Global Ship Lease [GSL] Conference call transcript for 2023 q1
2023-05-10 13:12:07
Fiscal: 2023 q1
Operator: Good day, and welcome to Global Ship Lease Q1 2023 Earnings Call. [Operator Instructions]. I'd now like to welcome Mr. Ian Webber, Chief Executive Officer, to begin the conference. Ian, over to you.
Ian Webber: Thank you. Thank you very much. Good morning, good afternoon, everybody, and welcome to the Global Ship Lease First Quarter 2023 Earnings Conference Call. The slides that accompany today's presentation are available on our website at www.globalshiplease.com. Slides 2 and 3 remind you as normal 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 filed on Form 20-F, which is for 2023 and was filed on March 23 this year. You can obtain this far 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 do not undertake any duty to update forward-looking statements. The 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, usually refer to the earnings -- please refer to the earnings release that we issued this morning, which is also available on our website. As usual, I'm joined today by our Executive Chairman, George Youroukos; our Chief Financial Officer, Tassos Psaropoulos; and our Chief Commercial Officer, Tom Lister. George will begin the call with a high-level commentary on GSL and our industry, and then Tassos, Tom and I will take you through our recent activity, the quarterly results themselves and the financials and the current market environment. After that, we'll be pleased to take your questions. So turning now to Slide 4. I'll pass the call over to George.
Georgios Youroukos: Thank you, Ian, and good afternoon or evening to all of you joining us today. As flagged in recent quarters, ongoing normalization in the charter market due to macro headwinds had led to downward pressure on charter rates and asset values relative to the record-breaking levels of last year. However, in recent weeks, the charter market has shown some signs of stabilization at rates that are still some way above both pre-COVID and historic average levels. It is difficult to say whether these recent positive trends will be sustainable. But we will, of course, closely monitor the situation. Meanwhile, our extensive contract cover for a large portion of our fleet, much of which were secured for long durations during the market's hot strike has positioned GSL to weather whatever markets are ahead. We have a robust balance sheet with no debt or refinancing requirements before 2026 and an overall low cost of debt with all of our floating rate debt fully hedged through 2026. From this position of financial strength, we are focused on the sustainability and resilience of our business in the long term, and on further improving our competitiveness by investing in our fleet to meet the challenging regulatory requirements and commercial demands for decarbonization. As and when growth opportunities arise that meet our strict and disciplined criteria, we want to be ready to act decisively for the benefit of our shareholders. As with our recently announced commitment to purchase 4 ships with attractive charters attached. More importantly, we're also continuing to payout sustainable dividend of $0.375 per common share quarterly $1.5 annualized, and we have returned further capital to shareholders through the buyback of an additional $3.8 million of shares since our last earnings call. $3.8 million, just to make sure, bringing the total share repurchases since third quarter 2021 to $43.8 million. With that, I will turn the call over to Ian.
Ian Webber: Thank you, George. Please turn to Slide 5. Here, we show the makeup of diversification of our charterer base. This is well spread across the top tier of liner companies. In total, as of March 31 this year, including the 4 ships that we've agreed to purchase that George just mentioned, and the other fixtures that we've agreed up to yesterday by the 9th, we have over $2.1 billion of contracted revenue spread out over a TEU weighted average of 2.5 years, including 12 new charters, which were agreed year-to-date, which collectively those 12 new charters agreed this year at around $190 million of contracted revenues. On the next slide, Slide 6. As in previous quarters, we show illustrative guidance across different rate scenarios, as always, I want to be very clear that this is not a forecast. We're not forecasting charter rates or our earnings, but we're rather illustrating the extent of our contracted revenues year-by-year and our very limited spot market exposure through 2024. As you can see from the modest variations across the scenarios, we have very little tonnage coming into the charter market this year. In fact, we're over 97% days covered. As we move into 2024, when we have a few more vessels coming open, nevertheless, we're nearly 80% covered on a days basis, the extense of the forward charters that we previously signed gives us good momentum for continuing earnings growth across the different scenarios. Moving on to Slide 7, we show an overview of our dynamic and disciplined capital allocation strategy. Because of our contract cover and therefore, forward visibility on cash flows we've been able to simultaneously pay our quarterly dividend, engage in share buybacks, delever the balance sheet to derisk and build equity value, deploy CapEx to meet the evolving needs of the market, including the increasing decarbonization requirements of our customers and build a degree of cash liquidity that makes it possible for us to act quickly when acquisition opportunities arise. Overall, we target a balanced approach to capital allocation with a focus on building long-term shareholder value on a sustainable basis in a cyclical industry. We always assess the risks to our cash flows before weighing the various capital allocation opportunities available to us, and we allocate our capital accordingly. As you see, when asset values were overheated and growth opportunities didn't meet our strict criteria, we spent almost $44 million on share buybacks, no growth, without which our share count would have been around 7% higher today. Now as asset values have normalized, we've directed some of our capital to the strongly value-adding purchase of ships with attractive charters attached. That brings us neatly to Slide 8, where you can see an illustration of our disciplined timing for acquiring vessels in the market. Having grown substantially prior to the COVID-driven spike in asset values, you can see that we went nearly 2 years without acquiring further vessels at the high prices prevailing during that peak period. This was despite the fact that GSL's balance sheet was as strong as it had ever been. And we're just not inclined to make acquisitions simply because we have access to capital. We aim to make acquisitions where doing so will benefit our business and our shareholders over the long term. On Slide 9, we recap the terms under which we've recently agreed to purchase 4, 8,500 TEU vessels built in 2003 and 2004. These are high specification, enhanced energy efficiency ships that will begin the 2-plus year charters to a leading liner operator upon delivery to us toward the end of Q2, beginning of Q3. In aggregate, these vessels will contribute around $77 million of aggregate adjusted EBITDA over the minimum firm period of the charters, and up to a total in aggregate of $95 million of EBITDA if all of the options are exercised by the charters. We're planning to finance the $123 million purchase price conventionally combination of cash on hand and senior secured debt. The latter of which will, of course, be covered by our interest rate caps, which we have an excess today, capping LIBOR and SOFR at 75 basis points. These are attractive ships, which we believe will have good earnings potential after the initial charters. On Slide 25, the so-called EBIT calculator page, we provide some benchmark rates for this size segment. And as you can see, we also provide the lightweight tonnage of the vessels, a little under 38,000 tonnes per ship, in case you wish to run downside sensitivity analysis based on scrap values. So consistent with our well-established track record, in our view, this deal is cash accretive, low risk with attractive upside potential. With that, I'll turn the call over to Tassos to talk you through our financials.
Anastasios Psaropoulos: Thank you, Ian. On Slide 10, we have summarized our year-to-date financial highlights. Revenue for the first quarter was $159.3 million, up from $153.6 million in the prior year period. Adjusted EBITDA for the quarter was $104.9 million, up from $90.4 million in the first quarter of 2022. Our normalized net income, which is adjusted for one-off items, increased from $67.3 million in the first quarter of 2022 to $75.6 million in first quarter 2023. Moving to the balance sheet items. Our gross debt at the end of first quarter was $896.5 million, down from a little under $1.1 billion in the prior year period. We had $288 million in cash on our balance sheet at the quarter end, of which $143 million is restricted with $126 million of that being received of charter hire in advance and $27 million other restricted cash. The remaining $135 million covers minimum liquidity covenants in our debt facility and provides for our working capital requirements together with some balance sheet flexibility. A portion is also earmarked to fund the acquisition of the 4, 8,500 TEU ships. As mentioned, we'll continue to return capital to shareholders through both our quarterly dividend and our continued use of the share buyback authorization where we have a little over $6 million of the current authorization remaining. Turning to Slide 11 now. We are delivering, lowering our cost of debt and minimizing our interest rate risk. On the left, you can see our progress derisking our balance sheet from $950 million in outstanding debt at the end of year 2022 to an expected $588 million in outstanding debt by the end of 2024, based on existing debt and scheduled amortization, which is aggressive and continues to derisk our balance sheet. In the center of the slide, you can see the margin and overall cost of debt. Our average margin is now down to just over 3% from 4.6% at the beginning of 2022. And as already mentioned, under our current interest rate cap of 75 basis points for LIBOR and similar level for SOFR, all our floating rate exposure is hedged till 2026, and there is still headroom under the cap to cover future floating rate facilities like the one we intend to use for the purchase of the 4, 8,500 TEU vessels. On the right of the slide, you can see that our financial leverage is increasingly robust. With our leverage ratio having fallen from approximately 8.4x at the end of 2018 to only 1.8x now. With that, I will turn the call over to Tom.
Thomas Lister: Thanks, Tassos. As usual, and for the benefit of listeners who are new to GSL, Slide 12 is intended to highlight the ship sizes on which our business is focused, which will help put the subsequent slides in context. GSL is focused on midsized and smaller ships, which are ships ranging from about 2,000 TEU up to about 10,000 TEU, so effectively the liquid charter market. The top map on the left shows the deployment of "our sizes of ship" i.e., ships under 10,000 TEU and emphasizes their operational flexibility, which is especially valuable in these uncertain times. As you can see, they're deployed everywhere. The bottom map shows where the big ships those larger than 10,000 TEU were deployed which tends to be on the East-West main lane or arterial trades, where the cargo volumes and shoreside infrastructure can support them. And it's important to note that over 70%, 7-0% of global containerized trade volumes. In fact, it was 72% in 2022, are moved outside these main lanes in the north-south regional and intermediate trades served predominantly by ships like ours rather than by the big ships. As George remarked at the outset, the macro and geopolitical outlook that we're all currently facing remains challenging and uncertain. So as usual, we focus on the supply side, where we do have forward visibility and against which listeners can set their own expectations for containerized trade or GDP growth as they feel appropriate. Slide 13 shows the metrics that tend to be used as a measure of supply-side tension. The top chart shows idle capacity, which at quarter end was around 2.5%, although it has since come down a bit. In fact, the latest figure I've seen is about 1.4%. The bottom chart shows containership scrapping and recycling. This has still been pretty limited so far in 2023, defining the prior expectations of many industry observers. We'll come back to this when discussing the charter market, but long story short, there's still demand for capacity in liner companies' networks and earnings in the charter market remain attractive. Slide 14, looks at the order book. Here, you can see on the left, the composition of the order book by size segment, covering all deliveries currently scheduled to take place not only this year but also through 2026 and beyond. The overall order book-to-fleet ratio as of quarter end was 30%, 3-0%. However, it is still heavily skewed towards the very big ships, over 10,000 TEU, for which the ratio is 52.8%. Meanwhile, our focus segments of 2,000 to 10,000 TEU highlighted in the gray box have a significantly lower ratio of 14.5%. And there are 2 important points to keep in mind when assessing the order book: one, that this is -- the relevant metric here is the net change to the absolute fleet size that is deliveries minus scrappings; and two, that we should consider effective supply, which is a function of capacity and operating speed, slow the fleet down and effective capacity shrinks. So on the first point, the midsized and smaller containership fleet is aging. As you can see from the chart on the right, if scrapping were to continue to be deferred, by the end of 2026, almost 2 million TEU of the sub-10,000 TEU capacity currently on the water would be at least 25 years old and potential candidates for the recycling yards in a softening market. Net this out against the total order book of sub-10,000 TEU ships due to be delivered over the same time frame, and you would get implied net growth in these sizes of just 1.1% and which itself would be spread over the coming 3-plus years. On the second point, new decarbonization regulations are already being rolled out across the industry from July -- sorry, from January 1 of this year with more to follow. These regulations, which will tighten over time, are prompting ships to slow down. Illustratively, for the GSL fleet, average operating speeds at sea for the first quarter of 2023 are down over 9% on 2022. Turning to Slide 15, the charter market. As you can see from the chart, after falling sharply in late 2022, rates in the charter market have plateaued in recent weeks. In fact, for the segments in which vessel availability and market liquidity is most limited, rates have actually firmed a little since the lows of February and early March. Charter durations have also improved somewhat since our last earnings call with up to 2 years achievable in some instances for the right ships. It's hard to say how long these market dynamics will last, but as you will have seen in the earnings release, we have capitalized on the opportunity to fix a handful of ships for decent terms and rates including the forward fixture, which is something unheard of since the third quarter of last year or so of one of our Eco-9,000s. The next 3 slides focus on decarbonization and the evolving regulatory environment. Slide 16, which is largely self-explanatory, I hope, summarizes the 3 existing regulations on which there is reasonable clarity, EEXI, CII and EU ETS. The direction of travel is clear, these regulations and more like them will only become broader in scope and more demanding in nature over time. On the next slide, Slide 17, we've laid out some of the expected implications of these regulations for the global fleet. Broadly, these are: number one, reduced operating speeds to reduce emissions. The upside here is that in addition to reducing emissions, a reduction in average operating speed of just 1 knot, 1 nautical mile per hour, reduces effective supply by around 6%; two, vessel operations will be optimized for the CII algorithm and ratings. In addition to slowing ships down, efforts will be made to improve their operational efficiency and thus, reduce their fuel burn and emissions; and number three, increasing investments will be made in energy-saving technologies and retrofits in developing clean or at least cleaner fuels and propulsion and in carbon capture and mitigation technologies. Slide 18 summarizes the actions we are taking to preserve and we hope, improve the commercial positioning and trading flexibility of the GSL fleet in a decarbonizing world. First, we're ensuring regulatory compliance, as you would expect. Second, we're installing technologies and applying protocols to our ships, including automated data capture and live performance management systems to enhance cooperation between owners and charterers to facilitate energy optimized vessel operations and reduced fuel burn. Third, we're retrofitting energy-saving technologies to our ships subject to commercial agreement and in cooperation with the charterers. Such agreements are commercially sensitive and vary on a case-by-case basis. But the underlying rationale is that we will only invest in discretionary retrofits, i.e., those not required to meet regulatory requirements that will enhance the value and earnings of the corresponding ship. So that's the crux of it. But for those of you who would like to know more, may I refer you to the Climate Strategy section of our latest ESG report, which is available on our corporate website. With that, I'll now turn the call back to George to wrap up.
Georgios Youroukos: Thank you, Tom. I will provide a brief summary, and then we would be happy to take your questions. Including our recent agreed charter fixtures, and the 4 ships we're to acquire, we have excellent contract cover of $2.1 billion over an average of 2.5 years. Fully covering our debt service, CapEx and dividends through 2023 and 2024 without depending at all upon charter renewals. We have built a strong balance sheet with $288 million in cash, of which $153 million is restricted with a balance of $135 million, covering minimum liquidity covenants regular working capital needs and, of course, the cash earmarked to partially fund the 4 8,500. With no refinancing requirements until 2026, we have continued to amortize debt, building equity value in the process, and bringing our financial leverage to below 2x. Our floating rate debt is fully hedged with LIBOR and software capped at only 75 basis points. And we have some additional headroom under the cap to hedge for further future floating rate facilities. And the average margin on our debt is competitive priced at below 3.1%. Now turning to Slide 20. It's clear that macro uncertainty is an overhang on the sector. But we have, for the time being, seen at least a pause to the sharp reduction in charter rates and asset values over recent quarters. And although the majority of chartering in the market during the first quarter tended to be tactical and short. In recent weeks, we have seen charter terms extended somewhat for the right ships. Meantime, liner operators after record earnings last year, are providing more cautious guidance for the year ahead. Now against this backdrop and capitalizing upon our high-specification fleet, year-to-date, we have added 12 new charters and about $190 million of contracted revenues. Now wrapping up, managing risk and being nimble and prudent in our capital allocation underpins everything we do. Our goal is to maximize long-term value for shareholders while ensuring GSL's continued resilience in a cyclical market. Our EBITDA and net income were both meaningfully up versus the prior year period. We remain active in share buybacks, which cumulatively have reduced our share count by about 7%, and we maintain a strong sustainable dividend. At the same time, we have returned to selective growth with a well-timed acquisition that matches our track record of making disciplined transactions that are cash accretive, low risk and have upside potential. With that, we'll be happy to take your questions.
Operator: [Operator Instructions]. Our first question comes from the line of Liam Burke from B. Riley Financial.
Operator: Our next question comes from the line of Omar Nokta, Jefferies.
Operator: [Operator Instructions]. Our next question comes from the line of Amit Mehrotra from Deutsche Bank.
Operator: There are no further questions at this time. I turn the call back over to Mr. Webber.
Ian Webber: Thank you very much. Thanks for listening. Thank you for your questions. We look forward to giving you a further update on our second quarter in about 3 months' time. Thank you.
Operator: This concludes today's conference call. You may now disconnect.
