May 9, 2013
Executives
Ian Webber - CEO Susan Cook - CFO
Analysts
Mark Suarez - Euro Pacific Capital
Operator
Good day, everyone, and welcome to the Global Ship Lease First Quarter 2013 Conference Call. This call is being recorded.
Joining us on the call today are Ian Webber, Chief Executive Officer and Susan Cook, Chief Financial Officer. We will conduct a question-and-answer session after the opening remarks.
Instructions will follow at that time. I will now turn the call over to Mr.
Webber. Please go ahead, sir.
Ian Webber
Thank you very much. Good morning everybody and thanks for joining us today.
I hope that you’ve been able to look at the earnings release which we issued earlier on and been enable to access the slides that accompany this call. Our slides one and two are the normal slides to warn you about forward-looking statements.
These are based on current expectations and assumptions and are, by their nature, inherently uncertain and outside of the company’s control. Actual results may differ materially from these forward-looking statements due to many factors including those described in the Safe Harbor section of the slide presentation.
We also draw your attention to the Risk Factors included in our annual report on Form 20-F, which we filed on April 12th, this year; you can access this via our website or via the SECs. All of our statements are qualified by these and other disclosures in our reports filed with the SEC and we don’t undertake any duty to update forward-looking statements.
For reconciliations of the non-GAAP financial measures that 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, www.globalshiplease.com. As usual, I'll start by reviewing the first quarter highlights and then talk about our charters including the successful re-chartering of our two 4,100 TEU vessels.
I'll then offer some comments on the industry covering CMA CGM as well before turning the call over to Susan for comments on our financials. After some brief concluding remarks, we will take questions.
Slide three shows the highlights for the first quarter. We are pleased with the start of the year by generating strong and consistent first quarter results.
With all of our 17 vessels continuing on time charters and fewer off-hire as we expected given fewer schedule dry dockings; we achieved utilization of just over 98% for the quarter. This allowed us to generate adjusted EBITDA of $22.2 million from revenue of $35.2 million in the quarter.
We continue to use our sizeable cash flow to delever the balance sheet. We paid down $14.8 million of debt during the quarter making a total repayment of $188 million since we commenced repaying debt in the fourth quarter of 2009.
As of March 31, 2013, our ratio of next bank debt to last 12 months adjusted EBITDA continues to be less than 41. Now subsequent to the end of the quarter, we successfully re-chartered the two 4,100 TEU vessels.
This contract expired this month. We have agreed to new one year charters with CMA CGM at the rate of $7,000 per vessel per day, which is consistent with current market rates.
Whilst the rate is obviously below that of the expiring contracts, we are pleased to have secured employment for these vessels at a time when some 5% for the containership fleet is idle particularly in this size category, midsized vessels and smaller and obviously these idle ships have no employment. The benefits of the new contracts include the fact that firstly our fleet will remain fully chartered for at least one more year and as a result we will continue to be insulated for many short term market fluctuations.
Secondly, by continuing the charters with CMA CGM on a seamless basis, we further strengthen our relationship with our customer during a challenging market environment. And thirdly, the cost of transition was seamless; we didn’t experience any off-hire and we didn’t incur any repositioning costs, which could have been substantial running into maybe couple of hundred thousand dollars in fuel costs alone.
In addition, we are not paying any third-party brokerage fees. And finally as before on the last renewal of these two vessel charters, the contracts, the new contracts expire in the second quarter of 2014, which is traditionally a stronger time for charter market activity.
Slide four, summarizes our financial results since the company began operations in the first quarter of 2008 and notably we have delivered consisted results from our long-term fixed rate charters, despite the volatility the spots market charter rates have experienced for many of the past several years as illustrated by the Time Charter Index at the top of the page. As highlighted on the slide, we generated solid revenue, adjusted EBITDA, operating income and utilization quarter-on-quarter which is a direct result of successful execution of our stable business model.
As we pointed out on previous calls, since growing our fleet to 17 vessels and until the two 4,100 TEU vessels came off their initial charters, the only quarterly fluctuations that we have experienced have been due to mainly days of off-hire for planned dry-docking which is unavoidable. Now having completed two dry-dockings during the first quarter of this year, we have only got one more dry-docking scheduled for the balance of 2013; and to remind you the dry-docking schedule for the next three years is late having completed 12 dry-dockings in the last two years, we’ve only got three in total for 2013 and two in 2014, and no dry-dockings are scheduled for 2015.
Turning to slide five, this gives an overview of our fleet and attractive charter portfolio. Our vessels are on average age just over nine years off of an economic life of 30 years.
Our time-charter coverage has an average remaining term of just over seven years, 7.2 years representing a contracted revenue stream of approximately $1 billion. Together with our stable and reasonably predictable cost base, our fully time-chartered fleet provides us with stable and visible cash flows into the future.
As I mentioned earlier on the call, our success in re-chartering the two 4,100 TEU vessels eliminates completely our exposure to the spot market for the next year or so. Besides these two vessels which currently represents a little under 4% of our total revenue, we have no charter expirations until late 2016.
Slide six highlights our successful deleveraging of the balance sheet and details of the principle terms of our credit facility. The two main points to takeaway from this slide; the first that we paid down 31% of our debt since quarter three of 2009; and secondly the way that we have from our bank group for the loan to value covenant continues until the end of 2014, December 2014 insulating us from the volatility of asset values that we see in the short term market and it also allows us to utilize our cash flow to reduce our debt.
And now a few words on the market; we have included the novel four slides to discuss which I’ll cover quickly, seeing that the messages are broadly the same as previously; we’re going to look at overall supply and demand, a more granular look at demand by trade region and then the order book and finally some comments on the line of sector’s financial performance. Slide seven shows supply and demand fundamentals as of 2000 together with the world GDP growth and the Time-Charter Index.
Estimated demand growth for 2012 a year just recently concluded now stand at 3.3% with supply growth at 4.9%. Forecast for 2013 shows supply growth at 6.3% and which continues to slightly exceed forecast demand growth of 5.8%.
This is a similar differential of 0.5 points between supply growth and demand growth at the time of our last call in March, although both of these forecasts have been reduced slightly. Although the metrics are more positive than the outturn for 2009 with supply growth a little less quickly than in the previous years, sorry the differential being slightly less than in previous years; the economic fundamentals for our industry for 2013 seem likely to remain fragile.
However to remind you, the GSL business model with a very high level of committed, contracted long term charter coverage, significantly protects us from the volatility of the short term market and allows us to deliver highly visible cash flow. Slide 8 as before shows the fastest growing trade lane continues to be the smaller regional trades, which in aggregate represents approximately 70% of global container trades, and these are the trades that typically employ the midsized and smaller vessels.
While the special call is currently in over supply hence the ideal capacity, and hence our pleasure of fixing our two ships to CMA CGM for a third year. The order book for this asset class is relatively modest representing only 8% of stand-in capacity.
Furthermore, our levels of scraping of this type of vessel and smaller are high and look to continue to be relatively high partly because owners particularly in Germany don't have the liquidity they don't have the cash to cover operating losses and/or the costs of upcoming special surveys. They are basically faced with no option but either to sell the vessel if they could find a buyer or to scrap it.
In the first four months of 2013 estimates vary but between 160,000 and 190,000 TEU was scrapped equivalent to an annual rate of not far, 0.5 million TEU. This compares to 350,000 TEU scrapped in 2012 as a whole.
We believe that these constraining supply side factors combined with expectation of reasonable trade growth in the trade lanes where these types of vessels are deployed, could improve supply-demand tension in this class of vessel in perhaps 18 to 24 months. Meanwhile we expect charter rate and asset values to remain under pressure.
Slide 9 gives based on the order book and the delivery schedule. The order book at 20% of existing capacity; standing capacity is at a 10-year low.
The order book remains heavily skewed towards the large containerships, 10,000 TEU and above ordered for the main east-west trades, Asia-Europe, Asia-North Europe, the Trans-Pacific which are currently performing below the expectations and below trend. We've previously discussed the General Rate Increases, GRIs imposed and retained by the carriers throughout 2012 and notably in the large East-West trades, which coupled with cost efficiencies from deploying very large vessels with unique cost savings and more slow steaming have allowed the carriers to show better financial performance in 2012 overall, than perhaps the top down supply demand fundamentals might suggest.
However a note of caution, slide 10 shows all those spot freight rates at the start of 2013, as measured by these [industries], were better than a year previously. Recently some grounds has been lost as vessel utilization and load [patterns] have fallen.
Now turning to CMA CGM, our very financial performance for 2012, based on operating margin was pretty much the best in the sector. Overall operating margin for 2012 was 6.3% well above the average for those companies that publish sufficient information to make the calculation.
They reported 2012 revenue up 7% from 2011, due mainly to volume growth 6% volume growth, but also 1% increase in average revenue of TEU. The total throughput in 2012 was nearly 16 million TEU.
That full year EBITDA was $1.3 billion compared to $700 million in the prior year 2011. Further they have now closed on the $100 million new equity injection from Yildirim which was a component of the financial restructuring they announced in February, and as you know they now have a new covenant package taking into account the industries inherent volatility.
The $100 million new equity from Yildirim I just mentioned add a further $150 million of equity committed by the FSI, the [Fund] Stage Infrastructure fund. They have also reached agreements for the sale of their 49% of terminal link of ports and terminal business for 400 million euros.
Closer to home they continue to pay charter hire in full, continue to never have thought to renegotiate terms, and as we speak only one period of hire due on the 1st of May is outstanding. Also I would now like to turn the call over to Susan.
Susan Cook
Thank you, Ian. Please turn to slide 12 for a summary of our financial result for the three months ended March 31, 2013.
We generated revenue of $35.2 million during the first quarter owing to our fully charter fleet of vessel. This is down $3.2 million from revenue of $38.4 million for the comparison period in 2012.
The decline in revenue is primarily due to lower levels of charter hire for two vessels which commenced new charter agreement in last September of 2012 at a daily rates of $9962 per vessel compared to the previous rates of $28,500 per vessel. Utilization was 98.3% for the quarter compared to 96.8% in the same period of 2012, as we experienced only 26 days of hire, temporarily for scheduled dry docking.
We have only one more dry docking scheduled for 2013 which will have a positive impact on all five days in revenue for the remainder of the year. Vessel operating expenses were $11.5 million for this three months period and the average cost for ownership day was $7546, up $219 or 3% on $7327 for the rolling four quarters ended December 31, 2012.
The increase is due primarily to increased crude cost offset by positive exchange rate movements on the portion of crude costs denominated in euros as well as reduced costs for communications. Interest expense excluding the effect of interest rates derivatives which do not qualify for hedge accounting for the three months ended March 31, 2013 was $4.9 million.
The company's borrowing is under its credit facility averaged $425.7 million during the first quarter. The average amount to preferred [chairs] outstanding throughout the period was $45 million, giving total average borrowings of just under $471 million.
Our derivative hedging instruments gave a realized loss of $5.4 million in the three months ended March 31, 2013 for settlement of swaps in the period. Our current LIBOR rates are lower than the fixed rates embedded in the swap contracts.
Further there was a $5.5 million unrealized gain through revaluation of the balance sheet position, given current LIBOR and movements in the forward curve for interest rates. In March 253 million of our interest rate derivatives which were all at a fixed rate of 3.4% expired.
On an annualized basis, this saves us approximately $7.5 billion. As of March 31, 2013, we had $327 million of swaps in place at a weighted average fixed rate of 3.74% which compares to $456 million worth of floating rate debt.
We are therefore paying a floating rate based on LIBOR on the unhedged $129 million of our debt. Net income for the first quarter was $7.2 million, including the $5.5 million non-cash interest rate derivatives mark-to-market gain.
For the prior year quarter, net income was $8 million after a $2.7 million non-cash interest rate derivative mark-to-market gain. Normalized net income adjusted for the non-cash items was $1.8 million for the three months ended March 31, 2013, and $5.3 million for the comparable period last year.
Moving to slide 13, which shows the balance sheet, key items as of March 31, 2013 include cash of $26.1 million; total assets of $888.6 million, of which $847.7 million is vessels; a total debt of $455.9 million including the preferred and shareholders equity of $373.9 million. In addition, the balance sheet position of our interest rate swaps was a liability of $30.1 million.
The next page, slide 14 shows our cash flows, main items here are cash provided by operating activities of $20.8 million in the first quarter, capitalized expenditure on drydockings in the quarter was $593,000. And on the credit facility as mentioned earlier, we repaid $14.8 million in the quarter leaving us with an outstanding balance of $410.9 million.
Finally, as Ian mentioned earlier, we have recently signed new charter agreement with CMA CGM for our two 4,100 TEU vessels. This contract expired on April 30.
These new charters will be for a period of one year at a rate of $7,000 per vessel per day, compared to the previous charter rate of $9,962. Based on the new rate, we expect a reduction in revenue and EBITDA of approximately $0.5 million a quarter.
However, this will be offset by savings from the recently expired credit facility. Our cash flow will also benefit from fewer planned drydockings over the next year.
I would now like to turn the call back to Ian for closing remarks.
Ian Webber
Thanks, Susan. I'll conclude by highlighting a number of the company’s cost rates and reiterating our current strategy to draw shareholder value.
This is slide 15. Firstly, fleet remains fully chartered with no expirations during the next year and only two expiations in the next four years, with an average remaining charter term of over 7 years and relatively stable costs.
We have significant visibility in to our future financial results and cash flow despite the volatile and fragile current market conditions. Secondly, we've begun to realize the positive cash flow effects of both the $253 million of swaps which rolled off mid-March as well as the much reduced drydocking schedule, only one more drydocking this year to next year and none in 2015.
Thirdly, we're insulated from asset value volatility as a result of our loans to value waiver which runs through until December 2014. Fourth, we are well positioned to utilize our strong cash flow to further delever our balance sheet and we have got no exposure to financing or refinancing risk until late 2016 when the credit facility matures.
Lastly exploring opportunities to increase financial flexibility remains hugely important for the company. We continue to believe that the improved financial position at CMA CGM, favourable credit markets in the U.S.
are waiver of the loan to value covenants until late next year together creates a supportive backdrop for capital rates. We can't as I am show you will understand speculate on timing or the eventual outcome, but we can tell you that we have been and continue to actively pursue this as our top priority as we seek to have the flexibility to pay our dividend and also position ourselves for growth at the bottom of the cycle.
That concludes our prepared remarks. And I’d now like to hand the call back to the operator who can explain the Q&A process.
Operator
(Operator Instructions) You have a question from the line of (inaudible) Please ask your question.
Unidentified Analyst
I just wanted to see if you can give a little bit more color on what you guys are seen in the credit market. There is a couple of reports out today stating that junk debt is trading below 5% right and now currently you guys are paying LIBOR plus 375.
I know you are at the discussions right now, but is there any kind of commentary you can give on what type of dealers you are seeing out there, so we can kind of put some numbers to what you guys are looking at?
Ian Webber
In fact, it is very difficult to comment on the specifics of what we are saying because it sort of too close to the actions so to speak. But for sure investors are start to yield, they are looking for new products as we understand it.
We want to try to capitalize on that. The yield will pretty common, that's available on different issues and different class of security varies from industry to industry and circumstance to circumstance.
Yeah, but sure as I said in our remarks we think that the credit markets are very supportive for all types of issues as of now.
Unidentified Analyst
So yeah, I mean either ways, do you guys are able to do some type of debt offering around that type of level, it would be positive to things you guys can do in the future?
Ian Webber
Yeah, I agree, I don't want to -- but just kind of (inaudible) trading, they traded off enormously which is fantastic to see and it is also further supportive for us, but they are sort of proxy and don't read anything more into this, so I am just putting it out there, but there are proxy for what a shipping company might be able to raise, they are trading in the sort of 9% to 10% range at the moment.
Unidentified Analyst
Can you give any clarity on your preferences for preferred versus credit debt?
Ian Webber
No, not really, I am afraid.
Unidentified Analyst
And then just lastly, you are touching on some growth opportunities or trying to capitalize on where asset prices are right now. Would this be -- would you guys be looking more towards new bills or would it be existing tonnage sale and leaseback type transactions?
Ian Webber
It would be more of the latter. The new building arena that's ship with the yards things sort of business and operating very expensive prices require significant amount of capital and you also have to wait 18 months to two years to four years for ships to be in your balance sheet and earnings.
What we think that at the other end of the spectrum, midlife and older and midsized and smaller tonnage presents some unique opportunities just now. Transactions aren't happening.
Here you are able to buy ships kind of maximum below or smallish premium at scrap value which would minimize the downside risk. That's crucial for us would be to have a charter in place.
If we were to purchase that charter or vessel we would want revenue associated with the ship, we wouldn't just speculate on tonnage. And it comes back to what we were saying in the prepared remarks about the cyclical nature of this business and the fact that the small, the mid-sized and smaller tonnage deployed on the fast growing trade lanes with a relatively small order book, only 8% of the [capacity] dealer represents an 8% standing capacity with high levels of static.
You could easily see that in a couple of years’ time there might be a shortage of these types of vessels which would support the technical recovery in asset values and charter rates. And that we are not the only owner that's spotted this.
That's what we would like to focus on and that's one of the reasons why we are keen to retain our 4100 TEU vessels in the fleet, albeit we are only able to charter them out at $7000 a day. We think a few ships of that vessel class is good.
Operator
(Operator Instructions) Your next question comes from the line of Nathan (inaudible).
Unidentified Analyst
Just a very quick clarification, you talked about the relatively interesting prospects for a capital raise; when you say that Ian you are specifically referring to debt financing as opposed to equity dilution. Is that fair?
Ian Webber
Yeah, that's a fair assumption. We are not (inaudible).
Unidentified Analyst
Just want to be sure that nobody goes off (inaudible) on that.
Ian Webber
We are not lined here to issue equity at the current valuations.
Operator
Your next question comes from the line of Mark Suarez [Euro Pacific Capital]. Please ask the question.
Mark Suarez - Euro Pacific Capital
Just a quick question on the from a modeling perspective of interest rates; I know that you are going to have the $250 million that just rolled of in mid-March. You have the annual asset in $7.5 million.
I am just wondering from a quarter-to-quarter perspective. I understand the annual impact, but should we be modeling for significant reduction in Q2, Q3, all the way to Q4 in terms of just to get a sense of how we should be thinking about interest expense going forward?
Ian Webber
The quarterly affects of the $7.5 million is $1.9 million. So Q2, 2013 compared to Q2 of 2012 well all thing equal show $1.9 million lower interest from the exploration of those swaps.
So it's linear.
Mark Suarez - Euro Pacific Capital
Got it,
Ian Webber
But expect change on March to April whatever it was 2013 where supplements of derivative just dropped by the equivalence of $7.5 million a year.
Mark Suarez - Euro Pacific Capital
Right. So I just sort of modeling that stepwise, just wanted to make sure I had to be clear on that one.
Also you also mentioned you drived out two vessels this quarter. You mentioned you are going to be dry docking an additional vessel.
You know, which quarter that’s going to happen?
Susan Cook
Q4
Ian Webber
It's planned for Q4
Mark Suarez - Euro Pacific Capital
And then going back to your interest obviously the balance sheet, is there any potential to maybe accelerate your debt repayment schedule this year versus last year? Is there a potential to do that?
Ian Webber
On the price of that, no because we are earning less cash, because we have got these two ships now running $7,000 a day, while $10,000 a day prefers full months of the year and they are about $7,000 a day for the balance of this year, whereas last year they were earning -- for the most of the year $28,500 a day. So EBITDA is down and therefore we’ve got less cash.
Now that is offset by the cash savings from the derivatives rolling off, also reduced level of drydocking. So yes, maybe we can maintain a same sort of level of debt repayment.
Mark Suarez - Euro Pacific Capital
And then lastly, you mentioned the two vessels recently rechartered, I know it's locked in the 7,000, could you have achieved the higher charter rate by locking them in at maybe a shorter contract with the help of renewing them earlier, it's the marketing boost and therefore getting that upside potential there or how should we think about that?
Ian Webber
Yeah, that’s a really good question. We previously said on the call when the charter market is soft, the tendency is the fix just to be short, because owners want to have the opportunity of securing higher rates sooner when there is a recovery.
Now at the moment, owners are not confident of the significant cover in charter rates say over the next 12 to 18 months. And you’re seeing fixtures in the spot market of longer duration than you might otherwise seeing, I am not charter losses there (inaudible).
We are very comfortable to lock these vessels in for a year. We don't have to worry about them.
If we had a six month fixture they would be coming open in October, November 2013. That’s a really core time of the year so we are trying to find employment for any vessel because lot of companies activities are winding down due to the seasonal downside.
With the 12 month quarter now the ships come open again next might be in April 2014 which is around about the best time at least traditionally for charter market activity.
Operator
Thank you. And I’d now like to turn the call back to Ian Webber.
Please continue, sir.
Ian Webber
Thank you very much. Thanks for joining us today.
Thanks for listening and thanks for your questions. We look forward to giving further update on quarter two in August.
Thank you.
Operator
Thank you. That does conclude our conference for today.
Thank you all for participating. You may all disconnect.