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Edited Transcript of MPCC.OL earnings conference call or presentation 30-Aug-19 1:00pm GMT

Q2 2019 MPC Container Ships ASA Earnings Call

OSLO Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Mpc Container Ships ASA earnings conference call or presentation Friday, August 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Constantin Baack

MPC Container Ships ASA - MD & CEO

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Presentation

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Operator [1]

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Thank you, all, for standing by. Ladies and gentlemen, welcome to today's Q2 2019 earnings conference call. I would now like to turn the conference over to your speaker, Mr. Constantin Baack. Thank you. Please go ahead.

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Constantin Baack, MPC Container Ships ASA - MD & CEO [2]

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Thank you, operator. Good afternoon and good morning, everyone. This is Constantin Baack, CEO of MPC Container Ships. And I'm here joined by our CFO, Mr. Harald Wilke.

Thank you for joining us to discuss MPC Container Ships second quarter earnings call. This morning, we issued a press release announcing MPCC second quarter results for the period ended June 30, 2019. The release as well as the accompanying presentation for this conference call are available on our Investor Relations website.

During this call, I would like to provide an update on MPC with a specific focus, obviously, on the second quarter and also look forward to 2019 and beyond.

Let me please remind you that the material provided and our discussion today contains forward-looking statements, actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our activities.

As anticipated, during the 2 most recent quarterly earnings calls, the market during the last quarter of 2018 as well into 2019 has been extremely challenging. This has also been reflected in our Q1 earnings and is still affecting Q2 and the financial year 2019 results. However, since end of Q1, we have observed positive market trends, with a significant decrease in idle capacity and also improving charter rates across the different container sectors. Despite trade war and global economic uncertainty-related headwinds for the demand side in particular, moderate demand growth is still expected for the full year 2019.

At the same time, we expect only modest supply growth and significant capacity implications for 2019 and 2020 as a result of IMO 2020 matters such as scrubber retrofitting.

Now I would like to run through the presentation, I would like to start with the highlights. And please turn to Page 4 of the presentation. As you can see at $47.8 million, Q2 revenues came in slightly higher than the previous quarter. The time charter equivalent stood at USD 9,071 per day, and the utilization was up at 93% compared to the previous quarter. EBITDA came in at around $8 million, and operating cash flow at roughly $9.8 million. End of Q2, we have a solid cash balance in excess of $50 million, whilst maintaining a strong equity ratio of 62%, and in line with our strategy, we maintained a low financial leverage of only 36%. More details on the financials can be found in the appendix of this presentation or on our website.

Please turn to Slide 5, where I want to run you through some of the key developments and activities during the second quarter. During the second quarter, we have entered into a $40 million, 3-year tenure revolving credit facility with CIT Group at attractive terms. With the new credit facility, we add highly flexible instrument to our capital structure, whilst maintaining the company strategy of moderate leverage. At the same time, we continue to maintain our low cash breakeven rate across the portfolio of vessels.

In terms of capital allocation, we have a clear focus on maintaining a solid liquidity reserve to be flexible in the presently challenging market environment to balance risk and opportunities. Besides the execution of our 10-vessel scrubber program, the most attractive investment opportunity we see in the market at the moment is buying back our own stock. Following initial purchases of own shares in Q1, we have therefore continued to buy back shares selectively during the second quarter of 2019.

The first half of 2019 has been the first 6 consecutive months with all vessels in operation. Following the fast ramp-up of the fleet in 2017 and 2018, we have put a very strong emphasis on the fleet operations during 2019. In that respect, we are pleased to show good operational KPIs as well as competitive and reliable operating expenses across the fleet during the first half of 2019.

Following the drop in the markets in Q4 2018, the first 6 months of 2019 have continued to be challenging on the charter market. But at the same time, we have been fairly busy in terms of chartering activities. We concluded 88 fixtures during the first 6 months of this year, with more than 30 charterers, reflecting both our deep relationship to market participants and charterers and the higher number of renewals in a difficult markets environment. IMO 2020 is coming closer, and hence the preparatory works are running full steam. We have continued to execute our balanced approach in terms of compliance options, which I will elaborate in more detail in the course of the presentation.

If you then please to -- please turn to Slide 6, where we address some additional operational highlights. As explained, with all vessels on the water, we have full focus on the operations. In the upper section of this slide, we have compared selective MPCC performance indicators with common industry benchmarks such as the Paris MoU or the annual study from Boston Consulting Group. As you can see, we are pleased to report that we are well positioned against common industry benchmarks in key operational performance indicators, such as, for example, loss time injury ratio.

On the commercial side, as illustrated on the bottom of this page, the first half was characterized by a demanding charter market environment, basically starting into the year with increasing number of idle ships and sliding charter rates. As I will explain in a bit more detail later on, this has changed a fair bit since March 2019, when we saw the start of a significant drop in idle capacity across sizes, combined with improving charter rates, the latter mainly in the larger container segment.

Within total 88 fixtures in all fleet, the chartering activity has been extremely high, with a large number of renewals during the first and second quarter. Regionally, it is worth noting that between the fourth quarter 2018 until well into the second quarter 2019, especially the intra-Asian markets, have seen significant high share of idle vessels as a result of the uncertainty of the impact of the U.S.-Chinese trade tensions on volume, and therefore, also on some of the intra-Asian trades. But with Vietnam and other Southeast Asian examples showing significant growth, mainly driven by rising exports to the U.S., quite a number of vessels were consumed by the market in the meantime.

Today, we see much tighter market in Asia across container sizes also including the feeder segment. During the first half of 2019, we have continued to build upon our strong links with all relevant liners and regional operators across regions, and we maintain an active chartering relationship with the top 10 regional operators.

I would now like to run you through the market section on the -- of the presentation, so please could you turn to Page 8, which shows the latest demand and supply forecast by Clarksons.

Overall, the container shipping industry continues to endure macroeconomic uncertainty in Q2 and the full of the first half of 2019, one prominent contributor of which being the unpredictability around the U.S.-China trade tensions. Adding to this were other geopolitical impact factors such as the potential risk of a global economic slowdown, all the impending IMO 2020 low sulphur regulations. Consequently, demand forecasts for 2019 have been revised downwards in the course of the first half of 2019. Demand for the first half of 2019 has been somewhere around 1.5% to 2%. And as illustrated in the chart on Page 8, financial year 2019 growth is now expected to come in at around 2.5%. Generally, the demand side is definitely the big uncertainty and presently constitutes a key risk for the shipping industry. In the scenario of modest growth of around 2% to 3% for 2019 and 2020, we, nevertheless, expect a rebalancing due to favorable supply and capacity developments. And let me elaborate on it in a bit more detail.

In the chart on Slide 8, we have included a line, which, based on the expected supply growth for 2019 and 2020, also factors in the implications of scrubber retrofitting on active capacity. This is based on recent charter from Clarksons, and it shows that the combination of the 2 effects point towards a market rebalancing in the overall market for both 2019 and 2020.

We'll elaborate on the effects of this in a bit more detail at a later point of the presentation.

Now please turn to Slide 9, which shows the development of global container trade between 2001 and 2020. The importance of Intra-Regional trade has increased from 33% in 2001 to 42% in 2018 in relation to total global trade. The MPCC fleet almost exclusively trades in these trades, which, as you can see from some of the comments at the left, are dominated by feeder vessels. Intra-Regional trades are also expected to drive growth, both in 2019 and 2020. And Intra-Regional trades has, in fact, grown significantly over the last decade. At the same time, Intra-Regional trades are less vulnerable by the implications -- to the implications of the trade tensions between the U.S. and China. They actually have the potential to benefit from shifting trading pattern. Especially countries like Vietnam and Indonesia have already shown significant growth in terms of exports into the U.S.

I would now like to run through the expected supply development. Please turn to Slide 10, which shows the fleet development over time by size, which is top left. The order book of -- to fleet composition by size at the top right, and the historic development of order book-to-fleet ratio at the bottom. What you can see is that there's a moderate fleet growth expected for both 2019 and 2020, that the order book is dominated by the very large container ships, and there's basically a blank in the sizes between 3,000 TEU north up to around 8,000 TEU. For the feeder segment, 40% of the fleet is currently on order, and most of that, around 80%, 85%, I would say, is for the fast-growing intra-Asian container market. And this is mainly replacement tonnage for older units, as you will all see on the next slide, where we will look at the age profile of the different sectors, but at the same time, it also shows confidence of those who have ordered that the segment between 1,000 and 3,000 TEU is a segment for the future.

Contracting in general has come down quite substantially and currently at 60% compared to the same levels during the first 6 months of 2018. The overall order book-to-fleet ratio at the bottom left is, in fact, the lowest in 2 decades and as such, a promising fundament for a rebalancing of demand and supply going forward.

If you then turn to Slide 12, where I would like to warp up some of the market insights. The slide shows the development of -- sorry, the development of deliveries over time, specifically for the feeder vessels on the top left, the demolition since Q1 2017 at the top right, and the age structure of the fleet by size at the bottom left.

The deliveries during the first half of 2019 have been at a historical low level and certainly well below the level seen in 2018. That is applicable for both the feeder size, where we see a drop of around 30%, but also in terms of total fleet where the drop is almost 40%.

All the orders current in the order book are scheduled to be delivered before 2020. On the scraping side, scraping has come down a bit over the last couple of months, but has been quite active between October 2018 and April-March -- April-May 2019, and as you can see in the top right, it is dominated by feeder vessels, which, again, has to be seen in context of the fleet age profile at the bottom left, where you see that more than 35% of feeder vessels between 1,000 and 3,000 TEU are, in fact, older than 15 years. Factors like more restrictive availability of debt, the aligned structure of liners, which, in my view, will at least limit to some extent a ordering spree and definitely the uncertainty about the right propulsion of the future, in our view, will continue to temper ordering activities throughout 2019.

If I can then wrap up the market size on Slide 12. This slide shows the development of idle TEU capacity by size over time, which is the top left, the development of time charter rates for various container vessels sizes at the top right, and the development of the secondhand values at the bottom.

A few comments on that. First of all, we see that S&P activity has been limited during the first half of 2019. It has actually been 50% below the levels we've seen in 2017 and 2018. Idle TEU capacity has decreased across sectors, especially in the larger segments, which is also linked to some of the scrubber retrofitting activities. Year-to-date, time charter rates, especially of larger container vessels, have increased, relatively strong. However, rates for smaller vessels have followed, but at a slower pace.

Over the last couple of weeks, we have actually seen a much more positive trend also for units between 2,500 TEU up to 4,300 TEU with increasing charter rates across sectors.

During basically 2019, the first half, we have seen also a trend towards longer periods especially for slightly larger ships, which is also one factor why we've seen a bit more price elasticity of demand for the smaller vessels compared to the larger vessels, which is one argument and one reason why the larger vessels have already increased much more in terms of rate recovery than the small units, which we expect will follow in the weeks ahead.

Now let me guide you through the next slide, which is Slide 14, in order to provide an outlook of both the market and the company. Slide 14 includes 2 charts, which I would like to explain. On the left, you can see idle fleet development versus the Clarksons Timecharter Index for container vessels. This graph show 2 interesting developments. Firstly, and marked with the number one, it shows that since March 2019, idle capacity has decreased sharply, which, in our view, has been the basis for improving charter rates seen during the recent months. Secondly, and marked with the number two, it is worth noting that the idle numbers include vessels undergoing scrubber retrofits. Subtracting those vessels would lead to a significantly lower idle number. Usually, idle fleet has increased quite notably during the low summer seasons. And if you look at the spikes in July and August for the years 2015, 2016, '17 and '18, you will see that there has always been a much steeper increase in idle capacity during the so-called flex season. This time, there has only been a moderate increase in idle fleets, and at the same time, charter rates remained robust and have actually increased. Now for the charts on the right-hand side, this is the Howe Robinson Container Index, which compares the weekly developments of the index since 2012 on a yearly basis. As you can see, in 2019, the index has the highest value for the Week 35 over the periods under review. In Q3 alone, the index rose by more than 12%, which is the second strongest increase in 10 years. Of course, the future is subject to the developments of a global economy, but in our view, the absence of a summer slump is a positive indicator for potentially further improvements in rates.

Please turn to Slide 15, which provides an update on IMO 2020, which is a key theme for the industry, and of course, also for MPCC. As previously communicated, we follow a balanced approach in terms of compliance options. By looking at the market, there is one headline that is worth noting, that is, obviously, that the spread has recently increased, at least the forecast for the spreads has increased to levels of more than $200 per ton. That is for those who will switch on the basis of scrubbers a positive news. At the same time, if you look at the average installation duration for scrubbers, talking to the various owners out there and also looking at our scrubber program to some extent, we expect that scrubber installation duration will take longer than previously assumed, which will have a knock-on effect, and which will mean that the effect of scrubber retrofitting on capacity will stretch well into 2020 in our view, and this is a positive factor on capacity.

Looking at our own compliance program when it comes to IMO 2020, as I said, we follow a balanced approach between compliance and fuel and scrubber retrofits based on a thorough analysis, where we looked at consumption trading profile, charter appetite, client's renewal cycle and other factors, and this resulted in the selection of 10 vessels that we will equip with scrubbers. For 6 out of 10 scrubber charters at attractive terms have been fixed. For the remaining 4 vessels, charters are under negotiation or under review.

Based on the current spreads, our scrubber-backed charters provide a solid payback time of 2 years and an attractive cash-on-cash yield above 20%. Scrubber installations have started to commence during the second half of this year as far as our fleet is concerned, and the first scrubber is fully commissioned and functioning. The remaining vessels will follow during the second half of 2019, which will inevitably have an effect on utilization during the months ahead.

For the remaining vessels, we will run those on compliant fuel and tank cleaning as well on schedule we have vessels that will be able to stem first passes of compliant fuel as of October this year.

Now let me go to Slide 16, which shows the -- on the left-hand side, the level of -- or the upside potential of the implied fleet valuation when looking at share price of -- on the basis of NOK 22 capital market valuation as well as the current book value of the equity of the company. The implied basically upside potential compared to new bidding parity is significant. We look at almost 200% upside when looking at the share price valuation, and almost 100% upside when looking at the book value of the fleet. We believe -- and that is back to the capital allocation focus, we believe that, currently, the best investment we can carry out with free liquidity after a liquidity bolster, this is to buy back our own shares. At the same time, we continue -- and that is the right-hand side, we continue to follow a strategy of low financial leverage, low cash breakeven in order to benefit with the high and significant operational leverage from an anticipated market recovery and rate increase in the months and quarters ahead.

I would then like to wrap up the session and open the floor for questions with Slide 17. Basically coming from the shipping markets and the feeder markets and as I said, the demand is heavily affected by macroeconomic uncertainties, U.S.-China tensions, potential risk of slowdown. But at the same time, the supply side looks much more favorable and this remains with limited growth due to 2 factors: one is the limited Newbuilding and limited order book, and at the same time, it is the admittedly temporary yet an effect, which, in my view, will at least last the next 6 to 12 months and the fact of vessels being out of the water and inactive due to scrubber retrofitting.

So based on the market fundamentals and some of the slides that I just run through, we did see a tightening in market over the last couple of weeks and months. We have seen a unusually active summer in terms of activity and let's say, only reduced -- increase of idle capacity, whilst at the same time, rates were on the upswing, and therefore, a lot of charter indices trending north. We believe this is a positive element, of course, all with kind of the disclaimer of the global economic uncertainties. What are our MPCC key priorities? The key priority is getting ready for 2020. The key factor there is to ensure a smooth transition into IMO 2020. The majority of our scrubber program is still ahead. We are currently struggling scrubbers, as I've said before, and we are also preparing for the switch to compliant fuel for the remaining fleet. This is a key priority for the next 6 to 12 months.

Secondly, we want to enhance the commercial and technical operations. We will and are in constant dialogue with our customers, our charterers, in order to find custom-made solutions, such as scrubber charters, which we have regionally agreed, for example, in South America and the Caribbs, with attractive charter terms and durations. Furthermore, the goal is always to optimize EBITDA per vessel in a day. That means to bring down the cost of the vessel operations and be a reliable partner to our customers.

Finally, and one of the most important pillars in our strategy from the very beginning has been to always preserve the strong balance sheet, use prudent leverage and always keep a solid cash position especially in a volatile market as we are faced with at the moment. Furthermore, after having accounted for that and subject to market developments, we will continue to consider selective FMP transactions, sale of vessels, maybe acquisitions, to reallocate capital, at the same time looking at -- on the investment side, the best use of our capital, in our view, would be to make accretive investments, for example, in our own share at these price levels.

So with the significant operational leverage that we have and the low cash breakeven, we believe that MPCC is well positioned to benefit from what we expect in the months ahead, which is a rebalancing of demand and supply, followed by improving charter rates. And they're our high and significant operational leverage, is of benefit, every $1,000 in additional time charter rates, on an annualized basis, translates into roughly $20 million in additional EBITDA per annum.

With that, I would like to close my presentation and look forward to receiving questions and comments. Back to you operator. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We got one question over the phone. It's from the line of [Henria Verstaad].

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Unidentified Analyst, [2]

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It seems that it's not the macro environment in the demand side, which has been a driver for the stronger rates so far this year, but rather the scrubber installations taking off part of the supply chain. And you mentioned briefly that you expect the effects of scrubber retrofitting lasting into 2020. However, can you provide some color on how long you expect the effect to last for? Or put differently, based on your comment, do you expect benefits to only last a few months?

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Constantin Baack, MPC Container Ships ASA - MD & CEO [3]

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Yes, thanks for your question. This is a question that is not easy to answer because, I think, it has a few elements to it. First of all, it is subject to the scraps. I mean if the scrap stays where it is, so even widens the incentives and the necessity to actually consider scrubber investment for many industry participants becomes more relevant. So I would say, it's closely linked to the scrap development. In general, I think -- and then also looking at most of the scrubber projects and installations that are being conducted, that there will be quite some scrubber installation volume shifted into the next year. I personally think that we will, at least, have an impact of 1% on capacity for next year, if not more. For this year, annualized, it's probably somewhere between 1% and 1.5%. And as such, I believe, it will have a prolonged impact on the supply and demand imbalance or rebalancing. So this is probably a more high-level answer, but generally speaking, when -- as I said, when looking at this spread, this is such a determining factor in kind of evaluating the number of scrubber retrofits for 2020 and beyond. It can actually be even more if the spread is wide on a prolonged basis.

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Operator [4]

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(Operator Instructions) And we do not have any questions over the phone, sir.

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Constantin Baack, MPC Container Ships ASA - MD & CEO [5]

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Okay. Then thanks, everyone, for your attendance. Thanks, operator, for moderating the presentation. And I wish everyone a pleasant day and a nice weekend. Thank you very much. Bye-bye.

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Operator [6]

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Thank you, and that concludes our conference for today. You may all disconnect, and thank you all for participating.