Global Ship Lease, Inc.

Thank you for standing by. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the Global Shipley's third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Tom Lister, Chief Executive Officer. Please go ahead.

Thank you very much. Hello, everyone, and welcome to the Global Ship Lease third quarter 2024 earnings conference call. You can find the slides that accompany today's presentation on our website at www.globalshiplease.com. As usual, slides two and three 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 harbor section of the slide presentation. We would also like to direct your attention to the risk factors section of our most recent annual report on our 2023 Form 20F, which was filed in March 2024. You can find the form on our website or 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 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. I'm joined today by our Executive Chairman, George Yeroukos, and our Chief Financial Officer, Tasos Tsaroupoulos. George will begin the call with a high-level commentary on GSL and our industry, and then Tasos and I will take you through our recent activity quarterly results and financials, and the current market environment. After that, we'll be pleased to answer your questions. So, turning now to slide four, I'll pass the call over to George. George.

Thank you, Tom, and good morning, afternoon, or evening to all of you joining us today. Through the third quarter, the dynamics driving the container ship sector have remained largely consistent with prior quarters. heightened geopolitical issues, and uncertainly persist, particularly around the Red Sea. The last numbers of ships continue to transit around the Cape of Good Hope, adding further ton-mile demand to an already tight market. Now, on the back of this, we have been building forward contract cover and locking in attractive charter rates. In the first nine months of the year, we added approximately 600 million in contracted revenues, almost 200 million of which in the third quarter. And, unusually as now is typically the low season, that positive momentum has continued into Q4. We have also remained disciplined and opportunistic financially, recently completing a 300 million refinancing that brings our average cost of debt to below 4%, reducing break-evens and further strengthening both our resilience through the cycle and our competitiveness. Our robust corporate credit ratings reflect the strength of our balance sheet and forward prospects. Now, on the basis of this success, we're pleased to have introduced a supplemental dividend in addition to our regular sustainable quarterly dividend, bringing our annualized dividend to $1.8 per share. Zooming out, I think it is worthwhile to give some larger context and what this all means for you as investors. Over the last five years, our total shareholder return is greater than 350%. And because we offer a stable, liquid, readily investable platform through the cycle, an opportunistic investor buying at a cyclical low in 2020 and selling in June 2024 had the potential to realize a total shareholder return of almost 1,300%. And I can tell you that capitalizing on the cycle by buying and selling shares is a lot quicker and easier to do than buying and selling ships. We invest in and operate a business on a through-the-cycle basis, and we make it possible for investors to participate for the time horizon that best fits their needs. We are proud to have made GSL a profitable investment for investors of all kinds over a multi-year period. By continuing to charter our existing fleet, preserving the optionality to invest in fleet renewal and growth when the time and terms are right, paying an attractive dividend, maintaining a resilient financial position, and staying nimble and dynamic in our capital allocation, we are working to build on our success and continue creating value for our shareholders. With that, I will turn the call back to Tom.

Thank you, George. Please turn to slide 5, which shows the diversification and highlights of our charter portfolio and financially strong charters. As of September 30th, we have $1.8 billion in contracted revenues, over 2.3 years of remaining contract cover. As mentioned, in the first nine months of the year, we added 32 charters for approximately 600 million of contracted revenues. So, to use a well-worn analogy, we continue to milk the cash cows in our fleet. And some of those recent fixtures are for ships in their 20s, often on the back of upgrades and retrofits to reduce their carbon footprint and to keep them commercially relevant and lucrative. But, however long we stretch their economic lives, the fact is that ships are depreciating assets. This means that fleet renewal will become increasingly integral to powering our future cash flows. That brings us neatly to slide six, capital allocation. To state the obvious, shipping is cyclical. And to capitalize on the cycle, you need to be disciplined, nimble, and have as much optionality at your disposal as possible. Often, the most attractive purchase opportunities, both for fleet renewal and selective growth, tend to be at a time in the cycle when the availability of capital is either limited or expensive or both. So we need a strong balance sheet and the resources to move quickly at the right time. Cash buys optionality, and optionality buys access to outsized returns. I'll come back to this point in the context of the shipping cycle in a minute or two. In the meantime, we have also other capital allocation levers, including share buybacks, which are always on the radar, de-levering to build equity value over time, and of course, our dividend. With our supplemental dividend in place in September of this year, our annualized dividend is now $1.80 per share. This dividend is an important component of our value proposition for investors and, as George mentioned in his opening remarks, it has contributed to a superior total shareholder return for both long-term GFL investors and for those who've traded the cycle. Illustratively, and even in taking the more conservative buy-and-hold approach, an investment in GSL has outperformed the S&P 500 by more than 3x over the five years through September 30, 2024. By the way, our TSR metrics are sourced from FactSet, who assume reinvestment of dividends in their total shareholder returns methodology. Slide 7 provides a long-term view of charter rates and asset values. During the COVID driven high, basically the orange part of the chart, we locked in charters at rates that have continued to drive cash flows today. But we didn't buy a single ship as asset values were overheated and returned capital to investors through dividends and buying back shares. As you can see, rates have firmed significantly in 2024. And once again, we have capitalized on market dynamics to lock in more charters at great rates. As you would expect, and in line with our earlier comments on the need for fleet renewal and opportunistic growth, we're constantly scanning the market for purchase opportunities. But we will remain disciplined, selective, and long-term oriented in our approach and will only move if the right opportunities arise. With that, I'll pass the call to Tassos to discuss our financials. Tassos.

Thank you, Dom. Our third quarter financial highlights are on slide 8. I would like to highlight a few key takeaways. Earnings and cash flow have continued to trend up in the first nine months of the year. We have lowered gross debt by over $135 million in the same period, and we still have some additional headroom under our 64 base point software interest cap rates. We have a healthy cash position of $405 million, $100 $18 million is restricted, of which $89 million is advanced receipt of charter hire. The remaining $287 million covers our working capital, CAPEX, covenant requirements, and dividend payment needs, while also ensuring that we have the capacity to pursue purchase opportunities when they arise. In addition to the supplemental dividend, we have got $33 million of capacity under our current buy-back authorization and we continue to deliver to build equity value. Our upgraded credit ratings reflect our financial strength, and I would note in particular our investment-grade senior secured notes. Now, slide 9 provides a more in-depth look at our progress on delivering and the risk in our balance sheet. In the graph on the left, you can see our aggressive amortization schedule. we are on track to have our static debt below $650 million by year's end and close to $500 million by the end of 2025. The graph on the right shows a similar story for financial leverage, where we have lowered our net debt to 0.8 times EBITDA as of September 30, 2024. This story continues on slide 10. The graph on the left shows the decrease in our cost of debt after our last 300 million refinance, down to a blended rate of 3.95% as of September 30, 2024. We have accomplished this despite a sharp uptick in treasury yields, the grey bar, in recent years, assisted in part by our well-timed hedging. The daily break-even rates for our vessels have likewise traded down over the years, dropping below 9,200 at quarter end. These slides display the strength of our position and our ability to weather this cyclical industry. As we move forward, we will continue to assess our standing and look for ways to reduce our leverage, cost of debt, and break-even rates to keep us robust and well-positioned to make counter-cyclical investments that build value. Tom will now discuss our market focus and SIP deployment.

Thanks, Tassos. On slide 11, we reiterate our focus on mid-sized and smaller container ships between 2,000 and 10,000 TU. These vessels are considered the backbone of global trade given their operational flexibility and reach across the globe as seen in the maps on the left. Very large container ships, on the other hand, play an important role in the very largest trades but are limited in where they can go, requiring deeper water and more specialized port infrastructure and are thus essentially restricted to the large east-west arterial trades. And the really big ships are either owned by the liner operators themselves or are locked up on very long-term charters, financings effectively, and are not part of the liquid charter market. As we have built our fleet and invested in retrofits and enhancements, we have focused on highly specified, efficient vessels that best meet the evolving needs of our liner customers, which includes an emphasis on reefer cargo capacity. Across the fleet, GSL vessels are typically in the top tiers of quality in their respective peer groups, and that has enabled us in a tight market to secure attractive charters for multiple years. Moving to slide 12, we recap the supply side trends we're seeing. Idle capacity is essentially nil for the year due in part to disruptions in the Red Sea. After a mild uptick in 2023, scrapping activity has once again all but ceased. as owners find liners eager to put older vessels to work. Nevertheless, this growing cohort of lower spec aging vessels will inevitably be scrapped out at some stage, which provides a useful supply side safety valve. On slide 13, we take a look at the order book. There has been a notable and well-covered expansion of the order book in recent years, but it is important to drill down into the detail to understand what that actually means. In particular, the vast majority of those orders have been for vessels in excess of 10,000 TU, a size segment in which GSL does not participate and which, as discussed earlier, is neither as operationally flexible as the ships we own nor a part of the liquid charter market. For the segments on which we do focus, the order book to fleet ratio is a far more manageable 11.3%. Moreover, given the ship age dynamics that I mentioned a moment ago, If we hypothetically assume that all ships over 25 years are scrapped out, the net fleet growth in the sub 10,000 TU fleet through 2027 would actually be negative, a reduction, in other words, of nearly 5%. The effect of the disruptions in the Red Sea is shown on slide 14. Whereas 20% of all global containerized trade passed through the Suez Canal pre-disruption, container ships are now forced to reroute along the Cape of Good Hope adding ton miles and absorbing capacity equivalent to roughly 10% of global supply. This has put upward pressure on both freight and charter markets and a year in with no end apparently in sight, it's beginning to feel more structural than transitory. But frankly, who knows? Slide 15 is a closer look at the charter market and you can clearly see the impact of disruptions to the Red Sea. When looking at the indicative market rates on the right side, I would remind you that our per vessel breakeven rates at the end of the third quarter averaged just below $9,200 per day. The spread between charter rates in the market and our breakevens should give you a pretty clear understanding of why we're so positive on this market and also why we're so eager to lock in as much charter cover as we can on both a prompt and forward basis. With that, I'll turn the call back to George to conclude our prepared remarks on slide 16. George. Thank you, Tom.

To briefly summarize, our cash flows are strong and growing, and our forward counter cover has grown to 1.8 billion over 2.3 years. Macro and geopolitical uncertainty remain pronounced, especially in the Red Sea. This is supporting the charter market, and we are securing charters across our fleet. in some cases on contracts that will take vintage vessels deep into their 20s. Our balance sheet is in great shape, with additional space under our chauffeur caps. We're continuing to deliver and to optimize our debt structure in a way that is making us both more resilient and more flexible. Having break-evens under 9,200 per day puts us in a great position to maximize cash flows. As an investment proposition, GSL offers a stable platform with trading liquidity, an annualized dividend of $1.8 per share, and illustrative buyback, buy and hold returns that have been three times those of the S&P 500 for the five years through September 30, 2024. Moving forward, in addition to our dividend and buybacks, we will look to selectively deploy capital towards fleet renewal with our usual discipline. In this way, we intend to sustain and expand our ability to generate strong returns well into the future, even as some of our fleet's existing cash cows begin to age out in the years ahead. In short, GSL is in a great position to sustain our positive momentum and continue creating a lot of value for shareholders. Now, we are ready to take your questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Liam Burke with B. Riley. Please go ahead.

Thank you. There was a headline in one of the trade publications about possibly adding assets. Is there any color you could add to that?

Hi, Liam. Yeah, I've seen the same article. I would say that obviously as a public company, we don't comment on rumors or speculation. But if we have a deal, then obviously we're obliged to make disclosures about that deal. So no, no comment.

Okay, fair enough. And then I just need clarification on something. On the press release, you announced a dividend of $0.45. I just want to clarify, that's your normal dividend plus the $0.75 special?

Correct, exactly. So the $0.45 incorporates both elements, both the base sustainable plus the 20% uplift, which is the supplemental.

Great. Thank you, Tom.

Thanks very much, Liam.

Our next question comes from the line of Omar Nocta. Richard, please go ahead. Thank you.

Hi, guys. Good afternoon. A couple of questions from my side. Maybe just first, you did spend a good amount of detail discussing the broader market, but just wanted to ask, you know, how would you characterize the state of the charter markets today? It's obviously been strong all year long, but just in terms of the pace of the market, how would you say things are today, you know, We've kind of gone past the maybe peak season. There's a bit of maybe pre-buying ahead of the risk of a strike. But I just wanted to get a sense from your side, how are liners looking at the charter markets today?

Hi. Hi, Omar. This is George. Well, the market is at full steam, as we speak. No difference. No deterioration, if that's the question. We see charters interested in... forward fixing, hence 200 million adding of the last quarter. There is not enough ships out there and there are not enough quality ships, even more importantly. Charters are willing to commit themselves in two years on smaller ships, ships up to let's say 3,500 EU. They're willing to commit to three years on Panamaxes. and extend to three years plus for post-Panama access. So this is more or less what the situation is today. And there is demand, although there's not enough supply of ships. I don't know, Tom, if you want to add to that.

Nothing to add to that, although, Omar, I think you said there were two parts to your question. Maybe I missed the second part.

No, thanks, Tom and George. Yeah, I guess the second question is, There's been a lot of talk of tariffs with the new Trump administration and that perhaps triggering retailers to pre-buy or shippers in general to pre-buy or pre-order. I guess from your vantage point, are you seeing that? Are you seeing ocean carriers coming to you looking for additional capacity in anticipation of perhaps some of this potential pre-buying?

Well, as George said, we are seeing liner operators still have a fairly robust appetite for ships and because there are comparatively few ships available in the market, obviously that's helping the charter market. Whether it's specifically with a view to covering a bring forward or an expected bring forward in demand, I can't really comment on that to tell you the truth. Omar, although obviously I did read today, I think it was the National Retail Federation in the U.S. echoed exactly those words, the notion that people may indeed be bringing forward volumes.

Thanks, Tommy. I guess that's the thing. It's always the may or the potential, and then just trying to see when that actually becomes an actuality. Yeah, maybe it's too early to point to hard data yet. Right. Well, thanks for the call, guys. I'll turn it over. Pleasure.

Again, if you would like to ask questions, please press star 1 in your telephone keypad and wait for names to be announced. And our next question is, comes from the line of Clement Mullins with Value Investors Edge. Please go ahead.

Good morning. Thank you for taking my questions. I wanted to start by asking about how you're handling environmental regulations and what you're doing to improve the efficiency of your vessels. Could you talk a bit about the CII ratings on your ships and to what extent can those be improved by the measures you're implementing?

Sure. Hi, Clement. Thanks for the question. So I'll break that down into different parts. First of all, we're working very closely with our customers, the liner operators, to selectively retrofit ships to make them operate more efficiently. Because as you remember, it's actually the charterers who pay for the fuel So if you make a ship more efficient to reduce its emissions, effectively you're making it more efficient to burn less fuel. So we work collaboratively with charters to do that and that's a program that we've been working on over time, I would say over the course of the last few years and it continues. We're also installing automated data capture on our vessels so that we can share live operating data in real time with our charters as well as capturing it ourselves And we expect that that will help us to collaboratively improve the operating profile of ships. And if you can smooth the operations of a ship and avoid the sort of ups and downs, accelerations and decelerations where possible, you can reduce fuel consumption. And reduced fuel consumption means reduced emissions. So that's on, you know, what we're doing. We're also making our ships biofuel compatible. so that they can burn low carbon content biofuels and all of this feeds in to the decarbonization strategy which aligns across our fleet and the operated fleet of our charters. Now you asked about CII specifically. CII is an operating metric which means that it's driven by the way in which the vessels themselves are operated and given that it's the charters themselves who determine the operating profile of our vessels, it's very much determined strongly by what they're doing. So once again, this comes back to a collaborative approach and doing what we can, A, to make the vessels more efficient at the physical level, and B, providing them with the data to operate them more efficiently, and C, ensuring that they're able to bunker them with biofuels, which has a very positive effect on CII. Sorry, long answer to a short question.

That's really helpful. Thank you. I also wanted to ask about the ATM usage during the quarter. You issued some shares at around 27 per share. Could you talk a bit about the reasoning for issuing those, especially considering you're sitting on a, we could call, rock-solid financial position? Was it maybe to preemptively raise funds for a potential acquisition?

Well, I think, as I hope we made clear in not only our comments for this call, but also on previous calls, we see tremendous value in optionality, particularly in uncertain times. So the ATM is just sort of the flip side to the same coin as share buybacks, essentially. As you will have seen from the press release, we've spent something like $57 million to date on buying back shares when we thought that there was real value in doing that. And we bought back, I think, at a volume weighted average price of about $18.5. And you're right, we issued some shares at $27 because we thought it made sense to do so. But as soon as share price the share price came off we we of course shut off the ATM program so it's all about optionality and we will exercise the same discipline as you will see I hope us doing everything that we do thanks for the color make sense that's all from me thank you for taking my questions and congratulations for the quarter thank you very much comments our pleasure

That concludes our Q&A session. I will now turn the conference back over to Tom Lester for closing remarks.

Just briefly to say thank you to everyone for joining today's call, and we look forward to catching up with you again on our fourth quarter earnings call in due course. Many thanks.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.