GSL 2023Q3

Hello and welcome to the Global Ship Lease Q3 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. I will now turn the conference over to Mr. Ian Webber, Global Ship Lease CEO. Please go ahead.

Thank you very much. Good morning everybody. Welcome to Global Ship Lease's third quarter 2023 earnings conference call. You can find the slides that accompany today's call and presentation on our website at www.globalshiplease.com. As usual, Slides 2 and 3 of our 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. We would also like to direct your attention to the Risk Factors section of our most recent annual report on our 2022 Form 20-F, which was filed earlier this year on March 23rd. You can find that 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. 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, please refer to the earnings release that we issued this morning which is also available on our website. As usual, 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 commentary on GSL and our industry. And then Tassos, Tom, and I will take you through our recent activity, the quarterly results, and financials, and the current market environment. After that we will be pleased to answer your questions. So, turning now please to Slide 4. I'll pass the call over to George.

Thank you, Ian and good morning, afternoon, or evening to all of you joining us today. In the third quarter, charter market activity continued to be muted as macro and geopolitical factors created significant uncertainty and the global fleet remained largely fixed on previously agreed charters. Now, against this backdrop we have successfully re-chartered our ships as they have come open. Although market rates are softening and the charter durations available have shortened considerably, especially for smaller ships, that said, we continue to benefit from our robust contract cover and forward visibility on cash flows. Our balance sheet remains strong with no debt refinancing requirements until 2026 and all our floating interest debt is hedged with an interest rate cap through 2026. We remain tightly focused on capital allocation and continue to pay an attractive and sustainable quarterly dividend that is well supported by our contracted cash flows. We have also continued to utilize our buyback authorization to repurchase our shares in the market on an opportunistic basis. We have demonstrated our ability to act on attractive acquisition opportunities when they meet our strict criteria. Just as importantly, we have also demonstrated that we will be patient, selective, and tightly focused on long-term value creation in doing so. We expect that increasingly attractive acquisition opportunities may arise as the cycle plays out and we intend to be ready to move quickly when the time comes, maintaining our resilience in the interim. With that, I'll turn the call back to Ian.

Thank you, George. Please turn to slide five. Here we show the composition of extensive diversification of our charter base, which is spread across top-tier liner companies. As of September 30, 2023, we had approximately $1.8 billion in contracted revenue, with an average remaining duration of 2.1 years. In the first nine months of the year, we've signed 18 new charters or charter extensions, adding $225 million of contracted revenues. Slide six provides an illustrative view of our future earnings potential under different rate scenarios. As in previous quarterly calls, it's important to emphasize that this is not a forecast. The charts illustrate the extent of our contracted revenue and our limited exposure through the end of next year 2024 to charter renewals and thus to the prevailing market at that time with 82% of our 2024 ship days already contracted. The current year is effectively fully covered. Moving forward, we will continue to see the incremental contribution from a number of the forward charters that we signed some time ago on strong terms, typically extended for multiple years. Our strong forward charter cover provides us with considerable earnings and cash flow visibility, a significant advantage in today's uncertain macroeconomic environment. Moving on to slide seven. We review the thinking underpinning our disciplined and dynamic capital allocation strategy, which has remained consistent over time and which we revisit regularly. We maintain our sustainable quarterly dividend, which totals $1.50 per share on an annualized basis and we continue to execute opportunistic share buybacks. We've repurchased approximately $22 million worth of shares year-to-date in 2023, including $5 million since June 30, bringing the total to $52 million since we began the program in late 2021. We have approximately $38 million of capacity remaining under the current Board of Directors authorization. We see significant value in deleveraging our balance sheet consistent with the scheduled fixed amortization inherent in our debt agreements and we've made great strides in reducing this debt, which should position us well to weather the challenges and capitalize on the opportunities of an uncertain macro environment and market. With evolving regulations and the demands of decarbonization, we've seen good opportunities to invest in our fleet to improve performance, reduce emissions and add commercial value to our ships. We also believe that it is important to maintain a degree of cash liquidity for both resilience and optionality, particularly as countercyclical acquisition opportunities are increasingly likely to arise. Overall, we intend to remain patient, nimble, and focused on long-term shareholder value. Slide 8 demonstrates our consistent and disciplined approach to acquisitions. During the period of sharply elevated asset values, we didn't make any ship purchases for nearly 2 years instead focused on securing the lucrative charters for our existing fleet, de-risking our balance sheet through debt amortization, putting in the interest rate caps, and buying back shares. Only in May of this year, once asset values had normalized substantially, did we purchase 4 vessels with attractive charters attached and a compelling risk-return mix. Selective growth is a vital element of our business model as is clear from our activity level leading up to 2021. But fundamentally, we're in the business of generating strong risk-adjusted returns, so we will continue to be highly disciplined in deploying capital for growth. Now, I'll pass the call over to Tassos to discuss our financials.

Thank you, Ian. On slide 9 is a snapshot of our financials. As you can see, our major P&L line items such as revenue, adjusted EBITDA, net income, and normalized net income continued to improve for the first nine months of this year versus the same period of last year. On our balance sheet we have reduced our gross debt to $874.3 million from $999.5 million at September 30, 2022 despite adding $76 million new debt for the newly acquired vessels. We closed the quarter with $267.3 million in cash, $155.3 million of which is restricted, primarily consisting of advance received of charter hire with the remaining $112.1 million covering minimum liquidity covenants and working capital needs. We have also continued to return capital to shareholders while also building equity value by delivery. Slide 10 now provides insight into our de-levering efforts and cost of debt reduction over time. We maintain an aggressive amortization schedule that effectively de-risks our balance sheet. That has contributed to our ability to achieve a low cost of debt at 450 basis points, including our 64 basis points interest rate cap on software which we put in place almost two years ago and which runs through 2026. The right side of the slide provides important long-term context as we have reduced our financial leverage from 8.4% at year-end 2018 to 4.2% at the end of 2021 to now 1.7% at September 30 of this year. Our financial leverage has been completely transformed and provides a robust foundation for our business at the time when the cycle is turned. Tom will now discuss our market focus and SIP deployment.

Thank you, Tassos. Moving to slide 11. We reiterate our clear focus on high-specification midsized and smaller container ships ranging from 2,000 to about 10,000 TEU. As in previous quarters, 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 widespread reach. In contrast, the lower map shows the deployment of larger ships at 10,000-plus TEU and higher, which tend to be more constrained to the main east-west arterial routes with sophisticated deepwater port infrastructure. Slide 12 presents a view of idle capacity and ship recycling. Idle capacity bottomed out at just under 0.9% during the third quarter driven by the extensive long-term chartering that took place in recent years. From that effectively full utilization, we saw a slight increase in idle capacity to 1.1% at the quarter's end and this upward trend has continued into the fourth quarter. Logically, the uptick in idle vessels has been 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 2021 and 2022 saw the lives of many older and lower specification container ships extended and thus scrapping deferred due to their phenomenal earnings. However, as the market normalizes, 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 five-year cycle, prompt owners to consider whether investing a couple of million dollars is justified by forward earnings potential. When a vessel is aging or poorly specified or both, the answer may well be no, particularly when there is a challenging market outlook and the ship likely gets scrapped. On slide 13, we show 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 14.5%, the order book for midsized and smaller container ships, which are the segments relevant to GSL, is much smaller but still meaningful. Here the older age profile of the midsized 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 midsized and smaller ships delivering through 2027, our focus segments would see net growth of only 1.2% through 2027, probably an extreme scenario admittedly but illustrative of the supply-side safety valve for the industry in the event of a protracted downturn. Slide 14 looks at the charter market, which together with asset values has been normalizing after the extreme highs of 2021 and 2022; we provide some indicative rates which reflect our best assessment of where things stood at the end of Q3, but there has been further softening into Q4. So take them with a pinch of salt. Frankly, a combination of an uncertain macroeconomic and geopolitical outlook combined with the usual seasonal weakness in the market makes it unsurprising that rates are under some pressure.

Thank you, Tom. On slides 15 and 16, we provide a summary of key points. We have continued to grow our EBITDA on the back of attractive forward contracts signed during the market upswing. We have no reliance on additional charter renewals to cover our debt service, CapEx, and dividends through 2024. We have remained squarely focused on the midsized and smaller containership space, and we have made excellent progress in positioning GSL to be financially strong and strategically flexible throughout the cycle, benefiting from the well-timed hedging of floating rate debt and continued deleveraging. Macro certainty continues to exert downward pressure on market sentiment, and the liners are providing cautious guidance, though they do so with significantly fortified balances. Now having said all that, container shipping has always been cyclical, and cyclicality presents opportunities. Our business model is designed to build, but also very importantly to preserve value for shareholders through both the highs and the lows of the cycle. So capital allocation is disciplined, but nimble, allowing us to de-risk the business, pay a sustainable dividend to shareholders, and opportunistically buy back shares. And also, when the cycle turns, we will be in a position to capitalize selectively on the right value-building purchase opportunities that may arise. Now, we're ready to take your questions.

Your first question comes from the line of Omar Nokta with Jefferies. Your line is open.

Thank you. Hi, gentlemen, good afternoon. Thanks as always for the update always providing good detail on both the company's strategy and just sort of the market in general. I did want to come back George just in your latest comments talking about the liners and some of the cautious discussion that they've had here recently and sort of think about opportunities on that front. There's a big focus or an increasing focus on the part of liners to cut costs or cater to cost where they can. We know there's a big order book and a lot of those orders have been placed outright by those liners themselves, and it seems perhaps that maybe there could be a chance for them to look to refinance those or maybe recapitalize them as they come closer to delivery, freeing up capital on their end and chartering them back. Do you see that as something upcoming for the industry? And is there any evidence of that happening at the moment? And does GSL have the interest to participate in something along those lines?

Thank you. I don't think it's likely that liner companies will fully sell their new builds and then charter them back. More often, they will continue their current practice of not operating older, mid-aged, or older ships efficiently due to higher costs. We've observed that when they aim to reduce expenses, they sell existing older ships and then take them back on charter as a cost-cutting measure. This is because older vessels aren't as efficient for them, given their different business focus. Therefore, I expect we'll continue seeing these types of transactions, as opposed to them parting with valuable new build ships and chartering them back. Even with a charter that lasts 10 years, the ship typically has another 15 years of operational life, which means they're giving up the flexibility of the asset.

This is Tom. Just to add to that during the super-hot years of 2021 and 2022, we saw the liner companies because they were so eager to secure capacity by a lot of secondhand tonnage out of the charter market. And I think to all of the points that George has already made, not all of those liner companies are necessarily natural holders of older tonnage. So that may be a further spur to send those ships potentially back into the charter market by way of sale and charter back. So, yes, we do see that as a potential area of opportunity. Let's see how it develops.

Interesting. That's actually very interesting color on both fronts. Thanks George and Tom on that. And maybe just a follow-up to you Tom. Perhaps you did talk about this in your remarks in the presentation about older ships in the global fleet. Obviously, GSL, you guys have invested, I would say very wisely. And always it seems in a de-risked fashion. You do have a handful of ships over the coming maybe a couple of years that are in that 20-year range that starts to roll off charter. I know it's still maybe a bit a ways away, but how are you thinking about what to do with those vessels as they roll off? Have you already sort of earmarked them for scrap or do you prefer to hold them for optionality, perhaps even if employment isn't so readily available as soon as they come open? Any kind of color you're able to share on what you kind of think or plan to do with some of the older vessels in your fleet?

Sure. Well, I think the first point to make is that just because the vessel is old, it doesn't make it a bad vessel, quite the contrary. I think we've been very careful about the vessels that we have selected to make sure that we're selecting high-quality, high-specification vessels, and particularly high reefer capacity vessels. So, we like to think that our vessels sit within the top quartile of specifications within their respective age groups. Thus, despite the fact that the market outlook is without a doubt quite challenging, at this stage, we remain confident of finding continued employment for our ships. And also, we've been working quite hard in conjunction with our charterers particularly on ships that have continued employment ahead of them already contracted to upgrade and enhance those vessels to make them more energy-efficient and more attractive within the market, more commercially attractive and as a result more commercially valuable. So, I don't think that ship recycling is something that we're thinking about actively at the moment.

Very good. Got it. Tom, thank you. Very helpful and George, thank you as well. I'll turn it over.

Your next question comes from the line of Chris Robertson with Deutsche Bank. Your line is open.

Hey, good morning. Thanks for taking our questions. This is Chris on for Amit. I just wanted to circle back I guess on the current market for secondhand ships. If you guys could provide a bit more detail about as you're looking at the landscape, are there opportunities there for middle-aged vessels that are rolling off charters? Or are there other ships with a few years left of charters remaining attached to them? Or what's kind of the current opportunity?

Yes, there are opportunities that we are continuously examining, particularly focusing on ships with charters. We're looking at either ships that have remaining charters or those from liner companies that will secure new charters. As market values decline, deals that seemed unfavorable yesterday may become attractive today as sellers adjust their price expectations. This landscape is constantly changing. There are many potential deals, but we have stringent criteria for selection; we aim for deals that will immediately enhance the company's cash flow. We're assessing opportunities with this in mind. Maybe Tom can provide additional insights.

Hi Chris. Actually, no, I think George has given a very good summary. Not much that I can add to that really.

Okay. Yes. My second question is related to the deleveraging efforts. I mean you guys have done an incredible job here getting the leverage ratio down. I was wondering if you could comment on the impact that's had on the total cash breakeven level? And if you could just kind of go into detail about what that total cash breakeven level is at today.

It definitely helps the fact that we have reduced the cost of debt because the reality is that the fixed amortization is something which is not changing. What I mean is that we are going to see a reduction of the breakeven levels when we have a total extension of the loans, which if I remember correctly the first material at least will be in 2026.

Okay. Got it. I think that's it for me. Thanks for taking the questions.

Your next question comes from the line of Ward Blum with UBS. Your line is open. Ward, perhaps your line is on mute. This will conclude the question-and-answer session. I will turn the call back to Ian Webber for closing remarks.

Thank you. Thanks everyone. Thanks for joining us and thank you for your questions. We look forward to providing you an update in early next year on full year 2023. Thank you.

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.