Global Ship Lease, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Global Ship Lease Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Ian Weber, Chief Executive Officer of Global Ship Lease. Thank you. Please go ahead, sir.

Thank you very much. Good morning, good afternoon, everyone, and welcome to Global Ship Lease's third quarter 2002 earnings conference call. The slides of the companies in today's presentation are available on our website at www.globalshiplease.com. Slides 2 and 3, as usual, 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 harbour section of the slide presentation. We also draw your attention to the risk factors section of our most recent annual report on Form 20F, which is for 2019 and was filed with the SEC on April 2nd, 2020, and which you can obtain via our website or by the SECs. 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 are the most directly comparable measures calculated and presented in accordance with GAAP you should refer to the earnings release that we issued this morning, which is also available on our website. As usual, I'm joined by our Executive Chairman, George Yurikos, our Chief Financial Officer, Tasos Seropoulos, and our Chief Commercial Officer, Tom Lister. George will begin the call with some high-level commentary and an update on our current areas of focus, and then Tasos, Tom, and I will take you through the quarterly results, the current market environment, and our financials, after which we'll be pleased to take your questions. Turning now to slide four, I'll pass the call over to George.

Thank you, Ian, and good morning or good afternoon to you all. As you may recall, on our last quarterly earnings call, we expressed guarded optimism about the signs that we were beginning to see for a potential charter market recovery. Three months later, I'm very happy to confirm that the container shipping industry has significantly outperformed all expectations and the charter market for our ships has experienced a remarkable rebound that continues through today. Demand for containerized freight has bounced back, with volumes and freight rates in certain trade ranges reaching record highs. In order to service this robust demand, our liner company customers have been extremely active in chartering ships, rapidly driving idle tonnage down from a second quarter peak of around 12% to below 2%, a level that is close to full employment for all practical purposes. Furthermore, in the post-Panamax segment, where over 75% of our fleet capacity is concentrated, competition between charterers for donuts is particularly fierce. And idle capacity is pretty much zero. Is Global Shipley is catching the wave, is the question to everybody's mind. The answer is yes. First of all, we are reporting both revenues and adjusted EBITDA that are up from the third quarter of 2019, reflecting both fleet growth and recent market strength. Second, and perhaps more significantly, our charters expired. We have been able to sign 15 new charters or extensions since the beginning of July, for combined revenues of over $120 million, demonstrating our ability to lock in contracts at good economics and for longer periods with top tier liner companies when the time is right. As of September 30th, we have a total of $674 million of contracted revenues over another period of 2.3 years. Importantly, in the face of weaker demand earlier in the year, the Lanner companies, our customers, have demonstrated a new level of resilience and discipline in managing capacity, which has allowed them to deliver stellar results despite COVID. That, combined with our ability to secure strong charter rates and improve our forward contract cover, as well as our reduced leverage, has allowed Moody's to recently upgrade our credit outlook. With that background, We believe that we have excellent momentum as we pursue a strategic priority of opportunistically refinancing our 9.875 notes that come due in late 2022. The container ship market is becoming more mature with both owners and operators moving forward, embracing the multiple challenges that we face. In view of that, and supporting the type of accountability that we believe is important, We have also published our inaugural ESG report, providing investors and other key stakeholders with insight into our approach to running a business in a forward-thinking, sustainable, and socially responsible manner. With that, I will turn the call to Ian.

Thank you, George. On slide 5, we have an overview of our fleet. We have a total of 43 container ships with a total capacity of almost a quarter of a million TEU. 25 of these ships are close to Panamax, wide beam container ships, which collectively represent over three quarters of our fleet capacity. Wide beam, by the way, allows ships to carry more cargo more efficiently, giving lower slot costs and lower emissions per slot. And nine of these ships add an eco-dimension. They are designed to be inherently more fuel-efficient and are the jewels of our fleet. On slide six, we show the role that our ships of our size play, flexible assets that form the backbone of global trade. Our mid-sized and smaller ships, all of which, with one exception, are below 10,000 TEU, sit at a sweet spot between high operational flexibility and low costs and emissions per cargo slot. The map at top left illustrates the first of these points well. Mid-sized and smaller ships trade everywhere, in contrast to the big ships above 10,000 tu, right the way up to 23,000 tu, which tend to be limited to the east-west arterial trades, as you can see from the map at bottom left. Over 70% of global containerised trade volumes are accounted for by the non-mainline trades, intermediate and regional trades, which are predominantly served by mid-size and smaller ships such as ours. Much of our fleet also has best-in-class reefer capacity, positioning us well to meet our customers' demands for transporting ever more refrigerated cargoes, which is premium rated and shows growth at higher rates than non-reefer or dry cargo, as has been the case for some time. On slide seven, you can see our charter contract cover, the engine room of our business. The detail is broken out on our website, and we've provided information on each of our recent new charters and extensions in our earnings press release issued this morning. But I will make a few bigger picture points here. The dark blue bars show new charters which have been agreed during the course of 2020. And, as you can see, we've been busy in securing charter coverage. securing multiple years of cover at attractive rates. The chart shows that charters agreed in 2Q 2020 hit a low and were generally very short in duration as we sought to secure employment for our vessels to ride out the trough period but expecting the next renewal to be in a better market. This strategy has played out very well for us with vessels coming back into the charter market under greatly improved circumstances For example, feeders fixed in the second quarter in the mid-sixes, $6,000 per day, were subsequently fixed in Q3 in the low to mid-nines, an increase of over 40%. And today, rates for subships, and we have a few coming open, are over $12,000 per day, double what they were in second quarter. For larger ships, the improvement has been even more dramatic. So we'll come back to this in a moment. But 8,500 2U ships that were fixing in the market at rates of around $12,000 per day in the second quarter have climbed into the 20s in the third quarter and are now being fixed at rates as high as $30,000 per day. You will see that we've also taken advantage of this market to lock in attractive charters for three of our larger ships. The latest of these, Amphia Y, one of our ECO 9000 TU ships, is for 33 to 35 months. For commercial reasons, we can't yet disclose either the charterer or the exact day rate, but you can back into a good approximation of the rate if we tell you that the implied adjusted EBITDA that we expect over the median charter term is close to $30 million, $30 million. As George mentioned, this charter portfolio amounts to more than $670 million of contracted revenue over an average of 2.3 years, giving us significant forward visibility. But in another way, we've already locked in pretty much all of our adjusted EBITDA for this year, 2020, and also have strong downside cover for 2021, combined with some potential upsides. As we are entering the winter period, when the container ship charter market normally sees a seasonal downturn, we continue to see very positive market conditions. And whilst there remain important questions about the further trajectory and the implications of COVID-19, Global Ship Lease has a strong base to weather any challenges whilst capitalising on the opportunities ahead of us. With that, I'll ask Tom to walk us through the market.

Thanks Ian. Let's turn to slide eight. So container shipping is a growth industry. Container volumes have grown every year of its 60 plus year history with one definite exception and another probable one. The first exception is 2009 when the world was in the grip of the financial crisis and the second will almost certainly be 2020 as a result of COVID-19. However, without wishing to make light of either crisis, The good news is that for container shipping, the rebound immediately after the financial crisis was immense. And from what we're already seeing, the rebound as the world gets to grips with COVID is also likely to be impressive. Now let's turn to slide nine, and George alluded to this earlier. Even during the depth of the downturn during the second quarter, the liner companies, our customers, were making good money thanks to strong capacity disciplines. 2019 was actually considered to be a pretty good year, but Liner's 2Q20 results were up, way up, year on year. To illustrate, 2Q20 EBITDA for both Maersk and CMA-CGM was up by more than 25% versus the same period in 2019. And Liner results for the third quarter are generally expected to be even better. In fact, Maersk put out updated full year 20 guidance in the middle of October, materially increasing EBITDA outlook versus previous guidance they had provided in August. And 3Q freight rates have doubled year on year on the major indices. And in fact, freight rates from China to the west coast of North America are at their highest points in more than a decade. So, in summary, our counterparties are in good shape, something the rating agencies are beginning to acknowledge. Turning to slide 10. you can see that supply-side trends are all moving in the right direction. Idle capacity is down sharply from 12% or so during the worst of the second quarter to about 1.6% today. And the big ship recycling facilities, which were closed for much of 2Q, have reopened, allowing scrap prices to rebound, or maybe it's more accurate actually to say to normalize accordingly. On slide 11, you can see that supply-side fundamentals are also supportive for the ship sizes we're focused on. In other words, the size segments sitting within the red boxes of the two charts. Net fleet growth over the last few years has been negligible and even negative. And the order book pipeline is at record lows. In fact, as far as we can tell, the overall order book to fleet ratio, which stands at 7.8%, hasn't been as low as this for at least the last 40 years. And the picture for 2,000 to just under 10,000 TU ships is even better, at only 1.7%. Best of all, however, is the order book to fleet ratio for our core mid-size post-Canamax segment, at effectively zero. So, what's all this done for earnings in the sector? The answer to this, please turn to slide 12. Frankly, the charter market is on fire in a good way, with rates up anywhere from 50% to well over double 2Q lows. The chart, which shows how rates have developed for various key sizes in the liquid charter market, tells its own story. And although the data on the chart only runs through end September, so the end of the third quarter, I can tell you that these positive trends have continued and that rates for various segments are now either at or above pre-COVID levels. And, as happened during 2019, the way up was led by the midsize post-Panamax ships, with rate uplifts subsequently flowing down to the smaller sizes as each larger size segment sold out. So, on that positive note, I'll turn the presentation over to Tassos to cover the financials.

Thank you, Tom. Now, slides 13, 14, and 15. So, I know that it performed a consolidated balance sheet. statement of operations, and statements of cash flow based on the third quarter 2020-20. Rather than going through every line item, let me point out a few key items. We generated revenue of $70.5 million during the third quarter and $212.8 million for the nine-month period. Our adjusted EBITDA was $41.6 million for the quarter and $123 million for the nine months. both measures consistent with the first two quarters of 2020-20 and up on third quarter 2019 despite the massive downturn in the first half of the year due to the COVID crisis. Our finance expenses have reduced by about 10% regardless of the additional debt facilities for the acquired chips and the issuance of 2024 notes, mainly due to substantial amortization, decreased LIBOR, and overall cheaper blended cost of our lending. Our normalized net income was $13.8 million for the quarter and $37.8 million for the nine months. Now, I won't go through them in detail now, but we have also included on slides 16 and 17 our adjusted EBITDA and operating cash flow calculator as well as detailed CAPEX guidance to assist you with your modeling. On slide 18, I would like to highlight two additional points. our continuous progress in diversifying our portfolio of high-quality charterers, and also the diversification of our lenders. As some of you will recall, at the genesis of Global Cycles, the company's entire fleet was on long-term charter to CME-CGM. Following some early steps to diversify the customer base in all GSL, the merger between Poseidon and GSL accomplished significant additional diversification, which has continued. Since that time, we have continued to sign charters with a diverse set of top-tier counterparts while almost maintaining a strong working relationship with CME CGM, who now account for just over 50% of our charter revenue. On the right side, you can see our highly diverse sources of debt capital. I won't go through this one by one, but you will recognize a wide assortment of leading banks and other financiers from around the world. Additionally, we have senior unsecured notes due 2024, as well as the red wedge, our 9.875% senior secured notes due 2022. As George mentioned at the outset, refinancing this high-cost debt from the legacy GSL days to benefit from our material-approved financial position is a strategic priority for us. With that, I would now like to turn the call back to George for closing remarks.

Hi, I will briefly summarize on slide 19 before moving to your questions. First, we've got great forward contract cover, $674 million, significantly up on three months ago, spread out over an average of 2.3 years. This generates sufficient cash to move to more than cover our debt service and CAPEX, giving us a resilient platform which has already been successfully stress-tested by the COVID crisis. With some charter renewals due in the next months, we have upside exposure to the strong charter market. We also look to pursue selective and accretive growth opportunities in due course. Second, our balance sheet is strong. We have 114 million of cash, which is reassuring when times are challenging and unpredictable, and provides us with resources to draw on for our prospective bond refinancing and for growth when the time is right. Moody's recently recognized our progress and the supportive market fundamentals by improving our credit outlook to B3 positive. We have no material debt maturities before mid-2022 and we have demonstrated access to multiple sources of non-dilutive capital. Third, we believe strongly that our fleet sits in the sweet spot. Our fleet has high operational flexibility and high reefer capacity with low slot costs and low emissions per cargo slot. All generate increased demand from charterers. Fourth, and maybe most importantly, the supply-side fundamentals for mid-size and smaller ships are phenomenally attractive. Idle capacity is down to under 2%. Net field growth is expected to be negligible or even negative. as the order book is at record lows. So, the market has proved more resilient than many expected during the downturn. Our customers are making money hand over fist, and rates in the charter market are on a steep upward curve, with many exceeding pre-COVID highs. Against this backdrop, our strategic priorities remain the following. Keep our people safe, both at sea and on shore. opportunistically refinance our 9875 notes maturing in November 2022. And our overarching goal is business resilience, allowing us to lock in value in the farming market and position ourselves for growth going forward. Thank you all for listening to our prepared remarks, which I hope have given you a good feel for the nature of our business, the opportunities we see, and how we plan to build value going forward. We'll now turn the floor over to you for Q&A.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by where we can bow the Q&A roster. And your first question does come from Liam Burke with B. Riley.

Yes, thank you. Good morning. Well, good afternoon. I have a question on the 2022 senior notes. You had a ratings upgrade by the agencies. You have a strong asset base. Obviously, you have plenty of time. Could you give us a sense as to what the timing is since it is now a strategic priority?

Ian, do you want to take this?

Sure, Ian. Thanks. We're a little reluctant to put out a timeline here. Experience shows that externalities can affect what we do, but you're absolutely right. It is our number one priority. We had hoped to get something done in the first half, and we were pretty close before COVID-19 just interrupted everything. But we've been a very positive charter market, which looks likely to continue, at least there's no reason why it should not continue, driven by the fundamentals of supply and demand, particularly supply where fleet growth is negative in our sub-sectors. And some certainty or less uncertainty in the US political situation, I guess. we're redoubling our efforts on the refinancing and we're working extremely hard to get something done as soon as possible because obviously if we can reduce our interest cost by two or three points, then we should do that as soon as possible to start generating incremental cash flow to develop the business. Sure, that's fair.

And then you've been pretty opportunistic on asset acquisitions. Timing seems to be pretty good as the market has come your way now. With the strengthening of charter rates, how has that affected your acquisition opportunities?

Well, I would say that it has not. In our industry... There are very few buyers, especially in the larger sizes that we focus on, post-Panamaxes. So the competition is not that strong, and we are considered one of the best buyers, one of the most active buyers into the industry. Therefore, we have, in many cases, first look of transactions, and especially transactions that never come to the market, private transactions. So... Our ability to execute on transactions has not changed because of the strong market, and I believe that with the right opportunities, once we switch into the growth mode, we will continue to deliver similar transactions like we have done last year.

Great.

Thank you, George. Thank you, Ian.

Your next question is from Ward Bloom with UBS.

Good morning. Great report. I know you're working hard on refinancing the 22 debt, and you may not be able to give a specific answer to this, but I'm interested in your general response. I'm assuming that the refinance will not include any restrictive covenants that prevent you from starting a dividend policy again for the common stock.

Well, I would tell you that I would answer to that as a major shareholder in the company. Clearly, companies are there to create shareholder value and distribute dividends. So, our company's financials are pretty strong and we do not need to have restrictions on dividends into our refinancing. So I would say that it is a priority to have maximum flexibility in what we will consider and we will execute at the end as a refinance. If you want to add to that, Ian?

I'm only to say that I obviously agree with George. We want to not only reduce the interest costs of our refinance debt but also increase financial flexibility. Dividend is hugely important. GSL is in a great position now to make acquisitions once we've refinanced but we intend to continue to make acquisitions and to do that in due course we will need to raise equity and to raise equity efficiently the stock should be paying a dividend. So we're very focused on ensuring appropriate dividend capacity.

Thank you very much.

As a reminder, ladies and gentlemen, if you would like to ask a question at this time, simply press star, then the number one on your telephone keypad. Your next question is from Joseph Farisielli with Cantor Fitzgerald.

Hi, good morning. I see cash of 98. Could you provide us with what your total credit availability is?

If you go to the appendix, let me see the appropriate page. On page 22 of the presentation, we have a full breakdown of our debt structure.

Yeah, I didn't see. I was looking at that.

But we don't have any undrawn facilities.

Yeah.

No lines of credit. Nothing of it.

Oh, okay.

I thought there was still one revolver. No, there's no revolvers. I mean, if there's something called a revolver, it isn't. I don't think there is anything called a revolver. All of our debt is secured on ships and financed on ships. We don't have any general... corporate facilities, and we don't have any lines of credit that we haven't drawn. We do have five ships which are unencumbered and would be available to collateralize new finance, either standalone or as part of the refinancing of the bonds that we've previously talked about.

Right. Okay. And so thinking of liquidity, what are the big things moving forward? Are you seeing any increase in in costs, any inflation, anything out of the norm given the impacts of COVID?

No, not really. I mean, EBITDA, which is kind of a starting point for cash, is revenue. We've talked about revenue. We've got huge visibility on revenue, and we don't experience bad debts. We've never had a bad debt. On costs, costs are pretty stable. They've been fluctuating a little, but not materially. And part of that is actually due to COVID, where we've either not been able to change crews as efficiently as previously, or where we had, we've had to incur incremental air travel costs as operators have put their prices up. We've given you information on jet service, and we've provided information on CAPEX, which is dry docking and scrubber installation. So I wouldn't say TASOS corrected me if I'm wrong, but I wouldn't say that there's anything out of the ordinary, either COVID-related or anything else, frankly, in the foreseeable future.

Exactly. I believe that all extraordinary have already been materialized in the previous quarter. We don't expect unless, I don't know, something very not predictable appears in the market, in global market.

Okay, great. Thank you. And then the city loan, that last balance, is it every November that you are required to make the... We have already paid that end of October.

Oh, okay. I'm sorry if I... The last 4.7 million have already been paid. Already been paid.

Okay, so then on that... That's gone. That's gone. There's nothing left.

So on the next $35 million, it all goes to the bondholders, nothing for... Okay. Very good.

Thank you, gentlemen. Correct. And that's mandatory. There's no option to it.

Mandatory for you to offer it, but not mandatory for the bondholders.

It's mandatory for you to take it.

Ah, okay. Thank you. And the amount will be somewhere near $28 million because it also accumulates the repayment of the Citibank loan that has been taking place on April and on October.

Okay, perfect. So to be clear, we've got $28 million coming up before the end of the year. at 102, which is mandatory on both parties. And then you'll write next year, it's 35 million mandatory on both parties, also at 102, assuming that we haven't refinanced the bond. Thank you.

Your next question is from Phil Larson with Mill Street Capital.

Hi, guys. Congrats on another strong quarter. I was going to ask about the AMOARD as well, and then the other just quick one from me is I noticed that you repurchased a small piece of the notes during the quarter. Have you repurchased any more subsequent to quarter end?

Dasha, you want to? In our first release, we actually mentioned it's a very small portion that we have purchased after the end of the quarter. I'm sorry, I must have just missed that. Can you tell me how much it was? Let me check. Ian, do you have it out of your mind? I remember it was around half a million, if I remember correct.

I don't.

That's fine. I can find it.

But that's not a material portion. Okay. Thank you.

Your next question is from Matthew Kerr, and he is an investor.

Good afternoon everybody. So I scoured the press release and I scoured the investor presentation online and nowhere do I see any mention of earnings per share. And I understand the business is leveraged and EBITDA is an important metric for the leveraged loan scenario but I'm wondering when can we start talking about earnings per share because there seems to be significant earnings per share and I understand the capital structure may be complicated with different classes of stock, but I think at this point there's a story to be told here for the equity investors, and it's not being disclosed by the focus on servicing the debtors. So I guess this is kind of a suggestion that management take a look at promoting or disclosing earnings per share and not just service from a presentation perspective the lenders. So when I calculate, if I just use the Class A shares outstanding, and it gets complicated after that, it's like 76 cents per share for the quarter. And that's an impressive number for a $7 stock. Now, I understand there's leverage, but I think, again, I think there's a story to be told here for the equity investors. There's not making through the clutter of all the very important details of the operating business, but for equity investors, I think there should be some interest here.

Thank you for your comment, which is indeed very, very constructive. Tassos will give the answer to that, but I totally agree with you. It's a very good point.

Just to mention that, as always, in our 6K that's going to be released after the call today, with the results, the net earnings per share will also be disclosed there. So you can easily find that in the full text. Yeah, but not in the presentation.

You're right. You have to go looking for it, and it should be in the headline somewhere.

True, true, true. Just for you to know, it's 087, if I remember correct, on diluted bases. And noted for that. We're going to include that next time.

Okay, thank you.

There are no further questions in queue at this time. I'll turn the call back over to Mr. Ian Weber for closing comments.

Great. Thank you very much, everybody. Thanks for listening to our commentary. We look forward to providing you an update on Q4 early in the year. Thank you very much. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.