Global Ship Lease, Inc.

Good morning and welcome to the Global Ship Lease Q4 2022 earnings conference call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call 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, everybody, and welcome to the Global Ship Lease fourth quarter and full year 2022 earnings conference call. The slides that accompany today's presentation are available on our website at www.globalshiplease.com. Slides two and three of that presentation remind you that, as normal, today's call may include forward-looking statements that are based on current expectations and assumptions. and I are, by their very 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 factor section of our most recent annual report on Form 20F, which is for 2021 and was filed with the SEC on March 24 of 2022. You can retain 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. We do not undertake any duty to update forwarded statements. The reconciliations of the non-GAAP financial measures to which we will refer during this call to the most directly comparable measures calculated and presented in accordance with GAAP usually 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, Georgi Rukos, 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. Then Tasos, Tom, and I will take you through our recent activity, quarterly results and financials, the current market environment. After that, we'll be pleased to take your questions. So turning now to slide four, I'll pass the call over to George.

Thank you, Ian, and good afternoon or evening to all of you joining us today. As we have flagged in recent quarters, macro headwinds and negative economic sentiment have continued to put pressure on consumer demand and thus on the container shipping industry. This has exerted downward pressure on charter rates and asset values, although they still broadly at or above levels prior to the pandemic. Nevertheless, because we secured extensive contract cover for a large portion of our fleet, while the market was very strong, GSL is well positioned to weather the challenges ahead and to capitalize on opportunities that we expect to arise now that we have clearly entered a different phase of the cycle. Our fourth quarter and full year 2022 results reflect our very strong contracted cash flow profile, and once again represent a dramatic step up relative to all prior years, reflecting our well-timed growth and the attractiveness of the charters that we secured across our fleet, many of which extend on a fixed rate basis several years into the future. We have a robust balance sheet with no significant debt refinancing obligations before 2026 and a low overall cost of debt. Our floating debt is fully hedged through 2026, with LIBOR and SOFR capped at an attractive 75 basis points only. We continue to pay our sustainable dividend of $1.5 per common share annually and have opportunistically repurchased a cumulative $40 million of our shares, of which $10 million was done since our last earnings call. From this position of stability and financial strength, we're continuing to reinforce the long-term resilience of our business in the face of cyclicality, evolving regulations, and the increasing decarbonization focus of our customers. With that, I will turn the call over to Ian.

Thank you, George. Please turn to slide five. Here we show the diversification of our charterer base, which is well-balanced across essentially all of the leading global liner companies. In total, we're just under $2.1 billion of contracted revenue, extending over a TU-weighted average of 2.7 years. Almost half of this total was from the 19 charters agreed during the course of 2022 and year-to-date 2023. 11 of these 19 were forward fixtures for multi-years. To illustrate how the market dynamics have changed, since October the 1st last year, so in the last five months, we have made only four charter fixtures for aggregate revenues of a little under $22 million. These charter periods range from four to 16 months with an average duration of about 10 months, a significant turnaround from the first nine months of 2022 when rates were elevated and fixtures often multi-year. Our fleet is already approximately 93% chartered through the end of this year, 2023, and 72% covered in 2024. We're pleased to be recognized as a trusted partner to the line of companies. and we work closely with them to ensure that our vessels meet their long-term strategic needs, both by ensuring that they're reliable and well-maintained and well-operated, but also by pursuing jointly with them, our customers, the charters, decarbonisation and other vessel optimisation investments that enhance both ongoing performance and the value and earnings potential of the underlying assets. On the next slide, slide six, as in previous quarters, we show illustrative guidance across a range of three different rate scenarios. As always, I want to be clear that this is not a forecast. Whilst it is important to note the extent of forward coverage that we have through 2024 and beyond, and the impact of forward charters that were previously agreed but have not yet been fully realized in our results, it is also the case that currently prevailing rates have dipped marginally below the rolling 15-year and 10-year averages. These averages are heavily influenced by the recent record peak earnings period. Moving on to slide seven, where we show an overview of our dynamic and disciplined capital allocation strategy. Our contracted revenue is highly visible and provides us with full coverage of our operating needs and our debt service, both interest and amortization. We've also been able to return capital to shareholders by way of our sustainable dividend of $1.50 per year, 37.5 cents per quarter. And as George said, we've repurchased about $40 million of our shares since we began our buybacks about 18 months ago. $30 million of this has been under the $40 million buyback authorization, which we put in place in the second quarter of last year, and includes $10 million since our last earning call in November. We continue to de-level the business to manage balance sheet risk and to build equity value. We are making continuous investments in ship performance optimization and decarbonization. As noted, this includes working with our charters to install energy-saving retrofits to our vessels. As asset values normalize and with a strong balance sheet, We're also keeping a disciplined eye open for fleet growth and renewal opportunities that meet our strict requirements. I'll come back to this on the next slide. We also want to build strong cash liquidity, both for resilience and in order to retain optionality and consistent competitiveness in a cyclical industry against an uncertain macro backdrop and an evolving regulatory environment. Through all of this, our ultimate focus is on generating long term value for shareholders through a balanced approach that allows us to be nimble in pursuing the most attractive value generating opportunities at each point in the cycle. Turning now to slide eight, the chart here shows the last 20 years or so of container ship asset prices and one year time charter rates, superimposed on which we have shown the acquisitions that we've made since we merged with Poseidon in late 2018. What are the main takeaways? The first is to demonstrate the cyclicality of our industry and to highlight the risks and opportunities that cyclicality entails. The second is to emphasize the discipline nature of our acquisitions, all of which have been made either at cyclical lows or more recently, immediately prior to a massive increase in asset values and earnings that we were able to identify early and to capitalize upon. And the third and equally important point to emphasize is that we have not made any acquisitions at all since the middle of 2021, June 2021, since when asset values were spiking. Not because there weren't ample opportunities to do so, but because we maintained our laser focus on managing risk and optimizing return. During that same period, in the absence of compelling purchase opportunities, we returned capital to shareholders by way of our sustainable dividend and through the opportunistic share buybacks. We've also increased the company's equity value and de-risked through aggressive de-leveraging. So, to conclude on this slide, the main takeaway is in the title. Discipline and timing the cycle correctly are key to making value-accretive acquisitions in container shipping, and those remain our core investment principles. With that, I'll turn the call over to Tasos to talk you through our financials.

Thank you, Ian. On slide nine, we have summarized our 2022 financial highlights. Revenue for the full year 2022 was $645.6 million, up 44% from 2021. Adjusted EBITDA for the year was $398.2 million, up almost 70%. Our normalized net income, which adjust for one of items, was $298.2 million, an increase of 75%. Now, on the balance sheet, we took a number of important actions throughout the year. To deliver... to reduce our cost of debt to a blended rate of 153 basis points, to push material refinancing requirements out to 2026, to diversify our sources of capital, notably including our first U.S. private placement of investment-grade debt, to fully hedge our exposure to rising interest rates and to amend governance in such a way as improves our flexibilities. Please note that the refinancings we have executed over the last 12 months or so have actually left us overheads, principally because we replaced some floating rate debt with a fixed rate private placement. There is currently about approximately 220 million of headroom available under the 75 basis points interest rate cap, which would reduce the effective cost of any additional floating rate debt we made rise. As already mentioned, We have been utilizing our buyback authorization and we continue to pay an attractive quarterly dividend. Between January 1, 2022 and year-to-date 2023, we have returned a total of about $80 million to common shareholders, $30 million by way of shared buybacks, and $50 million via sustainable common dividend. A further $13 million of common dividend is due to be paid in the next couple of days. Concluding this slide, although we have a total of 278 million of cash on our balance sheet at the year-end, please note that 150 million of this is restricted, out of which 118 million represents advanced receipt of charter hire, and a further 22.4 million is held for minimum liquidity covenants. The remaining 106 million of cash contributes to our working capital requirements and balance sheet flexibility. Moving on, Slide 10 is a summary of our key capital structure developments over time. In the upper left, you can see our amortization schedule through the end of 2024. As we think is prudent in a cyclical industry, with assets that have a finite life, we aggressively amortize our DEF, utilizing our cash flows to deliver and manage our risk. Our detailed amortization schedule is in the appendix of this presentation on slide 28. On the upper right of the slide, you can see the margin and overall cost of our debt, both of which continue to fall over time despite the high trade environment and is actually now as low as the Federal Reserve's benchmark interest rate. Our average margin is now down to just over 3% from 4.6% at the beginning of 2022. On the bottom left, you can see the development over time of our leverage profile on the basis of net debt adjusted for working capital to adjusted EBITDA, from 8.4 times at the end of 2018 to now 2 times at the end of 2022. With that, I will turn the call over to Tom.

Thanks, Tassos. As usual, and for the benefit of listeners who are new to GSL, Slide 11 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 about 10,000 TEU, which is effectively the liquid charter market. The top map 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, which is especially valuable in uncertain times. As you can see, they're deployed everywhere. The bottom map, on the other hand, where the big ships, i.e. 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%, 7-0%, of global containerized trade volumes, in fact 72% in 2022, are moved outside the main lanes in the north-south, regional, and intermediate trades, served predominantly by ships like ours rather than by the big ships. As George touched on in his opening remarks, the macro and geopolitical outlook that we're all currently facing remains challenging and uncertain. Unsurprisingly, given the Russia-Ukraine conflict, substantial inflation, and negative consumer sentiment, global containerized trade volumes are estimated to have fallen year on year in 2022 by a little over 1%, marking only the third year of negative growth in the industry's 60-plus year history. However, to offset the bearish tone of that statistic, the comparison year of 2021 is was one of extraordinary growth driven by peak COVID consumption habits. Anyway, our crystal ball is no better than anyone else's on how the forces driving consumption and thus containerized demand will play out in 2023 and beyond. So as usual, we prefer to focus on the supply side where we do have forward visibility and against which investors and others can set containerized trade or GDP growth projections as they feel appropriate. Slide 12, then, shows the metrics that tend to be used as a measure of supply side tension. The top chart shows idle capacity, which at year end was around 1.9%, which is slightly up on where it had been for the preceding 18 months or so. Idle capacity, incidentally, has since risen further, reaching around 3.3% in late February of this year. The bottom chart tells a similar story of exceptionally tight supply through 2021 and 2022. Container ship recycling, scrapping, was very limited in 2021 and almost non-existent in 2022 when fewer than 4,000 TEU of capacity was scrapped out. I would note, however, that scrapping activity is now beginning to pick up a bit and, should rate normalization continue, the deferred scrapping of the last two years or so would imply a sizable segment of lower specification older ships in the global fleet that would in again quote unquote normal conditions be expected to be retired let's turn to slide 13 which looks at the order book here you can see on the left the composition of the order book by size segment covering all deliveries currently scheduled to take place not only this year in 2023 but also in 2024 2025 and 2026. The overall order book to fleet ratio, as at December 31, 2022, was 29.4%. However, it continues to be heavily skewed towards the bigger ships, over 10,000 TU, for which the ratio is 51.8%. Meanwhile, our focus segments of 2,000 to 10,000 TU, highlighted in the red box, have a significantly lower ratio of a little over 14%, 1.4%. And there are two important points to keep in mind when assessing the order book. One, that the relevant metric here is the net change to the absolute size of the fleet. That is, the deliveries minus prospective scrappings. And two, that when we talk about the supply of ships in the global fleet, we're ultimately using that as shorthand for how those ships are actually used, how many boxes can be moved over a given distance, over a given timeframe. And slowing the speed of container ships within the system decreases effective supply and vice versa. On the first point, the midsize and smaller container ship fleet is aging. As you can see from the chart on the right, if scrapping were to continue to be deferred, by the end of 2026, which is the delivery horizon of the existing order book, A substantial slice of the sub-10,000 Tu capacity on the water, almost 2 million Tu's worth, would be at least 25 years old and potential candidates for the recycling yards in a softening market. However, if you net this out against the total order book of sub-10,000 Tu vessels due to be delivered over the same period, you would get implied net growth in these sizes of just 1.1%, which itself would be spread out over the coming three or four years. By the way, performing the same exercise for 2023 in isolation would imply a net 1.3% reduction of sub-10,000 TU fleet capacity. On the second point, 2023 marks the implementation of new decarbonization regulations from January 1st, 2023, which, according to broad industry consensus, is expected to cause a slowing down of the global fleet to reduce emissions, reducing effective supply. The year is still young and the implementation of the relevant rule is gradual and tightens over time, but we have already seen the operating speed of our fleet reduced by around about 8% versus the same period in 2022. And I'll come back to this in a couple of slides time. In the meantime, let's look at slide 14, the charter market. As you can see from the chart, the charter market continued its spectacular rise through the first few months of 2022, plateaued through the second quarter and much of the third, and then fell sharply. Furthermore, charter durations are currently shortening, with recent fixtures of only a few months to a year or so at best. And the forward fixture market is effectively on hold. Having said all that, availability of ships in the charter market remains comparatively limited, especially for larger sizes, as nearly all of the ships that would ordinarily have come into the market in recent months had already been forward fixed or extended before coming open. So hard representative data is still a bit thin. But few would dispute that a normalization of charter rates and logically also of asset values is currently in progress. And that's a neat segue to slide 15, which provides an update on decarbonization, which is expected to have a favorable impact for us charter owners on supply side fundamentals over time. Working through the slide. In the top box is a snapshot of the evolving regulatory environment. This is by no means an exhaustive list, by the way. It admits, for example, the ever-tightening regulations in California. Nevertheless, it addresses the regulations which are most imminent, broadest in their application, and on which there is currently most clarity. Let's start with EEXI, the Energy Efficiency Existing Ship Index. This is tied to a ship's technical characteristics and is binary in nature, pass or fail. A non-EEXI compliant ship will not be permitted to trade past its first annual IAPP survey, which is an air pollution survey, after January 1st, 2023. Next is CII, the carbon intensity indicator. This is an operating measure and is to be determined annually on a backward-looking basis by the ship's actual operating performance. CII is calculated as a function of actual CO2 emissions divided by vessel dead weight times distance traveled. The first assessments will be performed in 2024 based on 2023 data with CII ratings ranging from A to E. E-rated ships, or those rated D for the first three years in a row, will require corrective action. And it's worth noting that CII parameters will tighten progressively over time. Next up is EU ETS, the European Union Emissions Trading System. This will attribute a cost to greenhouse gas emissions from ships trading to, from, or within the EU. Phase-in is scheduled to begin in 2024, but detailed regulatory guidelines have yet to be published. In the next box, we have laid out some of the high-level implications of decarbonization regulations expected for the global container ship fleet. These are Reduced operating speeds to reduce emissions. Vessel operating speed has a disproportionate impact on CO2 emissions as the relationship between speed and fuel consumption, and thus emissions, is logarithmic. An important byproduct, as we've already mentioned, of slowing the global fleet down is a reduction in effective supply. And to put this in context, a reduction in average operating speed of one knot is estimated to reduce effective supply by around about 6%. Vessel operations will be optimized for the CII algorithm and ratings. In addition to slowing ships down, efforts will be made to improve their operational efficiency, so an overall smoothing of operations and increased incentive to utilize well-specified, fuel-efficient, and well-maintained vessels. Increasing investments will be made in energy-saving technologies and retrofits, in developing clean, or at least cleaner fuels and propulsion, and in carbon capture and mitigation technologies. So, what are the actions we, GSL, are taking to preserve and improve the commercial positioning and trading flexibility of our fleet in a decarbonizing world? Our first priority, naturally enough, is to ensure regulatory compliance. For EXI, this is relatively straightforward. Where needed, we're installing engine power limiters, EPLs, on our ships at a cost of just under $100,000 per ship, which will ensure compliance. CII is a bit more complex, as it's determined not only by the inherent efficiency of the underlying ship, but also, actually primarily in truth, by how the ship is operated by the charterer. Consequently, we're applying technologies and protocols to enhance cooperation between owners and charterers to facilitate CII-optimized vessel operations. Indeed, cooperation and partnership between owners and operators will be key to successful decarbonization. We're well positioned in this respect, as a partnership approach with our charterers has long underpinned the GSL business model. Consistent with this approach, we're also retrofitting energy-saving technologies, or ESTs, to our ships, subject to commercial agreement and in cooperation with the charterers. These agreements are commercially sensitive and vary on a case-by-case basis, but the underlying rationale is that we will only invest in discretionary ESTs that will enhance the value and the earnings of the corresponding ship. So that's the crux of it. But for those of you who would like to know more, may I refer you to the climate strategy section of our latest ESG report, which is available on our corporate website. And with that, I'll turn the call now back to George to wrap up.

Thank you, Tom. I will provide a brief summary on slide 16, and then we will be happy to take your questions. Our 2.1 billion of contract cover over the next 2.7 years ensures that our Debt service, CAPEX and dividend through 2024 are already fully covered without any need for additional charter renewals. We have built a very strong balance sheet and are rated WB stable and B1 positive by Standard & Poor's and Moody's, respectively. We have proven diversified access to capital and a very attractive and competitive cost of debt with a floating rate exposure fully hedged. We have a high quality fleet in the sweet spot of the market. High reefer, mid-sized post Panamax and smaller container ships that play a critical role for our liner customers. Adult capacity remains relatively low in the global fleet, though it is beginning to creep upward. Meanwhile, a large backlog of older scrapping candidates in the global fleet is only just starting to be recycled after an extended period with essentially zero deletions. Because of this dynamic and the disproportionate skew of investments towards the very largest ships, we expect net fleet growth in our fleet sizes to be negligible and perhaps even negative on an effective basis over the next few years. There's no question that macro headwinds and negative sentiment are causing a market normalization from the extraordinary conditions of the last two years and charter market fixtures are increasingly shorter term and tactical in nature for the slim subset of the global fleet that has recently come into the charter market. Now, to illustrate this, since October 1st, 2022, we have had four charter fixtures representing aggregate revenues of little under $22 million and ranging between 4 to 16 months with an average of 10 months. That's a significant turnaround from earlier in 2022 when rates were elevated and fixed, often multi-year. Finally, our capital allocation is focused on resilience throughout the cycle, while remaining nimble enough to capitalize on opportunities to build and maximize long-term value for shareholders. Through well-timed acquisitions and contracting On a long-term basis, whenever possible, we are well positioned to sustain the recent step change in our earnings. Our dividend is both attractive and, most importantly, sustainable. We have actively utilized our share repurchase program. And we continue to build cash liquidity for resilience to proactively address the challenges and opportunities of decarbonization and to ensure that we are in a position to be opportunistic and disciplined acquirers of ships for the right combination of immediate accretion, low downside risk, and high upside potential. With that, we'll be happy to take your questions.

If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. To withdraw your question, please press star 1 again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Amit Mehrotra from Deutsche Bank. Please go ahead. Your line is open.

Hi, good morning. Good afternoon. This is Chris Robertson on for Amit. How are you? Hi, Chris. Good. Yeah. Good. Good to hear that. Yeah. I mean, I think you guys have laid out really well here, just the resiliency and the earnings with your time chargers here. So one of the questions that we often get here, is on the renegotiation risk from the liners side, which was seen in kind of previous cycles. But could you kind of compare and contrast where the liners sit now in terms of their cash balances and resiliency and kind of like the willingness that they would actually renegotiate? And I mean, it's not like you guys have booked at the very top of the market here. So I don't think that your rates are really at risk. But could you kind of assuade some of the fears that are out there.

Chris, let me start by saying my opinion, then Tom can jump in as well. The previous times, the financial situation of our counterparty, these car charters, were completely different than today. They are today in the best shape they have ever been since the inception of containerization, I would say. So that's one positive. Second is that in general, in our industry, the top names do not tend to renegotiate and they haven't done so in the past. Even in the most difficult situations like 2009 when the financial crisis broke out, still there were no renegotiations from the first class counterparties. Of course, as in every market, there is first class, second class, third class. So far we have seen some third-class names going back up and not performing. But we haven't got any such names in our charters and we don't feel that such a thing would be there. Now, having said that, although we do not expect any renegotiations, sometimes it's commercially viable and it's commercially better, it's a win-win as the Chinese say for both, to amend and extend. Sometimes charters and owners agree to reduce the charter rate and elongate the charter period. And that is not a renegotiation, that is something that both parties might agree for the mutual benefit. So we should not confuse this kind of transactions with charter negotiations. I will let Tom get into that more.

Yeah, thanks, George. I would just echo those words. And Chris, I would say that, you know, GSL, when we took the company public back in 2008, shortly before Lehman Brothers went bust and the world went into a sort of synchronized global downturn, global financial crisis, and um during the whole of our history um all of our charters have performed and there haven't been uh renegotiations of any sort um other than as george says selectively on a bilateral basis where it's suited both parties to do so and we've never had a bad debt so i think you know the the business model um has been quite well stress tested yeah i definitely think the uh

The history of the company speaks for itself there. A follow-up question. You guys spent quite a bit of time talking about the older end of the fleet spectrum here with possibility of scrapping. Can you talk about just the types of owners that generally have these vessels that are 25-year plus? What type of owners are they? What type of segments do they generally operate in? As the fleet slows down and maybe helps put stabilizing pressure on rates, Do you think they'll still have an incentive to keep these things going as long as possible, or regardless of that slow steaming, is it just time for these ships to leave the fleet? Sure.

I'll have a crack at that, and I'm sure George will also have some thoughts. We used to provide a slide, and sadly it's not included here, that shows the age profile of the global fleet by size segment. And as a general rule, the smaller the ships in a size segment, the older they are. So, you know, if you look at the very smallest ship sizes, the average age of those segments tends to be higher than that for the largest sizes simply because of the upsizing of the fleet over time. Now, what tends to be a catalyst for scrapping ships out is if owners are confronted by the need to put more money into them to keep them going. So as you know, Chris, Every five years or so, there's a regulatory dry docking that ships are obliged to go through, and those can cost anywhere between one and a half to, say, three million, depending upon the size of the ship, the age of the ship, the spec of the ship, et cetera, et cetera, et cetera. So when you are approaching such an investment, that tends to be a catalyst for either saying, okay, we can see good earnings potential for this vessel size going forward, so we will invest, or We don't, in which case we will potentially scrap the ship out. So it's a fairly rational, economically driven decision.

If I may add one point that is interesting for the audience to know, the scrapping of scrap metal comes at one third of CO2 emissions versus new steel. So it's... more environmentally friendly with respect to CO2 emissions to use scrap steel than, you know, the classical brand new steel. That, in my mind, could keep scrap prices high in the long term. And the higher the scrap prices are, the more attractive it becomes for owners to scrap their ships of the older vessels.

Yeah, interesting. Thank you for that color. I'll turn it over.

Our next question comes from Liam Burke from B Reilly. Please go ahead. Your line is open.

Yes, thank you. Good afternoon. Good afternoon.

You've got 93% of your charters locked in for 2023. Are there any discussions with the other 8% of your fleet to move off the spot market and negotiate, as you pointed out, shorter but multi-month contracts?

Yes, we're always discussing with our charters the possibility to fix our ships, and we always try to get the longest possible period, as you have seen over the past couple of years. It's not like there is no demand. There is demand, of course, and there is ongoing charters. And then, as we have mentioned, since last earnings call, we fixed four ships. Those were the four ships coming open. But what happens right now is that charters are waiting a little bit closer to when the ships are becoming open to charter them, whilst before you could forward fix ship. So you could forward fix a ship to this year that was going to be open next year. And we've been doing that. As the market stands now, charters wait for like two, three months before the charter expiration to enter into discussions for, you know, renewals of charters. And that's because they want to see themselves also, what's their demand from their clients, the shippers and so on and so forth.

Great. Thank you, George. And on your utilization rates, I mean, it obviously bounces around with dry docking and then unscheduled off-hire. How are you looking at utilization rates as we move into 23? Is there anything? I mean, you give us a dry docking schedule, but is there any thought on the unscheduled part of the utilization?

Not really. This is Ian. It's unpredictable. These are accidents and breakdowns, machinery failures or whatever. And by their very nature, we can't forecast what they'll be.

Right. But is it, I mean, you do have older ships and that's part of your strategy, but is that, I mean, does that tie into the unscheduled off-hire?

No, not necessarily. It's a question of how well The ships are maintained, and we believe that we maintain our ships to a very high standard. But, you know, accidents do happen. Stuff does break. But I wouldn't say that an older ship is inherently more susceptible to significant off-hire than a new ship, unplanned off-hire.

Great. Thanks, Ian. Thanks, George.

Our next question comes from Omar Nocta from Jefferies. Please go ahead. Your line is open.

Thank you. Hey guys, good afternoon. I wanted to just ask about the balance sheet and how you guys seeing it evolve here. You've obviously got a very nice backlog of just over 2 billion, gives you that nice stream of cash over the next several years. And I think if you just throw in some conservative assumptions on vessels that roll off higher here the next few years, there's a real shot that GSL could get into a net cash position within say the next three years. I guess one, Do you agree with that type of math that GSL is on that trajectory to become debt-free here in the next, call it, say, three years? And then two, is that an aim for you guys to get GSL in that cash position, or do you see yourselves investing along the way?

Hey, Omar, this is Tom. I mean, yes, we're building cash, and we see... delevering as an important part of de-risking, but I don't think we would ever look to be debt-free. But we do see ourselves as entering an interesting point in the cycle, just as George said in his prepared remarks, where asset values are coming off, and thus the potential to make accretive acquisitions is increased at a far more attractive rate. risk, a lower risk profile than was possible during the 18 months of the super cycle when of course we didn't make any acquisitions at all. So yes, we're in this business for the long term and we see making accretive acquisitions as being core to running the business going forward, but always on a selective and highly disciplined basis as we've done in the past.

And if I may add to that, in combination with building cash flow as, you know, to have resilience for the market that is coming. You know, the companies need to have some minimum cash aside for all sorts of purposes to make sure that, you know, anything that comes along can be handled. And I'm not talking about just buying ships, but also to have some work capital requirements and some cash resilience for any kind of need in a difficult market.

And compliance with new regulations, which may be needed.

Thank you. That's interesting. I think it was in response to Chris's question about the liners. It is definitely a very interesting setup at this point. You're talking about cash resiliency and potential to be in a net cash position, assuming you do nothing, which you won't. But yeah, we're definitely, Tom, you mentioned the Lehman crisis shortly after you came public. I mean, yeah, it looks like this downturn that we're seeing, if this is indeed a downturn, both the liners and the owners are in a much stronger cash position than they were back then. So I guess... When we think about the capital that you got and you want to put that to work, is there any segment of the industry that you want to be investing in when the time is right? Or is it more about just the transaction and whether it's accretive or not?

Well, the first point that we always look at is risk. Every transaction we look at is viewed by us from a risk perspective. First of all, we do not want to take risk on board. We want to take the minimum. Then we want the transaction to be immediately accretive. So we want the cash to hit our balance sheet very quickly. So that means that as of today, we're looking at in this market, because the market has not bottomed, the prices of ships have not bottomed. We are looking at deals where we would have some kind of a charter together with it, or we can put it right away into a charter. so we can ensure growth of our EBITDA and cash flow and be a deal that is accretive immediately. Now, our sweet spot of ships, since we've said always, it's the post-Panama axis. This is what we like the most, let's say, without saying that the rest of the ships we don't like, but If you ask me what's my favorite, it's the post-Panamax because these ships always offer the best economies of scale to the liner companies. And that's where we have been focusing always. But I would say that we're focusing on mid-size ships between, let's say, 2,500 to 11,000 with more focus on the post-Panamax, which is like 5,000 and above. But again, it's a deal by deal.

Got it. Thanks, George. And maybe just one final one. I think maybe for Tassos, you mentioned the cash position and the restricted part of it. And I think it was $118 million that is advanced charter hire that's been paid. Can you just remind us how much of that? What does that constitute in terms of recognizing those revenues in the future?

This has to do with the way we have initially recognized and received the money. and as far as I remember now, we are going to build up some more cash in that case, so we increase the deferred revenue until next year, the same period, and then this will start running through our revenue.

Okay, so I just want to double check the $118 million, I think. Is that basically what you're going to be receiving in a year's time? No, if I may, we've already got it.

We've collected the cash and then the charterer will still pay a little bit more than the headline charter rate and that cash will build a bit. But then the charterer starts paying less than the headline charter rate and we start leaking, if you want to use that word, advance receipt of cash through the income statement. Okay, thank you. So it's a timing difference between recognizing revenue and receiving cash. That's all.

Yeah, and then the duration.

It's obviously very good sort of credit practice from our perspective as well.

Absolutely. Yeah, I just wanted to just make sure for modeling purposes that I'm not double counting the incoming revenue stream.

No, no, no, no, no. Just look at the chart rates in our tables and ignore the balance sheet.

Okay. You can a little bit, just to assist you, you can a little bit match this $118 million with the two lines which are in our current liabilities and long-term liabilities which refer to deferred revenue. just too much, let's be the liability to offer the service.

Yeah, and the thing that we wanted to make clear, Omar, to everyone, particularly for modeling purposes, is that, yes, we have a certain amount of cash on our balance sheet, which is always good news, but a very substantial slice of that is tied up, either as prepaid charter hire, as we've just discussed, or for other purposes. So there's not a huge amount there that's available as quote-unquote free liquidity, let's say.

Yeah, understood.

Well, thanks for that. Very helpful.

I'll pass it over.

As a reminder, if you'd like to ask a question, please press star followed by the number one. Our next question comes from Clement Mullins from Value Investors Edge. Please go ahead. Your line is open. Your line is open.

Good morning. Thank you for taking my questions. Following up on Omar's question regarding vessel acquisitions, do you have a preference for modern eco-ships or are you agnostic in that regard and think that there is, let's say, a right price for all assets?

I would say that we do not have a preference as long as the deal and the price is the right one. we are not there to, let's say, opportunistically acquire ships yet without a charter. We don't feel that the prices have bottomed to the point that we would be buying ships even opportunistically. So, so far, at this point, we're looking at a combination of cash flow and acquisition price. So, in this respect, whether it's an eco-ship or an existing design, let's call it, an older design, whatever you want to call it, it's not that relevant as long as we're looking at chips that have either a good potential or a good spec, always the top tier specs, some maybe enhancements of their characteristics, maybe they have some modifications to make them more eco-friendly. but more or less ships that can operate in the foreseeable future very successfully.

And just to be clear, Clement, we're not talking about new buildings. We are talking about existing ships that could be acquired and would be immediately accretive to cash flows from the time of acquisition, just as a sort of parenthetical.

Yeah, that's helpful. Thank you. I also wanted to ask about the capex related to energy savings and emissions reduction. Could you provide some commentary on the paybacks you are seeing on those investments?

It's difficult because they vary a huge amount on a sort of deal-to-deal, charterer-to-charterer basis. But there is, I would say, almost invariably a commercial agreement with the charterer such that we're confident that whatever money goes into the ship to enhance it will be more than recovered either by way of an uplift in the value of the ship or by way of increased earnings or both.

Makes sense. Thanks for the color. And final question from me. You've been clear you'd like to continue strengthening the balance sheet to withstand market volatility going forward. And I was wondering How do you plan to balance this with additional shareholder returns?

I'm sorry, Clement. I didn't understand the question. Would you mind repeating it?

Yeah, sorry. My question was, how do you plan to balance additional leveraging or strengthening the balance sheet with shareholder returns?

Well, if I may, it's part of our nimble capital allocation. We're always flexible. We always keep the various alternate uses of capital under review, as we've demonstrated in the past. If we think it's appropriate to return capital to shareholders by way of buybacks, then we will do so. But as we said in our prepared remarks, we also, in this time of macroeconomic uncertainty and potential opportunity for growth, as asset values normalize, we want to have a lighter potential for growth and therefore build some liquidity. not only for those opportunities, but just for good practice, good balance sheet management and resilience, as George, I think, mentioned in the prepared remarks. So we would hope that we would continue to allocate a certain portion of capital to buybacks, but we can't guarantee it, depending upon what the alternate uses of capital may be from time to time. But we've demonstrated our willingness to do so over the past 18 months.

Indeed. Makes sense. That's all for me. Thank you for taking my questions and congratulations for the quarter.

Thank you.

Thank you.

We have no further questions. I would like to turn the call back over to Ian Webber for closing remarks.

Thank you very much. Thanks, everybody, for listening. Thank you for your questions and your support. We look forward to giving you a further update in three months' time or so when we publish our first quarter 2023 earnings. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. © transcript Emily Beynon you Thank you Bye. Thank you. Good morning and welcome to the Global Ship Lease Q4 2022 earnings conference call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call 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, everybody, and welcome to the Global Ship Lease fourth quarter and full year 2022 earnings conference call. The slides that accompany today's presentation are available on our website at www.globalshiplease.com. Slides two and three of that presentation remind you that as normal, today's call may include forward-looking statements. that are based on current expectations and assumptions, and are, by their very 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 which is for 2021 and was filed with the SEC on March 24 of 2022. You can retain 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 forward written statements. The reconciliations of the non-GAAP financial measures to which we will refer during this call for the most directly comparable measures calculated and presented in accordance with GAAP. Please, with GAAP usually, 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, then Tasos, Tom, and I will take you through our recent activity, quarterly results and financials, the current market environment. After that, we'll be pleased to take your questions. So, turning now to slide four, I'll pass the call over to George.

Thank you, Ian, and good afternoon or evening to all of you joining us today. As we have flagged in recent quarters, macro headwinds and negative economic sentiment have continued to put pressure on consumer demand and thus on the continuous shipping industry. This has exerted downward pressure on charter rates and asset values, although they stood broadly at or above levels prior to the pandemic. Nevertheless, because we secured extensive contact cover for a large portion of our fleet while the market was very strong, GSL is well positioned to weather the challenges ahead and to capitalize on opportunities that we expect to arise now that we have clearly entered a different phase of the cycle. Our fourth quarter and full year 2022 results reflect our very strong contracted cash flow profile and once again represent a dramatic step up relative to all prior years, reflecting our well-timed growth and the attractiveness of the charters that we secured across our fleet, many of which extend on a fixed rate basis several years into the future. We have a robust balance sheet with no significant debt refinancing obligations before 2026 and a low overall cost of debt. Our floating debt is fully hedged through 2026 with LIBOR and SOFR capped at an attractive 75 basis points only. We continue to pay our sustainable dividend of $1.5 per common share annually and have opportunistically repurchased a cumulative $40 million of our shares, of which $10 million was done since our last earnings call. From this position of stability and financial strength, we are continuing to reinforce the long-term resilience of our business in the face of cyclicality, evolving regulations, and the increasing decarbonization focus of our customers. With that, I will turn the call over to Ian.

Thank you, George. Please turn to slide five. Here we show the diversification of our charterer base, which is well balanced across essentially all of the leading global liner companies. In total, we're just under $2.1 billion of contracted revenue, extending over a TU-weighted average of 2.7 years. Almost half of this total was from the 19 charters agreed during the course of 2022 and year-to-date 2023. 11 of these 19 were forward fixtures from multi-years. To illustrate how the market dynamics have changed, Since October 1st last year, so in the last five months, we have made only four charter fixtures for aggregate revenues of a little under $22 million. These charter periods range from four to 16 months with an average duration of about 10 months, a significant turnaround from the first nine months of 2022 when rates were elevated and fixtures often multi-year. Our fleet is already approximately 93% chartered through the end of this year, 2023, and 72% covered in 2024. We're pleased to be recognized as a trusted partner to the liner companies, and we work closely with them to ensure that our vessels meet their long-term strategic needs, both by ensuring that they're reliable and well-maintained and well-operated, but also by pursuing jointly with them our customers, the charters, decarbonisation and other vessel optimisation investments that enhance both ongoing performance and the value and earnings potential of the underlying assets. On the next slide, slide six, as in previous quarters, we show illustrative guidance across a range of three different rate scenarios. As always, I want to be clear that this is not a forecast. Whilst it is important to note the extent of forward coverage that we have through 2024 and beyond, and the impact of forward charters that were previously agreed but have not yet been fully realized in our results, it is also the case that currently prevailing rates have dipped marginally below the rolling 15-year and 10-year averages. These averages are heavily influenced by the recent record peak earnings period. Moving on to slide seven, where we show an overview of our dynamic and disciplined capital allocation strategy. Our contracted revenue is highly visible and provides us with full coverage of our operating needs and our debt service, both interest and amortization. We've also been able to return capital to shareholders by way of our sustainable dividend of $1.50 per year, 37.5 cents per quarter. And as George said, we've repurchased about $40 million of our shares since we began our buybacks about 18 months ago. $30 million of this has been under the $40 million buyback authorization, which we put in place in the second quarter of last year, and includes $10 million since our last earning call in November. We continue to deliver the business to manage balance sheet risk and to build equity value. We are making continuous investments in ship performance optimization and decarbonization. As noted, this includes working with our charters to install energy-saving retrofits to our vessels. As asset values normalize and with a strong balance sheet, we're also keeping a disciplined eye open for fleet growth and renewal opportunities that meet our strict requirements. I'll come back to this on the next slide. We also want to build strong cash liquidity both for resilience and in order to retain optionality and consistent competitiveness in a cyclical industry against an uncertain macro backdrop and an evolving regulatory environment. Through all of this, our ultimate focus is on generating long-term value for shareholders through a balanced approach that allows us to be nimble in pursuing the most attractive value generating opportunities at each point in the cycle. Turning now to slide eight, the chart here shows the last 20 years or so of container ship asset prices and one-year time charter rates, superimposed on which we have shown the acquisitions that we've made since we merged with Poseidon in late 2018. What are the main takeaways? The first is to demonstrate the cyclicality of our industry and to highlight the risks and opportunities that cyclicality entails. The second is to emphasize the discipline nature of our acquisitions, all of which have been made either at cyclical lows or more recently, immediately prior to a massive increase in asset values and earnings that we were able to identify early and to capitalize upon. And the third and equally important point to emphasize is that we have not made any acquisitions at all since the middle of 2021, June 2021. since when asset values were spiking. Not because there weren't ample opportunities to do so, but because we maintained our laser focus on managing risk and optimizing return. During that same period, in the absence of compelling purchase opportunities, we returned capital to shareholders by way of our sustainable dividend and through the opportunistic share buybacks. We've also increased the company's equity value and de-risked through aggressive deleveraging. So, to conclude on this slide, the main takeaway is in the title. Discipline and timing the cycle correctly are key to making value-accretive acquisitions in container shipping, and those remain our core investment principles. With that, I'll turn the call over to Tasos to talk you through our financials.

Thank you, Ian. On slide 9, we have summarized our 2022 financial highlights. Revenue for the full year 2022 was $645.6 million, up 44% from 2021. Adjusted EBITDA for the year was $398.2 million, up almost 70%. Our normalized net income, which adjusts for one of items, was $298.2 million, an increase of 75%. Now, on the balance sheet, we took a number of important actions throughout the year. To deliver, to reduce our cost of debt to a blended rate of 153 basis points, to push material refinancing requirements out to 2026, to diversify our sources of capital, notably including our first U.S. private placement of investment-grade debt, to fully hedge our exposure to rising interest rates and to amend covenants in such a way as improves our flexibility. Please note that the refinancings we have executed over the last 12 months or so have actually left us overheads, principally because we replaced some floating rate debt with a fixed rate private placement. There is currently about approximately 220 million of headroom available under the 75 basis points interest rate cap, which would reduce the effective cost of any additional floating rate debt we made rise. As already mentioned, we have been utilizing our buyback authorization and we continue to pay an attractive quarterly dividend. Between January 1, 2022 and year-to-date 2023, we have returned a total of about $80 million to common shareholders, $30 million by way of shared buybacks, and $50 million via sustainable common dividend. A further $30 million of common dividend is due to be paid in the next couple of days. Concluding this slide, although we have a total of 278 million of cash on our balance sheet at the year-end, please note that 150 million of this is restricted, out of which 118 million represents advanced receipt of charter hire, and a further 22.4 million is held for minimum liquidity covenants. The remaining 106 million of cash contributes to our working capital requirements and balance sheet flexibility. Moving on, Slide 10 is a summary of our key capital structure developments over time. In the upper left, you can see our amortization schedule through the end of 2024. As we think is prudent in a cyclical industry, with assets that have a finite life, we aggressively amortize our debt, utilizing our cash flows to deliver and manage our risk. Our detailed amortization schedule is in the appendix of this presentation on slide 28. On the upper right of the slide, you can see the margin and overall cost of our debt, both of which continue to fall over time despite the high trade environment and is actually now as low as the Federal Reserve's benchmark interest rate. Our average margin is now down to just over 3% from 4.6% at the beginning of 2022. On the bottom left, you can see the development over time of our leverage profile on the basis of net debt adjusted for working capital to adjusted EBITDA, from 8.4 times at the end of 2018 to now 2 times at the end of 2022. With that, I will turn the call over to Tom.

Thanks, Tassos. As usual, and for the benefit of listeners who are new to GSL, Slide 11 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 about 10,000 TEU, which is effectively the liquid charter market. The top map 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, which is especially valuable in uncertain times. As you can see, they're deployed everywhere. The bottom map, on the other hand, where the big ships, i.e. 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%, 7-0%, of global containerized trade volumes, in fact 72% in 2022, are moved outside the main lanes in the north-south, regional, and intermediate trades, served predominantly by ships like ours rather than by the big ships. As George touched on in his opening remarks, the macro and geopolitical outlook that we're all currently facing remains challenging and uncertain. Unsurprisingly, given the Russia-Ukraine conflict, substantial inflation, and negative consumer sentiment, global containerized trade volumes are estimated to have fallen year on year in 2022 by a little over 1%, marking only the third year of negative growth in the industry's 60-plus year history. However, to offset the bearish tone of that statistic, the comparison year of 2021 is was one of extraordinary growth, driven by peak COVID consumption habits. Anyway, our crystal ball is no better than anyone else's on how the forces driving consumption, and thus containerized demand, will play out in 2023 and beyond. So, as usual, we prefer to focus on the supply side, where we do have forward visibility, and against which investors and others can set containerized trade or GDP growth projections as they feel appropriate. Slide 12 then shows the metrics that tend to be used as a measure of supply side tension. The top chart shows idle capacity, which at year end was around 1.9%, which is slightly up on where it had been for the preceding 18 months or so. Idle capacity, incidentally, has since risen further, reaching around 3.3% in late February of this year. The bottom chart tells a similar story of exceptionally tight supply through 2021 and 2022. Container ship recycling, scrapping, was very limited in 2021 and almost non-existent in 2022 when fewer than 4,000 TEU of capacity was scrapped out. I would note, however, that scrapping activity is now beginning to pick up a bit and, should rate normalization continue, the deferred scrapping of the last two years or so would imply a sizable segment of lower specification older ships in the global fleet that would in again quote unquote normal conditions be expected to be retired. Let's turn to slide 13 which looks at the order book. Here you can see on the left the composition of the order book by size segment covering all deliveries currently scheduled to take place not only this year in 2023 but also in 2024, 2025 and 2026. The overall order book to fleet ratio, as at December 31, 2022, was 29.4%. However, it continues to be heavily skewed towards the bigger ships, over 10,000 TU, for which the ratio is 51.8%. Meanwhile, our focus segments of 2,000 to 10,000 TU, highlighted in the red box, have a significantly lower ratio of a little over 14%, 1.4%. And there are two important points to keep in mind when assessing the order book. One, that the relevant metric here is the net change to the absolute size of the fleet. That is, the deliveries minus prospective scrappings. And two, that when we talk about the supply of ships in the global fleet, we're ultimately using that as shorthand for how those ships are actually used, how many boxes can be moved over a given distance, over a given time frame. and slowing the speed of container ships within the system decreases effective supply and vice versa. On the first point, the midsize and smaller container ship fleet is aging. As you can see from the chart on the right, if scrapping were to continue to be deferred, by the end of 2026, which is the delivery horizon of the existing order book, A substantial slice of the sub-10,000 Tu capacity on the water, almost 2 million Tu's worth, would be at least 25 years old and potential candidates for the recycling yards in a softening market. However, if you net this out against the total order book of sub-10,000 Tu vessels due to be delivered over the same period, you would get implied net growth in these sizes of just 1.1%, which itself would be spread out over the coming three or four years. By the way, performing the same exercise for 2023 in isolation would imply a net 1.3% reduction of sub-10,000 TU fleet capacity. On the second point, 2023 marks the implementation of new decarbonization regulations from January 1st, 2023, which, according to broad industry consensus, is expected to cause a slowing down of the global fleet to reduce emissions, reducing effective supply. The year is still young and the implementation of the relevant rule is gradual and tightens over time, but we have already seen the operating speed of our fleet reduced by around about 8% versus the same period in 2022. And I'll come back to this in a couple of slides time. In the meantime, let's look at slide 14, the charter market. As you can see from the chart, the charter market continued its spectacular rise through the first few months of 2022, plateaued through the second quarter and much of the third, and then fell sharply. Furthermore, charter durations are currently shortening, with recent fixtures of only a few months to a year or so at best. And the forward fixture market is effectively on hold. Having said all that, availability of ships in the charter market remains comparatively limited, especially for larger sizes, as nearly all of the ships that would ordinarily have come into the market in recent months had already been forward fixed or extended before coming open. So hard representative data is still a bit thin. But few would dispute that a normalization of charter rates and logically also of asset values is currently in progress. And that's a neat segue to slide 15, which provides an update on decarbonization, which is expected to have a favorable impact for us charter owners on supply side fundamentals over time. Working through the slide. In the top box is a snapshot of the evolving regulatory environment. This is by no means an exhaustive list, by the way. It omits, for example, the ever-tightening regulations in California. Nevertheless, it addresses the regulations which are most imminent, broadest in their application, and on which there is currently most clarity. Let's start with EEXI, the Energy Efficiency Existing Ship Index. This is tied to a ship's technical characteristics and is binary in nature, pass or fail. A non-EEXI compliant ship will not be permitted to trade past its first annual IAPP survey, which is an air pollution survey, after January 1st, 2023. Next is CII, the carbon intensity indicator. This is an operating measure and is to be determined annually on a backward-looking basis by the ship's actual operating performance. CII is calculated as a function of actual CO2 emissions divided by vessel dead weight times distance traveled. The first assessments will be performed in 2024, based on 2023 data, with CII ratings ranging from A to E. E-rated ships, or those rated D for the first three years in a row, will require corrective action. And it's worth noting that CII parameters will tighten progressively over time. Next up is EU ETS, the European Union Emissions Trading System. This will attribute a cost to greenhouse gas emissions from ships trading to, from, or within the EU. Phase-in is scheduled to begin in 2024, but detailed regulatory guidelines have yet to be published. In the next box, we have laid out some of the high-level implications of decarbonization regulations expected for the global container ship fleet. These are Reduced operating speeds to reduce emissions. Vessel operating speed has a disproportionate impact on CO2 emissions as the relationship between speed and fuel consumption, and thus emissions, is logarithmic. An important byproduct, as we've already mentioned, of slowing the global fleet down is a reduction in effective supply. And to put this in context, a reduction in average operating speed of one knot is estimated to reduce effective supply by around about 6%. Vessel operations will be optimized for the CII algorithm and ratings. In addition to slowing ships down, efforts will be made to improve their operational efficiency, so an overall smoothing of operations and increased incentive to utilize well-specified, fuel-efficient, and well-maintained vessels. Increasing investments will be made in energy-saving technologies and retrofits, in developing clean or at least cleaner fuels and propulsion, and in carbon capture and mitigation technologies. So, what are the actions we, GSL, are taking to preserve and improve the commercial positioning and trading flexibility of our fleet in a decarbonizing world? Our first priority, naturally enough, is to ensure regulatory compliance. For EXI, this is relatively straightforward. Where needed, we're installing engine power limiters, EPLs, on our ships at a cost of just under $100,000 per ship, which will ensure compliance. CII is a bit more complex, as it's determined not only by the inherent efficiency of the underlying ship, but also, actually primarily in truth, by how the ship is operated by the charterer. Consequently, we're applying technologies and protocols to enhance cooperation between owners and charterers to facilitate CII-optimized vessel operations. Indeed, cooperation and partnership between owners and operators will be key to successful decarbonization. We're well positioned in this respect, as a partnership approach with our charterers has long underpinned the GSL business model. Consistent with this approach, we're also retrofitting energy-saving technologies, or ESTs, to our ships, subject to commercial agreement and in cooperation with the charterers. These agreements are commercially sensitive and vary on a case-by-case basis, but the underlying rationale is that we will only invest in discretionary ESTs that will enhance the value and the earnings of the corresponding ship. So that's the crux of it. But for those of you who would like to know more, may I refer you to the climate strategy section of our latest ESG report, which is available on our corporate website. And with that, I'll turn the call now back to George to wrap up.

Thank you, Tom. I will provide a brief summary on slide 16, and then we will be happy to take your questions. Our $2.1 billion of contract cover over the next 2.7 years ensures that our Debt service, CAPEX and dividend through 2024 are already fully covered without any need for additional charter renewals. We have built a very strong balance sheet and are rated WB stable and B1 positive by Standard & Poor's and Moody's, respectively. We have proven diversified access to capital and a very attractive and competitive cost of debt with a floating rate exposure fully hedged. We have a high quality fleet in the sweet spot of the market. High reefer, mid-sized post Panamax and smaller container ships that play a critical role for our liner customers. Adult capacity remains relatively low in the global fleet, though it is beginning to creep upward. Meanwhile, a large backlog of older scrapping candidates in the global fleet is only just starting to be recycled after an extended period with essentially zero deletions. Because of this dynamic and the disproportionate skew of investments towards the very largest ships, we expect net fleet growth in our fleet sizes to be negligible and perhaps even negative on an effective basis over the next few years. There's no question that macro headwinds and negative sentiment are causing a market normalization from the extraordinary conditions of the last two years and charter market fixtures are increasingly shorter term and tactical in nature for the slim subset of the global fleet that has recently come into the charter market. Now, to illustrate this, since October 1st, 2022, we have had four charter fixtures representing aggregate revenues of little under $22 million and ranging between 4 to 16 months with an average of 10 months. That's a significant turnaround from earlier in 2022 when rates were elevated and fixtures often multi-year. Finally, our capital allocation is focused on resilience throughout the cycle, while remaining nimble enough to capitalize on opportunities to build and maximize long-term value for shareholders. Through well-timed acquisitions and contracting, On a long-term basis, whenever possible, we are well positioned to sustain the recent step change in our earnings. Our dividend is both attractive and, most importantly, sustainable. We have actively utilized our share repurchase program. And we continue to build cash liquidity for resilience, to proactively address the challenges and opportunities of decarbonization, and to ensure that we are in a position to be opportunistic and disciplined acquirers of ships for the right combination of immediate accretion, low downside risk, and high upside potential. With that, we'll be happy to take your questions.

If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Amit Mehrotra from Deutsche Bank. Please go ahead. Your line is open.

Hi, good morning. Good afternoon. This is Chris Robertson on for Amit. How are you? Hi, Chris. Good. Yeah. Good. Good to hear that. Yeah. I mean, I think you guys have laid out really well here, just the resiliency and the earnings with your time chargers here. So one of the questions that we often get here, is on the renegotiation risk from the liner side um which was seen in kind of previous cycles but could you can kind of compare and contrast where the liners sit now in terms of their cash balances and resiliency and and kind of like the willingness that they would actually renegotiate and um i mean it's not like you guys have booked at the very top of the market here so i don't think that your rates are really at risk but could you kind of assuade some of the fears that are out there.

Chris, let me start by saying my opinion, then Tom can jump in as well. The previous times, the financial situation of our counterparty, these car charters, were completely different than today. They are today in the best shape they have ever been since the inception of containerization, I would say. So that's one positive. Second is that in general, in our industry, the top names do not tend to renegotiate and they haven't done so in the past. Even in the most difficult situations like 2009 when the financial crisis broke out, still there were no renegotiations from the first class counterparties. Of course, as in every market, there is first class, second class, third class. So far we have seen some third-class names going back up and not performing. But we haven't got any such names in our charters and we don't feel that such a thing would be there. Now, having said that, although we do not expect any renegotiations, sometimes It's commercially viable and it's commercially better. It's a win-win, as the Chinese say, for both. To an extent, sometimes charters and owners agree to reduce the charter rate and elongate the charter period. And that is not a renegotiation. That is something that both parties might agree for the mutual benefit. So we should not... confuse this kind of transactions with charter negotiations. I will let Tom get into that more.

Yeah, thanks, George. I would just echo those words. And Chris, I would say that, you know, GSL, when we took the company public back in 2008, shortly before Lehman Brothers went bust and the world went into a sort of synchronized global downturn, global financial crisis, And, um, during the whole of our history, um, all of our charters have performed and there haven't been, uh, renegotiations of any sort, um, other than as, as George says, selectively on a bilateral basis where it's suited both parties to do so. And we've never had a bad debt. So I think, you know, the, uh, the, the business model, um, has been quite well stress tested.

Yeah, I definitely think the, uh, The history of the company speaks for itself there. Follow-up question. You guys spent quite a bit of time talking about the older end of the fleet spectrum here with possibility of scrapping. Can you talk about just the types of owners that generally have these vessels that are 25-year plus? What type of owners are they? What type of segments do they generally operate in? As the fleet slows down and maybe helps put stabilizing pressure on rates, Do you think they'll still have an incentive to keep these things going as long as possible, or regardless of that slow steaming, is it just time for these ships to leave the fleet?

Sure. I'll have a crack at that, and I'm sure George will also have some thoughts. We used to provide a slide, and sadly it's not included here, that shows the age profile of the global fleet by size segment. And as a general rule, the smaller the ships in a size segment, the older they are. So if you look at the very smallest ship sizes, the average age of those segments tends to be higher than that for the largest sizes simply because of the upsizing of the fleet over time. Now, what tends to be a catalyst for scrapping ships out is if owners are confronted by the need to put more money into them to keep them going. So as you know, Chris, Every five years or so, there's a regulatory dry docking that ships are obliged to go through, and those can cost anywhere between one and a half to, say, three million, depending upon the size of the ship, the age of the ship, the spec of the ship, et cetera, et cetera, et cetera. So when you are approaching such an investment, that tends to be a catalyst for either saying, okay, we can see good earnings potential for this vessel size going forward, so we will invest, or We don't, in which case we will potentially scrap the ship out. So it's a fairly rational, economically driven decision.

If I may add one point that is interesting for the audience to know, the scrapping of scrap metal comes at one third of CO2 emissions versus new steel. So it's... more environmentally friendly with respect to CO2 emissions to use scrap steel than, you know, the classical brand new steel. That, in my mind, could keep scrap prices high in the long term. And the higher the scrap prices are, the more attractive it becomes for owners to scrap their ships of the older vessels.

Yeah, interesting. Thank you for that color. I'll turn it over.

Our next question comes from Liam Burke from B Reilly. Please go ahead. Your line is open.

Yes, thank you. Good afternoon. Good afternoon.

You've got 93% of your charters locked in for 2023. Are there any discussions with the other 8% of your fleet to move off the spot market and negotiate, as you pointed out, shorter but multi-month contracts?

Yes, we're always discussing with our charters the possibility to fix our ships, and we always try to get the longest possible period, as you have seen over the past couple of years. It's not like there's no demand. There is demand, of course. And there is ongoing charters. And then, as we have mentioned, since last earnings call, we fixed four ships. Those were the four ships coming open. But what happens right now is that charters are waiting a little bit closer to when the ships are becoming open to charter them, whilst before you could forward fix a ship. So you could forward fix a ship to this year that was going to be open next year. And we've been doing that. As the market stands now, charters wait for like two, three months before the charter expiration to enter into discussions for, you know, renewals of charters. And that's because they want to see themselves also, what's their demand from their clients, the shippers and so on and so forth.

Great. Thank you, George. And on your utilization rates, I mean, it obviously bounces around with dry docking and then unscheduled off hire. How are you looking at utilization rates as we move into 23? Is there anything, I mean, you give us a dry docking schedule, but is there any thought on the unscheduled part of the utilization rate?

Not really. This is Ian. It's unpredictable. These are accidents and breakdowns, machinery failures or whatever. And by their very nature, we can't forecast what they'll be.

Right. But is it, I mean, you do have older ships and that's part of your strategy, but is that, I mean, does that tie into the unscheduled off-hire?

No, not necessarily. It's a question of how well The ships are maintained, and we believe that we maintain our ships to a very high standard. But, you know, accidents do happen. Stuff does break. But I wouldn't say that an older ship is inherently more susceptible to significant off-hire than a new ship, unplanned off-hire.

Great. Thanks, Ian. Thanks, George.

Our next question comes from Omar Nocta from Jefferies. Please go ahead. Your line is open.

Thank you. Hey guys, good afternoon. I wanted to just ask about the balance sheet and how you guys seeing it evolve here. You've obviously got a very nice backlog of just over 2 billion, gives you that nice stream of cash here over the next several years. And I think if you just throw in some conservative assumptions on vessels that roll off higher here the next few years, there's a real shot that GSL could get into a net cash position within say the next three years. I guess one, Do you agree with that type of math that GSL is on that trajectory to become debt-free here in the next, say, three years? And then two, is that an aim for you guys to get GSL into that cash position, or do you see yourselves investing along the way?

Hey, Omar. This is Tom. I mean, yes, we're building cash, and we see... delevering as an important part of de-risking, but I don't think we would ever look to be debt-free. But we do see ourselves as entering an interesting point in the cycle, just as George said in his prepared remarks, where asset values are coming off and thus the potential to make accretive acquisitions is increased at a far more attractive rate. a lower risk profile than was possible during the 18 months of the super cycle, when, of course, we didn't make any acquisitions at all. So, yes, we're in this business for the long term, and we see making accretive acquisitions as being core to running the business going forward, but always on a selective and highly disciplined basis, as we've done in the past.

And if I may add to that, in combination with building cash flow, cash as, you know, to have resilience for the market that is coming. You know, the companies need to have some minimum cash aside for all sorts of purposes to make sure that, you know, anything that comes along can be handled. And I'm not talking about just buying ships, but also to have some work capital requirements and some cash resilience for any kind of need in a difficult market.

And compliance with new regulations, which may be needed. Also, yeah.

Thank you. Yeah, well, that's interesting. And I guess I think it was in response maybe to Chris's question about the liners. It is definitely a very interesting setup at this point. You're talking about cash resiliency requirements potential to be in a net cash position, assuming you do nothing, which you won't. But, yeah, we're definitely – Tom, you mentioned the Lehman crisis shortly after you came public. I mean, yeah, it looks like this downturn that we're seeing, if this is indeed a downturn, both the liners and the owners are in a much stronger cash position than they were back then. So I guess – When we think about the capital that you got and you want to put that to work, is there any segment of the industry that you want to be investing in when the time is right? Or is it more about just the transaction and whether it's accretive or not?

Well, the first point that we always look at is risk. Every transaction we look at is viewed by us from a risk perspective. First of all, we do not want to take risk on board. We want to take the minimum. Then we want the transaction to be immediately accretive. So we want the cash to hit our balance sheet very quickly. So that means that as of today, we're looking at, in this market, because the market has not bottomed, the prices of ships have not bottomed, we are looking at deals where we would have some kind of... of a charter together with it, or we can put it right away into a charter, so we can ensure growth of Arribida and cash flow, and be a deal that is accretive immediately. Now, our sweet spot of ships, since we've said always, it's the post-Panamax, this is what we like the most, let's say, without saying that the rest of the ships we don't like, but If you ask me what's my favorite, it's the post-Panamax because these ships always offer the best economies of scale to the liner companies. And that's where we have been focusing always. But I would say that we're focusing on mid-size ships between, let's say, 2,500 to 11,000 with more focus on the post-Panamax, which is like 5,000 and above. But again, it's a deal by deal.

Got it. Thanks, George. And maybe just one final one. I think maybe for Tassos, you mentioned the cash position and the restricted part of it. And I think it was $118 million that is advanced charter hire that's been paid. Can you just remind us how much of that? What does that constitute in terms of recognizing those revenues in the future?

This has to do with the way we have initially recognized and received the money. And as far as I remember, now we are going to build up some more cash in that case, so increase the deferred revenue until next year, the same period, and then this will start running through our revenue.

Okay, so just to double-check, the $118 million, I think, is that right? Is that basically what you're going to be receiving in a year's time?

No, if I may, we've already got it. Correct.

Oh, sorry.

We've collected the cash, and then the charterer will still pay a little bit more than the headline charter rate, and that cash will build a bit. But then the charterer starts paying less than the headline charter rate, and we start leaking, if you want to use that word, advanced receipt of cash through the income statement.

Okay, thank you.

So it's a timing difference between recognizing revenue and receiving cash. That's all. Yeah, and then it's obviously very good sort of credit practice from our perspective as well.

Absolutely. Yeah, I just wanted to just make sure for modeling purposes, I'm not double counting the incoming revenue stream.

No, no, no, no, no. Just look at the charter rates in our tables and ignore the balance sheet.

Just to assist you, you can a little bit match these 118 million with the two lines which are in our current liabilities and long-term liabilities which refer to deferred revenue. Just to match a little bit the liability to offer the service.

Yeah, and the thing that we wanted to make clear, Omar, to everyone, particularly for modeling purposes, is that, yes, we have a certain amount of cash on our balance sheet, which is always good news. but a very substantial slice of that is tied up, either as prepaid charter hire, as we've just discussed, or for other purposes. So there's not a huge amount there that's available as, quote-unquote, free liquidity, let's say.

Yes, understood.

Well, thanks for that. Very helpful.

I'll pass it over.

As a reminder, if you'd like to ask a question, please press star followed by the number one. Our next question comes from Clement Mullins from Value Investors Edge. Please go ahead. Your line is open.

Good morning. Thank you for taking my questions. Following up on Omar's question regarding vessel acquisitions, do you have a preference for modern eco-ships or are you agnostic in that regard and think that there is, let's say, a right price for all assets?

I would say that we do not have a preference as long as the deal and the price is the right one. We are not there to, let's say, opportunistically acquire SIPs yet without a charter. We don't feel that the prices have bottomed to the point that we would be buying SIPs even opportunistically. So, so far at this level, at this point, we're looking at a combination of cash flow and acquisition price. So in this respect, whether it's an eco-ship or an existing design, let's call it, an older design, whatever you want to call it, it's not that relevant as long as we're looking at ships that have either a good potential or a good spec, always the top tier specs, some maybe enhancements, of their characteristics. Maybe they have some modifications to make them more eco-friendly. But more or less ships that can operate in the foreseeable future very successfully.

And just to be clear, Clement, we're not talking about new buildings. We are talking about existing ships. that could be acquired and would be immediately accretive to cash flows from the time of acquisition, just as a sort of parenthetical.

Yeah, that's helpful. Thank you. I also wanted to ask about the capex related to energy savings and emissions reduction. Could you provide some commentary on the paybacks you are seeing on those investments?

It's difficult because they vary a huge amount on a sort of deal to deal, charterer to charterer basis. But there is, I would say, almost invariably a commercial agreement with the charterer such that we're confident that whatever money goes into the ship to enhance it will be more than recovered either by way of an uplift in the value of the ship or by way of increased earnings or both.

Makes sense.

Thanks for the color. And final question from me. You've made it clear you'd like to continue strengthening the balance sheet to withstand market volatility going forward. And I was wondering, how do you plan to balance this with additional shareholder returns?

I'm sorry, Clement. I didn't understand the question. Would you mind repeating it?

Yeah, sorry. My question was, how do you plan to balance additional leveraging or strengthening the balance sheet with shareholder returns?

Well, if I may, it's part of our nimble capital allocation. We're always flexible. We always keep the various alternate uses of capital under review, as we've demonstrated in the past. If we think it's appropriate to return capital to shareholders by way of of buybacks, then we will do so. But as we said in our prepared remarks, we also, in this time of macroeconomic uncertainty and potential opportunity for growth as asset values normalize, we want to have an eye to potential for growth and therefore build some liquidity, not only for those opportunities, but just for good practice, good balance sheet management and resilience, as George, I think, mentioned in the prepared remarks. So we would hope that we would continue to allocate a certain portion of capital to buybacks, but we can't guarantee it, depending upon what the alternate uses of capital may be from time to time. But we've demonstrated our willingness to do so over the past 18 months.

Indeed. Makes sense. That's all from me. Thank you for taking my questions, and congratulations for the quarter.

Thank you. Thank you.

We have no further questions. I would like to turn the call back over to Ian Weber for closing remarks.

Thank you very much. Thanks, everybody, for listening. Thank you for your questions and your support. We look forward to giving you a further update in three months' time or so when we publish our first quarter 2023 earnings. Thank you.

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