Global Ship Lease Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to Global Shipley's Q2 2023 Earnings Conference Call. I'll now turn the call over to Ian Weber, Chief Executive Officer. Sir, you may begin.

Speaker 1

Thank you very much. Good morning, everybody. Welcome to the Global Shipley 2nd quarter 2023 earnings conference call. You will find the slides that accompany today's presentation On our website at www.globalshiplease.com. As usual, Slides 23 of that Presentation and 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.

Speaker 1

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 in our most recent Annual Report on our 2022 Form 20 F, which was filed with the SEC on March 23 this year. You can find the form on our website or indeed on 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. The 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, Please refer to the earnings release that we issued this morning, which is also available on our website.

Speaker 1

As usual, I am joined today by our Executive Chairman, George Yuroukos our Chief Financial Officer, Tasos Tsodopoulos and our Chief Commercial Officer, Tom Lister. George will begin the call with a high level commentary on GSL and our industry, And then Tasos, Tom and I will take you through our recent activity, the quarter's results and the financials and the current market environment. After that, we'll be pleased to take your questions. So turning now to slide number 4, I'll pass the call over to George.

Speaker 2

Thank you, Ian, and good morning, afternoon or evening to all of you joining us today. First, a few words on the market. In the Q2, overall chartering activity remained modest by historical standards, with limited capacity coming available outside the feeder segment And idle capacity at quarter end hovering around 1%. Charter rates showed some stability at levels that compare Favorably to those that prevailed before the COVID driven rate spike of 2021 2022. However, current macroeconomic uncertainty notwithstanding of course recent apparent improvements in sentiment in the U.

Speaker 2

S. Unlimited liquidity in the charter market make it difficult to predict how things will evolve over the quarters ahead. As we speak, the charter market seems to lack direction or strong conviction as reflected by a relatively short charter duration In most recent cases, in this environment, we're benefiting from our strong contract cover and forward visibility, both of which will continue to extend with additional charter signings and extensions when opportunities arise. We have a robust balance sheet with no debt refinancing requirements before 2026 and we have hedged our floating interest debt through 2026. Overall, our credit profile has continued to strengthen as evidenced by both our recent upgrade and outlook improvements from the credit rating agencies.

Speaker 2

And just as importantly, the fact that our access to competitively price debt to support selective growth such as the 4 ships we purchased and financed In this quarter, it's stronger than ever. Our long standing focus on resilience, Sustainable value and disciplined capital allocation is showing its merit, providing us with a strong platform From which to pursue countercyclical value accretive growth opportunities, while also supporting our attractive dividend And allowing us to continue our existing share buyback program and add a new $40,000,000 buyback authorization going forward. With that, I will turn the call back to Ian.

Speaker 1

Thank you, George. Please turn to Slide 5. Here we show the makeup and diversification of our charter base, which is well spread across the top tier of liner companies. In total, as of June 30, 2023, we had about $2,000,000,000 of contracted revenue with reputable counterparties, Spread over a TEU weighted average of 2.3 years going out. This includes 15 new charters Agreed during the first half of twenty twenty three, which collectively added about $212,000,000 of contracted revenue.

Speaker 1

On the next slide, Slide 6, we show illustrative guidance across different rate scenarios. As always, I want to be very clear that this is not a forecast. We are simply illustrating the extent of our contracted revenues And our very limited spot market exposure through 2024. Indeed, we are fully essentially fully booked This year, 2023, have over 80% of our ownership days in 2024 already covered. You can see in the adjusted EBITDA columns on the right side of each chart the positive impact as more of our already agreed Forward charters at good rates come into effect.

Speaker 1

Our forward charter cover gives us significant cash flow and earnings visibility, which is particularly welcome in uncertain macro environments. Moving to Slide 7, We show an overview of our dynamic and disciplined capital allocation strategy. This will be familiar to many of you, I'd like to briefly highlight our $1.50 a year sustainable dividend and our ongoing share buybacks, $17,000,000 so far this year, which leaves only $3,000,000 of availability under our existing $40,000,000 buyback authorization. This limited amount of capacity Has prompted the Board to recently agree a further $40,000,000 authorization permitting management to continue to opportunistically buy back This complements our demonstrated commitment to deleveraging and to growing our cash liquidity, With the latter providing us with the ability to both invest in energy saving retrofits for our fleet and to pursue accretive growth and fleet renewal opportunities on a selective disciplined basis. We take a conservative long term approach driven by our focus on contracted cash flows and full consideration Of the various evolving risks and opportunities in the market throughout the cycle.

Speaker 1

We believe that this balance and long term perspective Are the best way to create sustainable shareholder value in a cyclical industry. This leads to Slide 8, which shows our disciplined timing for acquiring vessels in the market. In particular, I would point you to the section we've indicated in orange, which is the roughly 2 year period When asset values spiked at record breaking levels. Despite the many potential transactions crossing our desks During this period, we refrain from making acquisitions as we found the risk return mix uncompelling. Only when prices moderated substantially and when the right specific opportunity arose Did we return to fleet growth and acquire the 4 ships in May of this year?

Speaker 1

We aim to only make Acquisitions that will benefit the business and our shareholders, and we've demonstrated through our actions that we will not chase growth When doing so comes at the expense of returns or requires us to take a particularly optimistic assumption on residual value. Slide 9 provides additional details about our purchase of the 48,500 TEU ships. These were built in 2,030,004, and they have 24 to 28 month firm charter attached to each ship. As you can see, these high spec energy efficient ships were purchased at an attractive price $123,300,000 which was financed by cash on hand and new senior secured debt. The vessels are expected to contribute $76,600,000 of EBITDA, going up to $95,000,000 of EBITDA If the charterer exercises 12 month options to extend the charters beyond their initial 24 to 28 months firm period.

Speaker 1

The debt is covered by the headroom on our existing 0.64 percent SOFA interest rate caps. So with the margin of 3.5%, this gives us an overall very attractive cost of debt. The debt has an approximately 3 year tenure and amortization profile. Just to clarify, we previously referred to the interest rate caps As a 0.75 percent LIBOR interest rate cap, but from the middle of this year through to their maturity At the end of 2026, they transition to being SOFA caps at 0.64%. The economic effect remains unchanged.

Speaker 1

With that, I'll turn the call over to Tasos to talk through our financials.

Speaker 3

Thank you, Ian. Slide 10 shows our year to date financial highlights. Revenue for the first half of twenty twenty three was $321,400,000 up from 308 $100,000 in the first half of twenty twenty two. Adjusted EBITDA was $213,100,000 Up from $187,000,000 in the first half of last year. Our normalized net income adjusted for one off items Increased from $133,500,000 in first half of twenty twenty two to $149,500,000 in the first half of twenty twenty three.

Speaker 3

For balance sheet items, despite the new debt facility for the 4th ships we financed in the 2nd quarter, We have reduced our gross debt to $925,000,000 bringing that number down by approximately $200,000,000 Since June 30, 2022, we had $259,000,000 in cash on our balance sheet at the quarter end, of which $161,900,000 is restricted with $129,800,000 of that being receipt of Charter Hire in advance. The balance of $97,100,000 covers minimum liquidity covenants and working capital. We have continued to return capital to shareholders Through our quarterly dividend and also buybacks with around $7,000,000 of buybacks in the quarter bringing us to $17,000,000 during the first half of twenty twenty three And $47,000,000 since Q3 2021. As Ian has indicated, share buybacks are an important part of our capital allocation toolkit With the new $40,000,000 buyback authorization giving us valuable additional flexibility going forward. Notably, Our success in managing our balance sheet was recognized this past quarter by multiple credit rating agencies With Moody's upgrading us to BA3 from B1, S and P improving our outlook from stable to positive And KBRA reaffirming the BBB investment grade rating of our $350,000,000 5.6 9% senior secured notes due July 15, 2027.

Speaker 3

Now turning to Slide 11, We are delevering and lowering our cost of debt. You can see from the charts our progress in derisking our balance sheet With our scheduled amortization set to pay down nearly $200,000,000 this year alone, we continue to keep the overall cost of our debt At levels close to 4.50 basis points despite the overall rising interest rate environment above that level And lowering our financial leverage to 1.9 down from 4.2 at year end 2021. Our aggressive amortization schedule is keeping us on track to further de risk and deleverage. With that, I will pass the call to Tom. Thanks, Tasos.

Speaker 4

As in previous quarterly presentations, Slide 12 highlights the ship sizes on which GSL is focused, Namely the midsize and smaller ships ranging roughly from 2,000 TEU to about 10,000 TEU. The top map shows the deployment of ships within our size range, Emphasizing their operational flexibility and global reach, the lower map on the other hand shows the deployment of larger ships and their relative reliance on the main Arterial trade routes where the port infrastructure can support them. In understanding the current market fundamentals, particularly with the uncertain macro environment, We prefer to focus on the supply side where we have more forward visibility and can provide you with data rather than speculation. Turning to slide 13, you can see on the top chart, idle capacities dropped back down to about 1.1% at quarter end, Following a small uptick earlier in the year, this speaks both to the extent of the long term chartering that happened across the global fleet in recent years And shows that operators continue to need and recharter tonnage that does come into the charter market. The lower chart Given the continued demand and limited availability of tonnage, the uptick in containership recycling has been muted so far, That was noticeably up versus the near total pause in recycling during 2021 2022.

Speaker 4

Moving forward, we expect to see further vessel deletions, particularly among the relatively low spec vessels that would likely have already been removed If we had not seen the period of extremely strong demand over the last 18 to 24 months or more. Slide 14 takes a look at the order book, which has indeed been growing. While the overall order book to fleet ratio is now 29.1%, Our focus segments currently have a more manageable ratio of only 14.4%. And if we assume scrapping of ships over 25 years old, Our focus segments could see a marginal net growth of only 1.4% through 2026. And although there is a large order book for 10,000 TEU ships, it is important to keep in mind that there are practical and physical limitations to the trade lanes Such ships can service, which provides some protection for the fleet sizes on which we focus.

Speaker 4

Turning to slide 15, the charter market. As you can see, rates are down from recent peaks, but are still generally above pre COVID levels. But as George said in his opening remarks, The combination of macro uncertainty, limited charter market liquidity and a current lack of direction make it challenging to predict how rates will evolve going forward. And with that, I'll turn the call back to George to wrap up on Slide 1617.

Speaker 2

Thanks, Tom. I'll provide a brief summary and then we can open up the line for questions. We have excellent contract cover of $2,000,000,000 Over an average of 2.3 years, fully covering all our liabilities including debt service CapEx and dividends Through 2023 2024 without relying on further charter renewals. We have a strong balance sheet, But also see value in building additional liquidity at this point in the cycle. We have no refinancing requirements until 2026 And we have continued to reduce our financial leverage, which is now below 2 times.

Speaker 2

Our floating rate debt remains fully hedged with sulfur capped at Before basis points and we still have headroom under the cap to accommodate additional floating rate debt should we incur it. Our overall cost of debt remains close to 4.50 basis points, which is way below interest rates prevailing in the market today. And finally, we come to Slide 17. As in recent quarters, macro uncertainty remains a concern for the sector at large. Charter rate and asset value normalization is currently stalled and it is difficult at this time to get much forward visibility from the charter market.

Speaker 2

A number of the liner operators are providing cautious guidance on the rest of 2023, though I would note That they are approaching this period with balance sheets completely transformed by their extraordinary earnings in recent years. As we have continued to see cash flow and bottom line growth, we are continuing to return capital to shareholders Through our quarterly dividends at an annualized rate of $1.5 per common share as well as $47,000,000 of buybacks since Q3 2021, including $7,000,000 in this last quarter. And with the new $40,000,000 buyback authorization giving us added flexibility going forward. Our recent acquisition of 4 vessels, which delivered during the course of Q2, is consistent with our disciplined approach, Prioritizing strong cash flows, low risk and upside potential, while also highlighting Our continued access to very attractive financing. Moving forward, we intend to continue doing what we do best, Securing new charters, maintaining a long term through the cycle perspective and allocating capital in a dynamic and disciplined way to create

Operator

Thank you. For those of you who experienced a technical issue in joining the webcast, Please be aware that a full replay of the call will be available to you on the GSL website later today. Your first question comes from the line of Omar Mukhtar from Jefferies. Sir, your line is open.

Speaker 5

Thank you. Thank you, operator. Hi, guys. Good afternoon. Thanks for the update.

Speaker 5

Always very insightful and detailed, so appreciate that. I did want to maybe just dive a little bit deeper into the term charter market. Earlier this year, liners were pretty busy securing ships at higher rates than I think a lot of us anticipated And owners were able to get terms of maybe 1 to 2 years. From the commentary you just provided, things have slowed a bit. But just wanted to ask, we've seen here over the past perhaps This month or so, a surge in liner spot rates.

Speaker 5

Is that somehow or is there any sort of Pass through of that going into the term charter market at all, have liners gotten busier looking for vessels in this sort of environment A rising freight rate or is it still too early?

Speaker 4

Hi, Omar. It's Tom. Thanks for the question. I think it's still too early. As George said in the prepared remarks, there's been a little bit of what feels like A pause, a hiatus, let's say, in the charter market.

Speaker 4

And people, while they're still fixing ships, Are tending to fix for shorter periods until, collectively we have a little bit more clarity on how the market It is going to evolve going forward. So, terms by which I mean durations have come in a bit. In the smaller sizes, rates have perhaps softened. In the larger sizes, although it's harder to call because there's such limited activity So many bigger ships are tied up on long charters anyway, I would say that rates have remained relatively firm. So it's a sort of Wait and see going on at the moment.

Speaker 5

Thanks, Tom. Yes, makes sense. And I guess in terms of opportunities, Deal making wise, you obviously did the 4 ships back in May. How are things kind of looking right now for you? Let's say you did that deal, but as they compared to 3 months ago or 6 months ago, are the opportunities becoming more compelling or is it still a bit more Stagnant?

Speaker 2

Well, Omar, this is George. We see a continuous flow of deals And we have been seeing a continuous flow of deals before we executed that one. The thing is we just cherry pick the ones that we feel fit within our Investment profile. There are deals out there. Right now with the market the way it looks, we're looking more into Deals which will have charter or will be able to get charter right away.

Speaker 2

We do not want to take market risk Opportunistically at this stage, we are not at the levels that could make sense for such a move yet, Price levels of ships. So the answer is yes, there is a constant deal flow. Now Choosing and picking between this still flow is what we do.

Speaker 4

And Omar, just to add to that. We're quite strongly focused on building liquidity, which is prudent anyway in the context of A cyclical market and sort of uncertain macro outlook, but it's also crucial, if it comes to being in a position to Capitalize on opportunities that might arise in the market. So we somewhat well, we drew down on some of the liquidity that we built in order to buy the 4 ships During the Q4, and we would be looking to continue to rebuild that liquidity over time to be able to be resilient and opportunistic.

Speaker 5

Thank you. Thanks, Tom. That's very clear and thanks, George. I'll turn it over.

Operator

Thank you. Your next question comes from the line of Liam Burke from B. Riley Securities. Your line is open.

Speaker 6

Thank you. Could I just jump on that final Statement on rebuilding liquidity. Obviously, the balance sheet is in great shape. You had nice flexibility on the last acquisition of 4 vessels. But When you look at rebuilding liquidity, you pay a healthy dividend through the cycle.

Speaker 6

I don't think that's an area that you want to grow. How does that affect your thoughts on buybacks?

Speaker 4

I'll have a crack at this, Liam. Buybacks well, let's put buybacks in the context of overall capital allocation. And we try to be as thoughtful as possible On capital allocation through the cycle, so as you saw, we renewed the 40,000,000 Buyback allocation having worked through almost all of the preceding $40,000,000 allocation that we put in place, I think in April or so of last year. So buybacks will definitely remain an important part of the toolkit, as I think Tassos said in his prepared remarks, but we will always look at all capital allocation, buybacks included, in the context of, on the one hand, risk And on the other hand, opportunity. So which is the best way for us to put every dollar to work to build value for investors through the cycle?

Speaker 6

Fair enough. And in terms of Omar's question on the spot rates, If you're looking at shorter durations visavis past longer term charters, how do they how do potential re When facing shorter durations, are they still holding up or do you have to sacrifice a little here?

Speaker 2

Well, it very much varies, Liam has George, very much varies on the size of ship. Smaller ships Can do 12 year charters, very small, barely can do that. Panamax ships can do a year right now, maybe a bit more. Post Panamaxes, there aren't many, if at all, in the market. So we don't know, but probably they could do a year of MAX 2.

Speaker 2

So right now what we see is the charters have fulfilled their requirements Of 2 months ago and they're dropping the duration. It's not a matter of giving a ship A lower charter to get a longer duration, that doesn't work. It's what the charter really needs In order to employ a ship, whether they need 1 year, 2 year or 3 year depending on their plan on the plan of the line.

Speaker 6

Got it.

Speaker 5

Thank you, Julian.

Speaker 4

Sorry, Liam. Just to correct a slip of the tongue earlier, I think George started off by saying that feeders could get up to 12 years On charters, obviously that's up to 12 months, minor correction for the record.

Speaker 6

So embarrassingly that Okay. Got right past me. Just assume the 12 months.

Speaker 4

Operator, do we have any further questions? We're not hearing anything on this end.

Operator

Got it. I apologize. The next question comes from the line of Amit Mehrotra from Deutsche Bank. Your line is open.

Speaker 7

Thank you, operator. Hey, good morning and good afternoon. This is Chris Robertson on for Amit. How are you guys doing?

Speaker 4

Hi, Chris. We're well. Thanks very much. How about you?

Speaker 7

Yes, good. Thank you. I just wanted to ask about the 4 recent vessels that were acquired just in terms of Can you talk about the reefer slots or I guess technical differentiators on those vessels? And can you remind me The total amount of reefer slots spread out on the fleets?

Speaker 2

I don't have in hand the total reefer slot for the fleet, but generally I would say that we do have Probably the highest, one of the highest reefer capacity in comparison to our total capacity. Now We can look at that and come back to you. But on those 4 ships, They're very high spec because they have been built in a dense shipyard in Denmark. They were built In very high spec, they have a very high reefer capacity and they have also high Capacity to increase also the reefer. So the capacity is Beyond the 1,000 reefers and they also have been modified to be echo.

Speaker 2

So they have changed propellers and ESTs, various Changes. So these ships have a very good fuel consumption and CO2 emission.

Speaker 4

And quite apart from that, Chris, obviously, as you've looked at the economics, the returns, Even if you take the most conservative assumptions are tremendously attractive. So as Ian said, we've put $76,000,000 of debt on these ships, Amortizing over a little over 3 years and during the firm contracted periods, the charters there, they're each general they're generating Over $76,000,000 of EBITDA, so taking contracted cash flows plus the down Recycling value on the asset, you've got a tremendously attractive proposition in the first place. And we also think for the reasons that George has mentioned, High Reefer plus eco efficiency enhancements to the ships These ships will have a promising onward employment future, and it's obviously in That drove the original investment.

Speaker 7

Okay. Yes, that makes a lot

Speaker 3

of sense. And thanks for

Speaker 7

the color around those ships, guys. This is more of a general market question just in terms of what are you seeing in terms of Chinese manufacturing recovery And experts, I know that the first half of the year here has been characterized more by the service sector improving over there, but Just trying to get a sense more around what stage you think they're at in terms of the recovery in the manufacturing base.

Speaker 4

This is Tom, Chris. I'll have a crack at that. But I would say that, to be honest, The lines themselves, the shipping lines are closer to the real flow of cargoes out of China. But I think generally speaking, It seems that the view is that the post COVID recovery in China has been a little bit lukewarm. So I wouldn't say there's a tremendous driver coming from that perspective.

Speaker 4

And I would also say, and maybe the 2 are linked, that the anticipated restocking that was talked about a lot During the first and second quarters hasn't yet begun as far as we're aware on the demand side. So Again, it comes back to the theme of uncertainty that has sort of run through this earnings call. Guys, I don't know if anyone else wants to add to that.

Speaker 7

Last quick question for me, if you guys Just on the vessel OpEx, do you anticipate any cost pressures for the remainder of the year or any inflationary pressures that are out there that we need to be aware of?

Speaker 2

Well, the main inflation pressure we see is on the wages, salaries of the crew And the officers, that's something that is creeping up. Lubricant cost has come down Because of fuel prices, as fuel goes up, lubricant is related. Apart from those 2 and of course traveling. As we all know, we all travel. We see that airline tickets are going up and up and up continuously.

Speaker 2

So these are the 3. 1 is positive, the other 2 are negative inflationary costs, but we do not see anything that is really

Speaker 5

Material. All

Speaker 7

right. Yes, got it. Thank you for the time. I'll turn it over.

Operator

Thank you. The next question comes from the line of Clement Momens from Value Investors Edge. Your line is open.

Speaker 8

Good morning. Thank you for taking my questions. Most has already been covered, but I wanted to ask About the upcoming implementation of the European Union Emissions Trading System. It's still a bit early, but Could this new regulation further exacerbate the premium for ECO relative to non ECO tonnage? What kind of impact do you foresee?

Speaker 4

Hi, Clement. This is Tom again. Very good question. I think with the exception of the super cyclical high that we saw as a result of COVID, The shipping lines have always been focused upon getting the most efficient tonnage for their fleets that they can. It's worth noting, however, that essentially since the global financial crisis, most of the investment that's gone into the sector has gone into the bigger ships Where you would see the biggest concentration of eco tonnage, still in the midsize and smaller ships On which we are focused, the lion's share of the peer group is non eco, meaning that it was built prior to roundabout 2013.

Speaker 4

So you're right. EU ETS and other decarbonization initiatives are likely to Sharpen the focus on efficient ships, but the peer group against which We're competing has a relatively low concentration or relatively lower concentration of Eco ships. What we do expect on the other hand It's for EU ETS to prompt a further slowing of the global fleet because The decarbonization regulations that have been implemented so far in the shape of EEXI and CII are important, but they don't have dollars attached to them. Of course, as soon as you start attaching dollars to the emission of carbon dioxide within EU waters, There is a very clear economic incentive to mitigate that carbon dioxide and by far the most quick An efficient way to do that is to actually slow ships down. Sorry, a rather rambling response, but I hope helpful.

Speaker 8

No, that's very helpful. That's all for me. Thank you for taking my questions.

Speaker 4

Pleasure. Thank you.

Operator

Thank you. There are no further questions at this time. Mr. Weber, I turn the call back over to you.

Speaker 1

Thank you very much. Thank you all for listening. Thank you for your questions. We look forward to giving you a further update after our Q3 2023 results after the summer vacation period. So wishing you all an excellent summer.

Speaker 1

Thank you.

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