Global Ship Lease, Inc.

Hello and welcome to Global Ship Lease Q2 2023 Earnings Conference Call. I'll now turn the call over to Ian Webber, Chief Executive Officer. Sir, you may begin.

Thank you very much. Good morning, everybody. Welcome to the Global Ship Lease Second Quarter 2023 Earnings Conference Call. You'll find the slides that accompany today's presentation on our website at www.globalshiplease.com. As usual, slides two and three of that presentation remind you that today's call may include forward-looking statements that are based on current expectations and assumptions and are by their nature inherently uncertain and outside of the company's control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the safe harbour section of the slide presentation. We would also like to direct your attention to the risk factors section in our most recent annual report, on our 2022 Form 20F, which was filed with the SEC on March the 23rd of this year. You can find the form on our website or indeed on the SEC's. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements. The reconciliations of the non-GAAP financial measures to which we will refer during this to the most directly comparable measures calculated and presented in accordance with GAAP. Please refer to the earnings call that we, 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 Savopoulos, 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, the quarter's results, and the financials, and the current market environment. After that, we'll be pleased to take your questions. So, turning now to slide number four, I'll pass the call over to George.

Thank you, Ian, and good morning, afternoon, or evening to all of you joining us today. First, a few words on the market. In the second quarter, overall, Chartering activity remained modest by historical standards, with limited capacity coming available outside the feeder segment and idle capacity at quarter-end hovering around 1%. Charter rates showed some stability at levels that compare favourably to those that prevailed before the COVID-driven rate spike of 2021 and 2022. However, current macroeconomic uncertainty, notwithstanding, of course, recent Apparent improvements in sentiment in the U.S. and limited liquidity in the charter market make it difficult to predict how things will evolve over the quarters ahead. As we speak, the charter market seems to lack direction or strong conviction, as reflected by relatively short charter duration in most recent cases. In this environment, we are benefiting from a strong counter-cover and forward visibility, both of which will continue to extend with additional charter signings and extensions when opportunities arise. We have a robust balance sheet with no debt refinancing requirements before 2026, and we have hedged our floating interest debt through 2026. Overall, our credit profile has continued to strengthen, as evidenced by both our recent upgrade and outlook improvements from the credit rating agencies. And just as importantly, the fact that our access to competitively Priced debt to support selective growth, such as the four ships we purchased and financed in this quarter, is stronger than ever. Our long-standing focus on resilience, sustainable value, and disciplined capital allocation is showing its merit, providing us with a strong platform from which to pursue counter-cyclical value-accretive growth opportunities while also supporting our attractive dividend and allowing us to continue our existing share buyback program and add a new $40 million buyback authorization going forward. With that, I'll turn the call back to Ian.

Thank you, George. Please turn to slide five.

Here we show the makeup and diversification of our charter base, which is well spread across the top tier of liner companies. In total, as of June 30, 2023, we had about $2 billion of contracted revenue with reputable counterparties spread over a TU weighted average of 2.3 years going out. This includes 15 new charters agreed during the first half of 2023, which collectively added about $212 million of contracted revenue. On the next slide, slide six, we show illustrative guidance across different rate scenarios. As always, I want to be very clear that this is not a forecast. We are simply illustrating the extent of our contracted revenues and our very limited stock market exposure through 2024. Indeed, we are essentially fully booked this year, 2023, and have over 80% of our ownership days in 2024 already covered. You can see in the adjusted EBITDA columns on the right side of each chart the positive impact as more of our already agreed forward charters at good rates come into effect. Our forward charter cover gives us significant cash flow and earnings visibility, which is particularly welcome in uncertain macro environments. Moving to slide seven, we show an overview of our dynamic and disciplined capital allocation strategy. This will be familiar to many of you, but I'd like to briefly highlight our $1.50 a year sustainable dividend and our ongoing share buybacks, $17 million so far this year, which leaves only $3 million of availability under our existing $40 million buyback authorization. This limited amount of capacity has prompted the Board to recently agree a further $40 million authorisation, permitting management to continue to opportunistically buy back shares going forward. This complements our demonstrated commitment to deleveraging and to growing our cash liquidity, with the latter providing us with the ability to both invest in energy-saving retrofits for our fleet and to pursue accretive growth and fleet renewal opportunities on a selective basis. disciplined basis. We take a conservative, long-term approach driven by our focus on contracted cash flows and full consideration of the various evolving risks and opportunities in the market throughout the cycle. We believe that this balance and long-term perspective are the best way to create sustainable shareholder value in a cyclical industry. This leads to slide eight. which shows our discipline timing for acquiring vessels in the market. In particular, I would point you to the section we've indicated in orange, which is the roughly two-year period when asset values spiked at record-breaking levels. Despite the many potential transactions crossing our desks during this period, we refrained from making acquisitions as we found the risk-return mix uncompelling. Only when prices moderated substantially and when the right specific opportunity arose did we return to fleet growth and acquire the four ships in May of this year. We aim to only make acquisitions that will benefit the business and our shareholders, and we have demonstrated through our actions that we will not chase growth when doing so comes at the expense of returns or requires us to take a particularly optimistic assumption on residual value. Slide nine provides additional details of our purchase of the four 8,500 TU ships. These were built in 2003 and 2004, and they have a 24 to 28 month firm charter attached to each ship. As you can see, these high spec energy efficient ships were purchased at an attractive price of 123.3 million, which was financed by cash on hand and new senior secure debt. The vessels are expected to contribute $76.6 million of EBITDA going up to $95 million of EBITDA if the charter exercises 12 month options to extend the charters beyond their initial 24 to 28 months firm period. The debt is covered by the headroom on our existing 0.64% SOFA interest rate caps. So with the margin of 3.5%, this gives us an overall very attractive cost of debt. The debt has an approximately three-year tenor and amortization profile. Just to clarify, we previously referred to the interest rate caps as a 0.75% LIBOR interest rate cap. But from the middle of this year through to their maturity at the end of 2026, they transition to being SOFA caps at 0.64%. The economic effect remains unchanged. With that, I'll turn the call over to Tasos to talk through our financials.

Thank you, Ian. Slide 10 shows our year-to-day financial highlights. Revenue for the first half of 2023 was $321.4 million, up from $308.1 million in the first half of 2022. Adjusted EBITDA was $213.1 million, up from $187 million in the first half of last year. Unnormalized net income, adjusted for one of items, increased from $133.5 million in first half of 2022 to $149.5 million in the first half of 2023. For balance sheet items, despite the new debt facility for the four ships we financed in the second quarter, we have reduced our gross debt to $925 million, bringing that number down by approximately $200 million since June 30, 2022. We had $259 million in cash on our balance sheet at the quarter end, of which $161.9 million is restricted, with 129.8 million of that being receipt of charter hire in advance. The balance of 97.1 million covers minimum liquidity covenants and working capital. We have continued to return capital to shareholders through our quarterly dividend and also buybacks, with around 7 million of buybacks in the quarter, bringing us to 17 million during the first half of 2023 and 47 million since third quarter 2021. As Ian has indicated, shared buybacks are an important part of our capital allocation toolkit, with a new 40 million buyback authorization giving us valuable additional flexibility going forward. Notably, our success in managing our balance sheet was recognized this past quarter by multiple credit rating agencies, with Moody's upgrading us to BA3 from B1, S&P improving our outlook from stable to positive, and KBRA reaffirming the BBB investment grade rating of our 350 million 5.69% senior secured notes due July 15, 2027. Now, turning to slide 11, we are delivering and lowering our cost of debt. You can see from the charts our progress in de-risking our balance sheet with our scheduled amortization set to pay down nearly 200 million this year alone. We continue to keep the overall cost of our debt at levels close to 450 base points, despite the overall rising interest rate environment above that level, and lowering our financial leverage to 1.9 down from 4.2 at year-end 2021. Our aggressive amortization schedule is keeping us on track to further the risk and the leverage. With that, I will pass the call to Tom.

Thanks, Kathos. As in previous quarterly presentations, slide 12 highlights the ship sizes on which GSL is focused, namely the mid-size and smaller ships, ranging roughly from 2,000 TU to about 10,000 TU. The top map shows the deployment of ships within our size range, emphasizing their operational flexibility and global reach. The lower map, on the other hand, shows the deployment of larger ships and their relative reliance on the main arterial trade routes where the port infrastructure can support them. In understanding the current market fundamentals, particularly with the uncertain macro environment, we prefer to focus on the supply side where we have more forward visibility and can provide you with data rather than speculation. Turning to slide 13, you can see on the top chart idle capacities dropped back down to about 1.1% at quarter end following a small uptick earlier in the year. This speaks both to the extent of the long-term chartering that happened across the global fleet in recent years and shows that operators continue to need and recharter tonnage that does come into the charter market. The lower chart shows ship recycling. Given the continued demand and limited availability of tonnage, the uptick in container ship recycling has been muted so far, though is noticeably up versus the near total pause in recycling during 2021 and 2022. Moving forward, we expect to see further vessel deletions, particularly among the relatively low-spec vessels that would likely have already been removed from service if we had not seen the period of extremely strong demand over the last 18 to 24 months or more. Slide 14 takes a look at the order book, which has indeed been growing. While the overall order book to fleet ratio is now 29.1%, our focus segments currently have a more manageable ratio of only 14.4%. And if we assume scrapping of ships over 25 years old, our focus segments could see a marginal net growth of only 1.4% through 2026. And although there is a large order book for 10,000 TU ships, it is important to keep in mind that there are practical and physical limitations to the trade lanes such ships can service, which provides some protection for the fleet sizes on which we focus. Turning to slide 15, the charter market. As you can see, rates are down from recent peaks, but are still generally above pre-COVID levels. But, as George said in his opening remarks, the combination of macro uncertainty, limited charter market liquidity, and a current lack of direction make it challenging to predict how rates will evolve going forward. And with that, I'll turn the call back to George to wrap up on slides 16 and 17. Thanks, Tom.

I'll provide a brief summary and then we can open up the line for questions. We have excellent contract cover of $2 billion over an average of 2.3 years, fully covering all our liabilities including debt service, capex and dividends through 2023 and 2024 without relying on further charter renewals. We have a strong balance sheet but also see value in building additional liquidity at this point in the cycle. We have no refinancing requirements until 2026, and we have continued to reduce our financial leverage, which is now below two times. Our floating rate debt remains fully hedged with software capped at 64 basis points, and we still have headroom under the cap to accommodate additional floating rate debt should we incur it. Our overall cost of debt remains close to 450 basis points, which is way below interest rates prevailing in the market today. And finally, we come to slide 17. As in recent quarters, macro uncertainty remains a concern for the sector at large. Charter rate and asset value normalization is currently stalled, and it is difficult at this time to get much forward visibility from the charter market. A number of the liner operators are providing cautious guidance on the rest of 2023, though I would note that they are approaching this period with balance sheets completely transformed by their extraordinary earnings in recent years. As we have continued to see cash flow and bottom-line growth, we are continuing to return capital to shareholders through our quarterly dividends at an annualized rate of $1.5 per common share, as well as $47 million of buybacks since Q3 2021, including $7 million in this last quarter. and with the new $40 million buyback authorization giving us added flexibility going forward. Our recent acquisition of four vessels, which delivered during the course of Q2, is consistent with our disciplined approach, prioritizing strong cash flows, low risk, and upside potential, while also highlighting our continued access to very attractive financing. Moving forward, we intend to continue doing what we do best, securing new charters, maintaining a long-term through-the-cycle perspective, and allocating capital in a dynamic and disciplined way to create sustainable value for our shareholders. Now with that, we will be happy to take your questions.

Thank you. For those of you who experienced a technical issue in joining the webcast, please be aware that a full replay of the call will be available to you on the GSL website later today. At this time, I'd like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Omar Nocta from Jefferies. Sir, your line is open.

Thank you. Thank you, operator. Hi, guys. Good afternoon. Thanks for the update. Always very insightful and detailed, so appreciate that. I did want to maybe just dive a little bit deeper into the term charter market. You know, earlier this year, liners were pretty busy securing ships at higher rates than I think a lot of us anticipated. and owners were able to get terms of maybe one to two years. You know, from the commentary you just provided, things have slowed a bit. But just wanted to ask, you know, we've seen here over the past perhaps month or so a surge in liner spot rates. Is that somehow or is there any sort of pass-through of that going into the term charter market at all? Have liners gotten busier looking for vessels in this sort of environment of rising freight rates, or is it still too early?

Hi, Omar. It's Tom. Thanks for the question. I think it's still too early. As George said in the prepared remarks, there's been a little bit of what feels like a pause, a hiatus. let's say, in the charter market. And people, while they're still fixing ships, are tending to fix for shorter periods until collectively we have a little bit more clarity on how the market is going to evolve going forward. So terms, by which I mean durations, have come in a bit. In the smaller sizes, rates have perhaps softened. In the larger sizes, although it's harder to call because there's such limited activity because so many bigger ships are tied up on long charters anyway, I would say that rates have remained relatively firm. So it's a sort of wait and see going on at the moment. Thanks, Tom.

Yeah, it makes sense. And I guess, you know, in terms of opportunities, deal-making-wise, you obviously did the four ships back in May. How are things kind of looking right now for you? Let's say you did that deal, but as they compared to three months ago or six months ago, are the opportunities becoming more compelling or is it still a bit more stagnant?

Well, Omar, this is George. We see a continuous flow of deals, and we have been seeing a continuous flow of deals before we executed that one. The thing is we just cherry-picked the ones that we feel fit within our investment profile. There are deals out there. Right now, with the market the way it looks, we're looking more into deals which will have charter or will be able to get charter right away. We do not want to take market risk opportunistically at this stage. We are not at levels that would make sense for such a move yet, price levels of ships. So the answer is yes, there is a constant deal flow. Now, choosing and picking between this deal flow is what we do.

And Omar, just to add to that, we're quite strongly focused on building liquidity, which is prudent anyway in the context of a cyclical market and sort of uncertain macro outlook. But it's also crucial if it comes to being in a position to capitalize on opportunities that might arise in the market. So we somewhat, well, we drew down on some of the liquidity that we built in order to buy the four ships during the force of the quarter. And we would be looking to continue to rebuild that liquidity over time to be able to be resilient and opportunistic.

Thank you. Thanks, Tom. That's very clear. And thanks, George. I'll turn it over.

Thank you. Your next question comes from the line of Liam Burke from V Riley Securities. Your line is open.

Thank you. Could I just jump on that final statement on rebuilding liquidity? Obviously, the balance sheet is in great shape, yet nice flexibility on the last acquisition of four vessels. When you're looking at rebuilding liquidity, you pay a healthy dividend through the cycle. I don't think that's an area that you want to grow. How does that affect your thoughts on buybacks?

I'll have a crack at this, Liam. Let's put buybacks in the context of overall capital allocation. We try to be as thoughtful as possible on buybacks. capital allocation through the cycle. So as you saw, we renewed the 40 million buyback allocation, having worked through almost all of the preceding 40 million allocation that we put in place, I think, in April or so of last year. So buybacks will definitely remain an important part of the toolkit, as I think Tassel said in his prepared remarks. But we will always look at all capital allocation, buybacks included, in the context of On the one hand, risk, and on the other hand, opportunity. So which is the best way for us to put every dollar to work to build value for investors through the cycle?

Fair enough. And in terms of Omar's question on the spot rates, if you're looking at shorter durations vis-a-vis past longer-term charters, How do potential recharters look when facing shorter durations? Are they still holding up, or do you have to sacrifice a little here?

Well, it very much varies, Liam has, George, very much varies on the size of ship. Smaller ships can do 12-year charters. Very small, barely, can do that. Panamax ships can do a year right now, maybe a bit more. Both Panamaxes, there aren't many, if at all, in the market, so we don't know, but probably they could do a year max too. So right now what we see is the charters have fulfilled their requirements of two months ago, and they're dropping the duration. It's not a matter of giving a ship a lower charter to get a longer duration. That doesn't work. It's what the charter really needs in order to employ a ship, whether they need one year, two year, or three year, depending on their plan, on the plan of the line.

Got it.

Thank you, George. Sorry, Liam, just to correct a slip of the tongue earlier. I think George started off by saying that feeders could get up to 12 years on charters. Obviously, that's up to 12 months. Minor correction for the record.

So embarrassingly, that got right past me. I just assumed the 12 months.

Operator, do we have any further questions? We're not hearing anything on the send.

Got it. Apologize. And again, if you'd like to ask a question, please press star 1 on your telephone keypad. The next question comes from the line of Amit Meherotra from Deutsche Bank. Your line is open.

Thank you, operator. Hey, good morning and good afternoon. This is Chris Robertson on for MIT. How are you guys doing?

Hi, Chris. We're well. Thanks very much. How about you?

Yeah, good. Thank you. I just wanted to ask about the four recent vessels that were acquired just in terms of technical specifications. Can you talk about the reefer slots or, I guess, technical differentiators on those vessels? And can you remind me the total amount of reefer slots spread out on the fleet?

I don't have in hand the total refer slot for the fleet, but generally I would say that we do have probably the highest, one of the highest refer capacity in comparison to our total capacity. Now, we can look at that and come back to you. But on those four ships, the They're very high spec because they have been built in a dense shipyard in Denmark. They were built in very high spec. They have a very high reefer capacity, and they have also high capacity to increase also the reefer. So their capacity is beyond the 1,000 reefers. And they also have been modified to be echo. So they have changed propellers and ESDs, you know, various changes. So these ships have a very good fuel consumption and CO2 emission.

And quite apart from that, Chris, obviously, as you've looked at the economics, the returns, even if you take the most conservative assumptions, are tremendously attractive. So, as Ian said, we've put 76 million of debt on these ships, amortizing over a little over three years. And during the firm contracted periods of the charters, they're each, they're generating over 76 million of EBITDA. So taking contracted cash flows plus the downside recycling value on the asset, you've got a tremendously attractive proposition in the first place. And we also think, for the reasons that George has mentioned, high REFA plus... eco-efficiency enhancements to the ships, that these ships will have a promising onward employment future, and it's obviously in that that drove the original investment.

Okay, yeah, that makes a lot of sense, and thanks for the color on those ships, guys. This is more of a general market question, just in terms of what are you saying in terms of Chinese manufacturing recovery and exports. I know that the first half of the year here has been characterized more by the service sector improving over there, but just trying to get a sense more around what stage you think they're at in terms of the recovery and the manufacturing base.

This is Tom, Chris. I'll have a crack at that, but I would say that, to be honest, the The lines themselves, the shipping lines, are closer to the real flow of cargoes out of China. But I think generally speaking, it seems that the view is that the post-COVID recovery in China has been a little bit lukewarm. So... I wouldn't say there's a tremendous driver coming from that perspective. And I would also say, and maybe the two are linked, that the anticipated restocking that was talked about a lot during the first and second quarters hasn't yet begun as far as we're aware on the demand side. So, again, it comes back to the theme of uncertainty that has sort of run through this earnings call. Guys, I don't know if anyone else wants to add to that.

Last quick question for me, if you guys don't mind. Just on the vessel OpEx, do you anticipate any cost pressures for the remainder of the year or any inflationary pressures that are out there that we need to be aware of?

Well, the main inflationary pressure we see is on the wages, salaries of the crew and the officers. That's something that is creeping up. lubricant cost has come down because of fuel prices. As fuel goes up, you know, lubricant is related. Apart from those two, and of course, traveling. As we all know, we all travel, we see that airline tickets are going up and up and up continuously. So these are the three. One is positive, the other two are negative, inflation and cost. But We do not see anything that is really material.

All right. Yeah, got it. Thank you for the time.

I'll turn it over. Thank you. The next question comes from the line of Clement Momins from Value Investors Edge. Your line is open.

Good morning. Thank you for taking my questions. Most has already been covered, but I wanted to ask about the upcoming implementation of the European Union Emissions Trading System. It's still a bit early, but could this new regulation further exacerbate the premium for ECO relative to non-ECO tonnage? What kind of impact do you foresee?

Hi, Clement. This is Tom again. Very good question. I think... with the exception of the super cyclical high that we saw as a result of COVID, the shipping lines have always been focused upon getting the most efficient tonnage for their fleets that they can. It's worth noting, however, that essentially since the global financial crisis, most of the investment that's gone into the sector has gone into the bigger ships, where you would see the biggest concentration of of quote-unquote eco-tonnage. Still in the midsize and smaller ships upon which we're focused, the lion's share of the peer group is non-eco, meaning that it was built prior to roundabout 2013. So you're right, EU ETS and other decarbonization initiatives are likely to sharpen the focus on efficient ships but the peer group against which we're competing has a relatively low concentration or a relatively lower concentration of eco-ships What we do expect on the other hand is for EU ETS to prompt a further slowing of the global fleet because, you know, the decarbonization regulations that have been implemented so far in the shape of EEXI and CII are important, but they don't have dollars attached to them. Of course, as soon as you start attaching dollars to the emission of carbon dioxide within EU waters, there is a very clear economic incentive to mitigate that carbon dioxide. And by far, the most quick and efficient way to do that is to actually slow ships down. Sorry, a rather rambling response, but I hope helpful.

No, that's very helpful.

That's all for me. Thank you for taking my questions. Pleasure. Thank you.

Thank you. There are no further questions at this time. Mr. Weber, I turn the call back over to you.

Thank you very much. Thank you all for listening. Thank you for your questions. We look forward to giving you a further update after our third quarter 2023 results after the summer vacation period. So wishing you all an excellent summer. Thank you.

This now concludes today's conference call. You may now disconnect.