Earnings Labs

Global Ship Lease, Inc. (GSL)

Q3 2016 Earnings Call· Sun, Oct 30, 2016

$39.73

+1.47%

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Transcript

Ian Webber

Management

Good morning, everybody, and thank you for joining us. I hope you’ve been able to look through the earnings release that we issued earlier today and been able to access the slides that accompany this call. As usual Slides 1 and 2 remind you that the call may include forward-looking statements that are based on current expectations and assumptions and are by their nature inherently uncertain and outside of the company’s control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the Safe Harbor section of the slide presentation. We also draw your attention to the Risk Factors section of our most recent Annual Report on Form 20-F, which is for the year 2015, and was filed with the SEC in April 15, 2016. You can obtain this on 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. And we don’t undertake any duty to update forward-looking statements. For reconciliations of the non-GAAP financial measures to which we will refer during this call to the most directly comparable measures calculated in accordance with GAAP, you should refer to the earnings release that we issued this morning. As usual, I’ll begin today’s presentation with an overview of our results for the third quarter of 2016. Followed by a review of our fleets, charter portfolio and growth strategy. After that, Chief Commercial Officer, Tom Lister will provide an update on the container shipping industry. And Susan Cook, our Chief Financial Officer will give financial highlights. I’ll then return for a brief summary, after which we’ll be happy take your questions. Turning to Slide 3, we continued to generate stable cash flows from our long-term fixed rate time charter…

Tom Lister

Management

Thanks Ian. While our fleet has remained fully employed on long-term contracts, 2016 has been a tough year for the overall industry to put it mildly. The macroeconomic backdrop has been challenging with super national bodies such as the IMF, OECD and WTO marking down growth forecast as the year has progressed. Geopolitical and socioeconomic uncertainty has been on the rise, marks among other things by turmoil in the Middle East, the Brexit referendum and the ongoing presidential election in the U.S. In the third quarter, we’ve seen a meltdown of Hanjin shipping, formally the seventh largest container line. This has put pressure on related parties throughout the supply chain from cargo interests to stevedore and charter owners. The ramifications of which are still playing out. The short-term paying and in some instances uplift, this has causing has been well documented in the press. However, Hanjin’s trials may also serve with the useful wakeup call for the industry those “unsustainable freight rates” and by extension stock market charter rates are just that, unsustainable. Time will tell whether or not this lesion is absorbed, but as we will argue in the next few slides a very challenging market in the short term, this price scrapping low ordering and potentially further consolidation may sow the seeds of recovery in the medium term. Our thesis is that midsized and smaller size segment upon which global shipping continues to focus hold the best prospects for such a recovery and it due course. Turning to Slide 8. Containerized trade growth in the first nine months of 2016 as remained weak with fully growth forecast now below 3.5%. Fortunately supply side growth is also down with 2016 growth forecast cost in the high ones to low twos with the heavy majority of this new supply coming from the largest best vessel segments. The expectation is the demand growth will outgrow supply growth this year and potentially also in 2017 is certainly a steep [indiscernible] in the right direction. However, and as we pointed out from the previous call, it’s important to note that the starting point is one of the latent oversupply with idle capacity as of mid-October, standing at 7.6%. Turning to the liner operators, although some carriers enjoyed a short-term boost to liftings and freight rates [Indiscernible] cargo was rerouted, the line effect expect to continues to face volatile and challenging [technical difficulty].

Operator

Operator

Ladies and gentlemen, please standby. Sir you may begin.

Ian Webber

Management

Our apologies for that, I don't know what happened. We’ll start with Tom on Slide 8 of the presentation.

Tom Lister

Management

Right. Thanks, Ian. Apologies if you’ve had some this before. Container trade growth in the first nine months of 2016 has remained week with full year growth forecast now below 3.5% fortunately supply side growth is also down with 2016 growth forecast and the high ones to low twos with a heavy majority of this new supply coming from the largest vessel segments. The expectation that demand growth will outgrow supply growth this year, and potentially also in 2017 is certainly a step in the right direction. However, as we pointed out in the previous call, it’s important to note the starting point is one of latent oversupply with idle capacity as of mid-October standing at 7.6%. Turning to the liner operations. Although some carriers enjoyed a short term, boost, the lifting’s freight rates as [indiscernible] cargo was rerouted the line effect continues to face volatile and challenging times, especially in the main trades such as Asia and Europe. Grow prospect on the other hand in non-mainline trades which as you can see from the chart on the right hand side of the slide collectively represent about 70% global containerized trade volumes the largest trade grouping Asia for somewhat better. These non-mainline trades are typically serviced by mid-size smaller tonnage the focus of our fleet and the power growing strategy. Slide 9, shows that the weak near term fundamentals have kept spot charter rates under pressure. The right-hand chart illustrates spot rates for ship sizes captured by the various indices that converts on OpEx continuing the trend discussed on previous calls. And just to remind you, it is really only medium sized and smaller ships, no larger than 9,000 or 10,000 TEU that participate in the spot charter market. Larger ships are either on Liner Company’s balance sheet being directly…

Susan Cook

Management

Thanks, Tom. Please turn to Slide 14, for a summary of our financial results for the three months ended September 30, 2016. We generated revenue of $41.2 million during the third quarter, down $1 million from revenue of $42.2 million in the comparative 2015 period, as an increase level of off-hire from regulatory dry docking during the quarter and loss of revenue after the sale of our two oldest vessels in late 2015, largely was offset by increased revenues related to the third vessel we acquired from OOCL. With 38 days of planned off hires, for the three schedule drydockings completed in the quarter, of which one was commenced in the second quarter and no unplanned off hire, utilization was 97.7%. We have one drydocking schedule for fourth quarter for a total of six in the full year. Vessel operating expenses were $11.8 million down 7.7% from the prior year period due to 6% fewer ownership days after the disposal of two vessels in fourth quarter 2015 and also importantly from reduced average cost per ownership day, which was $7,103 for the quarter $130 less per day or 1.8% lower than last year’s third quarter. Interest expense was $11.1 million down $1 million on the interest in comparative 2015 period, primarily related to our purchase and cancellation in this year of $35.9 million of our outstanding 10% notes. $26.7 million of notes were purchased as a result of the tender offer in March, 2016 and $9.2 million of the notes were purchased in the open market $5 million of which was in August. Slide 15, shows the balance sheet. KI terms of as of September 30, 2016 include cash at $48.8 million, total assets of $844.6 million of which $791.5 million is vessels. Our total debt was $450.3 million down $42.4 million since the yearend from a combination of the note purchases I’ve just mentioned and regular amortization of our secured term loan. Net debt at the end of the quarter was $401.5 million. And shareholder’s equity of $383.9 million. The next slide, Slide 16, shows our cash flows and main items to mention here the net cash provided by operating activities with 8.9 million in the third quarter and the purchase and cancellation of the $5 million principle of note for $4.5 million. I would now like to turn the call back to Ian for closing remarks.

Ian Webber

Management

Thanks, Susan. If you would like to turn to Slide 17, I’ll give you a brief summary and then we can move to your questions. Our long-term charters with high quality counterparties in CMA CGM and OOCL give us full insulation through late 2017 from the current downturn and the uncertain near term outlook. Indeed, we’ve expanded two of our earlier expiring charters, three 2020 entirely at hire option. Bringing our contracted revenue to $680 million over a weighted average period of 4.2 years. As such, we will continued to receive stable predictable cash flows despite the generally distressed market. Since the inception of our growth strategy in 2014, we’ve increased our EBITDA by a 35% or so, whilst also diversifying our charter portfolio through the inclusion of our OOCL. We believe that additional relatively small scale immediately accretive charterer tax growth opportunities exist in the markets. And our steady cash flows and access to grow capital position us well to seize on those opportunities if and when they meets our highly selective criteria. Any such growth would have to be credit enhancing. Simultaneously, our ready liquidity gives us the opportunity to pursue proactive delivering of our balance sheet by buying back our bonds at attractive prices. We’ve made progress on these fronts by reducing net debt to EBITDA ratio from four times at the end of the 2015 to approximately 3.7 times at the end of third quarter 2016. We have no material refinancing until 2019 and we have largely eliminated both restrictive maintenance covenants and short-term debt. Enabling us to focus our efforts and capital on strengthening the company for the longer term. As a current severe downturn continues to leads record levels of scraping and very limited levels of new vessel ordering particularly in the mid-size and smaller segments where we focus, we believe that our strong financial position, consistent high quality operations and strategic approach that we’ve outlined here are what enabled Global Ship Lease to maximize value for our shareholders, not only by demonstrating resilience and stability in a challenging markets, but also by being well positioned to thrive in the eventual recovery. That concludes prepared remarks and we would now be happy to take your questions.

Operator

Operator

[Operator Instructions] And we have a question from the line of Phil Larson with Millstreet Capital Markets. Your line is open.

Phil Larson

Analyst

I was just wondering if you could tell us on the two vessels that you extended the charters on, what kind of margins will we be getting on those at this 13,000 per day and 9,800 per day rates.

Ian Webber

Management

Thanks for the question. We don’t set a split down on our result by vessel publicly at least, but you can get an idea of the result by looking at those charter rates and the operating costs, which on average for our business and year-to-date to just under $7,000 per day. And cost obviously varies from vessel-to-vessel, but it's not a bad proxy to seize the average. So against the $13,000 charter rates and our $7,000 OpEx we’re making a $6,000 gross margin if you want to look at it that way. And I guess 9,800 we will be making 2,800.

Operator

Operator

[Operator Instructions]

Operator

Operator

And I am showing no further questions at this time. I'd like to turn the call back to Mr. Ian Webber for any closing remarks.