Global Ship Lease Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 4, 2024

There are 7 speakers on the call.

Operator

I would like to welcome you to the Global Ship Lease Q4 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Speaker 1

Thank

Operator

you. I would now like to turn the conference over to Weber, Chief Executive Officer of Global Ship Lease. You may begin your conference.

Speaker 2

Thank you very much. Hello, everyone, and welcome to the Global Gitmeid 4th quarter 2023 earnings conference call. You can find the slides that accompany today's presentation on our website at www.globalshipleads.com. As usual, Slides 23 of that presentation 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.

Speaker 2

We would also like to direct your attention to the Risk Factors section of our most recent annual report, which was on 2022, and that was filed in March 2023. You can find the form on our website or 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, Usually, please refer to the earnings release that we issued this morning, which is also available on our website.

Speaker 2

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

Speaker 3

Thank you, Ian, and good morning, afternoon or evening to all of you joining us today. Elevated macro and geopolitical uncertainty defined much of the Q4. This was most visible in the Red Sea where the deteriorating security situation so many liners rerouting the services away from the Suez Canal and instead taking the much longer route around the Cape of Good Hope. This has tightened supply demand balance in the containership charter market causing charter rates to firm and deferring the market normalization that have been underway through much of 2023. It is impossible to know how long disruptions to the Red Sea will last.

Speaker 3

In the meantime, consistent with our core strategy and while conditions are supportive, we continue to work hard to lock in additional contract cover in order to grow cash flows and forward visibility. On the back of our strong contracted cash flows, we continue to fortify our balance sheet and build equity value by delivering. Furthermore, we have no refinancing needs before 2026 until which time we have also kept our floating interest rate exposure to suffer at 0.64%. Our business model and approach to capital allocation are unchanged. The sustainability of our $1.5 annualized dividend remains a key priority.

Speaker 3

And we continue to be active in the opportunistic buyback of shares. At the same time, we remain focused on ensuring GSL's resilience and positioning ourselves to act selectively on the investment opportunities we expect to emerge in the months and quarters ahead. Driving all of our actions is our relentless focus on preserving and building long term value for our shareholders. With that, I'll turn the call back to Ian.

Speaker 2

Thank you, George. Please turn to Slide 5. Here, we illustrate the composition and extensive diversification of our cathode base spread across top tier liner companies. During 2023, we signed 22 new charters or extensions, adding $313,000,000 of contracted revenues, almost $90,000,000 of which were added in the 4th quarter, despite the weakening market at that time. And as George said, we continue to work hard to capitalize on the positive momentum going into 2024 to grow that contract cover.

Speaker 2

As of December 31, 2023, we had approximately $1,700,000,000 of contracted revenues with an average remaining duration of 2.1 years. Moving on to Slide 6, this provides an illustrative view of our future earnings potential under different charter rate scenarios. As in prior quarters, it's important to emphasize that this is not a forecast. However, you can see that 2022, which was itself a record year, has been surpassed by our results in 2023 and 2024 is off to a strong start with 86% of 20 24's ownership days already contracted. On to Slide 7.

Speaker 2

Here we review our disciplined and dynamic capital allocation strategy. We maintain a sustainable dividend of $0.375 a quarter or $1.50 per share on an annualized basis, which is a dividend yield of over 7%. And we continue to execute share buybacks opportunistically. Since quarter 3 of 2021, we've repurchased 54 $5,000,000 of our shares in the open market, including $22,000,000 in 2023, with an aggregate of $4,000,000 worth of shares in Q4 2023 year to date 2024. This means that our fair count today is more than 8% lower than it would otherwise have been.

Speaker 2

And we have approximately $35,500,000 remaining under our Board authorization. We also continue to build equity value and the de risk by deleveraging our balance sheet, which we believe to be especially prudent in a period of macroeconomic and geopolitical uncertainty. New environment regulations and pressure on our customers to decarbonize have improved the expected return profiles of certain ship technologies and acting accordingly to add commercial and financial value to our vessels. We also believe that it is important to maintain cash liquidity, both for resilience and optionality to pursue acquisition opportunities. After all, in a cyclical industry such as ours, the real way to build long term value is by buying assets during the down cycle, which is a neat segue into Slide 8.

Speaker 2

This is a slide that we've shown before and it underlines 2 important points. The first is that there is value in the container shipping cycle. The second closely related point is that to unlock that value, you need to be disciplined in getting the timing and transaction terms right. To illustrate this, the orange bar on the chart corresponds to the super up cycle in 2021, 2022, when asset values and potential acquisition risk spiked to all time highs. We rode the charter market up during this period and locked in charters that continue to support earnings today.

Speaker 2

But we didn't buy a single chip from mid-twenty 21 until approximately 2 years later when we purchased 48,500 TEU Zips with attractive charges attached actually in May last year 2023 after the sharp downward correction in asset values. So you can see we are not compelled to pursue growth for growth sake. Rather, we have a strong track record of purchasing ships only when the risk adjusted return profile is compelling. Now, I'll pass the call over to Tassos to discuss our financials.

Speaker 4

Thank you, Ian. Slide 9 is a snapshot of our 2023 financials and highlights. Our key P and L line items all improved in 2023 with adjusted EBITDA at over $460,000,000 up 16% on 2022. Our gross debt reduced by almost 20% during the year even as we purchased and partially debt financed the 4 ships. Our cash position at year end was just under $295,000,000 $142,000,000 of that is restricted, most of which is advanced receipt of charter hire with the remaining $153,000,000 covering our liquidity covenants and working capital needs moving forward.

Speaker 4

You will also see that we have taken an impairment charge of $18,800,000 across 2 vessels purchased in 2021. This charge is non cash has zero impact upon the viability of our business and is the result of normal course impairment testing. And as Ian and George have already remarked, we have continued to return capital to shareholders via sustainable dividend and opportunistic share buybacks, while also building equity value by delivering. Meantime, our corporate credit ratings of BA 3 Stable, BB Positive and BB Stable on 3 3 credit agencies referred our cautious and prudent approach. Slide 10 illustrates our successful strategy to delever and reduce our cost of debt over time.

Speaker 4

We are on track to reduce our debt outstanding by a third from the end of 2022 to the end of 2024. We had reduced our cost of debt significantly to 4.50 basis points even as interest rates prevailing in the market rose. And on the right side of the slide, you can see the total transformation of a leverage profile with adjusted net debt to adjusted EBITDA falling from 8.4 times at the year end 2018 to 1.4 times at the end of 2023. That is a radical change with profound implication for our resilience, for our readiness to capitalize on potential opportunities during the down cycle and for our overall credit profile. Tom will now discuss our market focus and ship deployment.

Speaker 5

Thanks, Tassos. Moving to slide 11, we reiterate our clear focus on high specification, midsize and smaller container ships ranging from 2000 TEU to about 10,000 TEU. The top map illustrates the deployment of ships within our preferred size range highlighting their operational flexibility, which is a good structural hedge in uncertain times such as these and their widespread reach. In contrast, the lower map shows the deployment of larger ships, 10,000 TEU or larger, which tend to be more constrained to the main east west arterial trade routes with suitable deepwater port infrastructure. I should emphasize that neither of these maps yet reflects the ongoing rerouting of containerized trade around Southern widely reported disruptions in the Red Sea.

Speaker 5

We'll come back to this point incidentally repeatedly. Slide 12 presents a view of idle capacity and ship recycling. Idle capacity increased to 1.3% during the 4th quarter, but has since tightened again as a result of the Red Sea situation. As expected, the uptick in idle vessels was accompanied by the return of scrapping activity for essentially the first time since 2020, albeit at a limited scale thus far. The record breaking charter markets of 202120 22 saw the lives of many older and lower specification containerships extended and scrapping deferred due to their phenomenal earnings.

Speaker 5

However, as the market normalizes, which has been delayed for the time being by the situation in the Red Sea, there is an expectation that there will be a catch up in scrapping. Regulatory dry dockings, which ships are obliged to go through typically on a 5 year cycle, prompt owners to consider whether investing $2,000,000 to $3,000,000 in a ship is justified by the forward earnings potential of that ship. When a vessel is aging, poorly specified or both, the answer may well be no, particularly when there's a challenging outlook ahead and the ship likely gets scrapped. We'll look at what this may mean on the next slide. Slide 13.

Speaker 5

This slide shows the order book, which is heavily weighted towards the larger ship sizes. In other words, the over 10,000 TEU segments in which to be very clear GSL does not participate. With an order book to fleet ratio of 13.4 percent on the other hand, the order book for midsize and smaller ships, which are the segments relevant to GSL, is much smaller, but still meaningful. Here, the older age profile of the midsize and smaller fleet is important context and ties in with what I was saying earlier about deferred scrapping and the scrap versus invest decisions that may be driven by regulatory dry dockings. Extrapolating this point, if we were to assume the scrapping of all ships over 25 years old and net those numbers out against the order book for midsize and smaller ships delivering through 2027, our focus segments would actually see negative net growth.

Speaker 5

In other words, they would actually shrink by 2.2% through 2027. Now this is probably an extreme scenario, but it does illustrate the supply side safety valve for the industry in the event of a protracted downturn. On slide 14, we put some data around what disruptions in the Red Sea actually mean for container shipping. Under normal circumstances, about 20% of global containerized trade volumes, which are the boxes themselves, transit the Suez Canal, which sits at the northern end of the Red Sea. However, if anything, this 20% figure understates the dynamics at play as much of the container volumes transiting the Red Sea and Suez are on long haul trades.

Speaker 5

And the longer the trade, the more capacity you need to service it. So if you look at the Red Sea and Suez in terms of global containerized fleet capacity, in other words, the ships, over a third, 34% in fact would normally pass through this waterway, which is the routing shown with the yellow line on the map. If on the other hand you're forced to divert this traffic around the Cape of Good Hope as shown on the blue line then the impact is very significant. MSI in fact calculates that holding all else equal, if all Suez related containerized trades were to be diverted around the Cape, it would absorb around 10% of effective global containerized fleet capacity. And stating the obvious, this is a big deal, especially as an estimated 80% to 90% of Red Sea and Suez related containerized fleet capacity is already being diverted in this way.

Speaker 5

This brings us to Slide 15, which looks at the charter market. After the super cyclical highs of 2021 2022, both charter market rates and asset values have been normalizing with downward pressure accelerating in the second half of twenty twenty three. However, this decline was arrested towards year end and has been converted into positive upward momentum in early 2024. We will provide you with an update on our Q1 earnings call, but market rates are currently trending up from the levels indicated on the right hand side of this slide. And charter durations are also extending especially for larger ships.

Speaker 5

How long these supportive conditions will last is of course anyone's guess, but we're doing our best to lock in charter cover and grow cash flows while they do. With that, I'll turn the call back to George to conclude our prepared remarks on Slide 1617.

Speaker 3

Thank you, Tom. On Slide 16 and 17, we provide a summary of key points. We have 1 point $7,000,000,000 of contracted revenue over an average of 2.1 years, which fully covers our debt service, CapEx and through the at least 2025 without relying upon contributions from any future charter signings or extensions. We have a very strong balance sheet and credit ratings, including an investment grade rating for our senior secured notes due July 2027. We have almost $295,000,000 of cash on the balance sheet, though much of it is restricted and no refinancing risk before 2026.

Speaker 3

Our leverage is below 1.5 times. Our floating rate debt is fully hedged and our all linked debt cost is 4.55%. The world now is both complex and dynamic with the Red Sea playing a particularly significant role. Now this environment has weighted on general sentiment, but the implications for rerouting to avoid the Red Sea have in fact materially tightened container ship supply demand and thus improved both freight and charter market earnings. Amid the uncertainty, our liner company customers have been cautious, but importantly, they face the current uncertainty with balance sheets fortified by the recent upcycle.

Speaker 3

So to sum up, we remain absolutely focused on protecting and building shareholder value through the cycle by growing our cash flows, delivering, paying a sustainable dividend, buying back shares opportunistically and building cash liquidity for resilience and to capitalize on the right investment opportunities. Before we transition to your questions, I just want to take a moment to express my appreciation and the appreciation of the GSL board for everything that Ian Weber has contributed to the company since he initially came on board during its earliest days. Ian's impact and influence can be felt in every aspect of GSL. And while we're drawing towards the end of his final quarterly earnings call as CEO, I sincerely look forward to welcoming him on to the board and continuing to benefit from his experience and leadership from the board level.

Speaker 2

George, thank you very much for those kind words. It's been an honor to serve the SLP over the past 16 years or so, which has covered the worst industry conditions that we've ever seen after the global financial crisis and the best ever as well in the super up cycle of 2021, 2022. The company weathered the storms and we took advantage of the strong market where possible. With the transformational merger with Poseidon in 2018 and the resulting increase in scale and strengthened management team, GSL is in great shape. Tom, CEO from the end of March, has been with the company throughout all of these times and knows the business intimately, also having had substantial expertise across the industry.

Speaker 2

He's extremely well positioned to lead DSL going forward at this time of increasingly rapid change, not least from the pressures to decarbonize. With Tom, Tasos, George and the rest of the team, DSL is in very capable hands. So with that, let's move on to Q and

Operator

And your first question comes from the line of Liam Burke with B. Riley Securities. Your line is open.

Speaker 1

Thank you. Hello, Ian, George, Tom, Tassos, how are you today? We're well, thanks.

Speaker 2

Thanks, Liam.

Speaker 3

Thank you.

Speaker 1

We're seeing a tick up in rates. Q1 of 2024, we've really seen them

Speaker 4

move up

Speaker 1

after recovering Q4. What has been the appetite of your counterparties to either extend the duration on some of these open charters you have in 2020 4 and forward fix? And are you seeing any activity or commitment for higher rates?

Speaker 5

Hi Liam. Thanks for the question. This is Tom. I'll have a crack at it and no doubt George will add. You're absolutely right.

Speaker 5

Conditions have been supportive and that has lifted charter rates in the market and has made charterers willing to fix for longer. So ships that would have been fixed for call it, 2 to 6 months, towards the tail end of 2023 are now being fixed for 12 months and larger ships are being fixed for as many as 2 and possibly even 3 years. I would say that and I'm talking about the market in general at the moment rather than GSL specifically by the way. And I would say that the larger the ship and the higher the specification, there is growing appetite to forward fix in the market by quite a number of months in some instances. So we're obviously doing the best we can to capitalize on that environment while we can.

Speaker 5

And we'll give you an update on our Q1 earnings call of progress. But I would say directionally I would caution however that the charterers as you would expect are being entirely rational economically. So wherever they have charter options callable at their option to extend and if those charter options are in the money for them, then they're tending to take them. However, if there are no such options, we are indeed in very constructive conversations with those charterers to either extend, and if there is no appetite from a given charter, then we will look more broadly. But I would say, generally speaking, supportive environment and we're making use of it.

Speaker 1

Okay, great. Thank you. Your debt is coming very much in line. Is there any target debt level that you have for the long term?

Operator

[SPEAKER MARTIN

Speaker 4

PEREZ DE SOLAY:] I will respond to this question. Mainly, the debt has to do a little bit with the levels of the fair value. We are on the current position. We are not aggressive in our leverage, knowing that the fair values of the assets goes down. And this conservative actually approach has lead us to, as we mentioned in the repacks, to a level of having an adjusted EBITDA to debt to be at 1.4 times.

Speaker 4

There is no specific level depending on the markets, but let's say that on our current policy right now, we follow the fixed amortization schedule and we are comfortable of where we stand.

Speaker 5

Just to add to that Liam, we're very conscious of risk as Tassos was saying and managing that risk through the cycle. But we also see delevering as a way to build equity value as well. So as long as we amortize debt faster than the depreciation line of the economic life of the assets, then clearly that's building shareholder value as well as de risking the balance sheet.

Speaker 1

Great. Thank you very much.

Operator

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

Speaker 6

Hey, good morning everybody. This is Chris Robertson on for Amit. Thanks for taking our questions. And Ian, congratulations on the retirement. Sorry to see you go, but I know that you'll still be involved.

Speaker 6

So good luck in the next phase of your career.

Speaker 2

Thank you. Thank you very much.

Speaker 6

Just wanted to kind of circle back to the point that you were making with regards to the diversion on the Cape of Good Hope. One of the points was that there was all else equal. So I was wondering if you could clarify whether or not vessels are currently speeding up and to what degree?

Speaker 5

Yes. You're right. That's an important caveat. So we have seen vessels increase in speed around the Cape of Good Hope in an effort by the liner companies to mitigate the disruption to their networks. I think, our own view is that we will have a clearer view probably at the end of the Q1 as to how the dust will settle, because obviously when Red Sea began to be disrupted in earnest around the holiday period, everyone had to react to pretty serious change in circumstances.

Speaker 5

So the Red Sea and Suez is a natural bottleneck as it is. And if you put a cork in that bottle, then clearly it's going to have enormous consequences. So everyone tried to reshuffle their networks, accelerate vessel speeds to mitigate short term impacts. I think however, by the time we speak to you again in early May, we will have a clearer view of the sort of the steady state nature of networks including vessel speeds. But even the speeding up of ships has not fully offset the degree to which the capacity effective capacity of the global fleet has been absorbed by this diversion, which is precisely why you're seeing both charter rates and indeed durations and indeed underlying asset values firm as a result of this set of events.

Speaker 6

Okay. Yes, that's helpful. I guess my next question is related to the current S and P market. As you guys are looking on potentially evaluating opportunities for secondhand tonnage, Kind of what's the liquidity of the market look like? Are there any interesting opportunities out there that you're currently looking at?

Speaker 6

And kind of how deep are those opportunities?

Speaker 3

Yes. Well, there is liquidity indeed. We are looking at deals. The only thing is once the market goes up a little bit, the appetite or the perception of sellers goes up as well. So it's an art to make the situation where the buyer, the seller can see eye to eye and have a deal.

Speaker 3

We do not tend to follow the market. We stay clear from an upwind and upside of the market going up right now with the Red Sea. We still see the whole thing more fundamentally. So yes, there are plenty of deals out there. We are evaluating a number of them as we speak, but we're very selective and we stick to our fundamentals regardless of whether the market right now is very accommodating and charter rates are going up.

Speaker 3

We still feel that the whole picture globally hasn't changed going forward. So we view everything with this magnifying glass, if I may. Yes.

Speaker 6

It sounds like the bid ask spread is probably widened out with

Speaker 3

Exactly.

Speaker 6

Yes, some positivity from the sellers. But you guys have had a pretty good record of being capital disciplined in these types of cycles. So thank you for that commentary. That's going to be it for us. Thank you very much.

Speaker 5

Thanks, Chris.

Operator

Your next question comes from the line of apparently Amit Mehrotra. Did you want to ask another question? There are no further questions at this time. I will now turn the call back over to Ian Weber for closing remarks.

Speaker 2

Thank you very much. Thank you for your interest in DSO. Thank you for your questions. George, Tom, Tassos look forward to talking to you in May after our Q1 results. Thank you very much.

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