Earnings Call Transcript - GSL Q1 2024

Operator, Operator

Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Global Ship Lease Q1 2024 Earnings Conference Call. I would now like to turn the call over to Tom Lister, Chief Executive Officer. Please go ahead.

Thomas A. Lister, CEO

Thank you, Alex. Hello, everyone, and welcome to the Global Ship Lease First Quarter 2024 Earnings Conference Call. You can find the slides that accompany today's call on our website at www.globalshiplease.com. As usual, Slides 2 and 3 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 would also like to direct your attention to the Risk Factors section of our most recent annual report on our 2023 Form 20-F, which was filed in March this year. You can find the form on our website or on that of the SEC. 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. And the reconciliation of 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 release that we issued this morning, which is also available on our website. I'm joined today by our Executive Chairman, Georgios Youroukos; and our Chief Financial Officer, Tassos Psaropoulos. George will begin the call with a high-level commentary on GSL and on our industry, and then Tassos and I will take you through our recent activity, quarterly results and financials and the current market environment. After that, we'll be pleased to answer your questions. So turning now to Slide 4. I'll pass the call over to George. George?

Georgios Youroukos, Executive Chairman

Thank you, Tom. Good morning, afternoon, or evening to everyone joining us today. In early 2024, macroeconomic and geopolitical uncertainties remain elevated, but the industry has started the year with positive earnings momentum. This is partly due to an increase in containerized freight demand, while the reversal of 2023's downward trend in charter rates and asset values has primarily been influenced by most liner operators steering clear of the Red Sea and Suez Canal, which has effectively tightened supply until the security situation improves. While the timing of this improvement is unknown, we are working diligently to grow our contract coverage and cash flows as market conditions remain favorable. Our ongoing efforts to reduce debt and lower our cost of borrowing have strengthened our balance sheet, and we have no refinancing needs until 2026. Additionally, our exposure to floating interest rates, tied to SOFR, is capped at 0.64% through 2026. We continue to focus on our disciplined capital allocation strategy, prioritizing capital returns to shareholders through our sustainable quarterly dividend and opportunistic buybacks. Our commitment to enhancing our financial position has increased GSL's resilience and positioned us to act swiftly on the right acquisition opportunities as they arise, whether that be next week or next year, all aimed at protecting and enhancing shareholder value throughout the cycle. With that, I'll hand the call back to Tom.

Thomas A. Lister, CEO

Thanks, George. Please turn to Slide 5. Here, we highlight our well-diversified charter portfolio. As of March 31, we had $1.6 billion in contracted revenues over a TEU weighted average contract duration of 1.9 years. We signed 9 new charters in the first quarter, adding $54.6 million of contract cover. Including ships with charter extension options and based on median redeliveries, we have about 20 ships coming open in a firming market by the end of 2024. We will continue to work hard to capitalize on the current market conditions to grow contract cover on both a prompt and forward basis and very much look forward to updating you on progress next quarter. And by the way, our liner customers remain well-capitalized and financially strong. Turning to Slide 6, please. So Slide 6 illustrates our future earnings under different rate scenarios, and it's important to note these are not forecasts. But as you can see, implied 2024 results under all 3 scenarios remain in line with or even marginally improved relative to our record performance in 2023. While we still have a meaningful number of ships up for recharter in 2024, the extent of our contracted coverage nevertheless means that the majority of our revenue for this year is already fixed. On to Slide 7, where we recap our capital allocation strategy, which is value-driven, risk-adjusted, under constant review and guides everything we do. The first thing to keep in mind is that we operate in a cyclical and volatile industry, and that cyclicality is key as it contains risks to be managed but also very importantly, value-generating opportunities to capture. So what does this mean in capital allocation terms? Well, stating the obvious for which apologies, in order to allocate capital, we first need to generate capital. So running through the main points. First, ours is a leasing business. And so the main driver of capital generation is our contract cover, which we're always working on building and extending. Second, we free up capital to allocate by reducing costs. The biggest gains here are to be had from reducing debt service costs, not only by way of very competitively priced debt, which Tassos will talk about shortly, but also by reducing over time the debt principle that needs to be serviced. Delevering also has the significant benefits of reducing balance sheet risk and building equity value. Third, we need to ensure that our value-generating assets, our ships, in other words, remain economically relevant. So we need to allocate capital to CapEx in order to meet evolving regulatory and commercial demands of decarbonization. Fourth, taking a longer view and coming back to the cyclicality point I made at the outset, which is one of the reasons to be exposed to shipping in the first place, it means having cash liquidity both for resilience including to support asset-based covenants in case of need, and to have the optionality to buy ships on a selective disciplined and value-accretive basis. As George likes to say, if you want to keep milking the cow, you also have to feed the cow. And the right time to buy ships to feed the cow in this analogy is often towards the bottom of the cycle when access to capital can be challenging and sellers are often exceptionally motivated. And finally, it means being in a position to return capital to shareholders, which we do via our $1.50 per share annualized dividend, which is sized to be sustainable through the cycle. And also via opportunistic buyback of shares, including the $5 million worth of shares we repurchased in Q1, which means that over time, our share count is around 9% lower than it would otherwise be. Slide 8 builds on this point, showing both the cycle itself and our approach to value generative acquisitions. And our approach is a disciplined one. You'll notice that in the orange section of the chart, when containership prices skyrocketed, GSL did not purchase a single vessel, opting instead to buy back shares. When prices were lower, we capitalized on that opportunity. So in May 2023, when prices had normalized, we purchased 4 8,500 TEU ships with attractive charters. So we're happy to buy ships when the terms are right, but we've absolutely no interest in doing so unless our strict criteria are met and the acquisition genuinely adds value on a risk-adjusted basis. With that, I'll pass the call to Tassos to discuss our financials. Tassos?

Tassos Psaropoulos, CFO

Thank you, Tom. Slide 9 is an overview for first quarter financials and highlights. While I won't go into every item, I would like to highlight a few key takeaways. Earnings and cash flow were up in the first quarter of 2024 with adjusted EBITDA up to $125 million, a 20% increase year-over-year. We have continued to lower our gross debt and financial leverage, and we still have headroom under our 64 basis points SOFR interest rate caps that mature in 2026, allowing us to supercharge level returns on any acquisitions we might make. Our cash position remains strong at $317 million, even though $134 million of that being restricted. The balance covers working capital needs, CapEx investments and covenant requirements, also providing balance sheet resilience in some space to act selectively on the right purchase opportunities. As Tom and George have remarked, we have continued to return capital to shareholders through our sustainable quarterly dividend and share buybacks. We continue to delever and build equity value, and our corporate credit ratings of BA3 stable, BB stable and BB positive reflect both the success we have had in derisking the business to date and our continued risk averse approach going forward. Now turning to Slide 10 illustrates our progress in delevering our balance sheet, minimizing our cost of debt and capping our interest rate risk, even as interest rates in the market have risen, with our interest rate caps, we have managed to reduce our cost of debt to 4.5%, and we remain on track to reduce our debt outstanding by a third from the end of 2022 to the end of 2024. Our financial leverage has dropped significantly as well from 8.4x at the year-end 2018 to 1.1x at the end of Q1 2024. These efforts and progress made so far have all combined to make GSL robust, resilient and well positioned to respond quickly and effectively to opportunities or changing circumstances. Tom will now discuss our market focus and ship deployment.

Thomas A. Lister, CEO

Thanks, Tassos. Moving to Slide 11. We reemphasize our focus on midsize and smaller container ships ranging from 2,000 TEU to about 10,000 TEU. We see these assets as the backbone of global trade with their flexibility and widespread reach highlighted in the top map that shows the deployment of these ships. The lower map shows the deployment of larger ships at 10,000 TEU and higher, which require deepwater port infrastructure, which can limit where they can go. Both maps incidentally, show 'normal' trade patterns before Red Sea transits were disrupted. Moving to Slide 12. This slide shows idle capacity and ship recycling. Idle capacity trended down to 0.8% by the end of Q1 due primarily to disruptions in the Red Sea. This was a reversal from the normalizing trajectory that we saw in 2023 when both idle capacity and scrapping activity were edging up. Currently, the market is in a wait-and-see mode with earnings and option value attached to hanging on to ships that might otherwise be sent to the breakers. We anticipate that when market normalization does resume whenever that might be, there will be an uptick in scrapping and potentially a sizable uptick. Slide 13 shows the order book, which remains heavily skewed towards the larger containership sizes, where GSL does not participate. However, for the midsized segments where GSL does compete, the order book-to-fleet ratio is 12%, which is smaller, but still meaningful. It is also important to highlight the older age profile of the ships in our market peer group. To illustrate, if we were to assume that all ships over 25 years old were to be scrapped and we set that number against the order book delivering for midsized and smaller container ships through 2027, our peer group fleet segments would actually shrink by over 3%. Moving to Slide 14. This slide showcases the impact on the industry of disruptions to the Red Sea. Before these disruptions, around 20% of global containerized trade volumes, in other words, the boxes themselves went through the Suez Canal at the northern end of the Red Sea. Furthermore, much of this trade is long haul in nature, meaning that over a third of global containership fleet capacity by which I mean the ships themselves, transited the Suez Canal. The majority of this traffic is now being forced to take a much longer route around the Cape of Good Hope, effectively tightening vessel supply by as much as 10% which is, in turn, driving up charter rates. This brings us to Slide 15, where we take a closer look at the charter market itself. We saw COVID-driven cyclical highs in 2021 and much of 2022 before a sharp downward normalization through late 2023. That downward pressure has now shifted into positive momentum so far in 2024 with market rates trending up and charter durations extending as charters work to ensure that they will have access to the tonnage that they need. We can't say how long these trends will last, but we are working hard to lock in charter cover and grow cash flows as much as we can while conditions remain favorable. And as I said earlier, we look forward to updating you on progress on this front on our Q2 call. With that, I'll turn the call back to George to conclude our prepared remarks on Slide 16 and 17. George?

Georgios Youroukos, Executive Chairman

Thank you, Tom. On Slide 16 and 17, we provide a summary of key points. We have $1.6 billion of contracted revenue over an average of 1.9 years, which fully covers our debt service and CapEx through at least 2025 without relying upon contributions from any future charter signing or extensions. We have a robust balance sheet and strong credit ratings, including an investment-grade rating for our senior secured notes due July 2027. We have $317 million of cash on the balance sheet, though much of it is restricted and no refinancing risk before 2026. Our financial leverage is down to 1.1x. Our floating rate debt is fully hedged and our all-in debt cost is 4.56%. Now macro and geopolitical uncertainties remain with the Red Sea playing a particularly significant role in extending voyage lengths, tightening the supply-demand balance and pushing up market charter rates and asset values, effectively placing on hold the normalization of market conditions. However, just as quickly and unprecedentedly, as such issues can flare up, they can also go into remission, expand or change in unexpected ways, as we have all seen. And we have to manage our business accordingly. Meantime, our liner company customers remain generally cautious in outlook, although the tone of the Q1 calls to date is more positive than for Q4 2023, with momentum helped not only by the Red Sea situation, but also by an increase in containerized demand. And the balance sheets are exceptionally strong safe after record earnings in 2021 and 2022. So to sum up, Global Ship Lease is well placed to continue generating strong earnings, returning capital to shareholders, fortifying our balance sheet and positioning ourselves to maximize shareholder value by acting quickly when the right opportunities arise and demonstrating strategic patience until they do. Now before moving to Q&A, I would like also to take a moment to welcome George Giannopoulos as our new Chief Compliance Officer. George has headed up internal audit for several years and knows our organization inside and out. And we look forward to his participation, influence and insight as a member of the senior management team. Now we're ready to take your questions.

Operator, Operator

Operator Instructions and your first question comes from the line of Omar Nokta with Jefferies.

Omar Nokta, Analyst

I would like to ask about your comments. We've seen a significant upward shift in the container market over the past few months. You've secured certain charters and extensions, and you've mentioned that you're working hard to secure more of your available capacity. It appears there will be a notable earnings increase in 2025 based on the rate changes from three months ago to now for GSL. It seems that charters are booking ahead more than they previously did. Could you provide more insight into how much capacity you think you can secure in the upcoming months, considering the current market situation?

Thomas A. Lister, CEO

Sure. Well, first of all, I agree with all of your observations. Containerized volumes have indeed, I think, surprised to the upside and have surprised the upside for everyone, including the liner operators, not only tonnage providers like us. So that's obviously a very positive sign. Now I mentioned in the prepared remarks that if you assume median redelivery under all of the charters that are potentially coming open within the course of 2024, that's roughly 20 ships. So between the end of Q1 and the end of Q4 of this year, it's roughly 20 ships, taking the median. And I would say directionally, at least, larger ships by which I mean those above 5,500 TEU or so are beginning to attract forward fixture scope, which is something that we haven't seen since, I would say, late in the second quarter of 2022. So for larger vessels, particularly interestingly specified larger vessels, it is viable to fix forward by a number of months and we're seeing that. For the smaller ships, I would say there's less appetite in the market to forward fix, but we are seeing the duration of charters even for ships, call it, in the sort of 2,500 to 4,500 TEU range stretch up to potentially as long as a couple of years. So it's a complete change in tone. And I think the willingness that liner operators have to lock in tonnage for longer exhibits the confidence from their side that this strength in the market is not just a flash in the pan and they just genuinely need the capacity in order to accommodate both the Red Sea and the increase in demand and indeed, also the inefficiencies such as port congestion that we're beginning to see in the market as well. And just to remind listeners from a very general perspective, if there is an inefficiency in the supply chain, counterintuitively, that tends to be good news for tonnage providers like us supplying capacity into the supply chain because inefficiencies suck up capacity. So sorry, longer answer than you were probably expecting, Omar. I hope I covered most of your points, but by all means. follow up with other questions, if I missed anything.

Omar Nokta, Analyst

Not at all, Tom, that was very helpful and quite detailed. I think yes. So just to make sure I understood it, larger vessels have more forward fixing opportunities well in advance of deployment. For the smaller ships in the 2,500 to 4,500 range, you might not be seeing forward fixing, but there are potential contracts available for up to 2 years now.

Thomas A. Lister, CEO

Yes. Good Summary.

Omar Nokta, Analyst

And then more kind of sticking with you, perhaps, Tom, you mentioned milking the cow and feeding the cow that analogy. And looking at Slide 8, you have the current dynamic circled in which secondhand values have just started to lift off the bottom. What would you say the deal dynamics looks like now? The market has clearly gone quiet back at the end of '22 and for most of last year. What's the sailing purchase market looking like now? Is anything looking compelling? And I know GSL has very strict return hurdles. But just in general, are things stalling out, are things looking more interesting? Is there stuff that's transacting? Or is it still too early?

Georgios Youroukos, Executive Chairman

Omar, let me explain. When the market is strong, we avoid chartering freight ships because we find the prices too high and the risk disproportionate. Conversely, when the market is weak, we consider chartering freight ships since we can acquire them at lower prices and wait for the market to improve before selling them, as we have mentioned. In stronger market conditions like today, we focus on deals that involve ships already attached to a charter, which protects us from market risk. We evaluate these deals based on returns and residual value. Therefore, these deals are somewhat insulated from market fluctuations. When the market improved, we sought out charter-attached deals, and when it was weaker, we looked at charter freight opportunities. This approach outlines our strategy, and we continuously assess the associated risks.

Thomas A. Lister, CEO

Yes. And Omar, just to add to that comment. I would say that we see just as many potential deals across our desks at pretty much all times in the cycle. But as I hope we made clear in the prepared remarks, we don't move on deals unless we like the numbers. Unless as George says, we like the combination of risk and economics. So just because you're not seeing us making acquisitions, it's not reflective of us not seeing deals. It's reflective of us seeing deals either choosing not to move on them or being outbid. And in either case, we're absolutely sticking to our disciplined approach because that's how you protect value and build value over time in our business.

Operator, Operator

Your next question comes from the line of Amit Mehrotra with Deutsche Bank.

Christopher Robertson, Analyst

Tom and George, this is Chris Robertson on for Amit. This might be a simple question, but it kind of relates to the discussion you were just having with Omar. How do you guys think about the present value of the contracted revenues of the $1.6 billion I guess, on a discounted basis, whatever rate you're using, what is the present value of that?

Thomas A. Lister, CEO

That's a very good question, and it's reasonable because we focus on the value of our business in generating forward visibility on cash flows. Different observers will assign varying risks and therefore different discount rates to those cash flows. Typically, although this can vary over time, most analysts consider an approximately 8% discount rate. However, I would like to turn the question back to you, Chris. What do you believe is an appropriate discount rate for risk-averse containership lessors like us?

Christopher Robertson, Analyst

Sure. I probably won't be answering the questions on this particular call.

Tassos Psaropoulos, CFO

But yes, I mean, I've given you a sort of an 8%, but it's up to everyone obviously to decide on their own discount rate and as a result, take that approach to applying it to our contracted cash flows. And fortunately, I think our business is comparatively easy to model. We're very transparent in terms of contracted rates so people can model out our charter profiles and then figure out how to value those cash flows.

Christopher Robertson, Analyst

Sure. Yes, it was more a question about how you might look at it internally. But let me go to the next question. This is just as it relates to the share repurchase program. I guess now that shares are trading up into the mid-20s. How are you thinking about the repurchase program, is it still just as a compelling point that there'll be maybe steady repurchases in the coming quarters? Or is the analysis a bit different now?

Thomas A. Lister, CEO

I think the analysis changes at every point in the cycle, Chris. Therefore, at each stage, we consider all capital allocation options available to us and assess each one individually. Clearly, during the peak asset values of 2021 and 2022, we did not purchase ships and instead focused our capital on buying back shares. I can't provide a simple answer to that. I can say that we continuously evaluate our capital allocation both strategically and adaptively to determine the best use of funds at any given moment. Share buybacks will definitely continue to be part of our strategy moving forward.

Christopher Robertson, Analyst

Okay. Yes, that's fair. Last question for me, I guess. I mean, obviously, you guys have noted a couple of times now with regards to port congestion and then some increasing demand around containerized volumes. So I'm just trying to maybe dive into the specifics of that into specific regions that you're seeing a pickup in import demand specific ports that might be having congestion issues. If you have any details around that, it would be great to hear.

Thomas A. Lister, CEO

In terms of specific ports, I think that's getting a little bit too granular for me, apologies for that. In terms of regions that are seeing demand pick up, I would say, the U.S. consumer is proving as reliable as ever. So there's a lot of demand being driven particularly by the U.S. And from what we understand, there has been an element of restocking taking place not just in the U.S., but primarily in the U.S. And it's been going on probably kicking off from the fourth quarter of last year and progressing through year-to-date.

Georgios Youroukos, Executive Chairman

Let me also add to that, Tom said that we also see now lack of empty boxes of containers. When I say containers, you understand the boxes. Naturally, once you prolong the duration of the voyage so you suck up a portion of the fleet of the container ships. At the same time, you're shaking up a portion of the container fleet, the boxes themselves. So right now, we start to see the clear signs of shortages of boxes, which is in combination with the COVID situation in combination with port congestion reminds us of the COVID years. So we're not there yet as when COVID was, but we start to see the first clear signs of both congestion and box being not enough.

Christopher Robertson, Analyst

Right. I guess related to that, just my final kind of follow-up question. As voyage distances have lengthened, we've also seen an increase in voyage speeds. But is that being capped, I guess, by the environmental regulations and the carbon intensity regulations? In other words, have we seen the speeding up the fleet hit a maximum at this point in time? Or can it speed up further, do you think?

Thomas A. Lister, CEO

Yes, that's a simple question but actually a very complex one to analyze. There's probably more upside in the speed potential, but at the same time, as you accelerate, particularly within the EU, you're going to be hit or at least the charters are going to be hit by incremental costs by way of the EU emissions trading scheme. So everyone, I think, is trying to balance out their network. And by this I mean, everyone in terms of liner operators are trying to balance their network, stabilize their speeds and also stabilize their port calls because if you introduce higher unpredictability by changing some of the variables, such as speed, and you start impacting port schedules that adds to the congestion issue. So yes, I think there is probably more scope for vessels to accelerate in case of absolute need. But I would say, economically and logistically, there are incentives for the liners to keep speeds down to the extent that they possibly can.

Georgios Youroukos, Executive Chairman

I want to add that new regulations have led us to install Engine Power Limiters on our ships, which prevent them from operating above certain limits. This means that the power our ships used to have is no longer available due to these regulations, specifically the EXI regulation. Consequently, the ships are now naturally capped on their speeds. As we observe ships trading, they are generally operating very close to this limit. Therefore, I do not expect ships to increase their speed or create additional capacity; the current lack of capacity cannot be addressed by speeding up. They are trading at speeds that will not compromise the EXI number, as the power limiters dictate their operational capacity.

Operator, Operator

Your next question comes from the line of Liam Burke with B. Riley Securities.

Liam Burke, Analyst

I see that your net debt has decreased by 16% since the end of the year, and your debt levels are consistently going down. Do you have a target cap rate or debt rate in mind for managing the business?

Thomas A. Lister, CEO

Liam, again. Regarding leverage, it always has to do where we are in the cycle, the age of the fleet. We are currently at a very good level of 1.1. And we want to continue to be in a very good position regarding in situation to weather any fall down of the market, cash flow-wise and value-wise and also take advantage of any leverage in order to create value for our investors. Yes, in general, we are at a point that we're feeling comfortable both with the amortization that is already in place and the leverage that we put on every acquisition that we actually make.

Georgios Youroukos, Executive Chairman

When we established our financings and recent refinancings, we created a fixed repayment schedule that aligns with the age of our fleet at any point in time. We have the ability to refinance as necessary when the time comes. Our repayment schedules are essentially fixed.

Liam Burke, Analyst

Okay. If we can flip over to returning cash to shareholders. Your stock yields are healthy, we'll call it, 6%. I don't think there's a lot of benefit to raising the dividend. So how are you looking at buybacks? Are you just going to steadily just move through that process on a quarter-to-quarter basis?

Thomas A. Lister, CEO

Liam, again, and I don't mean to be dodging the question here at all, but I will return to the answer I gave earlier, which is as far as capital allocation is concerned, we view it dynamically, and we view it in context. And that context will include capital market dynamics, what's happening in the shipping market itself, forward visibility on charters, et cetera, et cetera, et cetera, the list goes on. And we trying to decide how to allocate capital depending upon the capital that's at our disposal, how we're getting on in terms of fixing additional contracts, et cetera. So I won't give you a neat answer as to whether we're going to buy back X number of shares or pay this dividend or that dividend. We'll keep everything under review and allocate capital as we see as building most value through the cycle and in the context of the overall market.

Operator, Operator

Your next question comes from the line of Ward Blue with UBS.

Unknown Analyst, Analyst

You sort of teased us a little bit about expecting contract extensions as the year goes on and that prices have remained firm or even better than the first quarter. Are we to expect or assume that so far, we're halfway through the quarter that you've already completed some extensions and not just announced them yet.

Thomas A. Lister, CEO

We appreciate your question, Ward. Let me put it this way: we look forward to updating you during our 2Q earnings call when the time is right. We want to ensure we manage expectations accurately, so we've provided what I hope is helpful guidance. We'll return to everyone once we've executed on the plans we've outlined.

Operator, Operator

That concludes our Q&A session. I will now turn the conference back over to Tom Lister for closing remarks.

Thomas A. Lister, CEO

Okay. Well, thank you very much to everyone for joining today. And to what I've just said to Ward, we very much look forward to talking to you again on our next earnings call for Q2. Many thanks.

Operator, Operator

Gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.