Earnings Call Transcript
Global Ship Lease, Inc. (GSL)
Earnings Call Transcript - GSL Q1 2022
Operator, Operator
Good day and thank you for standing by. Welcome to the Global Ship Lease Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Ian Webber, CEO of Global Ship Lease. Mr. Webber, the floor is yours.
Ian Webber, CEO
Thank you very much. Good morning, good afternoon, everyone. And welcome to the Global Ship Lease first quarter 2022 earnings conference call. The slides that accompany today's presentation are available on our website, www.globalshiplease.com. Slides 2 and 3 of that presentation, 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. We also draw your attention to the Risk Factors section of our most recent annual report on Form 20-F, which is for 2020 and was filed with the SEC on March 24th this year. You can obtain this via 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. And for reconciliations of the non-GAAP financial measures to which we will refer during this call to the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning, which is also available on our website. As usual, I am 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 on our industry. And then, Tassos, Tom, and I will take you through our recent activity, quarterly results and financials, and the current market, after which we should be pleased to take your questions. So, now, turning to slide 4, I'll pass the call over to George.
George Youroukos, Executive Chairman
Thank you, Ian. Good morning or good afternoon to everyone joining us today. The current macro environment presents uncertainty due to several factors, including the ongoing war in Ukraine, COVID lockdowns in China, and rising inflation. However, one certainty is that the charter market for containerships remains very tight, with almost no new vessel capacity entering this market, and minimal net growth in our size segments anticipated. Additionally, supply chain disruptions continue to be a significant issue, hindering global capacity and reducing effective supply. Most importantly, all of our 65 midsized and smaller vessels are generating revenue from fixed-rate time charters, many of which last several years and reflect the strong chartering conditions established in 2021. Our first-quarter results align with this situation and benefit from the significant forward charter agreements secured in previous quarters, including those effective from the first quarter of 2022. Higher-rate charter renewals are expected to come online this current quarter. Our financial metrics for the first quarter of 2022 show significant growth compared to a year ago, driven by cash flows secured for long durations. I am particularly pleased to report that our normalized earnings per share have more than tripled over the past year. In accordance with our policy to allocate capital dynamically based on relative returns adjusted for risk, we have used our increased cash flows and long-term visibility to raise our common dividend this quarter and have opportunistically repurchased around $5 million of our shares as part of our strategy to return capital to shareholders sustainably. Regarding ESG efforts, I want to highlight two points. Firstly, on decarbonization, we are adopting a collaborative approach. Proactively addressing decarbonization has become increasingly important for all supply chain participants. As part of our risk-averse investment strategy, we maintain ongoing discussions with our customers to explore opportunities to reduce our collective carbon footprint by retrofitting our fleet within the context of long-term charters. Our interests are clearly aligned on this issue, and we believe there are careful ways to implement such upgrades that benefit everyone involved. Secondly, I want to mention the Safe Haven initiative we launched to support our Ukrainian seafarers and their families during the ongoing humanitarian crisis. This initiative provides transportation to Greece and ensures accommodation and food for at least six months. We have created a small local community with 60 people safely in Greece and another 73 on their way. It's heartening to see other industry participants responding similarly to care for those impacted by this difficult situation. Now, I will hand the call over to Ian.
Ian Webber, CEO
Thank you, George. Please turn to slide 5. This slide should be familiar to many of you. It shows the portion of our fleet that we already owned at the start of last year, 2021. The darker blue bars represent charters that were agreed upon during that year. When you compare the rates from the newly agreed charters to those from the charters that came before, you'll notice that the renewal rates have, on average, doubled from previous levels. Since our operating costs, or daily OpEx, are essentially fixed, we have high operational leverage, meaning that most of this additional cash flow contributes directly to our bottom line and is expected to continue doing so throughout the multi-year duration of the contracts. On slide 6, we showcase the vessels acquired in 2021. We've marked in red what has occurred as the legacy charters from those acquisitions ended. The ships were re-fixed often much earlier than anticipated, allowing them to command double or even triple what they were previously earning in the market. We are very pleased with the staggered charter maturity profile of these acquisitions, as well as our legacy fleet, which offers us long-term certainty on attractive cash flows and exposes us to the charter market for further near-term renewals. This strategy has served us exceptionally well, enabling us to more than double our total adjusted EBITDA to $94.5 million in the first quarter of this year, compared to the first quarter of last year. By the end of the first quarter of 2022, our total contract cover was around $1.7 billion, with a weighted average remaining duration of 2.4 years. On slide 7, we provide some illustrative guidance on how our contract cover translates into our earnings and cash flows. As I've emphasized before, this is not a forecast but rather three illustrative scenarios designed to show the relationship between market charter rates and our adjusted EBITDA. The assumptions for this are detailed in the EBITDA calculator found in the presentation's appendix. I want to emphasize a few key points. With our contract coverage, having only three open days out of nearly 24,000 in 2022, our revenue for that year is largely secured. Any variations in revenue will depend on actual offhire days compared to our assumptions. Looking ahead to 2023, our exposure to the spot market remains limited. According to our EBITDA calculator, about 87% of our ownership days are covered, leaving 13% open. It's important to note that the ships becoming available in 2022 and 2023 are all on charters below market rates, and we anticipate that these charters will maintain their position for as long as possible, aiming to redeliver right at the end of the redelivery window. In summary, we possess strong visibility and certainty regarding cash flows for at least the medium term, and we are on track to realize another significant increase in our EBITDA in 2022, even without further growth or new chartering activity, regardless of market conditions. Turning to slide 8, I'd like to discuss our dynamic and disciplined approach to capital allocation. We look to allocate capital on the basis of relative returns adjusted for risk. As you will have seen expressed this quarter in multiple ways, we believe that it's important for us to prudently return capital to investors on a sustainable and value maximizing manner. From this quarter, we're paying a dividend of $0.375 per share, $1.50 annually, tripling the amount that we proposed of $0.12 per share, $0.48 in the year, just over a year ago. We've also been utilizing our share buyback authorization on an opportunistic basis, buying back approximately $5 million worth of our shares recently. Additionally, we look to build equity value by deleveraging and building liquidity while also proactively managing any balance sheet risks. We allocate capital to meet the evolving demands of our customers and the impact of decarbonization regulations to improve our vessels’ fuel efficiency. We approach such investments as we do any other with an eye towards anticipated return profile. And it is clear that there is a growing demand from the line of companies and their customers, think of Walmart or IKEA, on the basis of both regulatory compliance, and the impact on their Scope 3 greenhouse gas reporting. Finally, we continue to pursue accretive growth and fleet renewal on a selective disciplined basis. If the returns or the asset profile don't meet our requirements, we will pass on a potential acquisition. And in fact, we've on that basis declined far more transactions than we've actually pursued. As we consider these options, we look at the degree of forward visibility on associated cash flows, potential macro risks, industrial cyclicality, regulations and the decarbonization implications and potential opportunities. At its core, our focus is on generating long-term value for shareholders through a balanced, risk-averse approach that builds sustainability over time in a cyclical industry. With that, I'll turn the call over to Tassos to talk you through our financials.
Tassos Psaropoulos, CFO
Thank you, Ian. On slide 9 now, we have summarized our first quarter 2022 financials and highlights. Revenue for the quarter was $154 million, more than double the $73 million in the prior year period. Similarly, adjusted EBITDA for the quarter was $94.5 million, more than double the $44.2 million over the first quarter 2021. Our normalized net income, which adjusts for one-off items, almost went up 4 times at $69.7 million in the first quarter of 2022, compared to $17.8 million in the first quarter of 2021. Moving to the balance sheet items, where I would highlight the following. We had $222 million of cash for the end of which $126 million is restricted and $25 million represent a minimum fee liquidity level set by our debt facilities. We agreed amendments to our existing Syndicated Senior Secured Credit Facility in January, which had at that time an outstanding balance of $213 million, extending the maturity to December 2026, enhancing the covenants in our favor and releasing three vessels from the collateral package while leaving the price unchanged at LIBOR plus 3%. Those three unencumbered ships were used as collateral for a new $60 million loan facility priced at LIBOR 2.75%. We utilized the proceeds to reduce higher cost debt and eliminate the last junior facility of $26.2 million and $28.5 million partial redemption of 8% senior unsecured notes. We have an additional $89 million of those notes still outstanding and maturing in 2024. Now, we have fully hedged our floating rate debt exposure having put in place a second tranche of hedges reaching to an interest cap of $992 million of total floating rate debt with LIBOR capped at 0.75% and amortized through the years. Also, as mentioned, we have used $4.9 million to repurchase approximately 185,000 of our Class A common shares in the market with an average price of $26.66 per share. We have also declared a newly raised dividend of $0.375 per Class A common share. Now, moving to slide 10 is a summary of key capital structure developments over time. In the upper left is our scheduled authorization in the coming years. We maintain an aggressive authorization schedule that we believe is prudent for a business like ours, utilizing our cash flow to deleverage while limiting our exposure to refinancing risk at loan maturity. On the upper right, you can see the extent of improvement we have been able to achieve in our cost of debt. As our balance sheet, earnings power, counterparty risk profile and contracted cash flow have all improved markedly over time that is translating into a significant reduction in our boarding course from 7.7% at year end 2018 to 4.6% now. As I have said before, in a leasing business, this is both a key performance indicator and major determinant of our competitiveness. On the lower left, you will see that the trading liquidity in our stock has improved substantially over the last year. The sea change in our trading liquidity has made it far easier for investors to both build and exit positions in GSL. Our detailed financial statements appear in full on slides 11 through 13. With that, I will turn it over to Tom.
Tom Lister, CCO
Thanks, Tassos. Slide 14 highlights the sizes of ships that our business focuses on, providing context for the following slides. GSL concentrates on mid-sized and smaller ships, typically ranging from about 2,000 TEU to around 10,000 TEU, which aligns with the liquid charter market. The top left map shows where our sizes of ships, under 10,000 TEU, are deployed, highlighting their operational flexibility. As you can see, they are utilized everywhere. The bottom map illustrates the deployment of larger ships, those over 10,000 TEU, which generally operate on East-West main lanes or key trades where cargo volumes and shore infrastructure can accommodate them. Importantly, over 70% of global containerized trade volumes are transported outside these main lanes in North-South and intermediate regional trades served by ships like ours. In the opening remarks, George mentioned the macro uncertainty we are facing, and that's certainly true. A significant concern in the container shipping industry is when COVID restrictions in China will be eased, which would release pent-up demand into the market. The longer this backlog remains and the more unpredictable the volume increase is when it happens, the more difficult it will be for supply to catch up. This situation could benefit earnings. While I am not suggesting a repeat of the second half of 2020, that period serves as an example of how the supply chain and earnings can be affected when substantial demand suddenly returns. It's essential to note that year-on-year growth in 2020 was nearly negative, with volume strength barely increasing by just under 2%, and the rebound in earnings occurred after global fleet idle capacity peaked at just under 12%, a much lower baseline compared to today's near-full fleet employment. Instead of speculating on how the macro environment and demand will change, the following slides will primarily focus on the supply side, where we have clearer visibility. Slide 15 illustrates the supply side trends that are indicative of the sector's health. The top chart shows that idle capacity remains below 1%, indicating full global fleet employment. We have yet to enter the traditional peak season in the freight markets. The bottom chart reflects a similar situation, with almost no ship recycling for container ships in 2021, which has continued into the first quarter of this year. This is due to exceptional earnings in the charter market. Now, let’s move to slide 16, which presents the orderbook. On the left, you can see the orderbook's composition by size segment. As we noted in our last earnings call, the orderbook has grown over the past 18 months, reaching an orderbook to fleet ratio of 27.9% at the end of the quarter. However, this figure is heavily skewed towards larger ships over 10,000 TEU. When focusing on our key segments of 2,000 to 10,000 TEU, highlighted in the red box, the orderbook to fleet ratio is significantly lower, at less than 12%. Another important observation regarding the orderbook is that delivery schedules are back-loaded, meaning that most deliveries are set for 2023, 2024, and increasingly 2025, rather than this year, 2022. This backloading is crucial since 2023 marks the introduction of new environmental decarbonization regulations, which we anticipate will slow global fleet operations and decrease effective supply. For context, reducing the average operating speed of the global containership fleet by just one nautical mile per hour would cut effective supply by 6% to 7%. Additionally, the midsize and smaller container ship fleet is aging. The chart on the right supports this, and more details on the global fleet's age profile are provided in the appendix. If scrapping continues to be postponed, by the end of 2024, about 7.5% of sub-10,000 TEU capacity currently in operation will be at least 25 years old, particularly among lower specification candidates. When you compare this against the total orderbook for sub-10,000 TEU ships expected to be delivered through the end of 2024, you would find an implied net growth in these sizes of only 3% over the next two and a half years, not per year. Ultimately, we see strong supportive supply side fundamentals for our targeted size segments, which leads us to slide 17 about the charter market. The chart shows that the charter market continued to strengthen through the first quarter of this year. The market is very tight, as stated by George in his opening remarks. According to our inquiries, only five ships in the 5,500 to 10,000 TEU size classes are expected to become available for the remainder of 2022 across the entire charter market, not just the GSL fleet. For the limited chartering activity in feeder sizes, both owners and charterers are opting for brief, tactical fixes to meet network demands. Given this environment, it is difficult to forecast rates over the long term. The rates reflected in the table on the right are merely those presented in our March investor presentation, based on the anticipated availability of vessels. We believe that demand will spike and charter rates will continue to rise when China reopens. However, we do not have any ships available until later in the year. Instead, let's revisit the supportive fundamentals. Firstly, full fleet employment along with ongoing supply chain disruptions. Secondly, an aging midsized and smaller ship group combined with a modest orderbook indicating limited net supply growth in our segments. Thirdly, emissions regulations in 2023 that will likely slow the global fleet and reduce effective supply. Lastly, the potential for a significant increase in demand once China comes back online. Now, I will hand the call back to George to conclude.
George Youroukos, Executive Chairman
Thank you, Tom. I will provide just a brief summary and then we would be happy to take your questions. As a result of our extensive chartering activity and the signing of numerous multi-year charters at elevated rates, we have extensive contract cover of almost $1.7 billion over nearly 2.5 years. Of that service, CapEx and dividends is fully covered through the end of 2023, even without any further charter renewals or growth. We have a very strong balance sheet. While some of our $150 million of our $222 million cash is restricted, our increasing cash balance is starting to more fully reflect the earnings growth that we secured during 2021 from vessel acquisitions and charter renewals at higher rates. Further, we have no debt maturities until 2024. Our fleet is in the sweet spot of the market and well supported by supply side fundamentals. Our high-reefer midsized post-Panamax and smaller container ships were in high demand even before the current period of extraordinary market strength. And we have an expectation that they will remain so for the long term based on their efficiency, flexibility, and high specifications. Meanwhile, while the orderbook for very large ships has increased, net growth for our size segment is expected to be negligible and effective capacity might even shrink from 2023 with the new emissions regulations. This current market has proven to be more resilient than many initially expected, driven by continued underlying demand and by supply chain conditions that have proven to be more structural than transitory. Freight and charter markets remain very strong. Liners are forecasting another exceptional year of earnings in 2022. Further, a demand-side spike is expected when China loosens its COVID restrictions, which should have a very positive effect on earnings for the industry. Finally, we are looking at capital on a balanced opportunistic basis to maximize long-term value. With adjusted EBITDA for the first quarter 2022 just over twice that of the prior period, we have increased our quarterly common dividend to $0.375 from this quarter, tripled the level initially proposed just over a year ago. And as we begin to accrue cash from our larger fleet in new and improved charters, we were able to purchase approximately $5 million of GSL shares in the market under a share buyback authorization. We remain dedicated to returning capital to shareholders in a prudent, sustainable manner as a key part of our balanced approach to maximize long-term value.
Operator, Operator
Our first question comes from Chris Robertson of Jefferies.
Chris Robertson, Analyst
So, yes, revenues seem to be pretty locked in at this point, especially for this year. Can you talk about the expense side in terms of cost pressures you might be seeing this year compared to last and what are your expectations for any cost inflation this year?
George Youroukos, Executive Chairman
Yes, I'll address that. The operational costs that are rising due to current circumstances include lubricants, which are derived from fuel. As fuel prices rise, lubricating oils also increase. Another factor is COVID-related expenses, such as higher transportation ticket costs, which we all experience when traveling. Additionally, frequent regulatory changes in China significantly impact our operations, especially for container ships moving in and out of the country, resulting in extra costs due to delays and scheduling issues. While there are various expenses stemming from these factors, they are not substantial. We anticipate potential increases in spare parts costs, particularly due to the rising price of steel, as most spare parts for ships are made from steel. However, I do not expect any major cost increases. Shipyard costs have risen by 10% to 20% for dry dock services when a ship is being repaired, but container ships generally do not require significant steel replacements during repairs, which is the primary driver of steel price increases. In summary, while there are some cost increases, I do not believe they will materially impact the profitability of our companies.
Chris Robertson, Analyst
Okay. Yes. Thanks for that color. That was very comprehensive. My next question is related to some of the retrofitting and incremental upgrades being done ahead of IMO 2023 through 2030. So, on the engine power limiters and other measures that GSL is taking to get the ships ready, can any of that be done while at sea, or does it have to be done at the yard?
George Youroukos, Executive Chairman
I’ll let Tom speak more about this. But just to say a few things. The EPLs, engine power limiters can be done while a ship at sea. Other things, more major, need the shipyard. But, the EPLs can be done while trading.
Tom Lister, CCO
Chris, I think George probably addressed your two principal questions there. Is there anything you'd like me to add?
Chris Robertson, Analyst
No. I guess, if there's anything else outside of the EPLs that you guys are doing worth mentioning or talking about, that would be helpful. But if not, yes, George answered my question.
Tom Lister, CCO
Sure. Okay. What I would say is a general comment is that we're working with our customer base, with our charterers to seek to see what can be done to enhance the efficiency, and as a result, reduce fuel consumption and thus reduce the emissions of our ships. But I think it's too early, really to provide any more sort of exact guidance than that. But it's an issue which is clearly at the very front of our minds. It's the front of our charterer’s minds. And it's at the front of we understand their customer's minds. So, decarbonization is certainly something that's gathering momentum, and it will have to be attached or attacked on a collaborative basis, which I think is key.
Chris Robertson, Analyst
Sure. Yes. Understandable.
George Youroukos, Executive Chairman
To help the audience understand what we mean, it's important to clarify that the modifications aim to improve the water flow around the hull. This results in less friction as the ship moves through the water, which in turn reduces fuel consumption and CO2 emissions, since these emissions are directly related to the amount of fuel used. Modifications can include changing the propeller, altering the ship's bow design known as a bulbous bow, adding specialized fins near the propeller to enhance water flow, and applying special slick paint to reduce resistance. This explanation should give our audience a clearer picture of what we are discussing.
Chris Robertson, Analyst
I have a final question if I can here. So, just thinking through slide 10, you have the amortization schedule. The debt payments over 2022 and ‘23, just scheduled amortization. Are you guys thinking about any debt prepayments at this point? And how does that fit in or could it fit in with your capital allocation program here?
George Youroukos, Executive Chairman
Ian, do you want to take this?
Ian Webber, CEO
I'm happy to address that. This is the scheduled authorization mentioned on page 10, which is reasonably aggressive as agreed upon with our lenders. We have assets with a useful life of around 30 years, so we need to ensure that the debt tied to the ships is also reduced. We've discussed capital allocation several times during the prepared remarks. It's a flexible policy, and we've increased the dividend. We also have a $40 million share buyback authorization and successfully repurchased shares last year. While we are open to allocating capital for reducing debt, it's not our main priority at the moment, considering other uses for that capital. Regarding debt management, our team, particularly Tassos, has been effective in refinancing our debt, either by extending maturities, lowering costs, or achieving both. We've made significant progress in that area over the last three years since merging with Poseidon. However, there are still opportunities to improve, particularly where we have high-cost debt, and we will explore options to lower those costs over time, which could enhance the efficiency of our balance sheet.
Operator, Operator
Our next question comes from Liam Burke of B. Riley. Your line is open.
Liam Burke, Analyst
Just referring to the rate chart on slide 17, the rates are clearly high by any measure, whether you consider them sequentially or year-over-year. However, how much of that increase is due to lingering effects from past congestion? And do these figures accurately reflect the current supply-demand imbalance?
Tom Lister, CCO
That's a tough one to answer, Liam. This is Tom, by the way. Maybe I'll partially dodge the question and say, people who’ve been talking about congestion in the supply chain as being transitory for about the last 18 months, and at least from where we’re sitting, we don't see that congestion being structurally resolved anytime soon. So, I guess, that's a partial answer perhaps.
Liam Burke, Analyst
What I want to highlight is that we haven't experienced the release from Shanghai due to the closing, which could make the situation worse.
Tom Lister, CCO
Yes. I mean, I fully agree with that perspective. In fact, we tried to allude to that in our prepared remarks. For sure, the more pent-up demand that you have building up in China, while the ports and/or the production facilities themselves are effectively closed, the bigger the demand side shock when it comes back online, and the greater the sudden, additional tightening in the supply-demand balance. So, for sure, we see potential for the sustaining of these rates, or possibly even increases of those rates, when that eventually happens, and the longer it takes to happen, clearly, the greater the impact.
Liam Burke, Analyst
Sure. Higher rates affect asset pricing, which may be reducing your acquisition opportunities.
George Youroukos, Executive Chairman
Yes, that's correct. We continuously assess opportunities, but as you've noticed, we haven't pursued any of them because they haven't met our desired level of accretion. However, we anticipate that more favorable opportunities will arise over time. If interest rates decrease, which they will as part of the market cycle, that will impact values and create more opportunities.
Operator, Operator
Our next question comes from J. Mintzmyer, Value Investor's Edge. Your line is open.
J. Mintzmyer, Analyst
Great questions early by both the other analysts. I just wanted to follow-up a little bit on repurchase capacity. You mentioned the $40 million program. It looks like you used about $5 million of that in April. Stock prices have come down significantly since then, down another 15%, 20% since that point. What do you think is a reasonable pace where you can keep your balance sheet with enough liquidity but still deploy repurchases? Is there a certain number per quarter that you could think of?
George Youroukos, Executive Chairman
Ian, you want to take this?
Ian Webber, CEO
Sure, that's a good question. Thank you very much. It's really difficult to tell. We provide some information on annual figures for EBITDA and CapEx, regular dry dockings, and other regulatory matters. However, we do not break it down by quarter. As you would expect, cash flows in an environment where we have forward-fixed charters at higher rates tend to come into effect later in the year, making our cash flow somewhat backend loaded. It's not heavily skewed towards the end of the year, but there is a timing effect. Thus, cash will become more available to us towards the end of 2022 and into 2023. Given the other potential demands on capital and our dynamic approach, which we review every quarter with the Board, it’s just not possible to say we have done 5 million in this quarter, so expect $5 million a quarter for the next few quarters.
J. Mintzmyer, Analyst
Yes, appreciate it. I was trying to pin you down there. But it's worth looking at it. It's very interesting to see the stock essentially flat, I mean, up, what $1.50 last September, right when there was insider buys and repurchases. And that's after you've added significant value in your charter renewals. On the topic of charter renewals, it looks like the next availabilities are one or two in early '23, a bunch of ships coming up in mid '23. One of your peers did a lot of forward fixtures a year or so out. Obviously, there's some sort of discount associated with that. When do you think the next sort of window for new charters is going to be? Is this something we could expect this summer, this fall, or are you going to hold those a little bit longer?
George Youroukos, Executive Chairman
It’s noteworthy that 87% of our fleet days are already covered for 2022, leaving just 13% that needs to be rechartered. We have been actively working on rechartering our fleet for the past 18 months and will continue to do so. With very little left for 2023, we aim to time our rechartering efficiently. Currently, the opportunity for negotiations is open. There is no urgency to act immediately; rather, our focus is on securing the best possible deals for the company. We are in ongoing discussions with our customers about this. I can’t specify whether we will finalize a long-term charter tomorrow or in a couple of months, but we are consistently negotiating. It’s an ongoing process rather than a situation where a window shuts and then reopens.
J. Mintzmyer, Analyst
Yes, certainly a lot of moving parts and things remain really tight. It'll be interesting to see that...
George Youroukos, Executive Chairman
Yes. Exactly. You see, it's all about this. Obviously, when China reopens, a surge in demand will come, which helps rates even further. And depends on the exposure its company has. I mean, we like I said, we have very little exposure for 2023. It's only 15% of our days. We can afford to be, let's say a little bit more opportunistic in order to try to achieve the better result that we can without taking any risk, as I said, because we're laser-focused on extending and renewing in advance.
J. Mintzmyer, Analyst
Certainly. We’ll hope for the best and that the stock market improves a little bit. Thank you for your time, gentlemen, and congratulations on a great quarter.
George Youroukos, Executive Chairman
Thank you.
Operator, Operator
Thank you. And next we have Frode Morkedal of Clarksons Securities. Your line is open.
Frode Morkedal, Analyst
A quick question on the China lockdown. I see your point on the China reopening and that's going to drive exports up again. Just curious to hear if you have any view on port congestion, right? If there's a changed dynamic from basically vessels piling up in China versus it used to be in the importing side out of let's say Los Angeles, that congestion is coming down. So, is this changing the need to put more ships into the system, so to speak, in order to keep the loops up?
Tom Lister, CCO
Good question, Forde. I mean, to me it feels like a balloon in some ways. If you squeeze it in one place, it blows up in another. So, the business of congestion within the supply chain and exactly where it sits and where it's manifested through a buildup of ships waiting changes all the time. But I think the fact is at least as we see it, that that congestion is expected to remain. Now, whether it's in China or it's in the U.S. or it's in Europe, wherever, makes very little difference to the overall dynamic, which is, it's a super tight market in terms of supply.
Frode Morkedal, Analyst
I'm interested in the contract renewals, and I'm wondering if the liner companies are still considering purchasing outside ships instead of committing to long-term agreements. We observed this trend last year; is it still happening?
George Youroukos, Executive Chairman
I would say that currently, as long as chartering a ship remains more expensive, liner companies will prefer to pay out based on EBITDA rather than buying the ship. They are consistently interested in purchasing ships instead of chartering if they can acquire them at a lower cost. While chartering a ship usually generates more profit than selling one, this is why many owners are reluctant to sell to liner companies, as they can earn more by chartering. There are some transactions occurring, and a few owners are leaving the sector. However, overall, the frequency of these deals has significantly decreased. With fewer ships available, liquidity is extremely limited, making it more profitable for owners to retain and trade their ships instead of selling them.
Frode Morkedal, Analyst
Great. Well, that's a good support for asset values, I guess. In terms of the outlook, I think you mentioned some speed reduction and figure there. But when you look at it overall, when you look at orderbook and the deliveries, what's your current expectation from these new carbon regulations? Like, what's the effect of scrapping? What's the effect of speed, and what's the realistic effective fleet growth in 2023 and 2024 in your words or your opinion?
Tom Lister, CCO
Sure, Frode. This is Tom. I'll address that. We touched on this in the prepared remarks on slide 16. To recap, currently, there's about 1% idle capacity in the global fleet, which indicates full utilization. This year, to create additional capacity, we've increased our fleet's speed at the request of charterers, and we expect the global fleet to reflect this increase as well. Starting in 2023, with the implementation of EEXI, ships must comply with new regulations by operating within specific speed limits that will vary by vessel. This makes it challenging to predict a precise slowdown for the global fleet beginning January 1st. What we have shared, and what we’ve heard from others, is that for every nautical mile per hour the global container ship fleet is required to slow down due to these emissions regulations, it equates to a reduction of approximately 6% to 7% of effective supply. While the numbers can be adjusted, no one can definitively state how much capacity will be removed from the system come January.
George Youroukos, Executive Chairman
One thing I should add to that is that factually, the ships in general of all sizes are trading about 2 to 3 knots higher than they used to prior COVID. So, there is a lot of room for slowing down.
Frode Morkedal, Analyst
Would you care to make a guess on what's the effective speed growth, if it all combined?
George Youroukos, Executive Chairman
No, it's very difficult to guess. But we see the average speed around 2021 was about 17 or 18 knots. If I were to make a wager, I would say at least 1 knot is likely to decrease. It's a balance between the emissions penalties and the revenue that liner companies earn by speeding up their operations, as they want to increase their ton-miles per year. For example, if they used to complete 10 trips, they now aim for 11 trips. Achieving a higher speed allows them to do that. Higher speeds mean liner companies generate significant profits, which in turn benefits us as well, creating a reciprocal effect. Therefore, it's hard to pinpoint exactly. However, I would anticipate at least 1 knot decrease since the emissions penalties are expected to be quite severe. As we know, the regulations from 2023 to 2024 and then 2025 are becoming stricter. The emissions standards for 2024 are lower than those for 2023, and 2025 will have even tougher requirements. So, eventually, regardless of their strategies, ships will need to slow down, in my opinion.
Tom Lister, CCO
And to add to that, just a quick clarification. EEXI, which is this Energy Efficiency Existing Ship Index, which is the emissions regulation, which is prompting engine power limiters to be installed on ships is binary in nature. It's a pass-fail test. And if a ship fails, it can no longer trade, which means that the liner companies themselves are not going to be able to trade the vessels at speeds in excess of the limits imposed upon them by EEXI. So, sorry, I don't want to get into the weeds of the regulations, because it gets pretty complex. But I think that's an important point to make. EEXI is pass-fail and if you fail, you can't trade. So, everyone will have to bring their ships into compliance by way of engine power limiters or a combination of other factors.
George Youroukos, Executive Chairman
To simplify, think of it like a speed limit. The EEXI number for each vessel acts as a speed radar. If a ship exceeds this limit, it can't operate, similar to losing a driving license. This regulation ensures ships operate within their allowed emission limits. Each vessel has different emissions. I also mentioned the Carbon Intensity Index, or CII, which relates to how the ship is operated. For example, if you have a hybrid car and drive it sensibly, you'll achieve the fuel efficiency advertised by the manufacturer. However, driving it aggressively—whether it's a hybrid or not—will not yield the same fuel consumption results. The same principle applies to ships. If liner companies consistently operate their vessels at the maximum speed allowed by the EEXI, they may fall into a category that limits them after 12 months. Thus, it’s crucial for liner companies to operate their ships within speed limits and do so prudently. Excessive speed can lead to non-compliance, which complicates the situation.
Frode Morkedal, Analyst
Thank you for the detailed information. A speed reduction of 1 knot is quite significant. The order book shows an 8% growth, so a reduction of 6% or 7% in that would have a substantial impact. My final question is regarding the EBITDA scenarios on slide 7, which do not include 2024. If possible, could you provide the contract coverage for 2024? Also, do you have an estimate of what the 2024 EBITDA would be, assuming a 15-year average rate?
Ian Webber, CEO
We do know. We've done the math, but we don't disclose it yet. Because it's so far away. The further out you get with these illustrative earnings scenarios, the less accurate they become, and we're clearly confident enough to put the data out of 18 months in advance through to the end of 2023. But I think we wouldn't want to go beyond that. You can get a sense of contract cover from the previous couple of pages, 5 and 6, where there's more white, i.e., ships aren’t fixed, but there's still a significant amount of dark blue or red bars and pale blue bars as well actually, legacy charters that continue.
Frode Morkedal, Analyst
Yes. I think when I last checked, it was between 50% and 60% coverage. Anyway, it should be fairly good in 2024 as well. Thank you. That’s all.
Ian Webber, CEO
Thank you, everybody. Thank you for your questions. We look forward to giving an update on the second quarter, which will be early August, if we follow our normal timetable. So, thanks very much.
Operator, Operator
This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.