Earnings Call Transcript - GSL Q1 2023

Operator, Operator

Good day, and welcome to Global Ship Lease Q1 2023 Earnings Call. I would now like to welcome Mr. Ian Webber, Chief Executive Officer, to begin the conference. Ian, 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 2023 Earnings Conference Call. The slides that accompany today's presentation are available on our website at www.globalshiplease.com. Slides 2 and 3 highlight that today's call may include forward-looking statements based on current expectations and assumptions, which are inherently uncertain and beyond the company's control. Actual results may differ significantly from these forward-looking statements due to various factors, including those mentioned in the safe harbor section of the slide presentation. We also encourage you to review the Risk Factors section of our most recent annual report filed on Form 20-F for 2023, submitted on March 23 this year. This report can be accessed from our website or the SEC. All of our statements are subject to these and other disclosures in our SEC filings. We do not have any obligation to update forward-looking statements. For reconciliations of the non-GAAP financial measures we will discuss during this call to the most comparable measures as calculated in accordance with GAAP, please refer to the earnings release we issued this morning, which is also available on our website. As always, I’m joined today by our Executive Chairman, George Youroukos; our Chief Financial Officer, Tassos Psaropoulos; and our Chief Commercial Officer, Tom Lister. George will begin the call with a high-level overview of GSL and our industry. Then, Tassos, Tom, and I will discuss our recent activities, quarterly results, financials, and the current market environment. After that, we'll be happy to answer your questions. Now, turning to Slide 4, I’ll pass the call over to George.

Georgios Youroukos, Executive Chairman

Thank you, Ian, and good afternoon or evening to all of you joining us today. As flagged in recent quarters, ongoing normalization in the charter market due to macro headwinds had led to downward pressure on charter rates and asset values relative to the record-breaking levels of last year. However, in recent weeks, the charter market has shown some signs of stabilization at rates that are still some way above both pre-COVID and historic average levels. It is difficult to say whether these recent positive trends will be sustainable. But we will, of course, closely monitor the situation. Meanwhile, our extensive contract cover for a large portion of our fleet, much of which were secured for long durations during the market's hot strike has positioned GSL to weather whatever markets are ahead. We have a robust balance sheet with no debt or refinancing requirements before 2026 and an overall low cost of debt with all of our floating rate debt fully hedged through 2026. From this position of financial strength, we are focused on the sustainability and resilience of our business in the long term, and on further improving our competitiveness by investing in our fleet to meet the challenging regulatory requirements and commercial demands for decarbonization. As and when growth opportunities arise that meet our strict and disciplined criteria, we want to be ready to act decisively for the benefit of our shareholders. As with our recently announced commitment to purchase 4 ships with attractive charters attached. More importantly, we're also continuing to payout a sustainable dividend of $0.375 per common share quarterly, $1.5 annualized, and we have returned further capital to shareholders through the buyback of an additional $3.8 million of shares since our last earnings call. $3.8 million, just to make sure, bringing the total share repurchases since the third quarter of 2021 to $43.8 million. With that, I will turn the call over to Ian.

Ian Webber, CEO

Thank you, George. Please turn to Slide 5. Here, we show the makeup of diversification of our charterer base. This is well spread across the top tier of liner companies. In total, as of March 31 this year, including the 4 ships that we've agreed to purchase that George just mentioned, and the other fixtures that we've agreed up to yesterday by the 9th, we have over $2.1 billion of contracted revenue spread out over a TEU weighted average of 2.5 years, including 12 new charters that were agreed year-to-date, which collectively those 12 new charters agreed this year add around $190 million of contracted revenues. On the next slide, Slide 6. As in previous quarters, we show illustrative guidance across different rate scenarios. As always, I want to be very clear that this is not a forecast. We're not forecasting charter rates or our earnings, but we're rather illustrating the extent of our contracted revenues year-by-year and our very limited spot market exposure through 2024. As you can see from the modest variations across the scenarios, we have very little tonnage coming into the charter market this year. In fact, we're over 97% days covered. As we move into 2024, when we have a few more vessels coming open, nevertheless, we're nearly 80% covered on a days basis, the extent of the forward charters that we previously signed gives us good momentum for continuing earnings growth across the different scenarios. Moving on to Slide 7, we show an overview of our dynamic and disciplined capital allocation strategy. Because of our contract cover and therefore, forward visibility on cash flows we've been able to simultaneously pay our quarterly dividend, engage in share buybacks, delever the balance sheet to derisk and build equity value, deploy CapEx to meet the evolving needs of the market, including the increasing decarbonization requirements of our customers and build a degree of cash liquidity that makes it possible for us to act quickly when acquisition opportunities arise. Overall, we target a balanced approach to capital allocation with a focus on building long-term shareholder value on a sustainable basis in a cyclical industry. We always assess the risks to our cash flows before weighing the various capital allocation opportunities available to us, and we allocate our capital accordingly. As you see, when asset values were overheated and growth opportunities did not meet our strict criteria, we spent almost $44 million on share buybacks, no growth, without which our share count would have been around 7% higher today. Now as asset values have normalized, we've directed some of our capital to the strongly value-adding purchase of ships with attractive charters attached. That brings us neatly to Slide 8, where you can see an illustration of our disciplined timing for acquiring vessels in the market. Having grown substantially prior to the COVID-driven spike in asset values, you can see that we went nearly 2 years without acquiring further vessels at the high prices prevailing during that peak period. This was despite the fact that GSL's balance sheet was as strong as it had ever been. And we're just not inclined to make acquisitions simply because we have access to capital. We aim to make acquisitions where doing so will benefit our business and our shareholders over the long term. On Slide 9, we recap the terms under which we've recently agreed to purchase 4, 8,500 TEU vessels built in 2003 and 2004. These are high specification, enhanced energy efficiency ships that will begin the 2-plus year charters to a leading liner operator upon delivery to us toward the end of Q2, beginning of Q3. In aggregate, these vessels will contribute around $77 million of aggregate adjusted EBITDA over the minimum firm period of the charters, and up to a total in aggregate of $95 million of EBITDA if all of the options are exercised by the charters. We're planning to finance the $123 million purchase price through a conventional combination of cash on hand and senior secured debt. The latter of which will, of course, be covered by our interest rate caps, which we have in excess today, capping LIBOR and SOFR at 75 basis points. These are attractive ships, which we believe will have good earnings potential after the initial charters. On Slide 25, the so-called EBIT calculator page, we provide some benchmark rates for this size segment. And as you can see, we also provide the lightweight tonnage of the vessels, a little under 38,000 tonnes per ship, in case you wish to run downside sensitivity analysis based on scrap values. So consistent with our well-established track record, in our view, this deal is cash accretive, low risk with attractive upside potential. With that, I'll turn the call over to Tassos to talk you through our financials.

Anastasios Psaropoulos, CFO

Thank you, Ian. On Slide 10, we have summarized our year-to-date financial highlights. Revenue for the first quarter was $159.3 million, up from $153.6 million in the prior year period. Adjusted EBITDA for the quarter was $104.9 million, up from $90.4 million in the first quarter of 2022. Our normalized net income, which is adjusted for one-off items, increased from $67.3 million in the first quarter of 2022 to $75.6 million in the first quarter of 2023. Moving to the balance sheet items, our gross debt at the end of the first quarter was $896.5 million, down from a little under $1.1 billion in the prior year period. We had $288 million in cash on our balance sheet at the quarter end, of which $143 million is restricted with $126 million of that being received of charter hire in advance and $27 million other restricted cash. The remaining $135 million covers minimum liquidity covenants in our debt facility and provides for our working capital requirements together with some balance sheet flexibility. A portion is also earmarked to fund the acquisition of the 4, 8,500 TEU ships. As mentioned, we'll continue to return capital to shareholders through both our quarterly dividend and our continued use of the share buyback authorization where we have a little over $6 million of the current authorization remaining. Turning to Slide 11 now, we are delivering, lowering our cost of debt and minimizing our interest rate risk. On the left, you can see our progress derisking our balance sheet from $950 million in outstanding debt at the end of year 2022 to an expected $588 million in outstanding debt by the end of 2024, based on existing debt and scheduled amortization, which is aggressive and continues to derisk our balance sheet. In the center of the slide, you can see the margin and overall cost of debt. Our average margin is now down to just over 3% from 4.6% at the beginning of 2022. And as already mentioned, under our current interest rate cap of 75 basis points for LIBOR and a similar level for SOFR, all our floating rate exposure is hedged till 2026, and there is still headroom under the cap to cover future floating rate facilities like the one we intend to use for the purchase of the 4, 8,500 TEU vessels. On the right of the slide, you can see that our financial leverage is increasingly robust, with our leverage ratio having fallen from approximately 8.4x at the end of 2018 to only 1.8x now. With that, I will turn the call over to Tom.

Thomas Lister, CCO

Thanks, Tassos. As usual, and for the benefit of listeners who are new to GSL, Slide 12 is intended to highlight the ship sizes on which our business is focused, which will help put the subsequent slides in context. GSL is focused on midsized and smaller ships, which are ships ranging from about 2,000 TEU up to about 10,000 TEU, so effectively the liquid charter market. The top map on the left shows the deployment of 'our sizes of ship' i.e., ships under 10,000 TEU and emphasizes their operational flexibility, which is especially valuable in these uncertain times. As you can see, they're deployed everywhere. The bottom map shows where the big ships those larger than 10,000 TEU were deployed which tends to be on the East-West main lane or arterial trades, where the cargo volumes and shoreside infrastructure can support them. And it's important to note that over 70%, 70% of global containerized trade volumes. In fact, it was 72% in 2022, are moved outside these main lanes in the north-south regional and intermediate trades served predominantly by ships like ours rather than by the big ships. As George remarked at the outset, the macro and geopolitical outlook that we're all currently facing remains challenging and uncertain. So as usual, we focus on the supply side, where we do have forward visibility and against which listeners can set their own expectations for containerized trade or GDP growth as they feel appropriate. Slide 13 shows the metrics that tend to be used as a measure of supply-side tension. The top chart shows idle capacity, which at quarter end was around 2.5%, although it has since come down a bit. In fact, the latest figure I've seen is about 1.4%. The bottom chart shows containership scrapping and recycling. This has still been pretty limited so far in 2023, defying the prior expectations of many industry observers. We'll come back to this when discussing the charter market, but long story short, there's still demand for capacity in liner companies' networks and earnings in the charter market remain attractive. Slide 14 looks at the order book. Here, you can see on the left, the composition of the order book by size segment, covering all deliveries currently scheduled to take place not only this year but also through 2026 and beyond. The overall order book-to-fleet ratio as of quarter end was 30%. However, it is still heavily skewed towards the very big ships, over 10,000 TEU, for which the ratio is 52.8%. Meanwhile, our focus segments of 2,000 to 10,000 TEU highlighted in the gray box have a significantly lower ratio of 14.5%. And there are 2 important points to keep in mind when assessing the order book: one, that the relevant metric here is the net change to the absolute fleet size that is deliveries minus scrappings; and two, that we should consider effective supply, which is a function of capacity and operating speed, slow the fleet down and effective capacity shrinks. So on the first point, the midsized and smaller containership fleet is aging. As you can see from the chart on the right, if scrapping were to continue to be deferred, by the end of 2026, almost 2 million TEU of the sub-10,000 TEU capacity currently on the water would be at least 25 years old and potential candidates for the recycling yards in a softening market. Net this out against the total order book of sub-10,000 TEU ships due to be delivered over the same time frame, and you would get an implied net growth in these sizes of just 1.1% and which itself would be spread over the coming 3-plus years. On the second point, new decarbonization regulations are already being rolled out across the industry from January 1 of this year with more to follow. These regulations, which will tighten over time, are prompting ships to slow down. Illustratively, for the GSL fleet, average operating speeds at sea for the first quarter of 2023 are down over 9% on 2022. Turning to Slide 15, the charter market. As you can see from the chart, after falling sharply in late 2022, rates in the charter market have plateaued in recent weeks. In fact, for the segments in which vessel availability and market liquidity is most limited, rates have actually firmed a little since the lows of February and early March. Charter durations have also improved somewhat since our last earnings call with up to 2 years achievable in some instances for the right ships. It's hard to say how long these market dynamics will last, but as you will have seen in the earnings release, we have capitalized on the opportunity to fix a handful of ships for decent terms and rates including the forward fixture, which is something unheard of since the third quarter of last year or so of one of our Eco-9,000s. The next 3 slides focus on decarbonization and the evolving regulatory environment. Slide 16, which is largely self-explanatory, summarizes the 3 existing regulations on which there is reasonable clarity, EEXI, CII and EU ETS. The direction of travel is clear, these regulations and more like them will only become broader in scope and more demanding in nature over time. On the next slide, Slide 17, we've laid out some of the expected implications of these regulations for the global fleet. Broadly, these are: number one, reduced operating speeds to reduce emissions. The upside here is that in addition to reducing emissions, a reduction in average operating speed of just 1 knot, 1 nautical mile per hour, reduces effective supply by around 6%; two, vessel operations will be optimized for the CII algorithm and ratings. In addition to slowing ships down, efforts will be made to improve their operational efficiency and thus, reduce their fuel burn and emissions; and number three, increasing investments will be made in energy-saving technologies and retrofits in developing clean or at least cleaner fuels and propulsion and in carbon capture and mitigation technologies. Slide 18 summarizes the actions we are taking to preserve and we hope, improve the commercial positioning and trading flexibility of the GSL fleet in a decarbonizing world. First, we're ensuring regulatory compliance, as you would expect. Second, we're installing technologies and applying protocols to our ships, including automated data capture and live performance management systems to enhance cooperation between owners and charterers to facilitate energy optimized vessel operations and reduced fuel burn. Third, we're retrofitting energy-saving technologies to our ships subject to commercial agreement and in cooperation with the charterers. Such agreements are commercially sensitive and vary on a case-by-case basis. But the underlying rationale is that we will only invest in discretionary retrofits, i.e., those not required to meet regulatory requirements, that will enhance the value and earnings of the corresponding ship. So that's the crux of it. But for those of you who would like to know more, may I refer you to the Climate Strategy section of our latest ESG report, which is available on our corporate website. With that, I'll now turn the call back to George to wrap up.

Georgios Youroukos, Executive Chairman

Thank you, Tom. I will provide a brief summary, and then we would be happy to take your questions. Including our recently agreed charter fixtures, and the 4 ships we're to acquire, we have excellent contract cover of $2.1 billion over an average of 2.5 years. Fully covering our debt service, CapEx and dividends through 2023 and 2024 without depending at all upon charter renewals. We have built a strong balance sheet with $288 million in cash, of which $153 million is restricted, with a balance of $135 million, covering minimum liquidity covenants regular working capital needs and, of course, the cash earmarked to partially fund the 4 8,500. With no refinancing requirements until 2026, we have continued to amortize debt, building equity value in the process, and bringing our financial leverage to below 2x. Our floating rate debt is fully hedged with LIBOR and SOFR capped at only 75 basis points. And we have some additional headroom under the cap to hedge for further future floating rate facilities. And the average margin on our debt is competitively priced at below 3.1%. Now turning to Slide 20. It's clear that macro uncertainty is an overhang on the sector. But we have, for the time being, seen at least a pause to the sharp reduction in charter rates and asset values over recent quarters. And although the majority of chartering in the market during the first quarter tended to be tactical and short. In recent weeks, we have seen charter terms extended somewhat for the right ships. Meantime, liner operators after record earnings last year, are providing more cautious guidance for the year ahead. Now against this backdrop and capitalizing upon our high-specification fleet, year-to-date, we have added 12 new charters and about $190 million of contracted revenues. Now wrapping up, managing risk and being nimble and prudent in our capital allocation underpins everything we do. Our goal is to maximize long-term value for shareholders while ensuring GSL's continued resilience in a cyclical market. Our EBITDA and net income were both meaningfully up versus the prior year period. We remain active in share buybacks, which cumulatively have reduced our share count by about 7%, and we maintain a strong sustainable dividend. At the same time, we have returned to selective growth with a well-timed acquisition that matches our track record of making disciplined transactions that are cash accretive, low risk and have upside potential. With that, we'll be happy to take your questions.

Operator, Operator

Our first question comes from Liam Burke from B. Riley Financial.

Liam Burke, Analyst

Could we discuss the four vessel acquisitions and your perspective on the potential returns from those assets? These vessels are 20 years old, and you have 2-year charter agreements with a 1-year option. If we reach that third year, are you considering scrapping them at that point, or do you plan to charter them out for the full 25-year lifespan?

Thomas Lister, CCO

Thanks for the question, Liam. We are somewhat limited in what we can disclose about this deal due to commercial sensitivities. However, we see this transaction as having a significant asymmetry between potential rewards and risks. We included a summary slide that details the lightweight tonnage of the ships, which allows for evaluations of lightweight or scrap value to understand the downside. Importantly, we anticipate strong cash flows right from the start, appreciate the ships, and expect attractive opportunities for employment after the initial charters, although we are not reliant on that.

Liam Burke, Analyst

Okay. Great. And you've got plenty of dry powder in terms of acquisition capital. What does the pipeline look like in terms of potential asset additions?

Georgios Youroukos, Executive Chairman

Yes. Let me explain this, Liam. We always have a pipeline of transactions that we consistently evaluate. We choose the ones that meet our strict criteria. We are looking at several deals, but that doesn’t guarantee we will move forward with any of them unless they make sense. This particular transaction, for instance, has been in the works for a while. We are very selective in our approach.

Liam Burke, Analyst

You do have additional potential assets; the pipeline is large enough that there is significant potential to add vessels over time.

Georgios Youroukos, Executive Chairman

Yes. Yes. There is a good pipeline, but we are very selective as well.

Operator, Operator

Our next question comes from the line of Omar Nokta, Jefferies.

Omar Nokta, Analyst

I wanted to follow up on Liam's question regarding the recent vessel acquisition. As you have pointed out, the lightweight tonnage being presented shows that you can earn significantly below the residual value. It seems like a solid deal, providing you with ample options. While these vessels are older, they still have a considerable amount of useful life left. My main question is about this unique opportunity. It appears to align with your company's ability to identify such deals. Can you share how this opportunity arose? Was it a competitive bidding process or a direct arrangement with the seller? Any insight you can provide on how this deal came together would be appreciated.

Georgios Youroukos, Executive Chairman

Well, it's difficult to answer this question. I would just have to say that we have a strong relationships and proprietary deal flow, which the company is taking advantage of. And hence, we have a good track record of being able to perform these kinds of transactions. We have also a very strong track record on operating older ships, something that is not common. It's not for everybody's cup of tea. So that is giving us a competitive advantage. And I would just say that one thing that I'd like to mention is that these ships, you have to look very carefully to every ship and realize what's behind the ships. These ships have high reefer capacity, actually quite high. And they also have some CO2, let's call it, or fuel enhancements. So they're really special ships. They were built in a very good shipyard, quite unique shipment and very innovative at that time. And they're still in the Eco-9,000 TEU ship, they're very, very high spec ships.

Omar Nokta, Analyst

Understood. Since these vessels are around 20 years old, are there any special surveys that need to be conducted upon delivery? Or have those already been completed, and can you provide any cost details?

Georgios Youroukos, Executive Chairman

Some have passed and some will be passed, but that's within our normal cycle, nothing.

Omar Nokta, Analyst

I wanted to ask how much capacity you have available to utilize under your borrowing power that is subject to the interest rate cap, considering you mentioned you would finance this transaction with some cash and utilize your borrowing power under the interest rate cap.

Anastasios Psaropoulos, CFO

We managed with the last deal, first of all, I'm Tassos. We managed in the last deal that we have done the previous May to create a very, let's say, substantial buffer in order for us to be able to use it. I believe that we will have at least, if I remember correctly, around $150 million after this deal more or less. And it depends on the amortization schedule because as you can understand the interest rate cap falls as long as the amortization schedule, but more or less that.

Omar Nokta, Analyst

That's helpful. That's interesting. So obviously, you guys are in a unique position, right? If you have $150 million of buying power or capped at 75 bps. Is that correct at that level?

Anastasios Psaropoulos, CFO

Correct. Correct.

Omar Nokta, Analyst

Okay. Interesting. Well, great. Well, congrats on the deal yesterday, and I'll turn it over.

Operator, Operator

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

Christopher Robertson, Analyst

This is Chris Robertson on for Amit. So this first question is for Tom. Tom, you mentioned the average speed of the fleet kind of slowing down. I was wondering if you could give a commentary around where the average speed sits today? And do you think there's further room to the downside on this in terms of slowing down? Or when we're talking about the regulations, is there more of a cap on the potential for speeding up here?

Thomas Lister, CCO

Okay. I'll try and good question, first of all, Chris, thank you. I don't have in my head the average operating speed of our fleet at the moment. So I'm afraid I can't really add more details to the percentage of 9% slowing down in the first quarter versus that of 2022. However, we have recently analyzed fleet speeds for April versus the first quarter, and we're continuing to see the fleet decelerate, not by the same sort of quantum, but nevertheless, I would say that there still appears to be further slowing down to be done so far. Now to your sort of follow-up question, is there a question of the fleet once it's slowed down not really being in a position to speed up again. I would say, yes, that's likely in our view particularly as the decarbonization regulations are expected to tighten over time. So not only will ships have to slow down, but they will have to be enhanced to be made more efficient in order to continue steaming at the same speed. So you either improve the ship or you slow it down further?

Georgios Youroukos, Executive Chairman

Just like the regulation requires every year, stricter CO2 emissions, hence, slower speeds. The CII calculation is being tightened every year. '23, '24, '25 that we know is every year, tight. So that means every year slower.

Christopher Robertson, Analyst

Okay. Yes, got it. And this kind of really the second question on the 4 vessels. You had mentioned previously that they're pretty high spec, and they were special vessels at the time of construction. But considering the tightness of the regulations and as they get more strict over time, is the plan to simply just kind of slow these vessels over time to continue compliance or might there be some minimal CapEx required just to have some flight upgrades over time to keep them running?

Georgios Youroukos, Executive Chairman

Luckily, these ships have been already upgraded by the previous owners. And all these enhancements are existing on board. So not much from our side to be done apart from maintaining the ships in the same way and continuing the operation of application of silicon paints like the ships have already and so on and so forth. So these ships are already quite compliant, if I may say that.

Thomas Lister, CCO

Chris, just to add slightly to that. The other comment that we made in the prepared remarks is that in addition to technical enhancements to the ships. You can also enhance the way in which they're operated by installing live data capture and performance management systems. So that's something that we would look at over time. And fortunately, the CapEx associated with that is rather minimal by which I mean 100,000 or less per ship?

Christopher Robertson, Analyst

Right. Okay. And just with regards to the financing on those vessels, should we assume something around a 60% LTV?

Anastasios Psaropoulos, CFO

Yes, yes, more or less similar with the previous transactions.

Christopher Robertson, Analyst

Okay. Yes, fair. And my last question, this is a little bit more forward-looking. As you're speaking to your liner partners, do you get a sense of where their heads are at with thinking around future propulsion technologies? I know that we've seen a swap of the LNG dual-fuel container ships being ordered a few methanol capable. But how are they thinking about approaching that transition and maybe helping share the derisking element of that in the future?

Thomas Lister, CCO

Yes. I mean that's the multibillion-dollar question. I think no one yet has clarity on this. So most recently, I've seen the largest liner company in the world, MSC saying, look, we're not an energy provider, but we're having to become energy experts, which is not our core business, but needs must. And even they, a company of tremendous size with a fleet of roughly 750 ships doesn't have a single answer to that question. Instead, they're thinking, I believe, in spreading their bets across different technologies and different fuels until there is more clarity. And that's driven not so much by technological considerations, although that's obviously one big thing, but also the simple availability of fuel. So for example, green methanol, various lines are placing bets on green methanol, but the availability of green methanol as a fuel is very, very limited, which necessarily sort of until that changes constrains the number of chips that can be put on that particular counter. So hard to say. Everyone's waiting for additional clarity. And in the meantime, we think that the lowest risk approach, and one which provides the best potential for upside returns, is to buy older existing ships with good downside cover with scope for incremental enhancements, and then we the cash flows until there's greater clarity in the market.

Operator, Operator

There are no further questions at this time. I turn the call back over to Mr. Webber.

Ian Webber, CEO

Thank you very much. Thanks for listening. Thank you for your questions. We look forward to giving you a further update on our second quarter in about 3 months' time. Thank you.

Operator, Operator

This concludes today's conference call. You may now disconnect.