Global Ship Lease, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Global Ship Lease Q4 2020 Earnings Conference Call. . I would now like to hand the conference over to your speaker today, Ian Webber, CEO. Thank you. Please go ahead, sir.

[Ian Webber:]

Thank you very much. Good morning, good afternoon, everybody, and welcome to the Global Ship Lease Fourth Quarter 2020 Earnings Conference Call. The slides that accompany today's presentation are available on our website, www.globalshiplease.com. In those slides, Slide 2 and 3, as usual, 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.

[George Youroukos:]

Thank you, Ian, and good morning or good afternoon to you all. Through the second half of 2020 and into 2021, we have taken action to capitalize on the amazing bull container market in ways that will benefit the company for years to come. Our liner operator customers, our charters, have shown impressive capacity discipline during 2020, which is a real game changer that has helped them to deliver incredible results despite the challenges of COVID. From the third quarter 2020, the lines have increasingly found themselves short of containership capacity in the face of a rapid rebound of containerized freight demand. That shortage has been compounded by severe port congestion, particularly on the U.S. West Coast and in China, and the already tight vessel supply that preceded the onset of COVID. This combination of factors has driven up charter rates and has enabled us to lock in value by securing charters across our fleet of low slot cost, high reefer capacity, fuel- and emission-efficient containerships at rates and durations well beyond what has been available in recent years. On the back of adding contract cover at higher rates and our ongoing focus on deleveraging, which the rating agencies have acknowledged with ratings upgrades, we were able to achieve the major goal of refinancing our 2022 notes on significantly improved terms.

[Ian Webber:]

Thank you, George. Before moving on from Slide 4, I'd like to emphasize a couple of key numbers on the right-hand side. Firstly, adjusted EBITDA for the year of $161.7 million is up by $4.7 million on 2019. Secondly, adjusted earnings per share for the year is $1.60, a base upon which we will continue to build with accretive earnings from the 7 ships which will be delivered to us during the second and third quarters of this year. And I'll come back to them later on. The next slide, Slide 5, summarizes some of the key milestones we've hit since the beginning of 2020 in our continuing efforts to build value. Commercially and operationally, we've kept our people safe and the ships running with negligible downtime despite the challenges of COVID.

[Thomas Lister:]

Thanks, Ian. Hello, everyone. If you could all please turn now to Slide 9. As both George and Ian alluded to earlier, even during the depth of the downturn during the second quarter of 2020, the liner companies, our customers, were making good money, thanks to a quick response in imposing strong capacity discipline. So although 2019 was considered to be a pretty good year, you can see from the boxes at bottom right that liners' 2020 results are way up on those 2019 results. As an illustration, freight rates driving our customers' revenue from China to the U.S. are at a 10-year record high. So our counterparties are in good shape. Turning to the next slide, Slide 10. You can see that supply side trends all moving in the right direction. Idle capacity is down sharply from around 12% during the worst of the second quarter of 2020 to 1.1% in February of this year, which is pretty close to full employment during what is traditionally the slack season around Chinese New Year. But let's wind things back to the first part of the year when conditions were challenging. Here, the big takeaway is that, as I just mentioned, liner operators have shown extraordinary capacity discipline. In fact, almost 70% of capacity held idle in the first 8 months or so of 2020 was owned and controlled by the liner operators themselves. In other words, the lines were idling their own ships rather than trying to keep them running and fill them at any cost. This is unprecedented, I would say. And crucially, the lines have seen that it is a powerful moneymaking tool at their disposal. So a genuine game changer. As a footnote to this slide, the big ship recycling facilities, which were closed to much of the second quarter are now open and active, allowing scrap prices to rebound or maybe more accurate to say, to normalize accordingly. But frankly, with earnings where they are in the charter market, very few people are currently scrapping containerships. On Slide 11, you can see that the supply side fundamentals are highly supportive for the ship sizes we're focused on, which are the size segments sitting within the red boxes for the 2 charts. Net fleet growth over the last few years has been negligible and even negative. And the order book pipeline is almost empty for the sizes we focus on. So the overall global order book-to-fleet ratio stands at a little over 10%, which is very low by historical standards and includes all of the ships coming onto the water over the next 2 to 3 years. And the picture for the sizes we're interested in, which is 2,000 to 10,000 TEU broadly, is even better but only 1.4%. Best of all, however, is the order book for our core midsized Post-Panamax segment, which is effectively 0. That's the area that is ringed in red. And uncertainty regarding the next-generation of green fuels and propulsion technology is putting a serious damper on ordering activity for these long-lived assets, as Ian has already mentioned. So what's all this done for earnings in the sector? For the answer to this, please turn to Slide 12. And as you can see here, the charter market is red hot, with rates up anywhere from 1.8x to almost 3.4x where they were at 2Q 2020 loads. The chart, which shows how rates have developed for various key sizes in the liquid charter market tells its own story, with rates now above pre-COVID levels; and as happened during 2019, the way is being led by the midsized Post-Panamax ships with rate uplifts then flowing down to the smaller sizes as each larger size segment in the midsize and smaller peer group sells out. Right. With that, I'll hand the call over to Tassos to discuss the financials. Tassos?

[Anastasios Psaropoulos:]

Thank you, Tom. Slides 13, 14 and 15 show our unaudited pro forma consolidated balance sheet, statement of operations and statements of cash flow based on the fourth quarter 2020. Rather than going through every line item, let me point out a few key items. We generated revenue of $70 million during the fourth quarter of 2020 and $282.8 million for the full year. Our adjusted EBITDA was $38.8 million for the quarter and $161.7 million for the year. Adjusted EBITDA for the quarter was down a little compared to the third quarter as we had to catch up on crew rotations and ship supplies delayed by COVID earlier in the year. OpEx for the year at $6,410 per day is broadly as expected. Forced reductions early in the year due to COVID were caught up in the later part of the year as mentioned before. Adjusted EBITDA was up by $4.7 million for 2020 year-on-year. Our finance expenses have reduced by approximately 13% due to amortization, lower LIBOR and an overall cheaper blended cost of our debt. The refinance of our 2022 notes completed at the beginning of this current year will help to further compress debt service costs going forward. Our normalized net income was $11.3 million for the quarter and $49.1 million for the year. Our liquidity is strong. As of December 31, 2020, we had $92.3 million of cash on our balance sheet. And that's before the $72 million equity raise in January 2021, with some of the proceeds we're putting to work on the equity portion of the 7 ships we have contracted to purchase. We will also keep you posted on the financing of those ships and their delivery schedule as it firms up in second quarter and third quarter of this year. I won't go through them in detail now, but we have also included, as always, on Slide 16 and 17 our adjusted EBITDA and operating cash flow calculator as well as detailed CapEx guidance to assist with your modeling. On Slide 16, I would like to highlight that we have added some additional reference data on charter rates to the table on the right-hand side. In the past, we have provided 10-year and 15-year historic average rates as useful book ends for modeling purposes. However, as you may imagine, today's red-hot charter market has left these rates a long way behind. So we have added the column showing current market rates for short-term charters. I must reemphasize short term, which is up to 12 months. A starter fixer for longer periods, which are what we focus on, tend to be lower than shortened rates. Logically, longer periods means lower risk and lower risk usually risks -- means a lower rate. On Slide 18, I would like to highlight a couple of additional points

[George Youroukos:]

Thank you, Tassos. Here is the 30-second summary. First, we've got great forward contract cover, $893 million spread out over an average of 2.5 years, generating cash, which gives us a resilient business, which has been successfully stress tested by the COVID crisis. With a number of charter renewals due in the coming months, we have additional upside potential from the strong charter market. And as we have already demonstrated, it's a great platform to pursue growth. Second, our balance sheet is strong. At December 31, 2020, we had $92.3 million of cash. And subsequent to the year-end, we raised approximately $67.8 million net of fresh equity, which provides us with resources for growth. Both Moody's and S&P recently recognized our strengthening credit profile and the supportive market fundamentals, upgrading our ratings accordingly. We have no material debt maturities before mid-2022, and we have demonstrated access to multiple sources of capital always proactively. Third, we believe strongly that our fleet sits in the sweet spot by size and specification. Our fleet has high operational flexibility and high reefer capacity with low cost and low emissions per cargo slot, all of which generate increased demand from charters. Fourth and maybe most importantly, the supply side fundamentals for midsize and smaller ships are phenomenally attractive and, we believe, sustainable. Idle capacity is currently so low that it effectively represents full utilization. And net growth of the global fleet is expected to be negligible or even negative for some time as the order book is so low. The market has proven more resilient than many expected during the COVID downturn. Our customers are making money hand over fist, and rates in the charter market have rebounded to exceed pre-COVID heights. Against this backdrop, our strategic priorities are the following

[Operator:]

. Our first question comes from the line of Randy Giveans from Jefferies.

[Randall Giveans:]

All right. So in terms of your chartering strategy, looking at Slide 6, shows you have a handful of vessels with charters expiring here in the coming months. So I guess two questions around that. How soon in advance of these charter expiries will you likely book the next charter? And how will you balance kind of maximizing rate versus maximizing duration?

[George Youroukos:]

Tom, you want to talk about this?

[Thomas Lister:]

Sure. Randy, okay, so our chartering strategy. We've got roughly 12 ships coming open during the balance of 2021. And in a more normal market, you would expect to start talking about rechartering such ships about a month or possibly 2 months in advance. Today, however, such as the demand from the liners that discussing charters many months in advance, by which I mean, 4, 5, 6 months in advance is not unusual. And as you would imagine, those discussions are in progress today. So I think that was the first part of your question. The second part of your question was how do we balance going for longer charters with potentially slightly lower rates versus short-term exposure. I don't mean to dodge the question, Randy. But I would say that it's actually quite challenging to determine in the market today, although we have provided some benchmarks, a clear picture of where short term, by which I mean 12 months or less, charters really are for most sizes. And the reason for that is that most of the chartering activity in the market in recent weeks has actually tended to be focused upon longer charters for smaller tonnage. I'm talking about 2 years or more. And as the ships get bigger, so the durations get longer. So I think the takeaway there is that both owners and liner operators are of a mind that now makes sense to fix longer rather than shorter on the whole. So perhaps, there isn't such a trade-off as your question might have anticipated.

[Randall Giveans:]

Okay. That's fair. And then turning over to the recent acquisition. Obviously, congrats on that deal, seems pretty attractive and accretive as George was saying. With that, can you give some more color on maybe how you decided on that acquisition? And then looking ahead, are you going to remain focused on that 20-year asset or start looking at younger secondhands? And I agree with your strategy of staying away from newbuildings.

[George Youroukos:]

If I may start on this, Randy. The deal we looked at was a deal that was a private deal. We usually do private deals. We don't tend to go into the market and compete with others. It is a deal, a very strategic transaction for us. It grows our relationship with the number one charter. We're getting assets that are very much in demand. These assets have a useful life in our view of 30 years given the developments on the new fuels, et cetera. So there's plenty of years ahead of us to, let's call it, milk them away. And we're growing our fleet with accretive transaction that immediately brings down into our balance sheet the results without waiting for loan amortizations. Now going forward, yes, we will look at more secondhand transactions. We do not want to look at newbuildings for reasons that Tom and Ian can elaborate more. But we feel that the business model of GSL is deals which bring immediate cash to our balance sheet and to our shareholders. What that means, we will be focusing on midsize -- middle-aged ships rather than young ships. Especially in a hot market like this, very young ships are becoming overly expensive and requiring a larger than our appetite residual value risk to be assumed at the end of the charters. So we prefer to stay focused on what we feel is a more balanced risk-reward equation. I don't know, Ian, if you want to add to that on the newbuilds.

[Ian Webber:]

Sure. Yes. I mean I obviously agree with everything that George has said on our area of focus. Let's maximize the utility of existing assets rather than adding to containership capacity. That doesn't do anything for charter market and asset values, et cetera. Furthermore, as we said in the prepared remarks, if we ordered a newbuilding today, we wouldn't get it for 3 years. We would have to fund the entire build program, paying interest on debt if we arrange that and have no income. And that is inconsistent with a clear strategy of making immediately accretive acquisitions.

[George Youroukos:]

If I may add that -- sorry, Ian.

[Ian Webber:]

Yes.

[George Youroukos:]

Just to say something in more of your style. We are a right here, right now kind of company for the investors. They join GSL, they become shareholders. And they see the results right here, right now. This is our, let's say, motto.

[Randall Giveans:]

Yes. No, that's fair. And so, I guess, just finally, with your balance sheet being in, as you stated, kind of the best shape it's been maybe ever, further acquisitions, is that kind of the game plan here, the focus in the coming months?

[George Youroukos:]

Strategic acquisitions...

[Ian Webber:]

Yes, I would say so.

[George Youroukos:]

Yes.

[Ian Webber:]

Yes. Further growth and continued deleveraging, focusing particularly on seeing what we can do to reduce the cost of some of our more expensive debt. And we've got a couple of pieces of junior debt. It's not huge in terms of totals. It's around $80 million, I think, at the year-end, something like that. But it's costing us 10% or more. So if we can chip away of that, that's helpful. And focusing on our 2022 maturities and push those out if we can.

[Operator:]

Our next question comes from the line of Liam Burke from B. Riley.

[Liam Burke:]

George or Ian, you bought 20-year-old vessels. Could you help us out where you're looking -- they come with existing charters, but when you have older vessels, how do they compete vis-à-vis what are perceived as newer, more fuel-efficient vessels?

[George Youroukos:]

Liam, if I can start, and Ian can join me. In this market, the difference with the fuel price at the levels they are, it's immaterial, the differences in fuel. Of course, it always is reflected to the charter rate. So probably $1,000 or $2,000 more if the ships were brand new, very fuel efficient, but imagine what would be the residual value that we would have to amortize. So if you take that into account and also the interest expense of the larger loan that goes with brand-new ships, the advantage on the fuel efficiency vis-à-vis $1,000, $2,000 charter rate higher is diminished. It's eaten away by the additional interest expense. In today's market, we see charters say -- being away from -- shying away from new-build orders for the various reasons we have explained, environmental mainly. And we see charters like being logistics companies trying to hedge themselves strongly on capacity so that charterers, a lot of companies, our customers, they're trying to secure availability of cargo space going forward for the next 3 years, I would say -- 3 to 5 years. So that is another clear signal of the market that going forward, the perception of the market staying strong, it's all over. And if I may add to that, a lot of people are thinking that what we see is COVID-driven and so on and so forth. I will just give you 2 important figures, factual figures. Cargoes for 2020 -- cargo volumes were 2% less than the cargoes of 2019. So what is driven -- what we see in 2020 is not driven by an excess demand. It's driven by a reduced supply, and that reduced supply given the fact that if you order a ship today, you're not getting it before the third to fourth quarter of 2023, so in 2.5 years, is not going to change for the next, at least 2.5 years, to say the least. So these two numbers, it's not a matter of opinion, it's a factual. And I think that lets people understand the sustainability of the current market.

[Ian Webber:]

Not much more to add.

[Liam Burke:]

Okay. Fair enough. And on the acquisition, you -- that acquisition of 7 vessels was wildly accretive. You've highlighted the fact that the supply is going to be a driver of the value of the fleet. What do you anticipate pricing would be on future acquisitions? Can you still make them and still create value for the shareholder there?

[George Youroukos:]

As we always look at deals. And actually, we only do, like I said before, private deals. We don't go into the market and buy, competing with others, what is out there. We have a very strong deal flow, maybe one of the strongest out there. And that gives us a first look on many things. So we always try to create value to shareholders by doing the special deal. And this is the deal we did in 2019. This is similar to deals we did just now. And this is the kind of transaction that we look to do going forward. We only do deals that we feel are risk-adverse and create immediate accretive returns to the shareholders without taking unnecessary risks.

[Ian Webber:]

Liam, just to add, we've always said that we do want to grow, but we're not growing for growth's sake. We're not targeting a fleet of 100 ships just because we want 100 ships. We're very disciplined and rigorous in our approach to the investment appraisal, which we run the financial investment appraisal and also the sort of technical due diligence on the vessels themselves. And we always have to have a charter. As we keep saying, these transactions have to be immediately accretive.

[Operator:]

Our next question comes from the line of Ward Blum from UBS.

[Ward Blum:]

I want to congratulate you on another good quarter. Your niche-oriented and disciplined approach has certainly won the day. And finally, the market is starting to appreciate what you've done. I had a specific question about the ATM program for the 8% senior notes. You raised additional funds last year and in the first quarter. But with the liquidity on the balance sheet, I wonder if you plan at this point to continue issuing those notes in the current and coming quarters. And I'd also like to know what the current amount outstanding under -- of those 8% notes is at this point.

[George Youroukos:]

Ian?

[Ian Webber:]

Thanks for all that. I don't have the exact number outstanding. I'm afraid Tassos might be able to dig it out, but we'll obviously report it in the second -- sorry, in the first quarter balance sheet as and when. In terms of a continuation of the ATM program, the program for those 2024 notes and also our perpetual preferred shares has been very successful. It's raised a substantial amount of cash over the last 6, 7 months, however long those programs have been running, which has contributed in a substantial measure to our ability to refinance not only the 2022 notes, which has been an objective of ours for some -- quite some time. But also as I indicated in our prepared remarks, we paid down some expensive junior debt, costing us 10% of the proceeds as well. And to the extent that we're able to continue to do that, replacing expensive debt, 10% money with cheaper debt, 8% money. If we can't find a more holistic solution, that will continue. These programs are very much opportunistic. We turn them off and turn them on. And we turn them on only if we can see an appropriate use of proceeds. That's a bit of a woolly answer, but that's how it works, I'm afraid.

[Anastasios Psaropoulos:]

And just on the figures, if you see in our press release, the figures for both ATMs preferred -- series B preferred shares and 2024 notes is there. Let's say, since September, which was our last -- the previous we have raised something like, if I remember correct, $18.5 million of preferred and something like $13 million of the 2024 notes.

[Operator:]

. Next question comes from the line of Joe Kaplan from Whitefort Capital.

[Joseph Kaplan:]

There's been several comments on the call as well as questions with relation to accretive growth, and I thought it would be helpful to drill down into the math of the accretion, specifically as it relates into review and confirm the accretive growth from the purchase with Maersk of the 7 late-vintage Post-Panamax 6,000 TEU ships. And so I appreciate if you just bear with me while I walk through the assumptions that you've publicly disclosed and sort of how that derives the level of accretion. So you have $116 million purchase price, disclosed EBITDA of $95 million to $126 million over 3- to 5-year fixed charters. Based on the estimated scrap values at $400 per lightweight ton, as you highlight in Footnote 3 on Page 7 of your presentation, is approximately $70 million. That's probably conservative since that's based on 10-year averages versus the current steel prices, which are higher. And then if I make an assumption on dry docking CapEx, using as a proxy your November 2020 presentation for similar size and similar age vessels, specifically, I'm looking at the Dimitris Y, the GSL Vinia, the GSL Christel Elizabeth, on Page 18 of your November 2020 presentation, which implies approximately $1.6 million to $1.9 million per ship per dry dock. And if I look at those assumptions, effectively, what that leads me to is, one, you've diversified your counterparty risk with Maersk, who's, as you point out, the #1 charterer. You have no residual value risk because by the end of your year 3 fixed charter, you've amortized down your purchase price below the residual scrap value of your ships. And that implies an unlevered IRR in, call it, the low teens. But you've announced the financing for that transaction is only 1/3 equity, 2/3 bank debt. So on a levered basis, that implies an IRR significantly in excess of 20%. And those assumptions are only based on the 5-year contractual life. As George pointed out, these are 30-year useful life assets in the containership space. We're in a very tight market. In the sub-10,000 TEU segment, there's almost no supply coming online. And given the IMO environmental regulation uncertainty, there's almost no new CapEx. And therefore, potentially, the useful life of these ships may well be 30 years beyond the 5-year extension options with Maersk. And so that 20%-plus levered IRR excludes any real option value for the useful life of those ships. Am I thinking about that correctly? Am I capturing it? Because I mean, frankly, I'm trying to reconcile that sort of accretion growth with the valuation of your stock?

[George Youroukos:]

I can give it a try, and the rest to complete. More or less, although when we're doing our model, as you can understand, we are a little bit more conservative in the approach. The figures and the calculations you have mentioned is, more or less, correct on that case. And of course, on the assumption is that there is more value if everything goes well and we make full use of the useful life of the asset. So at least in my view, the basic assumptions that you have done are, more or less, a little bit on the positive side, but in line of what we have also calculated.

[Ian Webber:]

Yes. Joe, I think your summary is pretty good, frankly.

[George Youroukos:]

Just one point to say, out of the seven ships, only four will have dry docking.

[Joseph Kaplan:]

Yes. Got it. Well, look, I mean, if there's more transactions like that, this one was quite accretive on our view. So congratulations on these.

[Ian Webber:]

Absolutely. yes. And on a financial leverage basis, on a debt to EBITDA, this acquisition is sort of 4x against the corporate ratio of 4.5x. So it's delevering as well.

[Thomas Lister:]

Actually, it's even better than that. It's the purchase price to EBITDA is 4x.

[Ian Webber:]

Sorry, purchase price to EBITDA. Yes.

[Thomas Lister:]

Yes. So debt-to-EBITDA would be even lower than that. So you're right, it's an actively delevering transaction.

[Ian Webber:]

Yes. And we hope by executing on these sorts of deals award and by the market understanding, the economics behind it and the consequences for the business and the upside that we have, then that will be reflected in an improved stock price.

[Operator:]

At this time, I am showing no further questions. I would like to turn the call back over to Ian Webber for closing remarks.

[Ian Webber:]

Thank you. Thank you, operator. Thank you for your questions. Thank you for listening to us. We look forward to providing you with a further update on the company when we've issued our first quarter 2021 results, which according to our normal time table will be late April, early May. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.