Q3 2022 Global Ship Lease Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the global ship lease Q3, 2022 earnings conference call I would now like to turn the call over to Ian Webber CEO. Please go ahead.
Thank you good morning, good afternoon, everybody and welcome to.
The global ship lease third quarter 2022 earnings conference call. The slides that accompany today's presentation are available on our website.
But sometimes you don't see global shipments don't come.
Slides two and three you remind you as normal that today's call may include forward looking statements.
Just on current expectations and assumptions on our part.
Of that 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 slide presentation.
We also draw your attention to the risk factors section of our most recent annual report on form 20-F, which is for 2021 I'm as filed with the SEC on March 24, this year 2000, and I'm sure it's true.
And you can obtain thus far our websites or via the SEC's.
All of our statements are qualified by these and other disclosures in our reports filed with the SEC.
We do not undertake any duty to update forward looking statements.
The reconciliations of the non-GAAP financial measures to which we will refer during this cool to the most directly comparable measures calculated and presented in accordance with GAAP you should refer to the earnings release that we issued this morning, which is also available on our website.
As usual I'm going to stay by our executive Chairman George Your recourse Chief Financial Officer, Cashel surplus Chief Commercial Officer, Tom Lister.
George will begin the call with a high level commentary on GSO and our industry.
First off Tom and I will take you through our recent activities quarterly results and financials.
Current market environment after that well be pleased to take your questions.
So turning now to slide four I'll pass the call over to George.
Thank you Ian and good afternoon or evening to all of you joining us today.
As we have flagged in recent quarters macro headwinds and negative economic sentiment have continued to offset pressure on consumer demand and that's when the container shipping industry driving an ongoing normalization in the charter market, leading to downward pressure on charter rates and asset values.
From the historically high levels, both studies and bust.
Nevertheless.
We have secured extensive gone to cover for a large portion of our fleet, while the market remains very hot.
10, full with Fixings, Oh five years, each signed during the third quarter to start in late late 'twenty two 'twenty three isn't even 'twenty 'twenty four jets.
<unk> is well positioned to weather the challenges ahead and to capitalize on opportunities that may arise.
Positively we have added nearly $1 billion to our contracted revenue. This year with 770 million I did in the third quarter alone, giving over $2.2 billion of contracted revenue spread over just under three years.
As you can see on the right side of the slide here or is that for the quarter continues to demonstrate the heightened level of cash flow and earnings that we established through extensive chartering activity English in recent years as well as a well timed acquisition of vessels most of last year and below market rates.
We're able to reach out there.
Plus higher rates in the market over the course of 2021 and 'twenty two.
We have a robust balance sheet with no debt maturities before 2026 and O.
Low cost of debt despite the global high interest rate environment with all of our floating interest rates fully hedged.
The floating rate at 75 basis points.
With a weighted average cost of debt of four points, 53%.
We're also continuing to pay a sustainable dividend of one and a half dollar but come on a share annualized.
And have opportunistically repurchased $20 million of our shares this year of which 15 million of it was in the third quarter.
I Havent secured a 40 million buyback authorization during the second quarter of this year.
From this position of strength in Prudence, we are focused on their long term resilience of our business.
To continue to generate sustainable value preparing for decarbonization and further improving our competitiveness by investing in our fuel performed myself commoditization of our fleet in conjunction with our customers and supporting why the decarbonization initiatives.
I was gonna win attractive counter cyclical opportunities that is that meet our strict criteria, we want to be ready to act decisively for the benefit of our shareholders.
With that I will turn the call over to Ian.
Thank you George.
Please turn to slide five.
Here, we show the diversification of our chartering base, which now includes over 10 of the top liner operators.
In total as of September 30, we had over $2 $2 billion of contracted revenue.
Spread over Teu weighted average of two nine years.
We're fully covered for this year 2022, and 90% of that that is a covered for next year 2023.
We're pleased to be recognized as a trusted partner to the liner companies.
Worked closely with them to ensure that our vessels meet their long term strategic needs.
By ensuring that they are reliable well maintained and well operated but also jointly pursuing decarbonization and other vessel optimization investments, including for fuel efficiency that increased performance for our operators and our charterers and a long term asset value for ourselves.
Turning to slide six these are the vessels that we owned crossed the 2021.
You can see and talk and.
In Red the chances that we agreed during 2021 'twenty two 'twenty two respectively.
Materially increased rates and in most cases on a multiyear basis.
As George mentioned, we signed a further 10 forward fixtures during a quarter of this year and each instance.
The five year period.
These long term charters, which commenced on the expiry of the existing arrangements in late 2022 like this year through 2023 and into 2024.
Reassuring and another wise onset environment.
Turning to slide five these are the vessels that we acquired during 2021 again with subsequent charters indicated in dogs.
Right.
All points housekeeping things firstly as we highlighted on the bottom of the slides the combined impacts of these accretive acquisitions and the re chartering of our vessels that came open.
Pre existing paid almost doubled our first nine months adjusted EBITDA 22 compared to the prior year period.
It presents a major step change with GSO.
And secondly, some of the vessels, which we acquired in 2021 at charters attached appetites of acquisition, which were meaningfully below the then prevailing market rates.
Consistent with our strategy of building forward cover we were able to agree new challenges as the market strengthened at rates that were even more accretive than we than those we modeled at the time of agreeing to the transaction.
How do you call. It in principle, we are risk averse and disciplined in acquisitions, but we will move decisively when there are opportunities to invest where our residual risk where residual risk is low and potential upside is significant.
In these cases.
On the next slide slide eight and.
In previous quarters, we shouldn't illustrative guidance across different rate scenarios.
Louis I want to be very clear this is not a forecast.
Forecasting charter rate, so I ratings, but we'd rather illustrating the extension of our contracted revenues and a very limited spot market exposure, where you're trying to you're trying to treat.
As I mentioned before we fixed approximately 90% of our days of 2023 with those few vessels set to come open into the market.
Currently, earning charter rates meaningfully below recent highs.
Moving on to slide nine.
Where we show an overview of making disciplined capital allocation strategy.
As we mentioned our contracted revenue is highly visible and provides us with full coverage of our operating needs.
And that sort of expressed interest and amortization.
We've also been able to return capital to shareholders.
Our sustainable dividends of $1 50, but yeah.
Starting on the hall sensor quarter.
As discussed on previous earnings earnings calls and as George mentioned our share.
Share buybacks.
Now invested $30 million and bought back since the third quarter of last year.
$15 million since our most recent earnings call for Q2 of this year.
We still have some tens of million dollars.
Overall $40 million buyback authorization remaining.
We continue to Delever the business to manage balance sheet risk.
To build equity value.
We're investing by way of Capex over and above routine maintenance spend for example on regulatory dry dockings to enhance the commercial relevance and competitiveness of our fleet and an evolving regulatory and decarbonization environments.
This includes working with charterers to install energy saving retrofits the vessels currently on the water.
As the cycle turns and the risk and return dynamic improves we also keep an eye out for potential accretive growth and prudent fleet renewal opportunities on unusual selective and highly disciplined basis.
We also want to maintain strong cash liquidity, both for resilience and in order to retain optionality in a cyclical and uncertain market.
So all of this our ultimate focus is on generating long term value for shareholders through a balanced approach.
With us.
I'll turn the call over to <unk> to talk you through our financials.
Thank you Anne on Slide 10, we have summarized our financial highlights for the first nine months of 2022.
For the nine months period was $408 $6 million up from $294 $4 million in the prior year period.
Similarly, adjusted EBITDA for the nine months period was $298.4 million almost double the 158 $1 million. The first nine months of 2021.
Automotive my life income, which had that Ford one of items more than doubled from $104 6 million really the first nine months of 2021 to 221 million in the same period for 2022.
On the balance sheet during the third quarter to the major event was the completion of the U S. Private placement of $350 million of privately rated investment grade debt priced at a fixed rate of 569% used to fully redeemed the more expensive, 8% senior unsecured notes due 2020.
For the Haven credit facility due 2026, and the Hell ATM facility due 2024.
Together with our interesting.
Interest floating rate cops are zero point, 75% for all of our floating rate debt, we have reduced our average cost of debt to 453%.
We have also five vessels unencumbered and extended maturities such that we have no refinancing through 2026.
We have a little over $260 million of cash on our balance sheet net of restricted cash had minimum liquidity covenants gives ninety-seven median about much of which is required for working capital altogether, we have comprehensively improved our overall financial position and flexibility.
Also we have authorized 20 million of the 40 million share buyback authorization that we put in place in the second quarter 50 million of these buybacks have taken place since our last earnings call.
All of these is in addition to the 10 million of buybacks in 2021.
Finally, and as Ian has mentioned we are paying a quarterly dividend of <unk> 37.45 cents per share $1 five per share annualized.
On Slide 11, now is a summary of our key capital structure developments over time in the upper left is our amortization schedule through the end of 2023, we aggressively amortize our debt as we think is prudent in this business and we are focused on managing refinancing risk.
He then amortization schedule is in the appendix of this presentation on slide 29.
On the upper right of Slide 11, you can see the margin and overall cost of our depth both of which have come down markedly over time, despite the overall higher rate environment and being only slightly higher than the federal reserve's benchmark interest rate.
Robert its margin is now down to just over 3% from four 6% at the beginning of this year and as I mentioned, we have fully hedge our floating rate exposure with a zero point, 75% interest floating rate cut.
On the lower left you will see that the trading liquidity in our stock was somewhat reduced in recent months as the microenvironment has shifted remains far in excess of levels. As recently as the end of 2000 2020, driven by a material increase in our public float.
With that I will turn the call over to Tom.
Thanks Douglas.
As usual and for the benefit of listeners who are new to GSO. Slide 12 is intended to highlight the ship sizes on which our business is focused which will help with the subsequent slides in context.
GSO is focused on midsize and smaller ships, which is shorthand for ships ranging from about 2000 Teu up to about 10000, Teu, which is effectively the liquid charter market.
The top map on this slide on the left shows the deployment of quote unquote, our ships our sizes of ship Aida ships under 10000, Teu and emphasizes the operational flexibility, which is especially valuable in uncertain times.
As you can see they're deployed everywhere.
The bottom map on the other hand shows where the big ships I E. Those larger than 10000 Teu are deployed which tends to be on the east West main lane or arterial trades, where the cargo volumes and shoreside infrastructure can support them.
And it's important to note that over 70% that's seven zero percent of global Containerized trade volumes are actually moved outside the main lanes and the north South regional and intermediate trades served by ships such as ours.
In his opening remarks, George pointed to the increasingly challenging macro and geopolitical outlook that we're all currently facing and the corresponding deterioration in consumer sentiment.
Clearly all Crystal ball is no better than anyone else's on how these factors will ultimately play out so as usual we prefer to focus on the supply side, where we do have forward visibility and against which investors and all of those concert containerized trade or GDP growth projections as they feel appropriate.
Slide 13 shows the metrics that tend to be used as a measure of supply side tension.
The top chart shows idle capacity, which at quarter end was around 1%, which is broadly where it's been for about the last two years.
The bottom chart tells a similar story containership recycling scrapping was almost nonexistent for container ships in 2021 and fell to zero for the first nine months of 2022, although I would note that a small number of ships have subsequently been being scrapped.
So as at September 30th supply side tension was still positive, which means that the starting position from which the industry faces whatever challenges are coming down. The pipe is one of supportive fundamentals at least from the supply side in the segments. We're focused upon.
Slide 14 looks at the order book here you can see on the left the composition of the order book by size segment covering deliveries scheduled to take place all the way through 2025.
Undeniably the order book has expanded during the course of the last 18 months or so reaching an overall order book to fleet ratio of 29, 6% at the end of September .
However, it continues to be heavily skewed towards the big ships over 10000, Teu for which the ratio is 51, 4%.
Meanwhile, our focus segments of 2000 to 10000, Teu, which are highlighted in the red box have a significantly low ratio of a little over 15, that's one 5%.
And there are two important points to keep in mind when assessing the order book.
The first is the midsize and smaller containership fleet is aging.
As you can see from the chart on the right if scrapping which continue to be deferred by the end of 2025, a substantial slice at the sub 10000 Teu capacity currently on the water.
Over 1.5 million Teus with would be at least 25 years old and candidates for the recycling yards net.
Net this out against the total order book of sub 10000 Teu vessels due to be delivered through the end of 2025, and you would get implied net growth and these sizes of just 599%, which itself would be spread out over the coming three plus years.
The second is the 2023, which is now only two months away marks the implementation of new Decarbonization regulations, which according to growing industry consensus is expected to cause a slowing down of the global fleet to reduce emissions, thus reducing effective supply.
Back to this important point in a couple of slides time in.
In the meantime, let's look at slide 15, the charter market.
And as you can see from the chart. The charter market continued its spectacular rise through the first few months of 2022.
Plateaued through the second quarter and much of the third and then fell quite sharply.
Furthermore, charter durations are currently shortly shortening with recent fixtures of only a few months.
And the Ford fixture market currently is effectively on hold.
Having said all that availability of ships in the charter market remains very limited.
As many of the ships that otherwise would've come into the market in recent months had already been forward fixed or extended before coming open.
This means that data for vessels in the actual charter market is very thin and the rates and terms shown of us largely theoretical hence the large red question Mark on the charts.
This lets call. It health warning is particularly relevant to the indicative term charter rates shown to the right of this slide they all very much theoretical and illustrative.
The sharp fall in charter rates are in the charter market rate index seems at odds with the supply side fundamentals shown on the earlier slide.
This apparent disconnect may be explained by overwhelmingly negative macro sentiment compounding the lack of liquidity in the charter market.
And is perhaps exaggerating the downward correction of rates in the near term, though this remains to be seen.
Logically downward pressure on earnings and negative sentiment will put downward pressure on asset values, but if holidays are on charter fixtures. As thin then holidays are on sale and purchase transactions on vessel values is currently even finished.
Anyway, we will have better visibility in due course, although probably not until the new year and possibly not even until after Chinese new year, but few would dispute that a normalization of charter market rates is currently in progress.
And that's a nice segue to slide 16, which provides an update on decarbonization, which is expected to actually have a favorable impact on supply side fundamentals overtime.
Walking through the slide in the top box is a snapshot of the evolving regulatory environment. This is by no means an exhaustive list, but addresses the regulations, which are most imminent and on which there is currently most clarity.
Let's start with E X I, which is the energy efficiency existing ship index.
This is tied to a shift technical characteristics and is binary in nature. So it's parcel fail.
Unknown E X I compliant ship will not be permitted to trade passed its first annual I E. P. P survey, which is an air pollution survey after January one 2023.
Next to see eye to eye, the carbon intensity indicator.
This is an operating measure and is to be determined annually on a backward looking basis by the ships actual operating performance.
Oh it is calculated as a function of actual C. O two emissions divided by vessel deadweight times distance traveled with some correction factors thrown in for good measure.
The first assessments will be performed in 2024 based on 2023 data with C. O N I ratings ranging from a to E E.
E rate had ships all those rates are D for three years in a row will require corrective action and it's worth noting that C. I parameters will Titan progressively over time.
Next up is E U E T S. The European Union emissions trading system.
This will attribute a cost to greenhouse gas emissions from ships trading to from or within the E U.
The mechanism and timing for the incorporation of shipping under EU E. T. S is still under review, but ratification and implementation is expected to be within the comparatively near term. So we will keep you posted on that front in due course.
And the next box, we have laid out some of the high level implications of Decarbonization regulations expected for the global Containership fleet visa, firstly reduced operating speeds to reduce emissions.
Vessel operating speed has a disproportionate impact on C. O two emissions as the relationship between speed and fuel consumption and thus emissions is close to logarithmic.
An important byproduct of slowing the global fleet down is a reduction in effective supply.
And to illustrate a reduction in average operating speed of the global fleet of just one notch one nautical mile per hour is estimated to reduce effective supply by around 6%.
The two largest liner operators M. S C and musk have recently reported being being reported is estimating that effective capacity effective supply reductions could be of the order of 10% and between five and 15% respectively.
Secondly vessel operations will be optimized for the C. I I algorithm and ratings. In addition to slowing ships down efforts will be made to improve their operational efficiency and to minimize unproductive time, such as waste for bus terminals. So an overall smoothing of operations and increased incentive.
To utilize while specified fuel efficient and well maintain ships.
And thirdly, increasing investments will be made in energy saving technologies and retrofits in developing green or in the near term greed are fuels and propulsion I didnt carbon capture and mitigation technologies.
So with all that said what are the what are the actions that we are taking to maintain and hopefully improve the commercial positioning of the GSL fleet and a decarbonising world.
Clearly our first priority is to ensure regulatory compliance.
For E X I this is relatively straightforward.
When needed we're installing engine power limiters or <unk> on our ships at a cost of under $100000.
Dollars per ship, which will ensure compliance.
See I I on the other hand is a little more complex as it is determined not only by the efficiency of the underlying ship, but also I would say actually primarily in fact by how the ship is operated by the charterer.
Sequentially, we are applying technologies and protocols to enhance cooperation between owners and charterers to facilitate C. I R. Optimized vessel operations, Indeed cooperation and partnership between owners and operations will be key to successful D kind of daunting to successful decarbonization.
And we're well positioned in this respect as a partnership approach with our charterers has long underpinned the G. S L business model and our strategy.
Consistent with this approach, we're also retrofitting energy saving technologies or E. S. Ts to our ships subject to commercial agreement and in cooperation with the charterers are these agreements are commercially sensitive as you might imagine and vary on a case by case basis, but the underlying rationale is that we will only invest in.
E S Ts that will enhance the value and earnings of the corresponding ship.
That's the crux of it but for those of you who would like to know more may I refer you to the climate strategy section of our latest ESG report, which is available on our corporate website.
With that I'll turn the call back to George to wrap up Georgia.
Thank you Don I will provide a brief summary, and then we would be happy to take your questions.
Our recently signed long term forward fixtures, we have excellent contract coverage of over $2 $2 billion over an average of two nine years fully covering our debt service capex and sustainable dividends.
So at least 123, even before the impact of any further charter regulus.
Build a very strong balance sheet.
That will be stable and b minus one positive by standard <unk> Poor's and Moody's respectively.
We have proven diversified access to capital most recently through a successful private placement and a very attractive cost of debt.
We have a very high quality fleet of high Reefer, midsized post panamax and smaller container ships, which play a critical role for Atlanta customers.
Idle capacity to manage very low in the global fleet and scrapping scrapping has only just begun at the margins falling a complete stop for an extended period, suggesting a backlog of aging vessels that would likely be scrapped in the down market.
Due to this and to the high concentration of ordering activity in the very largest vessels. We expect net fleet growth in our fleet sizes to actually be fairly negligible and perhaps negative on the effective basis from 'twenty to 'twenty three.
There's no question that macro headwinds and negative sentiment, that's causing a normalization from the excel genetic conditions in recent quarters.
In depth, some frac fright rates charter rates and asset values.
That being said given the extremely limited the number of ships that are presently in that side of the market. It remains to be seen whether that.
Current steep declines on in fact broadly representative.
It is worth noting that lateral pay those are still forecasting full year 'twenty two to be extraordinary profitable for them.
Finally, our capital allocation is focused on the business resilience and on maximizing long term value for shareholders.
Through well timed acquisitions and contracting on a long term basis, we are well positioned to sustain their recent step change in our earnings.
Our dividend is both attractive and sustainable.
And we've continued to build cash liquidity for resilience optionality and to proactively address the challenges and opportunities of the carbonization.
With that we would be happy to take your questions.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if at any point, we'd like to withdraw from the queue. Please press star one again.
You will be provided the opportunity to ask one question and one further follow up question, we will take a moment to render our roster.
Your first question comes from the line of Amit Malhotra from Deutsche Bank. Your line is open.
Hey, good afternoon, gentlemen, this is Chris Robertson on for Matt Thanks for taking our questions.
Hi, Chris.
I just wanted to ask on you mentioned the backlog of potential scrapping candidates. So.
Do you have a sense of how much bottlenecking could be there in terms of the space that's available at the breaker yards.
I'm, just trying to get a sense of how much of that.
Scrap capacity could actually be absorbed by the yards in any given point in time.
Yeah. That's a that's a good question and Chris I would say that at least for US. It's it's a comparatively academic one unfortunately, because even our oldest ships are on on contracted on charters are by and large but you raise.
You raise a very reasonable point I think the other thing that we have to keep in mind is that with the decarbonization regulations, which are going to tighten over time I think both we and the industry as a whole are expecting the fleet to slow down so it's quite difficult to know how much excess capacity quite.
Unquote is need to be to be scrapped out and in any case. So sorry, I can't give you a clearer stay with them as well.
No problem.
My second question is just on looking at the current share price. How are you guys thinking about valuation in the context of the remaining share repurchase authorization program.
And when it comes to kind of the current market sentiment are you taking more of a cautious approach in building cash on the balance sheet or what's the appetite for secondhand acquisitions in this counter cyclical market.
Yeah, I'll try to answer that Chris and Ian can jump in.
First of all.
We have taken a cautious approach always that's why we have not purchased any ships for a long time as prices we felt were not.
Making a lot of sense for us.
No, yes prices are coming down opportunities will arise and.
We're not in any hurry to grab them, we want to see where the market will stabilize in the saddle.
But it is very important for the company entering in a in a market like this to have a you know a lot of cash on the side for all sorts of purposes. So we are building our cash position naturally which is the right thing to do for any company.
And we're sitting still and then observing the market and the opportunities now.
Now with respect to buyback still it now.
Book as it has been we have done buybacks last quarter.
And Oh, we have still differentiation open.
And we're looking at it as well.
Okay. That's clear thank you.
Okay.
Your next question comes from the line of Omar <unk> from Jefferies. Your line is open.
Thank you Hey, guys. Good afternoon, I wanted to ask broadly just about the market and then Tom I think you outlined the things very well, especially in terms of what's going on in the charter market. We've obviously seen a slowdown here over the past few months and even if things were slowing down you were able to take care of some sort.
I guess 10 11 forward contracts at good rates, but just in general.
And how would you characterize the actual conversations youre, having with your liner customers.
Are they still interested in discussing contracting eco ships and maybe they are just taking a step back from from older tonnage how would you frame the market just in general in terms of your customers and how they're viewing the different types of assets out there.
Sure Omar Thanks for the question I'll try and answer this and I'm sure George will have some views as well, but I think what's going on at the moment is this tactic.
Tactically the lines are taking a little bit of a wait and wait and see approach. So no one's rushing in to to fixed chips, you know be they <unk> or existing tonnage and part of that is that there's very little liquidity. There were very few ships coming open in the market.
At the moment, so it's it's going to be I think and I'm sorry for deflecting. The question I would say, it's going to be really only and in two or three months time that will have a little bit more clarity.
And how the market is shaping shaping up and where the demand for vessels lies in and you know one of the principal considerations. There is the decarbonization regulation, everyone has tried to model out what the implications of that are going to be but I think the proof is always.
Ultimately in the pudding them. So we'll have to see how that has an impact early next year. So at the moment tactical wait and see taking ships on comparatively short terms and I would say that that broadly characterizes it George would you agree.
Yeah, and I would just add to that that in a lot of companies being businessmen. They want to take the best deal for them and when they see that the market is softening and sharpening our fast actually what we have seen it wasn't quite quite a substantial drop very quickly.
No one is willing to commit until they see where they matter where the market is going to set the bar.
They might you know whatever your charter today tomorrow might be expensive. So they want to see where the demand supply balance and then that would come into the market and this has happened recently I mean, the there's an increase of fixtures.
The last.
Five weeks.
We had in the first three weeks less fixtures and I'll have a bit more fixtures. So the liner companies are coming into the market seeing that the day rates have bottomed out in a way so that they are going to take their needs I mean, they do need ships, there's no doubt the containers and need ships is just an opportunistic I think approach that Atlanta covenants have taken.
Are we the opportunity of Oh of you know.
Including you know contacting shapes at lower rates, if they wait a bit. It's it's always happens the same happens on the way up land land governance that are there to take ships and the owners are.
You know shy away from doing this so that in that space and that the rates are going up show you charter a ship tomorrow, it's better than what you are a charter today, it's the same thing.
Yeah.
Got it thanks for that color.
George and Tom and just as a follow up you were fairly acquisitive.
Early stages of the cycle bank shifts fairly cheap, let's say and then you've been harvesting the cash sense and we've got a nice cash position low leverage and a pretty sizable backlog.
When it's time to start focusing on acquiring tonnage again, yeah. How do you think about that in terms of what you actually buy are you agnostic to whether they're eco vessels or older ships and Tom you mentioned in your opening remarks, its really just about the residual value is that does that hold in this.
As context of looking at newer ships versus older ships.
In and contain this it's more than that you are younger it's the specifications for the Zip codes.
The container ships have they.
They have different specification between them, we always focus on the highest level of commercial characteristics of ships. So we we prefer the shapes that are the first choice you'll charters, whether this fall within the eco type or are they the classic type well.
And let's not forget that the container fleet, it's a 80% almost non non eco type. So it's not like a you know Fleetwood. It's 50 50 or so what is important for chapter is really AIDS. The commercial cost base, where the ship lets say if for example, if a ship.
It's a very high reefer capacity, that's a very positive.
If the ships can take a lot of a loaded cargo they have a high.
Loading capacity.
Homogeneous loading what do we call it in our industry show stability of the ship is high so it's going to take a lot of loaded and stuff like that.
And Joe just to add to that Omar I would I would just like to clarify that where we're not looking at new buildings. So we will continue to focus upon.
Existing ships that would be immediately accretive.
Acquisitions, where we can make such acquisitions.
And we would be focusing upon midlife ships and as George said, you know in the segments upon which we're focused the because it's a set of segments that have been underinvested structurally over a number of years. The the proportion of quote unquote eco ships in the mid size and smaller segments is rather limited anyway.
So that's it it's not as important let's say.
As it would be if one were to focus upon the bigger ships and there we always like deals that have visibility on cash flows can be written down to modest residuals with upside Optionality. Thereafter. So you know we're not changing the recipe for our cooking.
Okay very good thanks.
Thanks, Tom Thanks, George I'll pass it over.
Yeah.
If you previously indicated that you would like to ask a question and we'd still like to do so please indicate your interest again as some questions appear to have dropped away.
Okay.
Our next question.
From the line of Liam Burke from B Riley Your line is open hi.
Alright, thank you.
And today.
No. We're good thanks, Liam what about you're.
Doing just fine thank you.
It's just saying if you lay out your operating revenues and break it down between the amortization of <unk>.
Charter agreements it really highlights and your growth in TCE revenues.
As long as it kind of take for that amortization around through the income statement.
[laughter].
Yeah.
[laughter] alright.
Alright.
Yeah, I think that's fair.
Yeah, I'm talking about I'm, sorry, and I apologize for that.
My other question was just.
Fantastic.
<unk>.
And in fact, so fantastic could you repeat it please.
[laughter] anyway.
Amortization of the charter agreements it had been running through the income statement for a few years now beginning to run down but I mean, if you look at it on a year over year basis. It really muted the growth of your TCE revenues on an apples to apples basis, how long is it going to take.
For this amortization to run its course best.
Yeah.
The honest answer is I'm not sure what tassos.
No.
I mean theres no its not in cash as well.
When we adjust for that one.
Come up with.
EBITA adjusted EBITA.
How about your ROIC over time.
There's.
At Cordis, the amortization of the liability.
Deteriorates and the challenges associated with acquisitions that we made in 2021.
Most of those charters I'm thinking out loud here relatively short so I would imagine that in the not too distant future.
And we will disappear.
Okay and getting back to acquisitions.
Scrapping.
As Tom laid out is fairly nonexistent are there any is there any crossover between potential scrap vessels. When you start looking at acquisitions again.
How you are able to squeeze additional economic value out of those older assets.
Well, how I'll have a crack at answering that I mean this this ties in again.
I'm with we're trying to work very closely with our charterers to enhance existing ships that are on charters to to them, including older ships are where the specifications are are attractive enough.
In such a way as to ensure that those ships remain sticky, let's say on those charters and get renewed with those charterers. So I think there is going to be a shaking out potentially of the fleet depending upon the degree to which the global fleet has to slow down, which we think is going to be significant and then he excess vessels.
That are no longer needed to the global fleet in there that will be a differentiation I think between those vessels that are well specified and enhanced for more efficient operation and those that are less so I don't know if that addresses your.
No that's fine thank you.
Yeah.
Your final question comes from the line of fruit more <unk> from Clarksons Securities. Your line is open.
Thank you hi, guys Hi.
Uh huh.
And you mentioned the opportunities.
What kind of opportunities are you.
Looking for hoping for us.
We're looking at like distressed opportunities or are these.
Let's call it normal more normal sale leaseback transactions that are let's say.
More reasonably priced.
Yeah I will.
I'll tell you what in this market I wouldn't expect.
The many distressed by the real meaning of it is.
Owners have been making money in the last couple of years.
There are two types of opportunities out there.
Either sale and leasebacks, which is something we have been always doing throughout the years.
And these are not market related really to suggest that you know that transaction, a wedge of cash flow and that.
As you provided at the end.
And then there are the market they'll slab.
Save.
Some some owner is willing to sell the fleet or what a single ship for a couple of ships.
The values of the ships are now we do have a lot of inside deals and we always had that don't come into the market and the what we call the market and we buy those ships when we feel that the level of Oh.
<unk> of the ship makes sense for us and and the downside risk is minimal.
On the upside Optionality is is substantial.
We have done a lot of these deals they all would definitely.
Sometimes they gave you a very high return sometimes they give you a more reasonable good return it very much depends on how the market moves away from the point of acquisition onwards are but you know this is the type of deal that you always do it in shipping as long as the entry point the entry price.
Right.
Yes sure.
Final question I had this theres a lot of question on the let's call it the counterparty risk.
How should investors think about that are in relation to let's say the resilience of the backlog.
Well.
I would let the analysts will talk about that because.
He has been having this question over the years, but I would say that the counterparties in a container shipping all the Atlanta companies that they have they had and the better the best shape they have ever been historically financially.
And actually in more than that so that order.
I would probably say net debt zero.
And lots of cash in addition to that on the side.
So we're not worried about.
How about the Counterparties and because we also have.
Only first class names in our portfolio.
But you can also add to what you're.
Your experience has been living in a difficult years.
Sure.
They are.
Yes, another great deal to add George.
Operator, we have industry standard chartered contracts.
Noncancelable.
We only deal with.
But really good names, we've never had a bad debt.
And J S. L. It kind of doesn't happen in our industry bar and lounge anyway.
Liner companies are desperate for the ships they need good charter fleets say run that scheduled services without the ships. They don't have services I'm sorry, it's in their own interests.
So by properly and as George said that they are in the best financial shape.
Probably ever been and so we're not complacent about it but where it doesn't it doesn't.
It doesn't keep us awake at night.
The last point I'll make is that we've got very strong relationships.
With all of our customers.
As well so we're very careful with her with her.
Contract.
Yeah.
Sure.
Fair enough. Thank you very much.
Thank you. Your final question comes from the line of Amit Malhotra from Deutsche Bank. Your line is open.
Hey, Thanks, I just had one final follow up question. This is Chris again.
<unk> 23, you guys did a good job laying out.
Survey Drydocking capex as well as ballast water treatment systems and upgrade can you comment as to what the other capex category is the $4 six and $4 7 million in.
In 'twenty, two and 23, respectively and does that add to the depreciable value of the assets.
Usually we have expenses that are related with some upgrades that have to do with commercial and its' been reflected to old these upgrades and the other capex.
Mainly to the charter rates that we are taking or there are some upgrades on the smaller scale, which are our regulatory to hub.
I don't know if that's okay with you and you are covered.
Okay.
Okay.
That does conclude today's questions I would now like to turn the call over to Ian Webber CEO .
Thank you very much. Thank you all for listening. Thank you for your questions. We look forward to providing you with a positive uptake from GSO and the container shipping market fourth quarter earnings which will be next.
Next year in 2023, thank you very much.
Thank you ladies and gentlemen, this does conclude.
Thank you for your participation you may now disconnect.
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