Global Ship Lease, Inc. (NYSE:GSL) Q4 2023 Earnings Call Transcript
Global Ship Lease, Inc. (NYSE:GSL) Q4 2023 Earnings Call Transcript March 4, 2024
Global Ship Lease, Inc. beats earnings expectations. Reported EPS is $2.49, expectations were $2.34. GSL isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and thank you for standing by. My name is Ginnie and I will be your conference operator today. I would like to welcome you to the Global Ship Lease Q4 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Mr. Ian Webber, Chief Executive Officer of Global Ship Lease. You may begin your conference.
Ian Webber: Thank you very much. Hello everyone, and welcome to Global Ship Lease's fourth quarter 2023 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 of our 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 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 which was on 2022 and that was filed in March 23rd.
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. For reconciliations of the non-GAAP financial measures to which we will refer during this call to the most directly comparable measures calculated and presented in accordance with GAAP, please 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 Youroukos, our Chief Financial Officer Tassos Psaropoulos; and our Chief Commercial Officer, Tom Lister. George will begin the call with some high-level commentary on GSL and our industry.
And then Tassos, Tom, and I will take you through our recent activity, the quarterly results, and financials, and the current market environment. After that we will be pleased to answer your questions. So, turning now please to slide four. I'll pass the call over to George.
George Youroukos: Thanks, Ian. And good morning and good morning afternoon or evening to all of you joining us today. Elevated macro and geopolitical uncertainty defined much of the fourth quarter. This was most visible in the Red Sea where the deteriorating securatization so many liners re-routing the services away from the Suez Canal instead taking the much longer route around the Cape of Good Hope. This has tightened supply demand balance in the containership charter market, causing charter rates to firm and deferring the market normalization that had been underway through March of 2023. It is impossible to know how long disruptions to the Red Sea will last. In the meantime, consistent with our core strategy and while conditions are supportive, we continue to work hard to lock in additional contract cover in order to grow cash flows and forward visibility.
On the back of our strong contracted cash flows, we continue to fortify our balance sheet and build equity value by delevering. Furthermore, we have no refinancing needs before 2026, until which time we have also capped our floating interest rate exposure to suffer at 0.64%. Our business model and approach to capital allocation are unchanged. The sustainability of our $1.5 annualized dividend remains a key priority and we continue to be active in the opportunistic buyback of shares. At the same time, we remain focused on ensuring GSL's resilience and positioning ourselves to act selectively on the investment opportunities we expect to emerge in the months and quarters ahead. Driving all of our actions is our relentless focus on preserving and building long-term value for our shareholders.
With that, I'll turn the call back to Ian.
Ian Webber: Thank you, George. Please turn to slide five. Here we illustrate the composition and extensive diversification of our charter base spread across top tier liner companies. During 2023, we signed 22 new charters or extensions, adding $313 million of contracted revenues, almost $90 million of which were added in the fourth quarter, despite the weakening market at that time. And as George said, we continue to work hard to capitalize on the positive momentum going into 2024 to grow that contract cover. As of December 31, 2023, we had approximately $1.7 billion of contracted revenues, with an average remaining duration of 2.1 years. Moving on to slide six, this provides an illustrative view of our future earnings potential under different charter rate scenarios.
As in prior quarters, it's important to emphasize that this is not a forecast. However, you can see that 2022, which was itself a record year, has been surpassed by our results in 2023 and 2024 is off to a strong start with 86% of 2024's ownership days already contracted. Onto slide seven, here we review our disciplined and dynamic capital allocation strategy. We maintain our sustainable dividend of $37.5 a quarter, or $1.50 per share on an annualized basis, which is a dividend yield of over 7% and we continue to execute share buybacks opportunistically. Since quarter three of 2021, we've repurchased $54.5 million of our shares in the open market, including $22 million in 2023, with an aggregate of $4 million worth of shares in Q4 2023 and year-to-date 2024.
This means that our share count today is more than 8% lower than it would otherwise have been, and we have approximately 35.5 million remaining under our board authorization. We also continue to build equity value and to de-risk by deleveraging our balance sheet, which we believe to be especially prudent in a period of macroeconomic and geopolitical uncertainty. New and environment regulations and pressure on our customers to decarbonize have improved the expected return profiles of certain ship technologies and upgrades, and we're acting accordingly to add commercial and financial value to our vessels. We also believe that it is important to maintain cash liquidity, both for resilience and for optimality to pursue acquisition opportunities.
After all, in a cyclical industry such as ours, the real way to build long-term value is by buying assets during the down cycle, which is a neat segue into slide eight. This is the slide that we've shown before, and it underlines two important points. The first is that there is value in the container shipping cycle. The second closely related point is that to unlock that value, you need to be disciplined in getting the timing and transaction terms right. To illustrate this, the orange bar on the chart corresponds to the super up cycle in 2021, 2022, when asset values and potential acquisition risk spike to all-time highs. We rode the charter market up during this period and locked in charters that continue to support earnings today. But we didn't buy a single ship from mid-2021 until approximately two years later when we purchased four 8,500 TEU ships with attractive charters attached, actually in May last year, 2023, after the sharp downward correction in asset values.
So you can see we are not compelled to pursue growth for growth's sake. Rather, we have a strong track record of purchasing ships only when the risk-adjusted return profile is compelling. Now I'll pass the call over to Tassos to discuss our financials.
Tassos Psaropoulos: Thank you, Ian. Slide nine is a snapshot of our 2023 financials and highlights. Our key P&L line items all improved in 2023, with adjusted EBITDA at over $460 million, up 16% on 2022. Our gross debt reduced by almost 20% during the year, even as we purchased and partially debt-financed the four ships. Our cash position at year-end was just under $295 million, $142 million of that is restricted, most of which is advanced receipt of charter hire, with the remaining $153 million covering our liquidity governance and working capital needs moving forward. You will also see that we have taken an impairment charge of $18.8 million across two vessels purchased in 2021. This charge is non-cash, has zero impact upon the viability of our business, and is the result of normal course impairment testing.
And as Ian and George have already remarked, we have continued to return capital to shareholders via sustainable dividend and opportunistic share buybacks, while also building equity value by delivery. Meantime, our corporate credit ratings of Ba3 stable, BB positive, and BB stable on three credit agencies, referred our cautious and prudent approach. Slide 10 illustrates our successful strategy to deliver and reduce our cost of debt over time. We are on track to reduce our debt outstanding by a third from the end of 2022 to the end of 2024. We have reduced our cost of debt significantly to 450 base points even as interest rates prevailing in the market rose. And on the right side of the slide, you can see the total transformation of our leverage profile, with adjusted net debt to adjusted EBITDA falling from 8.4 times at year-end 2018 to 1.4 times at the end of 2023.
That is a radical change with profound implications for our resilience, for our readiness to capitalize on potential opportunities during the down cycle, and for our overall credit profile. Tom will now discuss our market focus and SIP deployment.
Tom Lister: Thanks, Tassos. Moving to slide 11, we reiterate our clear focus on high specification, mid-size and smaller container ships, ranging from 2,000 TEU to about 10,000 TEU. The top map illustrates the deployment of ships within our preferred size range, highlighting their operational flexibility, which is a good structural hedge in uncertain times such as these, and their widespread reach. In contrast, the lower map shows the deployment of larger ships at 10,000 TEU or larger, which tend to be more constrained to the main east-west arterial trade routes with suitable Deepwater port infrastructure. I should emphasize that neither of these maps yet reflects the ongoing rerouting of containerized trade around southern Africa as a result of the widely reported disruptions in the Red Sea.
We'll come back to this point, incidentally, repeatedly Slide 12 presents a view of idle capacity and ship recycling. Idle capacity increased to 1.3% during the fourth quarter, but has since tightened again as a result of the Red Sea situation. As expected, the uptick in idle vessels was accompanied by the return of scrapping activity for essentially the first time since 2020, albeit at a limited scale thus far. The record-breaking charter markets of 2021 and 2022 saw the lives of many older and lower specification container ships extended and scrapping deferred due to their phenomenal earnings. However, as the market normalizes, which has been delayed for the time being by the situation in the Red Sea, there is an expectation that there will be a catch up in scrapping.
Regulatory dry dockings, which ships are obliged to go through typically on a five-year cycle, prompt owners to consider whether investing $2 million to $3 million in a ship is justified by the forward earnings potential of that ship. When a vessel is aging, poorly specified, or both, the answer may well be no, particularly when there's a challenging outlook ahead and the ship likely gets scrapped. We'll look at what this may mean on the next slide. Slide 13 this slide shows the order book, which is heavily weighted towards the larger ship sizes, in other words the over 10,000 TEU segments in which, to be very clear, GSL does not participate. With an order book to fleet ratio of 13.4%, on the other hand, the order book for midsize and smaller ships, which are the segments relevant to GSL, is much smaller but still meaningful.
Here, the older age profile of the midsize and smaller fleet is important context and ties in with what I was saying earlier about deferred scrapping and the scrap versus invest decisions that may be driven by regulatory dry dockings. Extrapolating this point, if we were to assume the scrapping of all ships over 25 years old and net those numbers out against the order book for midsize and smaller ships delivering through 2027, our focus segments would actually see negative net growth. In other words, they would actually shrink by 2.2% through 2027. Now this is probably an extreme scenario, but it does illustrate the supply side safety valve for the industry in the event of a protracted downturn. On slide 14, we put some data around what disruptions in the Red Sea actually mean for container shipping under normal circumstances, about 20% of global containerized trade volumes, which are the boxes themselves, transit the Suez Canal, which sits at the northern end of the Red Sea.
However, if anything, this 20% figure understates the dynamics at play as much of the container volumes transiting the Red Sea and Suez are on long haul trades, and the longer the trade, the more capacity you need to service it. So if you look at the Red Sea and Suez in terms of global containerized fleet capacity, in other words, the ships over a third, 34% in fact, would normally pass through this waterway, which is the routing shown with the yellow line on the map. If, on the other hand, you're forced to divert this traffic around the Cape of Good Hope as shown on the blue line, then the impact is very significant. MSI in fact calculates that, holding all else equal, if all Suez related containerized trades were to be diverted around the Cape, it would absorb around 10% of effective global containerized fleet capacity.
And stating the obvious, this is a big deal, especially as an estimated 80% to 90% of Red Sea and Suez related containerized fleet capacity is already being diverted in this way. This brings us to slide 15, which looks at the charter market after the super cyclical highs of 2021 and 2022, both charter market rates and asset values have been normalizing, with downward pressure accelerating in the second half of 2023. However, this decline was arrested towards year-end and has been converted into positive upward momentum in early 2024. We will provide you with an update on our Q1 earnings call, but market rates are currently trending up from the levels indicated on the right-hand side of this slide, and charter durations are also extending, especially for larger ships.
How long these supportive conditions will last is of course anyone's guess, but we're doing our best to lock in charter cover and grow cash flows while they do. With that, I'll turn the call back to George to conclude our prepared remarks on slides 16 and 17.
George Youroukos: Thank you, Tom. On slides 16 and 17 we provide a summary of key points. We have $1.7 billion of contracted revenue over an average of 2.1 years, which fully covers our debt service CapEx and through the at least 2025 without relying upon contributions from any future charter signings or extensions. We have a very strong balance sheet and credit ratings, including an investment grade rating for our senior secured notes due July 2027. We have almost $295 million of cash on the balance sheet, though much of it is restricted and no refinancing risk before 2026. Our leverage is below 1.5 times, our floating rate debt is fully hedged and our all-in debt cost is 4.55%. The world now is both complex and dynamic, with the Red Sea playing a particularly significant role.
Now this environment has weighted on general sentiment, but the implications for rerouting to avoid the Red Sea have in fact materially tightened container ship supply demand and thus improved both freight and charter market earnings. Amid the uncertainty, Liner company customers have been cautious, but importantly they face the current uncertainty with balance sheets fortified by the recent upcycle. So, to sum up, we remain absolutely focused on protecting and building shareholder value through the cycle by growing our cash flows, de-levering, paying a sustainable dividend, buying back shares opportunistically, and building cash liquidity for resilience and to capitalize on the right investment opportunities. Before we transition to your questions, I just want to take a moment to express my appreciation and the appreciation of the GSL board for everything that Ian Webber has contributed to the company since he initially came on board during its earliest days.
Ian's impact and influence can be felt in every aspect of GSL, and while we're drawing towards the end of his final quarterly earnings call as CEO, I sincerely look forward to welcoming him onto the board and continuing to benefit from his experience and leadership from the board level.
Ian Webber: George, thank you very much for those kind words. It's been an honor to serve as the GSLs CEO for the past 16 years or so, which has covered the worst industry conditions that we've ever seen after the global financial crisis, and the best ever as well. In the super up cycle of 2021, 2022, the company weathered the storms and we took advantage of the strong market where possible with the transformational merger with Poseidon in 2018 and the resulting increase in scale and strengthened management, team GSL is in great shape. Tom, CEO from the end of March, has been with the company throughout all of these times and knows the business intimately also, having had substantial expertise across the industry, he's extremely well positioned to lead GSL going forward at this time of increasingly rapid change, not least from the pressure to decarbonize.
With Tom Tassos, George and the rest of the team, GSL is in very capable hands. So, with that, let's move on to Q&A.
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