on today and been able to access the slides that accompany this call. As normal, Slides 1 and 2 reminds 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 was filed with the SEC on April 12 this year. You can find the 20-F on our website or via the SEC’s. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We 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 and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning which is also available at our website. For today’s presentation, I’ll begin with an overview of our first quarter results as well as our fleet, charter portfolio and our strategy. After that, Tom Lister will discuss the current state of the wider shipping - container shipping market and provide an overview of our financials. I’ll then return for brief summary remarks and we’ll then be glad to take your questions. Turning to Slide 3, you can see our usual earnings overview. Our fleet remained fully charted throughout the quarter and continue to provide stable cash flow and earnings. Revenue in the quarter was $39.6 million and net income was $6.8 million. Adjusted EBITDA was $28.0 million. On Slide 4 you can see the contrast between the stability of our performance at the bottom of the slide and the quite substantial volatility in the spot charter market index, which is in the top part of the slide. You'll notice that the market index following a sustained downward trend in the last six or seven quarters ticked up markedly in the first quarter of 2017. As Tom will discuss in more detail, we believe that there is a sound fundamental basis for long-term improvement in the spot charter market after the slow demand growth overcapacity driven doldrums of the recent years, particularly for mid-sized and smaller vessel classes where we focus. Although we may - sorry, although we feel that it may be premature at this stage to overemphasize the sustainability of this recent improvement, we saw a somewhat similar improvement a couple of years ago, which was regressively only short-lived. We are heartened as it indicates increasing supply demand tension in the markets. In the meantime, we've continued to operate our fleet at very high utilization levels, maximizing the value of our long-term fixed rate contracts with top-tier counterparties. This in conjunction with our continuing emphasis on controlling costs wherever possible and prudent has enabled us to generate consistent stable revenue and cash flow over the long term. Slide 5 shows more detail on our 18 vessel charter portfolio, all of which has continued to perform as expected. As at March 31, 2017, we have an average weighted remaining contract duration of 3.7 years as well as full insulation from the spot charter market through the later portion of this year. In total, we have approximately 598 million of contracted revenues over that 3.7 years on average providing us with significant forward visibility. Our stated charter exploration portfolio and shows that we're never excessively exposed to any particular moment in the cycle. I would again note that our highest paying charter for the 11,000 TEU CMA CGM Thalassa extends through 2025 whilst two of our three vessels coming off a charter this year - later on this year, the Delmas Keta and the Julie Delmas are among the lowest earning vessels in our fleet. Turning now to Slide 6, I’ll give a brief update on our primary account party, CMA CGM, which is the charter of 15 of our 18 vessels and continues to be our largest shareholder. CMA CGM continually outperforms the wider market and we draw confidence from our deep relationship with one of the largest and strongest players in the container shipping world. CMA CGM have consistently fulfilled all charter obligations to us throughout our history which overlaps the most severe and extended downturn ever experienced by the industry. As you can see from the upper left part of this slide, CMA CGM is on the water fleet remains the third largest in the world amounting to some 2.2 million TEU of capacity including from the acquisition of APL. 75% of this capacity is charted in with the 15 global ship leased vessels representing just under 3% of CMA CGM’s total deployed capacity. Our other charterer Orient Overseas Container Line, OOCL ranks number seven in the world by capacity as of the end of the quarter with almost 100 vessels in their fleet. They are also a top quality line of company and a valued partner for GSL, again fully performing on their charter contracts. On Slide 7, we’ve outlined our strategy for maximizing long-term shareholder value. We continue to emphasize proactive risk management structuring of our long-term contracts with high-quality counterparties 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 focus has always been on ensuring stability and forward visibility through longer term fixed rate contract employment enhancing, we have agreed six amend and extend transactions to increase forward cover. So employment enhancing our revenue streams wherever possible and protecting them from outside factors. Our results over time are illustrative of that focus. We also continue to evaluate opportunities to further strengthen our balance sheet putting us in a position to remain strong throughout difficult market environments and to be able to act decisively to create value throughout a market recovery. On this front, we remain open to opportunistically deleveraging, in addition to fully participating, sorry, in addition to facilitating full participation in our recent excess cash flow offer which retired an additional $19.5 million principal amount of our outstanding notes. That offer closed in April of this year. Our stable contracted cash flows put us in a good position to continue to be active when appealing opportunities arise. I’d now like to hand over to Tom Lister was for some commentary on the market.

Thanks Ian. Well, what a difference a couple of months makes. Much has changed since we presented our 4Q 2016 results back in early March. Surprising most industry participants and observers to the upside. In the April report, the IMF forecasts 3.5% global GDP growth for full-year 2017, up from 3.1% in 2016 and 3.8% growth of global trade in goods and services, up from 2.2% last year. They remark upon buoyant financial markets and suggests that a long awaited cyclical recovery in manufacturing and trade may be underway. However, they also caution the downside risks remain. These include geopolitical tensions and uncertainty, persistent structural problems in various economies of low productivity growth and high income inequality and growing support in a number of developed economies for inward looking and potentially protectionist policies. In container shipping, sentiment has improved materially, with the charter rates and asset values climbing in March and April. Supply demand fundamentals have been improving, but the most significant recent development in the sector is the launch on April 1 of two new liner alliances, the Ocean Alliance comprising CMA CGM, COSCO SHIPPING, Evergreen and OOCL, and the Alliance which is had by the Hapag-Lloyd and UASC, three Japanese liner companies and Yang Ming. Turning now to Slide 8. Industry fundamentals are improving, particularly for midsize and smaller tonnage. Containerized trade growth for full-year 2017 is forecast 4.3%, up from around 3.4% in 2016 and current expectations are that demand growth should exceed that of supply during 2017 and 2018 continuing a trend established in 2016. Excess supplier remains an important consideration, but idle capacity has trended down significantly. The non-mainlane and intra-regional trades especially into Asia are expected to perform well in 2017 with the north south trades showing signs of recovery after a disappointing couple of years. As these trade groups are of particular relevance as one, collectively they represent over 70% of global containerized trade volumes, and two, they tend to be served mainly by mid-sized and smaller tonnage, which continues to be the focus of global shipping. Slide 9 focuses on forces shaping supply side dynamics, namely the forward order book, idle capacity and scrapping activity. All of which should continue to have a positive in other words downward impact on the supply of mid-sized and smaller tonnage. As you can see from the charts the vessels below 10,000 TEU continue to be under represented in the order book. Order book to fleet ratios for mid-sized and smaller tonnage range from 1% to 6.8%. Contrast that with 14.8% for the fleet as a whole and 45.8% for larger vessels. Ordering activity remained limited. Meantime, idle fleet capacity has trended down significantly. By mid-April, it stood at 3.4% roughly half that at year end. Almost 210,000 TEU was scrapped in 1Q, 2017, up by roughly 50% on 1Q, 2016. And as you’ll remember, 2016 was a record year. However, in March and April, as idle capacity reduced, market tension and spot market charter rates improved and scrapping activity slowed somewhat. Broker estimates suggest that roughly 37,000 TEU were committed for scrap during the 30 days to April 25 against a monthly average of about 70,000 TEU during the first quarter. This brings us to slide 10, where you can see a sharp uptick in the index, the spot market charter rates. As an illustration, rates for old styled Panamax tonnage, so vessels of broadly 4,000 to 5,000 TEU increased by 135% to around $10,000 per day during the quarter. Logically, values of existing vessels also increased, correlating with the trailing charter rates. Clearly, this is a very welcome development for the industry. The upward pressure is likely a function of improving sentiment, seasonality and preparation for including competing carriers’ reaction to the launch of the new liner alliances on April 1. One industry analyst calculates that liner capacity deployed on east west trades in early April was up on March by over 5%, with the number of vessels deployed up by nearly 4%. As the new service networks bed in, time will tell if the current upturn is sustained. Regardless, the speed and trajectory of charter rate increases points to increasing supply-demand tension in the sector. Slide 11, you've seen before. Vessel deployment patterns would have evolved since year end, particularly since April 1 and we will update the analysis once the new alliance network is 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-mainland and intraregional trades, such as intra-Asia. To conclude this section, I'd like to underline the following points. One, the macroeconomic backdrop, trade dynamics and overall sentiment appear to be improving, although downside risks remain. Two, container shipping fundamentals continue to improve, particularly for mid-sized and smaller ships, with demand growth outstripping supply growth in 2016 and forecast to do so again in 2017 and 2018, but there is still excess supply in the system. Three, spot market charter rates and asset values have firmed significantly in the first few months of 2017. Positive catalysts include improved sentiment, seasonality and the launch of new liner alliances and enhanced service networks. So while acknowledging the inherent volatility and cyclicality of the sector, we are more optimistic, albeit cautiously so than we've been for a while. If the recovery proves sustained, it will be good news for the re-chartering of both of our vessels coming open in late 2017 and early 2018. At the same time, we draw comfort from the downside insulation of our strong contracted charter coverage with industry leading counter parties. And in the context of evolving industry fundamentals, we remain strongly convinced that mid-size smaller tonnage is the right niche on which to continue to focus. So moving now onto the first quarter financials, starting on high thirteen. Revenue and utilization. We generated revenue of $39.6 million during the first quarter, down 3 million from revenues of $42.6 million in the comparative 2016 period. This decrease is due primarily to 68 fewer operating days, mainly as a result of three dry dockings in the quarter compared to none in the prior period and to the prior period being a leap year. Furthermore, the effect of reduced charter rates for Marie Delmas and Kumasi from August 1, 2016, as part of their negotiated charter extensions. Utilization was 96.9%. Vessel operating expenses. Vessel operating expenses were $10.4 million in the first quarter, down 8.7% from the prior year period. Importantly, the average cost per ownership day fell $535 per day or 7.7% to $6426 per day in the first quarter. Interest expense. Interest expense in the quarter was $11 million, down 2.1 million on the interest in the comparative 2016 period, primarily due to a lower principal amount outstanding on the notes from the 2015 excess cash flow and sale proceeds offer, which closed in March last year and the subsequent open market purchases, which in aggregate retired $53.9 million of principal amount of the notes. Net income. Net income for the first quarter was $7.6 million as compared to $5.3 million of net income for the three months ended March 31, 2016, driven primarily by a reduced interest expense, reduced depreciation and reduced operating costs, partially offset by lower operating revenues. Turning now to the balance sheet. Slide 14 shows the balance sheet. Key items as of March 31 include cash at 57 million, total assets of $773.4 million, of which 712.7 million is vessels. Our total debt was $426.4 million, down 2.9 million since the end of 2016. Net debt was $369.4 million and shareholders' equity was $335.7 million. Cash flows. Slide 15 shows our cash flows. I’d highlight that net cash provided by operating activities was $8.2 million in the first quarter as compared to $7.2 million in the same period last year. Also subsequent to the end of the quarter, we executed our 2016 excess cash flow offer, resulting in $19.5 million principal amount of the notes being retired. I would now like to turn the call back to Ian for closing remarks.

Thanks, Tom. If you’d like to turn to slide 17, I’ll give a brief summary and then we can move on to your questions. We continue to have full performance on our long-term charters with high quality counterparties and to have high vessel utilization. We generate stable, predictable cash flows and things. As Tom described, the fundamentals of our industry have moved in an encouraging direction of late, with vessel scrapping and limited new vessel ordering over the last five or six quarters depressing supply growth combined with a higher level of demand growth for container ships that has been experienced in recent times. Our fleet remains fully contracted with most vessels continuing to service their current charters for multiple years going forward. And whilst the longer-term sustainability of this recent market improvement has yet to be proven, it does demonstrate that there is an underlying tension in supply and demand, which is clearly encouraging after the substantial overcapacity in recent years, particularly given the charter renewals we have later in the year. Finally, our contracted cash flow stream supports our ongoing efforts to opportunistically enhance our balance sheet. By engaging in open market repurchases and the annual excess cash flow offer and the collateral sale proceeds offer, alongside our continued focus on operational performance and cost control, we've made progress in reducing our net debt to adjusted EBITDA from 4 times at the end of 2015 to 3.3 times as of March 31, this year. Note, we have no material refinancing requirements until 2019. That concludes our formal remarks or prepared remarks and we’d now be very happy to take your questions.

[Operator Instructions] Our first question is from the line of George Brickfield of BTIG. Your line is open. Please check your mute button, George.

So just a couple of questions. Can you repeat the April scrappage statistics that you gave on the call? I’m sorry, I just missed those.

Yes. During the first quarter, it was 210,000 TEU that was scrapped and during the course of April or at least the first 25 days of April, we believe it was region 37,000 TEU.

Great. Thank you. And then second question, in terms of how your fleet is being deployed, do you have a sense of how much of it is on mainline routes versus north-south or intra-Asia routes?

Our vessels are mainly medium sized and smaller. And they are best suited to and are consequently deployed in the smaller trade lanes, be the intra-regional or north-south or smaller east-west trade lanes. And our largest ship, [indiscernible] used to be deployed on East Europe trade lane, but she's been redeployed now to one of the smaller arterial rigs.

Got it. That's very helpful. Thank you. And then a final question, is there any update you can give us in terms of a refi of your 10% notes.

Well, it remains an important priority for us. We do have a couple of years to go before the bond forced you, although that time will go by pretty quickly. We certainly don't want to leave a refi until late in that period. If we're able to refinance early on sensible terms, then we will and we continue to evaluate opportunities to do that.

Thank you. [Operator Instructions] I’m not showing any further questions at this time. I'd like to turn the call back over to Ian Webber for any further remarks.

Thank you. Thanks everyone for listening to us. We look forward to giving an update on our second quarter, which would be end of July, early August. Thank you very much.

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