Global Ship Lease, Inc. (GSL) Q2 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Global Ship Lease Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will have 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 turn the call over to your host for today’s conference, Ian Webber, Chief Executive Officer of Global Ship Lease. Sir, you may begin.

Thank you, very much. Good morning, everybody and thank you for joining us. I hope you’ve been able to look at the earnings release that we issued earlier today and also have been able to look at the slides that accompany this call. As usual, the first two our Slides remind you that today’s call may include forward-looking statements that are based on current expectations and assumptions and are by their nature inherently uncertain and outside of the Company’s control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the Safe Harbor section of the slide presentation. We also draw your attention to the Risk Factors section of our most recent Annual Report on Form 20-F, which is for 2016, and which was filed with the SEC on April 12, 2017. You can attain this via our 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. We do not undertake any duty to update forward-looking statements. For reconciliations of the non-GAAP financial measures to which we will refer during this call to the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning. Today's presentation will follow the normal format. I'll provide an overview of our results for the quarter, our fleet, our charter portfolio and our strategy. After that, Tom will discuss the wider shipping -- the container shipping market and provide an overview of our financials. I’ll then return for brief summary remarks and we’ll be then glad to take your questions. Turning to Slide 3. Our fleet was fully chartered through the quarter, generating operating revenue of $40.3 million, net income of $6.8 million, and adjusted EBITDA of $28.1 million. On Slide 4, as usual, I would draw your attention to the contrast between the performance of the containership spot charter market, which is the graph at the top of the page, the red line indicating how that spot market moves. And the stability of our earnings, which we show in the lower half of the Slide. Additionally, I would also like to point to the significant strengthening in the charter market since the start of the year. Tom will discuss this more. While seasonal and other factors, which Tom will also discuss in detail a little bit later, have caused some moderation recently, we remain encouraged by the underlying supply-demand fundamentals that have contributed to this upward movement in the charter market. And we believe that these fundamentals are most promising for the mid-size and smaller vessel classes where we focus. It remains to be seen whether overall progress can be sustained for the long-term but we believe the manifest tension in the market is cause for cautious optimism. As for Global Ship Lease's results, with full charter coverage we have closely controlled costs and have delivered high levels of vessel utilization this quarter as in previous quarters. Leading to very stable financial results over time. Slide 5 shows more detail on our 18 vessel charter portfolio. As of June 30, we had an average weighted remaining contract duration of 3.5 years, and approximately $557 million of contracted revenue. Our mainly long-term staggered charter portfolio ensures that we not only have a high degree of forward visibility but also that we not overly exposed to renewals at any particular point in the cycle. To this point, while you can see that most of our vessels have multiple years of remaining contract cover, we do have three vessels coming off their current charters later this year. It's important to note that two of these vessels are among the lowest earning vessels in our fleet and whist the current market certainly isn't anywhere near peak levels, the overall environment is substantially more appealing even at the beginning of this year. Additionally, you will notice that our highest paying charter for the 11,000 TEU CMA CGM Thalassa up $47,200 per day runs through to late 2025. Turning to Slide 6. I will give you a brief update on our main counterparty, CMA CGM, which is the charterer of 15 of our 18 vessels and is also our largest shareholder. CMA CGM has consistently outperformed the wider industry and we are proud of our strong long-term relationship with this premier player in the container shipping world. They have consistently fulfilled all charter obligations through our ten-year history which overlaps the most severe and extended downturn that the industry has experienced. As you can see in the upper left of this Slide. CMA CGM's on the water fleet remains the third largest in the world amounting to some $2.3 million TEU. Including from the acquisition of APL. Approximately three-quarters, 75% of that capacity is chartered in with the 15 GSL vessels representing just under 3% of CMA CGM total capacity. We believe that we are among the largest providers of tonnage to CMA CGM by vessel number. Our other charterer, Orient Overseas Container Line, OOCL, another premium name in the industry has recently announced a merger with COSCO Shipping. That would see the combined entity becoming a top three liner company by TEU capacity. Assuming this consolidation moves forward as anticipated, we expect GSL to have both the number three and the number four liner companies as our customers. On Slide seven, we have outlined our strategy for maximizing long-term shareholder value. In keeping with our core philosophy of pursuing stability and consistency in cash flow and earnings, we strongly emphasize pro-active risk management through our long-term contracts, as well as in the assessment of any potential acquisition opportunities which would need to be immediately cash generative and involve the vessels employment with a high quality counterparty. Our financial results over the years demonstrate our commitment to these principles. We continue to evaluate opportunities to proactively enhancing the balance sheet through both deleveraging and opportunistic refinancing of our 10% notes. Whilst these notes don’t fall due until April 2019, some 18 months away, we will continue to look for opportunistic refinancing, moving forward only as such time as we find terms to be sufficiently attractive and supportive of the GSL strategy. This was exemplified by our recent approach to the bond market which ultimately we suspended as we were not able to price the transaction on terms acceptable to us. We were encouraged however by investor feedback and continue to evaluate ways forward. I would now like to hand over to Tom for some commentary on the market.

Thanks, Ian. Since our Q1 earnings call, the development of the macroeconomic backdrop has been encouraging. In their July update, the IMF described a firming recovery and although they hold their global GDP growth forecast for 2017 steady of 3.5%, up from 3.1% in 2016, they notched up their 2017 growth forecast to global trade in goods and services from 3.8% to 4%. Furthermore, they note the upside potential of a stronger or more sustained cycling rebound in Europe, where political risks have diminished. But as always, they also caution that downside risks remain. In container shipping, 2017 has shows marked improvement on 2016. Cargo volumes have firmed, idle capacity is down, charter rates and asset values are up and supply-demand fundamentals are moving in the right direction. Indeed our thesis is that the industry is at a point of positive inflection, particularly from mid-sized and smaller vessels and over the next few slides we will provide data to support that contention. So turning to Slide 8. Industry fundamentals are improving, particularly for mid-sized and smaller tonnage. Containerized trade growth of around 5.1% is projected for 2017 and growth and demand is expected to exceed that of supply during 2017 and 2018, continuing a trend of established in 2016. Excess supply remains a consideration but idle capacity has trended down significantly. As you can see from the charts on the right hand side, non-main lane trades collectively represent around 70% of global containerized trade volumes with intra-regional trades, most notably intra-Asia, forming the largest and fastest growing slice of that pie. As you know, these trade groups are of particular relevance as they tend to be served mainly by mid-sized and smaller tonnage which continues to be the focus of global ship leases. Slide 9 focuses on the forces shaping supply side dynamics, namely the forward order book, idle capacity and scrapping activity, all of which have continued to have a positive, in other words, downward impact on the supply of mid-sized and smaller tonnage. As you can see from the charts, vessels below 10,000 TEU continue to be under-represented in the order book. Order book to fleet ratios of mid-size and smaller tonnage range from 0.5% to 6.1% against 13.1% for the fleet as a whole and almost 40% for larger vessels. Ordering activity remains limited, around 60,000 TEU ordered during the first half of 2017. Contrast that with around 200,000 TEU ordered in the first half of 2016 and over $1.3 million TEU in the same period of 2015. Meantime, idle capacity has trended down significantly, hitting around 2.6% by the end of June. Over 295,000 TEU scrapped in the first half of 2017, up slightly on the same period in 2016 and as you will recall, 2016 was a record year for container ship demolition. However, scrapping activity was concentrated in the mid-size and smaller tonnage segments. However, I should note that logically enough scrapping momentum slowed in the second quarter as idle capacity reduced and market tension improved pushing rates up in the spot charter market. Broker estimates suggest that less than 10,000 TEU of capacity was scrapped out during June. Slide 10 puts recent fleet developments in the longer-term perspective. There are various takeaways from the top chart. First, global fleet growth tends to be concentrated in the large vessel sizes and there is nothing new about this. Second, the sector has absorbed its legacy order book and is adjusting to a lower growth paradigm. Third, speculative ordering which drove order book to fleet ratios north of 60%, [indiscernible] of the global financial crisis in 2007, is extremely limited. By the end of 2016, the order book to fleet ratio has fallen to 15.7%, the lowest level for at least 17 years. It has since fallen further to 13.1%. And as we have already noted, the ratios for mid-size and smaller tonnage are lower still. The chart at the bottom Slide speaks to the fact that all fleet segments below 8000 TEU showed either net-neutral or net-negative fleet growth during the first half 2017, continuing the trend of 2016. This translates to improving fundamentals while the growing likelihood of the supply side squeeze for the midsize and smaller fleet segments. This brings us to Slide 11, where you can see a sharp uptick in the index of spot market charter rates and asset values. After a long challenging period, the sector looks to be at a point of positive inflection. It won't all be smooth sailing of course. There will be some choppiness along the way driven both by structural and seasonal factors. The spot market charter rate index at June 30, 2017 was up 24% on year-end 2016 despite slight softening during the latter part of the second quarter. As referenced during our Q1 earnings call, there was increased chartering activity around the launch of liner operators new mega alliances in April. This catalyzed a steep increase in spot market charter rates which in our view brought forward the rate recover curve. Put another way, have the new alliances not been launched, we would have anticipated a less steep recovery curve supported by improving fundamentals. As the new alliance networks bed in and the charter market comes down during the usual summer lull, rates are correcting towards what we would regard as a more normalized recovery curve. But the direction of travel remains clearly positive and it is also reflected by firming asset values with the second hand price index up 28% during the first half of 2017. Slide 12, you have seen before. Vessel deployment patterns will have evolved since year-end particularly since April and we will update the analysis once the new alliance networks have stabilized. Nevertheless, the thrust of the message is unchanged. Mid-sized and smaller ships remain key to most trades, particularly to the large groupings of non-main land and intra-regional trades. Such as intra-Asia. This point is highlighted further on the next couple of slides, the first of which, Slide 13, maps the global sailing of big container ships, those of 10,000 TEU and up, over a 30-day period in the second quarter. Slide 14, on the other hand maps the sailings of sub-10,000 TEU vessels. In other words, the mid-sized and smaller container ships [indiscernible] over the same period. A picture speaks a thousand words and the deployment flexibility and breadth and depth of global coverage of small and mid-sized container ships is really quite striking. So to conclude this section, I would like to underlying the following points. One, the macroeconomic backdrop, trade dynamics and overall industry sentiment appear to be improving. Although as ever, downside risks remain. Two, container shipping fundamentals continue to improve, particularly for mid-size and smaller vessels with demand growth outstripping supply growth in 2016 and forecasted to do so again in 2017 and 2018. The starting point is still one of excess supply but idle capacity of 2.6%, down from around 7% at year-end, shows things are moving in the right direction. Three, mid-size and smaller container ships remain a fundamental relevance to global container trade, especially to the non-main lane and intra-regional trades that collectively represent around 70% of global volumes. And finally four, spot market charter rates are back in cash flow accretive territory and asset values while still close to cyclical lows are firming significantly. In short, while still acknowledging the inherent volatility of the sector, we believe container shipping is at a point of positive inflection. Furthermore, we remain convinced that the recovery prospects are strongest through mid-sized and smaller tonnage. Moving now on to the second quarter financials starting on Slide 16. First, revenue and utilization. We generated revenue of $40.3 million during the second quarter, down $1 million from revenues of $41.3 million in the comparative 2016 period. This decrease is due primarily to reduced revenue as a consequence of lower for longer amendments to the charters of Marie Delmas and Kumasi, effective August 1, 2016, offset by fewer off-hire days in the quarter compared to prior year period mainly due to fewer regulatory dry-dockings. Utilization was 97.4% despite the grounding of a vessel that has since been fully repaired and returned to service. Vessel operating expenses. Vessel operating expenses were $10.9 million in the second quarter, down 4.1% from the prior year period. Importantly, the average cost per ownership day fell $274 per day or 4% to $6,635 per day. Interest expense. Interest expense in the quarter was $11 million, down $0.1 million on the interest in the comparative 2016 period, primarily due to a lower principal amount outstanding on the notes. Net income. Net income for the second quarter was $6.8 million as compared to $6.0 million in the second quarter of 2016, driven primarily by reduced interest -- a reduced interest expense, reduced depreciation and reduced operating costs, partially offset by lower operating revenues. The balance sheet. So Slide 17 shows the balance sheet and key items as of June 30 include cash of $59.4 million, total assets of $766.4 million of which $704 million are vessels. Our total debt was $396.9 million, down $23 million since the end of 2016. Net debt was $337.5 million and shareholders' equity was $342.5 million. Cash flows. So Slide 18 shows our cash flows and here I would highlight that net cash provided by operating activities was $27.9 million in the second quarter compared to $27.2 million in the same period last year. I will now turn the call back to Ian for closing remarks.

Thanks, Tom. If you will now turn to Slide 19, I will give a brief summary and then we can move on to questions. Our charters have all continued to perform as we provide top class counterparties with consistently high quality performance. We maintain close control of costs resulting in stable, predictable cash flows and earnings. As Tom has discussed, the underlying drivers that we have long been focused on, minimal ordering of new vessels in the mid-size and smaller vessel classes, elevated scrapping levels and continued growth in international containerized trade particularly in the non-main lain trades most reliant on our size of vessels. Have driven a meaningful strengthening of the charter market in 2017. While the ultimate sustainability of this charter market improvement remains to be seen and with the majority of our fleet continuing on their long-term fixed rate contracts for multiple years, there is much to be encouraged by in the recent display of positive tension in the market. Finally, our long-term contracted cash flows put us in position where we can actively pursue enhancements to our balance sheet. Having reduced our net debt to adjusted EBITDA ratio from 3.3 times as of March 31, 2017 to 3.1 times at this most recent quarter ended June 30, we will continue with these efforts, whilst also continuing to look for attractive opportunities to proactively refinance our outstanding 10% loans. At the same time, it's important to keep in mind that we have no material refinancing obligations until April 2019, and we are thus able to approach any opportunity in a measured and disciplined manner, proceeding only at such time as we believe that we can achieve terms that support our long-term goals. We would now be happy to take your questions.

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

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

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

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

I wouldn’t really want to speculate but we are open minded.

[Operator Instructions] Our next question is from the line of Nicholas Gower with Clarksons Platou Securities. Your line is open.

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

Yes, thanks for question, Nick. It's very much the same answer that we have given on recent calls to this. We had preliminary discussions with both OOCL via brokers and with CMA CGM direct. But it's really too early before the renewals are due for those discussions to be classified as serious. And that’s a function of today's market. It's generally the case that when the market is soft, owners and charterers don’t engage much before three of four, or maybe five weeks before the potential delivery - redelivery of the ship. And that’s exaggerated today in the middle of 2017 as charterers, the liner companies wait to see how their reconfigured fleets post the launch of the alliances that Tom mentioned, settle down. So we really wouldn’t expect to engage with CMA CGM on the two 2200 TEU vessels until mid-August maybe. And OOCL a little later.

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

Yes. We will be extending those vessels.

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

Yes. Absolutely. Unfortunately, these kinds of incidents happen. Our record is pretty good but we did have a grounding, as you say. It was 25 odd days of off hire and the repairs have been carried out and the vessel is back in service as Tom said, and the principal costs of the repairs was covered by insurance. We have to prepare a deductible but otherwise the bill is paid by insurers.

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

Well, it was one of the 2200 TEU vessels. [indiscernible] months.

Thank you. I am not showing any further questions. I will now turn the call back over to Ian Webber.

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