Global Ship Lease, Inc.

Good day, and thank you for standing by. Welcome to the Global Ship Lease Q1 2022 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 that session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any assistance during the call, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Ian Weber, CEO of Global Ship Lease. Mr. Weber, the floor is yours.

Thank you very much. Good morning, good afternoon, everyone, and welcome to the Global Ship Lease first quarter 2022 earnings conference call. The slides that accompany today's presentation are available on our website, www.globalshiplease.com. Slides two and three of that presentation, 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 2021 and was filed with the SEC on March the 24th this year. You can obtain this via our website or via 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 material looking material update forward-looking statements, and 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, you should 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 Yeroukos, our Chief Financial Officer, Tasos Saropoulos, and our Chief Commercial Officer, Tom Lister. George will begin the call with a high-level commentary on GSL and our industry, and then Tasos, Tom, and I will take you through our recent activity, quarterly results and financials, and the current market environment, after which we should be pleased to take your questions. So now turning to slide four, I'll pass the call over to George.

Thank you, Jan, and good morning or good afternoon to all of you joining us today. Looking at the current macro environment, it is safe to say that there is uncertainty related to any number of factors from the continuing war in Ukraine to COVID lockdowns in China and rising inflation. What is certain, however, is that the charter market for container ships has remained very tight with almost no vessel capacity coming into the charter market and net growth in our size segments is likely to be negligible. Moreover, Widespread supply chain disruptions has remained a persistent feature of the market, tying up global capacity and reducing effective supply. And perhaps most importantly for today's discussion, all of our 65 midsize and smaller vessels are earning revenues from fixed-rate time charters, many of which extend for several years and reflect the excellent chartering conditions that really took hold during 2021. Our results for the first quarter of the year reflect that reality, as well as benefiting from the significant forward charter fixtures that we were able to secure over the last few quarters, including those which only came into effect during the first quarter of 2022. higher rate charter renewals were due to come online in this current quarter, second quarter of 2022. As you can see on the right side of the slide, our financial metrics for the first quarter of 2022 are all multiples of what they were just a year ago, driven by cash flows that we have in many cases secured for long durations into the future. I'm particularly proud to say that our normalized earnings per share has more than tripled over the last year. In line with our policy to allocate capital dynamically, driven by relative returns adjusted for risk, we have used our increased cash flows and long-term visibility to increase our common dividend this quarter, as promised, as well as to opportunistically buy back around $5 million of our shares in the market. In line with our policy of returning capital to shareholders in a prudent manner that is well supported and sustainable for the long term. On the ESG front, I would like to mention two things. The first is decarbonization, where we are pursuing a collaborative approach. Over time, taking proactive steps to tackle decarbonization has become even more important to all participants in the supply chain. In line, With a risk-averse approach to investment, we are in continuous dialogue with our customers to identify opportunities where we can reduce our collective carbon footprint by retrofitting our fleet in the context of long-term charters. Interests are clearly aligned on this point, and we believe that there are prudent ways to incorporate such upgrades into the fleet in a manner that benefits all involved. Secondly, I wanted to mention the Safe Heaven Initiative that we launched to look after our Ukrainian seafarers and their families during the ongoing humanitarian crisis in their country by providing transportation to Greece and on arrival accommodation and food, etc., for a minimum of six months. We created a small community locally and now have a total of 60 people safely here in Greece and another 73 on their way. And it's wonderful to see Other industry participants with similar initiatives to look after people caught up in this awful situation. And with that, I will turn the call to Ian.

Thank you, George. Please turn to slide five. This slide will be familiar to many of you, but here we show the portion of our fleet that we already owned at the beginning of last year, 2021. The darker blue bars indicate charters that were agreed during the course of that year. If you compare the rates that we were earning in each of the newly agreed charters to the rates in the charters that immediately preceded them, you'll see that the new rates for renewals over the last year have on average doubled from previous levels. Given that operating costs, daily OPEX, are essentially fixed, we therefore have high operational leverage, operating leverage, And pretty much all of this incremental cash flow falls straight to our bottom line and should continue to do so through the multi-year duration of the contracts. On slide six, we show those vessels that we acquired in 2021. We've highlighted in red what has happened as the legacy charters that were in place on acquisition came to an end and those ships were refixed, often well ahead of anticipated expiry. at which point they've been able to command double or even treble at what they've been previously earning in the market. And we're very happy with the graduated charter maturity profile of these acquisitions and indeed our legacy fleet, which provide us with a combination of long-term certainty on very attractive cash flows and nearer-term charter market exposure for further nearer-term renewals. And that thus far has served us exceedingly well, enabling us to more than double our total adjusted EBITDA to 94.5 million for the first quarter of this current year compared to the first quarter of last year. At the end of first quarter 2021, sorry, 2022, our total contract cover stood at over just around $1.7 billion with a weighted average remaining duration of 2.4 years. On the next slide, slide seven, we provide some illustrative guidance on how our contract cover flows through to our earnings and our cash flows. As I've said in the past, I want to be clear that we are not providing a forecast. Rather, we're providing three illustrative scenarios in order to demonstrate the relationship between market charter rates and our adjusted EBITDA. The assumptions underlying this exercise are spelled out in detail in the EBITDA calculator in the appendix to the presentation. I'd like to highlight just a few things. Given our contract coverage with only three open days and on our assumptions, sorry, three open days out of nearly 24,000 in 2022 and based on the assumptions that we've set out, our revenue for 2022 is pretty much set. Any variability on revenue will be driven by the amount of actual off-hire compared to the assumptions that we've made. Looking out to 2023, our spot exposure remains limited. According to our EBITDA calculator, around 87% of our ownership days are covered, so 13% are open. I should point out that for ships coming open in 2022 and 2023, all of which are on charters at below market rates, we assume that the charters will hold on to that capacity for as long as possible, looking to re-deliver right at the end of the re-delivery window In short, we have very high visibility and certainty on cash flows through at least the medium term, and we're on track to experience yet another significant step up in our EBITDA in 2022, even absent further growth or new chartering activity and irrespective of market conditions. Turning to slide eight, I'd like to discuss our dynamic and disciplined approach to capital allocation. We look to allocate capital on the basis of relative returns adjusted for risk. As you will have seen expressed this quarter in multiple ways, we believe that it's important for us to prudently return capital to investors on a sustainable value maximizing manner. From this quarter, we're paying a dividend of 37 and a half cents per share, $1.50 annually, treble the amount that we proposed of 12 cents per share, 48 cents in the year, just over a year ago. We've also been utilizing our share buyback authorization on an opportunistic basis, buying back approximately $5 million worth of our shares recently. Additionally, we look to build equity value by deleveraging and building liquidity, while also proactively managing any balance sheet risks. We allocate capital to meet the evolving demands of our customers and the impact of decarbonization regulations to improve our vessels' fuel efficiency. We approach such investments as we do any other with an eye towards anticipated return profile. And it is clear that there is a growing demand from the line of companies and their customers, think of Walmart or Ikea, on the basis of both regulatory compliance and the impact on their scope-free greenhouse gas reporting. Finally, we continue to pursue accretive growth and fleet renewal on the selective discipline basis. If the returns or the asset profile don't meet our requirements, we will pass on a potential acquisition. And in fact, we've on that basis declined far more transactions than we've actually pursued. As we consider these options, we look at the degree of forward visibility on associated cash flows, potential macro risks, industrial cyclicality, regulations and the decarbonization implications and potential opportunities. At its core, our focus is on generating long-term value for shareholders through a balanced, risk-averse approach that builds sustainability over time in a cyclical industry. With that, I'll turn the call over to Tasos to talk you through our financials.

Thank you, Ian. On slide 9 now, we have summarized our first quarter 2022 financials and highlights. Revenue for the quarter was $154 million, more than double the $73 million in the prior year period. Similarly, adjusted EBITDA for the quarter was $94.5 million, more than double the $44.2 million of the first quarter 2021. Our normalized net income, which adjusts for one of items, almost went up four times at $69.7 million in the first quarter of 2022, compared to $17.8 million in the first quarter of 2021. Moving to the balance sheet items, where I would highlight the following. We had $222 million of cash at port, the rent of which $126 million is restricted, and $25 million represent a minimum free liquidity level set by our debt facilities. We agreed amendments to our existing syndicated senior secured credit facility in January, which had at that time an outstanding balance of $213 million, extending the maturity to December 2026, enhancing the covenants in our favor, and releasing three vessels from the collateral package while leaving the price unchanged at LIBOR plus 3%. Those three unencumbered ships were used as collateral for a new $60 million loan facility priced at LIBOR 2.75%. We utilized the proceeds to reduce higher-cost debt and eliminate the last junior facility of $26.2 million and $28.5 million partial redemption of 8% senior unsecured loans. We have an additional $89 million of those notes still outstanding and maturing end 2024. Now, we have fully hedged our floating rate debt exposure, having put in place a second tranche of hedges reaching to an interest cap of $992 million of total floating rate debt, with LIBOR capped at 0.75% and amortized through the years. Also, as mentioned, we have used $4.9 million to repurchase approximately 185,000 of our Class A common shares in the market, with an average price of $26.66 per share. We have also declared a newly raised dividend of 37.5 cents per Class A common share. Now, moving to slide 10 is a summary of key capital structure developments over time. In the upper left is our schedule amortization in the coming years. We maintain an aggressive amortization schedule that we believe is prudent for a business like ours, utilizing our cash flow to deleverage while limiting our exposure to refinancing risk at loan maturity. On the upper right, you can see the extent of improvement we have been able to achieve in our cost of debt. as our balance sheet, earnings power, counterparts in risk profile, and contracted cash flow have all improved markedly over time, that has translated into a significant reduction in our borrowing costs, from 7.7% at year-end 2018 to 4.6% now. As I have said before, in a leasing business, this is both a key performance indicator and major determinant of our competitiveness. On the lower left, you can see that the trading liquidity in our stock has increased substantially over the last year. The sea change in our trading liquidity has made it far easier for investors to both build and exit positions in GSL. Our detailed financial statements appear in full on slides 11 through 13. With that, I will turn it over to Tom.

Thanks, Tassos. As usual, slide 14 is intended to highlight the ship sizes on which our business is focused, which will help put the subsequent slides in context. GSL is focused on mid-sized and smaller ships, which is shorthand for ships ranging from about 2,000 TEU up to around 10,000 TEU, effectively the liquid charter market. The top map on this side, on the left, shows the deployment of quote-unquote our sizes of ship, i.e. ships under 10,000 TEU, and emphasizes their operational flexibility. As you can see, they're deployed everywhere. The bottom map, on the other hand, shows where the big ships, those larger than 10,000 TU, are deployed, which tends to be on the east-west main lane or arterial trades, where the cargo volumes and shoreside infrastructure can support them. And it's important to note that over 70% of global containerized trade volumes are moved outside the main lanes, in the north-south, regional, and intermediate trades served by ships like ours. In his opening remarks, George acknowledged the macro uncertainty that we're all currently facing, and clearly that's true. And one of the big questions the container shipping industry in particular is having to ponder is when COVID restrictions in China will be relaxed, which will release pent-up demand volumes into the system. The longer the delay on releasing this growing backlog and the lumpier the volume uplift when it does come, the more challenging it will be to absorb on the supply side. And that's a good thing for earnings, of course. And I'm not suggesting a repeat of the second half of 2020, but that period does illustrate what can happen to the supply chain and to earnings when substantial demand suddenly comes back online. And it's worth remembering that year-on-year growth in 2020 was actually negative. Volumes shrank that year by just under 2%, and that the snapback in earnings came after idle capacity of the global fleet had peaked at just under 12%, a substantially lower baseline than today's situation of almost full fleet employment. Anyway, rather than trying to second-guess how the macro environment and demand will evolve, The following slides are focused primarily on the supply side, on which we do have clear forward visibility. Slide 15 shows the supply side trends that tend to be a barometer of health for the sector. The top chart shows idle capacity, which remains below 1%, so basically full global fleet employment, and we haven't even hit the traditional peak season in the freight markets yet. The bottom chart tells a similar story. Ship recycling, scrapping, was almost nonexistent for container ships in 2021, which has remained the case through the first quarter of this year. Why? Because the earnings in the charter market remain phenomenal, and we'll come back to that in a moment. In the meantime, please turn to slide 16, which looks at the order book. Here you can see on the left the composition of the order book by size segment. As we acknowledged on our last earnings call, the order book has expanded during the course of the last 18 months or so, reaching an overall order book to fleet ratio of 27.9% at quarter end. However, this overlooks the fact that the order book is very heavily weighted towards the bigger ships over 10,000 TU. If, on the other hand, you focus upon our focus segments of 2,000 to 10,000 TU, highlighted in the red box, you can see that for these sizes, the order book to fleet ratio is significantly lower at under 12%. Another point we continue to make when discussing the order book is that the delivery schedule is backloaded. By this, I mean that the order book deliveries tend to be weighted more heavily towards 2023 and 2024, and increasingly 2025, rather than to this year, 2022. And this back-loading is significant, as 2023 marks the implementation of the new environmental decarbonization regulations, which we expect to cause a slowing down of the global fleet, reducing effective supply. To put that in context, reducing the average operating speed of the global container ship fleet by just one knot, one nautical mile per hour, would reduce effective supply by between 6% and 7%. Furthermore, the midsize and smaller container ship fleet is aging. As you can see from the chart on the right, and we provide additional data on the age profile of the global fleet in the appendix, if scrapping were to continue to be deferred, by the end of 2024, around 7.5% of sub-10,000 TEU capacity currently on the water would be at least 25 years old, and for the lower specification candidates, at least potential scrapping candidates. Net this out against the total order book of sub 10,000 TEU ships due to be delivered through end 2024, and you would get implied net growth in these sizes of just 3%, not 3% per year, but 3% total over the coming two and a half years or so. The long and the short of all of this is that we continue to see supportive supply side fundamentals for our focus size segments, which brings us to slide 17, the charter market. As you can see from the chart, the charter market continued to firm through the first quarter of this year. The market is very tight, as George said in his introductory remark. Indeed, from the feelers we've put out, no more than five, I repeat, five ships in the 5,500 to 10,000 TU size classes are expected to come open in the balance of 2022. And to be clear, I'm not talking about the GSL fleet here. I'm talking about the charter market as a whole. And for the smattering of chartering activity in the feeder sizes, the smaller ships, both owners and charters are preferring to fix for short tactical periods covering network gaps. Against this backdrop, it's challenging to provide guidance on rates in the longer term market. So the rates you see in the table on the right simply replicate those shown in our March investor presentation based upon the assumed prompt availability of vessels. Now, our view is that there will be a scramble for capacity and thus a continued firming of charter rates when China reopens. Having said that, we don't have any ships coming open until late in the year. Anyway, so I'll circle back instead to the supportive fundamentals. Firstly, a baseline of full fleet employment compounded by continued supply chain disruption. Secondly, an aging midsize and smaller ship peer group coupled with a modest order book. pointing towards limited net supply growth in our segments. Thirdly, emissions regulations in 2023, expected to slow the global fleet and reduce effective supply. And finally, strong potential for an upward jolt in demand when China comes back online. And with that, I'll turn the call back to George to wrap up.

Thank you, Tom. I will provide just a brief summary, and then we would be happy to take your questions. As a result of our extensive chartering activity and the signing of numerous multi-year charters at elevated rates, we have extensive contract cover of almost $1.7 billion over nearly two and a half years. Our debt service, capex, and dividends is fully covered through the end of 2023, even without any further charter renewals or growth. We have a very strong balance sheet. While some of our $150 million of our $222 million cash is restricted, our increasing cash balance is starting to move more fully reflect the earnings growth that we secured during 2021 from virtual acquisitions and charter renewals at higher rates. Further, we have no debt maturities until 2024. Our fleet is in the sweet spot of the market and well supported by supply side fundamentals. Our high reefer, mid-size post Panamax and smaller container ships were in high demand even before the current period of extraordinary market strength and we have even expectation that they will remain so for the long term on the basis of their efficiency, flexibility and high specifications. Meanwhile, While the order book for very large ships has increased, net growth for our size segment is expected to be negligible and effective capacity might even shrink from 2023 with the new emissions regulations. This current market has proven to be more resilient than many initially expected, driven by both continued underlying demand and by supply chain congestion that has proven to be more structural than transitory. Freight and charter markets remain very strong. Liners are forecast in another exceptional year of earnings in 2022. Further, a demand-side spike is expected when China loosens its COVID restrictions, which should have a very positive effect on earnings for the industry. Finally, we allocate capital on a balanced, opportunistic basis to maximize long-term value. With adjusted EBITDA for first quarter 2022, just over twice that of the prior period, we have increased our quarterly common dividend to 37.5 cents from this quarter, triple the level initially proposed just over a year ago. And as we begin to accrue cash from our larger fleet and new and improved charters, we were able to purchase approximately $5 million of GSL shares in the market under our share-by-back authorization. We remain dedicated, to returning capital to shareholders in a prudent, sustainable manner, as a key part of our balanced approach to maximize long-term value. With that, we'll be happy to take your questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To throw your question, please press the pound key. Stand by as we compile the Q&A roster. Our first question comes from Chris Robertson of Jefferies. Your line is open.

Hello, gentlemen. Thank you for taking my questions.

All pleasure, Chris. Go ahead.

Yeah. So, yeah, revenues seem to be pretty locked in at this point, especially for this year. Can you talk about the expense side in terms of cost pressures you might be seeing this year compared to last? And what are your expectations for any cost inflation this year?

Yes, I'll take that. The things that, you know, in a cost operation of a ship that are increasing due to the situation we feel we see today is number one, lubricate, lubricate oils, which is a byproduct of fuel. So as fuel price go up, lubricating oils increase. That is one aspect. The other aspect is COVID related. Expenses such as transportation costs, tickets, those increase also, as we all face when we travel. China regulations, as a lot of our ships and generally container ships trade in China or in and out of China, all these regulations that change on a bi-weekly basis in China can create additional expenses of people having to wait and not being able to board the ship at the right time. All these kinds of expenses, but those are not material expenses. We see also some, we will believe that we will see actually, we don't see yet, but we will see some increase in possibly spare parts because of the price of steel going up as mainly spare parts for ships are made of steel. But I don't foresee any you know, major increases. From the shipyards point, we have seen a 10-20% increase in costs, in dry dock costs when the ship goes to repair. But container ships, again, do not need a lot of steel renewals during a repair show, which is the main thing that has increased, the price of steel. Again, there are some increases, but nothing that would materially affect profitability of companies, I would imagine.

Okay. Yeah. Thanks for that color. That was very comprehensive. My next question is related to some of the retrofitting and incremental upgrades being done ahead of IMO 2023 through 2030. So on the engine power limiters and other measures that GSL is taking to get the ships ready, can any of that be done while at sea or does it have to be done at the yard?

Let Tom speak more about this, but just to say a few things. The EPLs, energy power limiters, can be done while at sea. Other things, more major, need a shipyard, but the EPLs can be done while trading.

Chris, I think George probably addressed your two principal questions there. Is there anything you'd like me to add?

No, I guess if there's anything else outside of the EPLs that you guys are doing worth mentioning or talking about, that would be helpful. But if not, yeah, George answered my question.

Sure. Okay. Well, what I would say as a general comment is that we're working with our customer base, with our charterers, to seek to see what can be done to enhance the efficiency and, as a result, reduce fuel consumption and thus reduce the emissions of our ships, but I think it's too early really to provide any more sort of exact guidance than that. But it's an issue which is clearly at the very front of our minds. It's the front of our charters' minds, and it's at the front of, we understand, their customers' minds. So decarbonization is certainly something that's gathering momentum, and it will have to be attached or attacked on a collaborative basis, which I think is key.

If I just can add for the audience to understand a little bit what we mean so it doesn't sound like a black box. What really is the modifications are meant to do are to improve the friction of water on the hull. So the ship has less friction as she moves ahead into the water and therefore reduce the fuel consumption and effectively the CO2 emission which is directly proportional to the fuel consumed. These things can be changing a propeller, changing the nose of the ship called bulbous bow, adding some special fins around the propeller area which make the flow of water more efficient and these kind of things, putting special paint that is more slippery so the ship slides into the water with less resistance, just to make our audience understand what we're talking about.

I have a final question if I can here. So just thinking through slide 10, you have the amortization schedule. Is the debt payments over 2022 and 3 just scheduled amortization? Are you guys thinking about any debt prepayments at this point? And how does that fit in or could it fit in with your capital allocation program here?

Ian, do you want to take this?

I'm happy to, George. This is scheduled amortization that we show on page 10, and it's reasonably aggressive anyhow, as agreed with our lenders. We have assets which have a useful life of what we use 30 years, so we need to make sure that that's associated with the ships also reduces. In terms of capital allocation, we talked about that at a couple of touch points during the prepared remarks. It's a dynamic policy, and we've increased the dividends. We've got a $40 million share buyback authorization. We actually bought back shares last year as well. We're open-minded about allocating capital to deleveraging, but it isn't additional capital to deleveraging but it isn't a priority for us right now given everything else that we think that we can do with that capital but what I would say about debt is that we we've been very successful Tasos and his team in particular have been very successful at refinancing our debt either to push out maturities or to reduce cost or to do both extended maturity and lower costs. And we've made enormous strides in that over the last three years since the merger with Poseidon. But there's probably more that we can do. So where we still have pockets of expensive debt, then we will look over time to see what we can do to bring that cost down. And that would be a kind of not using any capital to make the business more efficient, the balance sheet more efficient.

Thanks, guys. I appreciate the time.

Thank you. Our next question comes from Liam Burke of B. Reilly. Your line is open.

Thank you. How is everybody today? Very well. Good, Liam.

Thank you.

I'm fine, thank you. Just touching on slide 17, it's just the rate chart. They're obviously elevated on any kind of measurement you want to see, either on a sequential or year-over-year basis, but how much of that lift is on the overhang from past congestion, or is it normal representation of the supply-demand strain right now?

That's a tough one to answer, Liam. This is Tom, by the way. Maybe I'll partially dodge the question and say people have been talking about congestion in the supply chain as being transitory for about the last 18 months. And at least from where we're sitting, we don't see that congestion being structurally resolved today. anytime soon. So I guess that's a partial answer, perhaps.

Well, what I want to get to is the fact that we haven't seen the release from Shanghai, the Shanghai closing, so this could be exacerbated.

Oh, yeah. I mean, I fully agree with that perspective. In fact, we tried to allude to that in our prepared remarks For sure, the more pent-up demand that you have building up in China while the ports and or the production facilities themselves are effectively closed, the bigger the demand-side shock when it comes back online and the greater the sudden additional tightening in the supply-demand balance. So for sure, we see potential for... the sustaining of these rates or possibly even increase of those rates when that eventually happens. And the longer it takes to happen, clearly the greater the impact. Sure.

And asset pricing follows rates. So I'm presuming that these higher rates are reducing your potential acquisition opportunities. Excuse me.

Yes, that's true. I mean, we feel that we look at opportunities continuously, but as you have seen, we have not executed any of them because we feel that the level of accretion that we want has not been in any of these transactions. But yes, as time goes by, we expect more and more opportunities to make sense going forward. And if rates subside at a point, which they will, obviously, it's a cyclical market, then that will be reflected on the values and opportunities.

Great.

Thank you very much. Thank you. Thanks, Liam.

Thank you. And to ask a question, you need to press star 1 on your telephone. To withdraw your question, please press the pound key. Our next question comes from Jay Mincemeyer of Value Investor's Edge. Your line is open.

Hi, good morning and good afternoon, gentlemen. Congrats on a fantastic quarter.

Thanks, Jay.

Yeah, of course, the market's not joining yet, but we'll see. Great questions early by both the other analysts. I just wanted to follow up a little bit on repurchase capacity. You installed the $40 million program. Looks like you used about $5 million of that in April. Stock prices have come down significantly since then, down another 15%, 20% since that point. What do you think is a reasonable pace where you could keep your balance sheet with enough liquidity but still deploy repurchases? Is there a certain number per quarter that you could think of?

Ian, do you want to take this?

Sure. That's a good question, Jay. Thank you very much. It's really difficult to tell. I mean, we do provide you all with some information on annual figures for EBITDA and CAPEX, regular dry dockings and the regulatory stuff as well. We don't split it down by quarter. As you'd expect, though, cash flows in an environment where we forward fixed charters at higher rates to come into effect further into the year, to a degree our cash flow is back-end loaded. It's not massively toward the end of the year, but there is a timing effect of it. So cash becomes more available to us towards the end of 2022 and through into 2023. So it's Given the other potential demands on capital and the dynamic approach that we have, which we review with the board every quarter, I'm afraid it's just not possible to say, well, you know, we've done five million in this quarter, so expect five million a quarter for the next few quarters.

Yeah, I appreciate it. I was trying to pin you down there. But it's worth looking at. It's very interesting to see the stock essentially flat. I mean, up $1.50 since last September, right, when there was insider buys and repurchases. And that's after you've added significant value in your charter rules. On the topic of charter rules, it looks like the next availabilities are one or two in early 2023, a bunch of shifts coming up in mid-2023. One of your peers did a lot of forward fixtures a year or so out. Obviously, there's some sort of discount associated with that. When do you think the next sort of window for new charters is going to be? Is this something we could expect this summer, this fall, or are you going to hold those a little bit longer?

Well, what is interesting is that 87% of our fleet, of our days, let's call it fleet days, is covered for 2023, so only 13% remains covered. to be rechartered. So we are looking at actively rechartering forwarders of fleet and that's what we've been doing for the past 18 months and we continue to do that. Obviously with very little remaining for 2023, we want to time this in the most efficient way and therefore the window is open as we speak. It's not like a window that we have to snap It's a matter of negotiating the best deal for the company. And we are in continuous discussions with our customers in doing so. So I wouldn't be able to tell you whether it's now or in three months. It could be tomorrow morning that we fix a ship, a long-term forward fix, and then again in two months the next one or right away the next one. It's... But it's not like there is a window that is closed right now and it's going to reopen. It's an ongoing process and it's a negotiation, if you know what I mean.

Yeah, certainly a lot of moving parts and things remain really tight. It'll be interesting to see what happens with China reopening.

Exactly. You see, it's all about this. Obviously, when China reopens, A surge in demand will come, which helps rates even further. So, you know, and depends on the exposure each company has. I mean, like I said, we have very little exposure for 2023. It's only 13% of our days. We can afford to be, let's say, a little bit more opportunistic in order to try to achieve the better result that we can. without taking any risk, as I said, you know, because we're razor focused on extending and renewing in advance.

Certainly. Well, we'll hope for the best and hopefully the market conditions, the stock market conditions improve a little bit. Thanks for your time, gentlemen, and congrats on a great quarter.

Thank you very much. Thank you.

Thank you. And next we have Froda Mokadal of Clarkston Securities. Your line is open.

Thank you. Hi, guys. Quick question on the China lockdown. I see a point on China reopening and that's going to drive exports up again. Just curious to hear if you have any view on port congestion. If there's a change dynamic from basically vessels piling up in China versus it used to be in the importing side out of, let's say, Los Angeles. That congestion is coming down. So it is changing the need to put more ships into the system, so to speak, in order to keep the loops up.

Good question, Frodo. I mean, to me, it feels like a balloon in some ways. If you squeeze it in one place, it blows up in another. So the business of congestion within the supply chain and exactly where it sits and where it's manifested through a buildup of ships waiting changes all the time. But I think the fact is, at least as we see it, that that congestion is expected to remain. Now, whether it's in China... or it's in the US, or it's in Europe, wherever, makes very little difference to the overall dynamic, which is it's a super tight market in terms of supply.

Interesting. That's good. You mentioned the contract renewals, but I'm curious to see if the liner companies are willing to buy outright ships instead of going long. That was at least a phenomenon you saw last year. Is that still the case?

Well, I would say that as long as, and this is the case right now, as long as chartering a ship is more expensive cumulatively, if you see the total EBITDA, the charter higher the liner company is going to pay out, EBITDA-wise versus buying the ship, they will always be interested in doing so. And right now, yes, there is such interest, continuously, there is the interest of liner companies buying ships instead of chartering if they can get them, because it's cheaper for them. You make more money by chartering a ship than selling a ship always, but there are some That's why you don't have a lot of owners willing to sell the ship to the liner companies as they can charter the ship and make more money by chartering the ship to them. So we do see some deals happening. There are some owners who are exiting the sector. But generally speaking, the pace of happening this has reduced quite a bit because the less ships there are, the liquidity for ships right now is very, very, very limited. the more profitable it is for the owners to keep the ships and trade them rather than sell them.

Great. Well, that's a good support for asset values, I guess. In terms of the outlook, I think you mentioned some speed reduction and figure there, but when you look at it overall, When you look at the order book and the deliveries, what's your current expectation from these new carbon regulations? What's the effect of scrapping? What's the effect of solar speed? What's the realistic effective fleet growth in 2023 and 2024 in your words or your opinion?

Sure, Frodo. Again, this is Tom. I'll try and address that That's something we had a crack at addressing in the prepared remarks on slide 16. First of all, let's sort of recap. At the moment, there's about 1% idle capacity in the global fleet, which is to all intents and purposes, full utilization. And during the course of this year, in order to synthesize additional capacity, we've seen our own fleet speed up at the orders of the charterers, and we presume that that would be reflective of the global fleet also speeding up. And come 2023, with the implementation of EEXI, the only way that ships can be brought into compliance with the new regulation is by being brought down inside a particular speed envelope, let's say. Now that envelope is going to vary by ship, so it's very, very difficult to come up with a nice, elegant, starting January the 1st, the global fleet is going to slow down by X. So all that we've put out there ourselves, and I think we've heard this also from others, is that illustratively, for every knot, in other words, for every nautical mile per hour, that the global container ship fleet is obliged to slow down as a result of the implementation of these emissions regulations, that is equivalent to removing between 6% and 7% of effective supply from the mix. So you can play around with those numbers, but I don't think anyone has been able to say, come January 1st, X amount of capacity is going to be taken out of the system.

One thing I should add to that, is that factually the ships in general of all sizes are trading about two to three knots higher than they used to prior to COVID. So there is a lot of room for slowing down.

Would you care to make a guess on what the effective fleet growth is?

It's very difficult to guess, but we see the average speed around 2021 used to be around 17, 18. If I was a betting man, I would bet that at least one knot is going to slow down. Of course, it's a balance between the emissions penalties and the money the liner companies make by speeding up. Why they speed up the fleet? because they want to make more ton miles per year. So they want to make more rounds, more rounds every year than they usually say. Instead of doing 10 rounds, they want to make 11 rounds. How can they do that by making the line going faster? So having high speed means liner companies are making a lot of money. and making a lot of money, we make a lot of money. So it's a triple effect. So it's difficult to say, but I would say that I would expect at least one not slowing down because the emissions penalties are going to be quite steep for them. And especially, as we all know, year on year, 2023 to 2024 and then to 2025, the emissions are are being stricter and stricter. They're not whatever they are for 23 or for 24. 24 is less emissions required and 25 even less emissions. So eventually, whether they like it or not, ships are going to have to slow down, I think.

And to add to that, just a quick clarification, EEXI... which is this energy efficiency existing ship index, which is the emissions regulation, which is prompting engine power limiters to be installed on ships, is binary in nature. It's a pass-fail test. And if a ship fails, it can no longer trade, which means that the liner companies themselves are not going to be able to trade the vessels at speeds in excess of the limit imposed upon them by EEXI. So, sorry, I don't want to get into the weeds of the regulations because it gets pretty complex, but I think that's an important point to make. EEXI is pass-fail, and if you fail, you can't trade. So everyone will have to bring their ships into compliance by way of engine power limiters or a combination of other factors.

Yeah, you could, to make it simple, it's like you have a speed radar and the police is stopping you if you go above the speed limit. So that's the EXI number for each vessel, the speed radar. So if you go above that, you can't. They take your license. So that will make ships go to the maximum of what is allowed, basis, their emissions, per vessel, you know, each vessel has a different emission. That's the one thing. The one I was mentioning is the CII, which is Carbon Intensity Index, which is a matrix that has to do with how you trade the ship. So in other words, you can take, let's take a car, which is simple for everybody to understand. If you take a hybrid car, you know, which is with gasoline and battery, and you operate that car slowly and prudently, you achieve what the maker suggests that is going to be the fuel consumption. If you take the same car and you flat out, you know, you pedal to the metal, drive the car, obviously, whether it is a hybrid or not, it won't produce the same fuel consumption as advertised. The advertisement of the fuel consumption is assuming that a prudently driven car. The same goes for ships. So if the ship is operated by the liner companies in a manner always to the maximum allowed speed by EXI, which we said is speed radar, but always to that limit and with a lot of days at sea and so on and so forth, then the ship gets into a category that is not allowed to stay for more than 12 months because that's a different process. It's, you know, how you operate the ship also. So, liner companies have to operate the ships within the speed limit, number one, and prudently, number two. So, no pedal-to-the-metal kind of actions in order for them not to get into the categories that are not allowed to be. So, it's quite a complex equation.

Indeed. Thanks for all the color on that speed stuff. I mean, clearly, I mean, If you have one knot speed reduction, it's quite significant. I think the order book says 8% growth, and if you have 6-7% reduction, that, of course, has a big impact. The final question I have, if I may, if I look at this slide seven, you have these EBITDA scenarios, but 2024 is not in there. Just if you could, if you have the numbers, what is the contract coverage for 2024? And do you know, maybe you don't since it's not on there, but do you know what 2024 EBITDA would be with this, let's say, 15-year average rate?

We do know. We've done the math, but we don't disclose it yet because it's so far away. The further out you get with these illustrative earnings scenarios, the less accurate they become. We're clearly confident enough to put the data out 18 months in advance through to the end of 2023, but I think we wouldn't want to go beyond that. Okay, fair enough. You can get a sense of contract cover from the previous couple of pages, five and six, where there's more white, i.e. ships aren't fixed, but there's still a significant amount of dark blue or red bars And pale blue bars as well, actually. Legacy chances that continue.

Yeah. I think when I last checked, it was between 50% and 60% coverage. Anyway, it should be fairly good in 2024 as well. Thank you. That's all.

Thank you. And I see no further questions in the queue. I will turn the conference back over to Ian Weber for closing remarks.

Thank you, everybody. Thank you for your questions. We look forward to giving an update on the second quarter, which will be early August, if we follow our normal timetable. So thanks very much.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.