Q4 2022 Global Ship Lease Inc Earnings Call
Speaker 1: F.
Speaker 2: mode. After the speaker's presentation, we will conduct a question-and-answer session.
Speaker 2: To ask a question you'll need to press star followed by the number one on your telephone keypad.
Speaker 2: As a reminder, this conference call is being recorded. I would now like to turn the call over to Ian Weber, Chief Executive Officer of Global Shipwreese. Thank you. Please go ahead, sir.
Speaker 1: Thank you very much.
Speaker 3: Good morning, good afternoon everybody and welcome to the Global Shipmates fourth quarter and full year 2022 Earnings Conference Call.
Speaker 3: The slides to the company today's presentation are available on our website at www.globalshiplease.com. Slides 2 and 3 of that presentation remind you that is normal. Today's call may include poor looking statements that are based on current expectations and assumptions. And I are by their nature.
Speaker 3: 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 also draw your attention to the Risk Factors section of our most recent annual report on Form 20F.
Speaker 3: which is for 2021 and was filed with the SEC on March 24 of 2022. You can retain this via our website or via the SEC.
Speaker 3: 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.
Speaker 3: The recommendations of the non-GAP for natural measures to which we will refer during this call to the most directly comparable measures calculated and presented in accordance with GAP. You, please, would GAP usually refer to the earnings release that we issued this morning, which is also available on our website.
Speaker 3: As usual, I'm joined today by our Executive Chairman, Georgi Roukos, our Chief Financial Officer, Tasos Seropoulos and our Chief Commercial Officer, Tom Lister. George will begin the call with a high-level commentary on GSL and our industry, then Tasos, Tom and I will take you through our recent activity, quarterly results and financials, the current market environment.
Speaker 3: After that, we'll be pleased to take the 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, macrohead wins and negative economic sentiment have continued to put pressure on consumer demand.
Speaker 3: and thus on the continuous shipping industry. This has exerted downward pressure on charter rates and asset values, although they still broadly at or above levels prior to the pandemic.
Speaker 3: Nevertheless, because we secured extensive contact cover for last portion of our fleet, while the market was very strong, GSL is well positioned to weather the challenges ahead and to capitalize on opportunities that we expect to arise now that we have clearly entered a different phase of the cycle.
Speaker 3: A fourth quarter and full year 2022 results reflect a very strong contractive cash flow profile and once again represent a dramatic step up relative to all prior years. Reflecting a well time growth.
Speaker 3: and the attractiveness of the charges that we secured across our fleet, many of which extend on a fixed rate, basis several years into the future. We have a robust balance sheet with no significant debt refinancing obligations before 2026.
Speaker 3: and the attractiveness of the charges that we secured across our fleet, many of which extend on a fixed rate, basis several years into the future. We have a robust balance sheet with no significant debt refinancing obligations before 2026, and a low overall cost of debt.
Speaker 3: Of floating debt is fully hedged through 2026, with LIBOR and SOFR CUPed at an attractive 75 basis points only. We continue to pay our sustainable dividend of 1.5$ per common serenially and have opportunistically slippery purchased.
Speaker 3: a cumulative 40 million dollars of our shares, of which 10 million dollars was done since our last earnings call.
Speaker 3: From this position of stability and financial strength, we continue to reinforce the long-term resilience of our business in the face of cyclicality, evolving regulations and the increasing decarbonization focus of our customers.
Speaker 3: With that I will turn the call over to Ian.
Speaker 4: Thank you George. Please turn to slide 5. Here we show the diversification of our charterer base, which is well balanced across essentially all of the leading global liner companies.
Speaker 4: In total, we have just under $2.1 billion of contracted revenue, extending over a TU-weighted average of 2.7 years. Almost half of this total was from the 19 charters agreed during the course of 2022 and year-to-date 2023.
Speaker 4: Eleven of these 19 were forward fixtures from multi-years.
Speaker 4: To illustrate how the market dynamics have changed.
Speaker 4: Since October the first, last year, so in the last five months, we have made only four charts of pictures for aggregate revenues of a little under $22 million.
Speaker 4: These charter periods range from 4 to 16 months with an average duration of about 10 months, a significant turnaround from the first nine months of 2022 when rates were elevated and fixtures often multi-year.
Speaker 4: Our fleet is already approximately 93% chartered through the end of this year, 2023, and 72% covered in 2024. We are pleased to be recognised as a trusted partner to the line of companies.
Speaker 4: and we work closely with them to ensure that our vessels meet their long-term strategic needs, both by ensuring that they're reliable and well maintained and well operated, but also by pursuing jointly with them, our customers, the charterers, decarbonisation and other vessel optimisation investments.
Speaker 4: that enhance both ongoing performance and the value and earnings potential of the underlying assets.
Speaker 4: On the next slide, slide six, as in previous courses, we show illustrative guidance across a range of three different rate scenarios.
Speaker 4: As always, I want to be clear that this is not a forecast. Whilst it is important to note the extent of forward coverage that we have through 2024 and beyond,
Speaker 4: and the impact of four charters that were previously agreed that have not yet been fully realised in that results.
Speaker 4: It is also the case that currently prevailing rates have dipped marginally below the rolling 50 here and 10 year averages.
Speaker 4: These averages are heavily influenced by the recent record peak earnings period.
Speaker 4: Moving on to slide 7, where we show an overview of our dynamic and disciplined capital allocation strategy.
Speaker 4: Our contracting revenue is highly visible and provides us with full coverage of our operating needs and our debt service of interest and amortization.
Speaker 4: We've also been able to return capital shareholders, but we have a sustainable dividend of $1.50 per year.
Speaker 4: to 7.5 cents per quarter. As George said, we've repurchased about $40 million of our shares since we began our buybacks about 18 months ago.
Speaker 4: 30 million dollars of this has gone under the 40 million dollar buyback authorization which we put in place in the second quarter of last year.
Speaker 4: and includes 10 million since our last earning call in November . We continue to de-level the business to manage balance sheet risk and to meet equity value.
Speaker 4: We are making continuous investments in ship performance optimization and decarbonization. As noted, this includes working with our charters to install energy saving retrovits to our vessels.
Speaker 4: A VESIC values normalize, then with a strong balance sheet, we're also keeping a disciplined eye open for flea growth and renewal opportunities that meet our strict requirements. I'll come back to this on the next slide.
Speaker 4: We also want to build strong cash liquidity, both for resilience and in order to retain optionality and consistent competitiveness in a cyclical industry against a non-circum macro backdrop and the evolving regulatory environment.
Speaker 4: Through all of this, our ultimate focus is on generating long-term value for shareholders through a balanced approach that allows us to be nimble in pursuing the most attractive value-generating opportunities at each point in the cycle. Coming now to slide 8, the chart here shows the last 20 years or so of containers shipped.
Speaker 4: asset prices and one year time chart rates, superimposed on which we have shown the acquisitions that we made since we merged with Poseidon in late 2018.
Speaker 4: one of the main takeaways. The first is to demonstrate the cyclicality of our industry and to highlight the risks and opportunities that cyclicality entail. The second is to emphasise the disciplined nature of our acquisitions, all of which have been made either at sector bulldoze or more recently.
Speaker 4: immediately partially massive increase in asset values and earnings that we were able to identify early and to capitalise upon. Under third and equally important point to emphasize is that we have not made any acquisitions at all since the middle of 2021, June 2021, since when asset values were spiking.
Speaker 4: Not because the WONT Apple and Apple opportunities is to do so, but because we maintained our laser focus on managing risk and optimizing return.
Speaker 4: During that same period, in the absence of compelling purchase opportunities, we returned capital to shareholders by way of our sustainable dividend and through the opportunistic share by- email I Republicans, thank you.
Speaker 4: We've also increased the company's equity value and de-risked through aggressive delivery cheap. So to conclude on this slide, the main takeaway is in the title.
Speaker 4: Discipline and timing the cycle correctly are key to making valuable creative acquisitions and containing shipping, and those remain our core investment principles.
Speaker 4: With that, I'll turn the call over to Tasos to talk you through our credentials. Thank you, Ian. On slide 9, we have summarized our 2022 financial highlights.
Speaker 3: Revenue for the full year 2022 was $645.6 million, up 44% from 2021.
Speaker 3: Adjusted the bidafor the year was 398.2 million, up almost 70%. Our normalized net income, which adjusts for one of items, was 298.2 million, and increased degrees or 75%
Speaker 3: Now, on the balance sheet, we took a number of important actions throughout the year. We took a number of actions to deliver to reduce our cost of debt to a blended rate of 453 basis points.
Speaker 3: to push material refinancing requirements out to 2026, to diversify our sources of capital, notably including our first US private placement of investment-grade debt.
Speaker 3: To fully hedge our exposure to rising interest rates and to amend confidence in such a way as improves our flexibility. Please note that the refinancing we have executed over the last 12 months or so have actually less than overheads.
Speaker 3: principle because we replace some floating rate debt with a fixed rate private placement. There is currently about approximately 220 million of headroom available under the 75 basis points interest rate cap which would reduce the effective cost of any additional floating rate debt we made rise.
Speaker 3: As already mentioned, we have been utilising our buyback authorisation and we continue to pay an attractive quarterly dividend. Between January 1, 2022 and year to date, 2023, we have returned a total of about 80 million to common shareholders.
Speaker 3: 30 million by way of served bybacks and 50 million, we are sustainable common dividend. A further 13 million of common dividend is due to be paid in the next couple of days.
Speaker 3: Concluding this slide, although we have a total of 278 million of cash on our balance sheet at the year end, please note that 150 million of this is restricted, out of which 180 million represents advanced receipt of charter hire, and a further 22.4 million is held for minimum liquidity governance.
Speaker 3: The remaining 106 million of gas contributes to our working capital requirements and balance its flexibility. Moving on, slide 10 is the summary of our key capital structure developments over time. In the upper left you can see our monetization schedule through the end of 2024. As we think is prudent in a cyclical industry,
Speaker 3: With assets that have offended life, we aggressively amortize our death, utilizing our cash flows to deliver and manage the risk. Our detailed amortization schedule is in the appendix of this presentation on slide 28.
Speaker 3: On the upper right of the slide you can see the Martin and the overall cost of our debt, both of which continue to fall over time despite the high trade environment and is actually now as low as the Federal Reserve's benchmark interest rate.
Speaker 3: Our average margins now down to just over 3% from 4.6% at the beginning of 2022. On the bottom left, you can see the development over time of our leverage profile on the basis of net data adjusted for working capital to adjust the bidat. From 8.4 times at the end of 2018,
Speaker 3: to now two times at the end of 2022. With that, I will turn the call over to Tom. Thanks, Tassos. As usual, and for the benefit of listeners who are new to GSL,
Speaker 5: Slide 11 is intended to highlight the ship sizes on which our business is focused, which will help put the subsequent slides in context. GFL is focused on mid-sized and smaller ships, which is shorthand for ships ranging from about 2000 TU up to about 10,000 TU, which is effectively the liquid charter market.
Speaker 5: The top map on the left shows the deployment of quote-unquote our sizes of ship, i.e. ships under 10,000 T.E.U. and emphasizes their operational flexibility, which is especially valuable in uncertain times.
Speaker 5: As you can see, they're deployed everywhere. The bottom map on the other hand, where the big ships, i.e. those larger than 10,000 TU, 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.
Speaker 5: And it's important to note that over 70% of global containerized trade volumes, in fact 72% in 2022, are moved outside the main lanes in the north-south, regional and intermediate trades, served predominantly by ships like ours rather than by the big ships.
Speaker 5: As George touched on in his opening remarks, the macro and geopolitical outlook that were all currently facing remains challenging and uncertain. Unsurprisingly, given the Russia Ukraine conflict, substantial inflation and negative consumer sentiment, global containerized trade volumes are estimated to have fallen.
Speaker 5: year on year in 2022 by a little over 1%. Marking only the third year of negative growth in the industry's 60 plus year history. However, to offset the bearish tone of that statistic, the comparison year of 2021 was one of extraordinary growth driven by peak COVID consumption habits. Anyway, our crystal ball is no better than anyone else's on how the force is driving
Speaker 5: 12 then shows the metrics that tend to be used as a measure of supply side tension.
Speaker 5: The top chart shows idle capacity, which at year end was around 1.9%, which is slightly up on where it had been for the preceding 18 months or so. Idle capacity incident may has since risen further reaching around 3.3% in late February of this year.
Speaker 5: The bottom chart tells the similar story of exceptionally tight supply through 2021 and 2022. Containership recycling, scrapping, was very limited in 2021 and almost nonexistent in 2022 when fewer than 4,000 TU of capacity was scrapped out.
Speaker 5: I would note, however, that scrapping activity is now beginning to pick up a bit and should rate normalization continue, the deferred scrapping of the last two years or so would imply a sizeable segment of lower specification, older ships, in the global fleet that would, in, again, quote unquote, normal conditions, be expected to be retired.
Speaker 5: Let's turn to slide 13, which looks at the order book. Here you can see on the left the composition of the order book by size segment covering all deliveries currently scheduled to take place not only this year in 2023, but also in 2024, 2025, and 2026. The overall order book to fleet ratio as at December 31, 2022 was
Speaker 5: 29.4%. However, it continues to be heavily skewed towards the bigger ships over 10,000 T.U., for which the ratio is 51.8%. Meanwhile, our focus segments of 2,000-10,000 T.U., highlighted in the red box, have a significantly lower ratio of a little over 14%, 1%4%. And there are two important points to keep in mind when assessing the order.
Speaker 5: and slowing the speed of containerships within the system decreases effective supply and vice versa.
Speaker 5: On the first point, the mid-size and smaller container fleet is aging. As you can see from the chart on the right, if scrapping were to continue to be deferred, by the end of 2026, which is the delivery horizon of the existing order book, a substantial slice of the sub-10,000 TU capacity on the water, almost 2 million TUs worth.
Speaker 5: would be at least 25 years old and potential candidates for the recycling yards in a softening market.
Speaker 5: However, if you net this out against the total order book of sub-10,000 TU vessels due to be delivered over the same period, you would get implied net growth in these sizes of just 1.1 percent, which itself would be spread out over the coming three or four years.
Speaker 5: By the way, performing the same exercise for 2023 in isolation would imply a net 1.3% reduction of sub-10,000 TU fleet capacity. On the second point, 2023 marks the implementation of new decarbonisation regulations from January 1st to January 21st.
Speaker 5: 2023, which, according to broad industry consensus, is expected to cause a slowing down of the global fleet to reduce emissions, reducing effective supply. The year is still young and the implementation of the relevant rule is gradual and tightens over time, but we have already seen the operating speed of our fleet reduced by around about 8% versus the same period in 2022. And I'll come back to this in a couple of slides time. In the meantime, let's look at Slide 14, the Charter Market. As you can see from the chart, the Charter Market continued its spectacular...
Speaker 5: been forward fixed or extended before coming open.
Speaker 5: So, hard representative data is still a bit thin, but few would dispute that a normalization of charter rates and logically, also of asset values, is currently in progress. And that's a neat segue to Slide 15, which provides an update on decarbonisation, which is expected to have a favourable impact for us charter owners on supply side fundamentals over time.
Speaker 5: working through the slide. In the top box is a snapshot of the evolving regulatory environment. This is by no means an exhaustive list by the way. It admits, for example, the ever tightening regulations in California. Nevertheless, it addresses the regulations which are most imminent, broadest in their application, and on which there is currently most clarity. Let's start with EEXI, the Energy Efficiency Existing Ship Index.
Speaker 5: This is tied to a ship's technical characteristics and is binary in nature, pass or fail. A non-EEXI compliant ship will not be permitted to trade past its first annual IAPP survey, which is an air pollution survey, after January 1, 2023. Next is CII, the Carbon Intensity Indicator. This is an operating measure and is to be determined annually on a backward looking basis by the ship's actual operating performance.
Speaker 5: CII is calculated as a function of actual CO2 emissions divided by vessel dead weight times distance traveled. The first assessments will be performed in 2024, based on 2023 data, with CII ratings ranging from A to E. E-rated ships.
Speaker 5: All those rated D for the first three years in a row will require corrective action. And it's worth noting that CII parameters will tighten progressively over time. Next up is EUETS, the European Union emissions trading system.
Speaker 5: This will attribute a cost to greenhouse gas emissions from ships trading to, from, or within the EU. Phase-in is scheduled to begin in 2024, but detailed regulatory guidelines have yet to be published. In the next box, we have laid out some of the high-level implications of decarbonisation regulations expected for the global container ship fleet. These are...
Speaker 5: Reduced operating speeds to reduce emissions. Vessel operating speed has a disproportionate impact on CO2 emissions as the relationship between speed and fuel consumption and thus emissions is logarithmic. An important byproduct, as we've already mentioned, of slowing the global feed down is a reduction in effective supply. To put this in context, a reduction in average operating speed of 1 knot.
Speaker 5: is estimated to reduce effective supply by around about 6%. Vessel operations will be optimised for the CII algorithm and ratings. In addition to slungships down, efforts will be made to improve their operational efficiency, so an overall smoothing of operations and increased incentive to utilise well-specified, fuel-efficient and well-maintained vessels.
Speaker 5: Increasing investments will be made in energy saving technologies and retrofits in developing clean or at least clean air fuels and propulsion and in carbon capture and mitigation technologies. So what are the actions we GSL are taking to preserve and improve the commercial positioning and trading flexibility of our fleet in a decarbonizing world.
Speaker 5: Our first priority, naturally enough, is to ensure regulatory compliance. For EXI, this is relatively straightforward. When needed, we're installing engine power limiters, EPLs on our ships at a cost of just under $100,000 per ship, which will ensure compliance. CII is a bit more complex as it's determined not only by the inherent efficiency of the underlying ship, but also, actually primarily in truth, by how the ship is operated by the charsera.
Speaker 5: Consequently, we're applying technologies and protocols to enhance cooperation between owners and charterers to facilitate CII-optimized vessel operations. Indeed, cooperation and partnership between owners and operators will be key to successful decarbonization.
Speaker 5: We're well positioned in this respect as a partnership approach with our charters has long underpinned the GSL business model. Consistent with this approach, we're also retrofitting energy saving technologies or ESTs to our ships, subject to commercial agreement and incorporation with the charters.
Speaker 5: These agreements are commercially sensitive and vary on a case-by-case basis. But the underlying rationale is that we will only invest in discretionary ESTs that will enhance the value and the earnings of the corresponding ship.
Speaker 5: So 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.
Speaker 5: And with that, I'll turn the call now back to George to wrap up. Thank you, Tom. I will provide a brief summary on slide 16, and then we will be happy to take your questions.
Speaker 3: Our 2.1 billion of contract cover over the next 2.7 years ensures that our debt service, CapEx and dividend through 2024 are already fully covered without any need for additional charter renewals.
Speaker 3: We have built a very strong balance sheet and are rated double B stable and B1 positive by Stadon and Poor's and Moody's respectively.
Speaker 3: We have proven diversified access to capital and a very attractive and competitive cost of debt with a floating rate, exposure fully hedged.
Speaker 3: We have a high quality fleet in the switch spot of the market. High RIFR, mid-sized post-paramax and smaller containerships that play a critical role for our liner customers.
Speaker 3: Idle capacity remains relatively low in the global fleet, though it is beginning to creep upward.
Speaker 3: Meanwhile, a large backlog of older scrapping candidates in the global fleet is only just starting to be recycled after an extended period with essentially zero delusions.
Speaker 3: Because of this dynamic and the disproportionate skew of investments towards the very largest ships, we expect net fleet growth in our fleet sizes to be negligible.
Speaker 3: and perhaps even negative on an effective basis over the next few years. There's no question that macro headwinds and negative sentiment are causing a market normalization from the extraordinary conditions of the last two years and charter market fixtures are increasingly shorter term and tactical in nature.
Speaker 3: for the slim, sub-let, subset of the global fleet that has recently come into the charter Now to illustrate this, since October 1st, 2022, we have had four charter features representing aggregate revenues of little under 22 million dollars and ranging between 4 to 16 months with an average of 10 months.
Speaker 3: That's a significant turnaround from earlier in 2022 when raids were elevated and the features often molded here.
Speaker 3: Finally, our capital location is focused on resilience throughout the cycle.
Speaker 3: while remaining nimble enough to capitalize on opportunities to build and maximize long-term value for shareholders. Through well-timed acquisitions and contracting on a long-term basis whenever possible, we are well positioned to sustain the recent step change in our earnings.
Speaker 3: Our dividend is both attractive and most importantly sustainable.
Speaker 3: We have actively utilized our shared Repetches program.
Speaker 3: And we continue to build cash liquidity for resilience, to proactively address the challenges and opportunities of decarbonization, and to ensure that we are in a position to be opportunistic and disciplined acquirers of ships for the right combination of immediate accretion.
Speaker 2: load down side risk and high upside potential. With that, we'll be happy to take your questions. If you would like to ask a question, please press star, followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster.
Speaker 2: Our first question comes from Amit Meiratra from Doja Bank. Please go ahead. Your line is open.
Speaker 6: Good morning, good afternoon. This is Chris Robertson on permit. How are you? Hi, please. Good. Yeah.
Speaker 6: Good. Good to hear that. Yeah, I mean, I think you guys have laid out really well here just the resiliency in the earnings with your time chargers here. So one of the questions that we often get here is on the renegotiations risk from the liners side.
Speaker 6: which was seen in kind of previous cycles, but could you kind of compare and contrast where the liners sit now in terms of their cash balances and resiliency and kind of like the willingness that they would actually renegotiate? And I mean, it's not like you guys have booked at the very top of the market here. So I don't think that your rates are really at risk, but could you kind of assuage? Yeah.
Speaker 6: Some of the fears that are out there.
Speaker 3: Well, Chris, let me start by saying my opinion, then Tom can jump in as well. The previous times, the financial situation of our counter-party, the Scott Charters, were completely different than today's. They are today in the best shape they have ever been since the inception of containerization, I would say.
Speaker 3: So that's one positive. Second is in general in our industry the top names do not tend to renegotiate and they haven't done so in the past. Even in the most difficult situations like 2009 when the financial crisis broke out still there were no renegotiations from the first class counterpart. Of course.
Speaker 3: As in every market there is first class, second class, third class. So far we have seen some third class names, go back up and, you know, not performing.
Speaker 3: But we haven't got any such names in our, let's say, Charters. And we don't feel that such a thing would be there.
Speaker 3: Now, having said that, although we do not expect any renegotiations, sometimes it's commercially viable and it's commercially better for, it's a win-win as the Chinese say for both, to amend an extent. But of course, charters and owners agree.
Speaker 3: to reduce the charter rate and elongate the charter period. And that is not a negotiation. That is something that both parties might agree for the mutual benefit.
Speaker 3: So we should not confuse these kinds of transactions with charter negotiations.
Speaker 5: I will let Tom get into that more. Yeah, thanks George. I would just echo those words and Chris I would say that GSL when we took the company public back in 2008, shortly before Lehman Brothers went bust in the world, went into a sort of synchronized global downturn, global financial crisis.
Speaker 5: and during the whole of our history, all of our charters have performed and there haven't been renegotiations of any sort. Other than as George says, selectively on a bilateral basis where it suited both parties to do so, and we've never had a bad debt. So I think, you know, the...
Speaker 5: the business model has been quite well stress tested.
Speaker 6: Yeah, I definitely think the history of the company speaks for itself there. Follow up question. You guys spent quite a bit of time talking about the older end of the fleet spectrum here with possibility of scrapping. Can you talk about just the types of owners that generally have these vessels that are...
Speaker 6: 25 year plus. What type of owners are they? What type of segments do they generally operate in? As the fleet slows down and maybe helps put stabilizing pressure on rates, do you think they'll still have an incentive to keep these things going as long as possible? Or, you know, regardless of that slow steaming, is it just time for these ships to leave the fleet?
Speaker 5: Sure, I'll have a crack at that, and I'm sure George will also have some thoughts. We used to provide a slide, and sadly it's not included here, that shows the age profile of the global fleet by size segment. So, whatever the topic of where we can find the
Speaker 5: as a general rule, the smaller the ships in a size segment, the older they are. So, you know, if you look at the very smallest ship sizes, the average age of those segments tends to be higher than that of the larger sizes simply because of the up-sizing of the fleet over time.
Speaker 5: Now, what tends to be a catalyst for scrapping ships out is if owners are confronted by the need to put more money into them to keep them going. So as you know, Chris, every five years or so, there's a regulatory dry docking that ships are obliged to go through. So, you know, the need to put more money into them to keep them going.
Speaker 5: and those can cost anywhere between one and a half to say three million depending upon the size of the ship, the age of the ship, the spec of the ship, etc., etc., etc. So when you are approaching such an investment, that tends to be a catalyst for either saying, okay, we can see...
Speaker 5: good earnings potential for this vatletize going forward, so we will invest, or we don't in which case we will potentially scrap the ship out. So it's a fairly rational, economically driven decision.
Speaker 3: If I may add one point that is interesting for the audience, the scrapping of scrap metal comes at one third of CO2 emissions versus new iron. You know, you know, you steal. See you in a second.
Speaker 3: So it's more environmentally friendly with respect to CO2 emissions.
Speaker 3: to use scrap than you know the classical brand new steel. That in my mind could keep scrap prices high in the long term. And the higher the scrap prices are the more...
Speaker 3: I'm talking with the Becomes Forowness to scrap the ships of the old divisors. Yeah, interesting. Thank you for that color. I'll turn it over.
Speaker 2: Our next question comes from Liam Burke from Be Rylee. Please go ahead to line is open. Yes, thank you. Good afternoon.
Speaker 7: You've got 92% to 93% of your charters locked in for 2023. Are there any discussions with the other 8% of your fleet to move off the spot market and negotiate? As you pointed out, shorter but multi-month contracts. Yes, we'll always.
Speaker 3: discussion with our Charters the possibility to fix our ships and we always try to get the longest possible period as you have seen over the
Speaker 3: the past couple of years. It's not like there is no demand, there is demand of course, and there is ongoing charges and then as we have mentioned since last turning school we fixed four ships. Those were the four ships coming open.
Speaker 3: But what happens right now is that charters are waiting a little bit closer to when the ships are becoming open to charter them, whilst before you could forward fix ships. So you could forward fix a ship to this year that was going to be open next year. And we've been doing that.
Speaker 3: As the market stands now, Charters wait for like two or three months before the Charter expiration to enter into discussions for you know renewals of Charters and that's because they want to see themselves also what's their demand from their clients, the Capers and Kirkstone's ?? so forth.
Speaker 7: Great, thank you George. And on your utilization rates, obviously bounces around with dry docking and then unscheduled off-hire. How are you looking at utilization rates as we move into 23 years or anything? I mean, you give us the dry docking schedule.
Speaker 4: But is there any thought on the unscheduled part of the utilization? Not really. The only thing that is there is that it's unpredictable. These are accidents and breakdowns, machinery failures or whatever. And by their very nature we can't forecast what they'll be.
Speaker 7: Right, but is it, I mean you do have older ships and that's part of your strategy, but is that, I mean does that tie into the unscheduled up heart?
Speaker 4: No, not necessarily. It's a question of how well the ships are maintained and we believe that we maintain our ships to a very high standard. But, you know, accidents do happen, stuff does break. But I wouldn't say that an older ship is inherently more susceptible to significance or higher than a new ship.
Speaker 2: on planned off. Our next question comes from Omar Nocta from Jeffries. Please go ahead and align it open.
Speaker 8: Thank you. Hey guys, good afternoon. I wanted to just ask about the balance sheet and how you guys seeing it evolve here. You've obviously got a very nice backlog of just over 2 billion gives you that nice stream of cash over the next several years. And I think if you just throw in some conservative assumptions on vessels that roll off higher here in the next few years.
Speaker 8: There's a real shot that JSL could get into a net cash position within, say, the next three years. I guess, one, do you agree with that type of math that JSL is on that trajectory to become debt free here in the next couple of, call it, say, three years? And then, two, is that an aim for you guys to get JSL into a net cash position?
Speaker 5: or do you see yourself investing along the way? Hey Omar, this is Tom. I mean yes we're building cash and we see de-levering as an important part of de-risking but I don't think we would ever look to be debt free.
Speaker 5: but we do see ourselves as entering an interesting point in the cycle, just as George said in his prepared remarks, where asset values are coming off and thus the potential to make accretive acquisitions is increased at a far more attractive risk, i.e.
Speaker 5: lower risk profile than was possible during the 18 months of the sort of the super cycle, when of course we didn't make any acquisitions at all. So yes, we're in this business for the long term and we see making accretive acquisitions as being
Speaker 3: core to running the business going forward, but always on a selective and highly disciplined basis as we've done in the past. And if I may add to that, in combination with building cash, cash as, you know, to have resilience.
Speaker 3: for the market that is coming. You know, we companies need to have some minimum cash aside for all sorts of purposes to make sure that, you know, anything that comes along can be handled.
Speaker 3: I'm not talking about just buying ships but also to have some working capital requirements and some cash resilience for any kind of need in a difficult market.
Speaker 9: and compliance with new regulations which were mailed it also yeah
Speaker 8: Thank you. Yeah, well, that's interesting. And I guess I think it was in response maybe to Chris's question about the liners. And it is definitely a very interesting setup at this point. You're talking about cash resiliency potential to be in a net cash position at assuming you do nothing, which you won't.
Speaker 8: But yeah, we're definitely, Tom, you mentioned the Lehman crisis shortly after you came public. I mean, yeah, it looks like this downturn that we're seeing, if this is indeed a downturn, both the liners and the owners are in a much stronger cash position than they were back then. So I guess...
Speaker 8: When we think about the capital that you've got and you want to put that to work, is there any segment of the industry that you want to be investing in when the time is right? Or is it more about just the transaction and whether it's accretive or not?
Speaker 3: Well, the first point that we always look at is risk. Every transaction we look at is viewed by us from a risk perspective. First of all, we do not want to take risk on board. We want to take the minimum. Then we want the transaction to be immediately accretive.
Speaker 3: So we want the cast to hit our balance sheet very quickly. So that means that as of today we're looking at...
Speaker 3: in this market because the market has not bottomed, the prices of ships have not bottomed. We are looking at deals where we would have some kind of a charter together with it, or we can put it right away into a charter so we can ensure growth of Arribida and cash flow.
Speaker 3: And be a deal that is agreed immediately. Now, our sweet spot of ships, since we've said always, it's the post-ponomax. This is what we like the most, let's say, without saying that the rest of the ships we don't like. But if you ask me what's my favorite, it's the post-ponomax because these ships always offer...
Speaker 3: more razor focus on the post-Panamax which is like 5,000 and above. But again, it's a deal by deal.
Speaker 8: Got it. Thanks, George. And maybe just one final one, I think maybe for Tosco, as you mentioned, the cash position and the restricted part of it. And I think it was $188 million that is advanced charter hire that's in hay. Can you just remind us how much of that? Yeah. How much, what is that constitute in terms of?
Speaker 9: You know, recognizing those revenues in the future. This has to do with the way we have initially recognized and received the money. And as far as I remember now, we are going to build up some more cash in that case. So increase the different revenue until next year, the same period. And then this will start.
Speaker 4: We've collected, we've collected, we've collected the cache and then the charterer will still pay a little bit more than the headline charter rate and that cache will build a bit. But then the charterer starts paying less than the headline charter rate and we start.
Speaker 4: It's leaking if you want to use that word. Advance receipt of cash through the income statement.
Speaker 8: Okay, thank you. So it's a timing difference between recognizing revenue and receiving cash. That's all. Yeah, and then it's a duration. Obviously very good credit practice from our perspective as well. Absolutely. Yeah, I just wanted to just make sure for modeling purposes that I'm not double counting.
Speaker 9: and long-term liability which is referred to the third revenue. Just to match the liability to offer the service.
Speaker 5: Yeah, and the thing that we wanted to make clear, Omar, to everyone, particularly for modeling purposes, is that yes, we have a certain amount of cash on our balance sheet, which is always good news. But a very substantial slice of that is tied up either as prepaid, child or hire, as we've just discussed.
Speaker 5: or for other purposes. So there's not a huge amount there that's available as quite on quite free liquidity, let's say. Yeah, understood. Well, thanks for that. Very helpful. I'll pass it over.
Speaker 2: As a reminder, if you'd like to ask a question, please press star followed by the number one. Our next question comes from Clement Mullins from Value Investors Edge. Please go ahead. Your line is open. Please press star followed by the number one.
Speaker 10: Good morning. Thank you for taking my questions.
Speaker 10: Following up on Omar's question regarding best acquisitions, do you have a preference for modern acquiships?
Speaker 3: Or are you agnostic in that regard and seeing that there is let's say a right price for losses? I would say that we do not have a preference as long as the deal and the price is the right one. We are not there to...
Speaker 3: It's opportunistically acquired ships yet without a charter. We don't feel the prices have bottom to the point that we would be buying ships even opportunistically. So far at this point we're looking at a combination of cash flow and acquisition price. So in this respect whether it's an ecosystem or...
Speaker 3: you know, an existing design, let's call it an older design, whatever you want to call it. It's not that relevant, as long as we're looking at ships that have either, you know, good potential or the good spec always, the top tier spec, some maybe enhancements.
Speaker 3: of their characteristics, maybe they have some modifications to make the more eco-friendly, but more or less ships that can operate for the foreseeable future very successfully.
Speaker 5: And just to be clear, Clement, we're not talking about new buildings. We are talking about existing ships.
that could be acquired and would be immediately accreted to cash flows from the time of acquisition, just as a sort of parenthetical.
I also wanted to ask about the cap-backs related to energy savings and emissions reduction. Could you provide some commentary on the paybacks you are seeing on those investments?
It's difficult because they vary a huge amount on a sort of...
deal to deal charterer to charterer basis. But there is, I would say almost invariably, a commercial agreement with the charterer, such that we're confident that whatever money goes into the ship to enhance it will be more than recovered either by way of an uplift in the value of the ship or by way of increased earnings or both.
Makes sense, thanks for the color. And final question from me. You've been clear you'd like to continue strengthening the balance sheet to withstand market volatility going forward and I was wondering how do you plan to balance this with additional shareholder returns? Are you a guest Hot-
Make sense, thanks for the color. And final question for me, you've been clear you'd like to continue strengthening the balance sheet to withstand market volatility going forward. And I was wondering how do you plan to balance this with additional shareholder readers? I'm sorry, Clement. I didn't.
understand the question, would you mind repeating it? Yeah, sorry. My question was, how do you plan to balance additional deliberaging or strengthening the balance sheet with shareholder returns? Well, it's possible. It's possible that nimble capital allocation is always flexible. We will always keep the various alternate uses of capital under reviewers. That's what demonstrate it in the policy, if we think it's pretty pretty.
good balance sheet management and resilience as George I think mentioned in the prepared remarks.
So we would hope that we would continue to allocate a certain portion of capital to buybacks, but we can't guarantee it, depending upon what the alternate uses of capital may be sometimes.
But we've demonstrated our willingness to do so over the past 18 months. In the big sense, that's all from me. Thank you for taking my questions and congratulations for the quarter. Thank you. We have no further questions. I would like to turn the call back over to Ian Weber for closing remarks.
Thank you very much. Thanks everybody for listening. Thank you for your questions and your support. We look forward to giving you a further update in too much time or so when we publish our first call to 2023 events. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.
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Good morning and welcome to the Global Shiplease Q4 2022 Earnings Conference call.
All participants are in a WISON-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone
All participants are in a WISON-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. On the phone, we will conduct a question and answer session.
I would now like to turn the call over to Ian Weber, Chief Executive Officer of Global Please go ahead, sir.
I'd like to turn the call over to Ian Weber. Chief Executive Officer of Global Ship Least. Thank you, please go ahead, sir. Thank you, everyone.
Good morning, good afternoon, everybody. And welcome to the Global Shipbuilding's fourth quarter and full year 2022 earnings conference call. The slides that accompany today's presentation are available on our website at www.globalshiplease.com. Slides 2 and 3 of that presentation remind you that is normal today's call.
We also draw your attention to the Risk Factors section of our most recent annual report on Form 20F which is for 2021 and was filed with the SEC on March 24 of 2022.
You can obtain this via our website or via the SEC. All of our statements are qualified by these and other other distrauters in our reports filed with the SEC.
We do not undertake any duty to update forward with the 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, please, with GAAP usually, 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 Erukos, our chief financial officer, Tassos Rappalos, and our chief commercial officer, Tom Lister. George will begin the call with a high level commentary on GSL and our industry. Then Tassos, Tom and I will take you through our recent activity, quarterly results and financials, the current market environment. After that, we'll be pleased to take the questions.
So, turning out to slide 4, 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 put pressure on consumer demand and thus on the condensueping industry.
This has exerted downward pressure on charter rates and asset values, although they stood broadly at or above levels prior to the pandemic. Nevertheless, because we secured extensive contract cover for a large portion of our fleet while the market was very strong, GSL is well positioned to weather the challenges ahead and to capitalize on opportunities that we expect to arise in the coming months.
Now that we have clearly entered a different phase of the cycle. A fourth quarter and full year 2022 results reflect a very strong contractive cash flow profile and once again represent a dramatic step up relative to all prior years. Reflecting a well-time growth.
and the attractiveness of the charges that we secured across our fleet, many of which extend on a fixed rate, basis several years into the future.
We have a robust balance sheet with no significant debt refinancing obligations before 2026 and a low overall cost of debt.
We have a robust balance sheet with no significant debt refinancing obligations before 2026, and a low overall cost of debt. Our floating debt is fully hedged.
through 2026 with LIBOR and SOFR CUPED at an attractive 75 basis points only. We continue to pay our sustainable dividend of 1.5$ per common serenially and have opportunistically clearied purchased?
a cumulative 40 million dollars of our shares, of which 10 million dollars was done since our last earnings call.
From this position of stability and financial strength, we continue to reinforce the long-term resilience of our business in the face of cyclicality, evolving regulations and the increasing decarbonization focus of our customers.
position of stability and financial strength, we are continuing to reinforce the long-term resilience of our business in the face of cyclicality, evolving regulations and the increasing decarbonization focus of our customers. With that, I will turn the call over to Ian.
Thank you George. Please turn to slide 5. Here we show the diversification of our charterer base which is well balanced across essentially all of the leading global liner companies.
In total, we've just under $2.1 billion of contractive revenue extending over a TU-weighted average of 2.7 years. Almost half of this total was from the 19 chapters agreed during the course of 2022 and year to date 2023.
Eleven of these 19 were forward fixtures for multi-years. To illustrate how the market dynamics have changed, since October 1st last year, so in the last five months, we have made only four charter fixtures for aggregate revenues of a little under $22 million. These charter periods range from four to 16 months.
with an average duration of about 10 months. A significant turnaround from the first nine months of 2022 when rates were elevated and fixtures often multi-year. Our fleet is already approximately 93% chartered through the end of this year, 2023, and 72% covered in 2024.
We are pleased to be recognised as a trusted partner to the liner companies and we work closely with them to ensure that our vessels meet their long-term strategic needs.
both by ensuring that they're reliable and well maintained and well operated, but also by pursuing jointly with them, our customers, the charlaturers, decarbonisation and other best-el-optimisation investments, that enhance both on-going performance and the value and earnings potential of the underlying assets.
On the next slide, slide six, as in previous courses, we show illustrative guidance across a range of three different rates scenarios.
As always, I want to be clear that this is not a forecast. Whilst it is important to note the extensive forward coverage that we have through 2024 and beyond.
and the impact of the four charters that were previously agreed but have not yet been fully realised in our results. It is also the case that currently, prevailing rates have dipped marginally below the rolling 15-year and 10-year averages. These averages are heavily influenced by the recent record peak earnings period. Moving on to slide 7, where we show an overview of our dynamic and disciplined and the impact of the four charters that were previously agreed.
capital allocation strategy. Our contracting revenue is highly visible and provides us with full coverage of our operating needs and our debt service with interest and amortisation. We've also been able to return capital to shareholders by way of our sustainable dividend of $1.50 per year.
to 7.5 cents per quarter. As George said, we've repurchased about $40 million of our shares since we began our buybacks about 18 months ago. $30 million of this has been under the $40 million buyback authorization, which we put in place in the second quarter of last year.
and includes 10 million since our last earning call in November .
We continue to de-level the business to manage balance sheet risk and to deal with equity value. We are making continuous investments in ship performance optimization and decarbonization. As noted, this includes working with our charterers to install energy saving retrofits to our vessels. As asset values normalize, and with a strong balance sheet, we are making continuous investments in ship performance.
We're also keeping a disciplined eye open for fleet growth and renewal opportunities that meet our strict requirements of come back to this on the next slide. We also want to build strong cash liquidity both for resilience and in order to retain optionality and consistent competitiveness.
in a cyclical industry against a non-circum-macro backdrop and the evolving regulatory environment. Through all of this, our ultimate focus is on generating long-term value for shareholders through a balanced approach that allows us to be nimble in pursuing the most attractive value generating opportunities at each point in the cycle.
Turning now to slide 8, the chart here shows the last 20 years or so of container ship asset prices and one year time chart rates. Superimposed on which we have shown the acquisitions that we've made since we merged with the Sidon in late 2018. What are the main takeaways?
The first is to demonstrate the cyclicality of our industry and to highlight the risks and opportunities at cyclicality in tail. The second is to emphasise the discipline nature of our acquisitions, all of which have been made either at cyclical lows or more recently, immediately prior to a massive increase in asset values and earnings.
that we were able to identify early and to capitalise upon. And the third and equally important point to emphasize is that we have not made any acquisitions at all since the middle of 2021, June 2021, since when asset values were sparse.
Not because there weren't ample opportunities to do so, but because we maintained our laser focus on managing risk and optimising return. During that same period, in the absence of compelling purchase opportunities, we returned capital to shareholders by way of our sustainable dividend and through the opportunistic share buybacks.
We've also increased the company's equity value and de-risked through aggressive delivery cheap. So to conclude on this slide, the main takeaway is in the time, is in the title.
Discipline and timing the cycle correctly are key to making value-occurative acquisitions in container shipping, and those remain our core investment principles.
With that, I'll turn the call over to Tasos to talk you through our credentials.
Thank you, Ian. On slide 9, we have summarized our 2022 financial highlights. The revenue for the full year 2022 was $645.6 million, up 44% from 2021.
Adjusted EBITDA for the year was $398.2 million, up almost 70%. Our normalized net income, which adjusts for one of items, was $298.2 million, an increase of 75%. Now, on the balance sheet, we took a number of important actions throughout the year.
to deliver, to reduce our cost of debt to a blended rate of 453 basis points, to push material refinancing requirements out to 2026, to diversify our sources of capital, notably including our first US private placement of investment-grade debt, to fully hedge our exposure to rising interest rates and to a meant commoners.
in such a way as improves our flexibility. Please note that the refinancings we have executed over the last 12 months or so have actually left us overheads, principally because we replaced some floating rate debt with a fixed rate private placement. There is currently about approximately 220 million of headroom available under the 75 basis points interest rate cap which would reduce the effective cost of any additional floating rate debt.
we may rise. As already mentioned, we have been utilizing our buyback authorization and we continue to pay an attractive quarterly dividend. Between January 1, 2022 and the year to date, 2023, we have returned a total of about 80 million to common shareholders.
30 million by way of shared buybacks and 50 million via sustainable common dividend. A further 13 million of common dividend is due to be paid in the next couple of days.
Concluding this slide, although we have a total of 278 million of cash on our balance at the year end, please know that 150 million of this is restricted out of which from 118 million represents advanced receipt of total higher, and a further 22.4 million is held for minimum liquidity governance. The remaining 106 million of cash contributes to our working capital requirements
and balance its flexibility. Moving on, slide 10 is a summary of our key capital structure developments over time. In the upper left, you can see our monetization schedule through the end of 2024.
As we think is prudent in a cyclical industry with assets that have a thinned life, we aggressively amortize our death, utilizing our cash-loose to deliver a manager's risk.
Our detailed amortization schedule is in the appendix of this presentation on slide 28. On the upper right of the slide, you can see the margin and overall cost of our debt, both of which continue to fall over time despite the high trade environment and is actually now as low as the Federal Reserve's benchmark interest rate.
Our average margin is now down to just over 3% from 4.6% at the beginning of 2022. On the bottom left, you can see the development over time of our leverage profile on the basis of net debt adjusted for working capital to adjust it to be done. From 8.4 times at the end of 2018, we have now reached the end of the year.
to now two times at the end of 2022. With that, I will turn the call over to Tom. Thanks, Tassos. As usual, and for the benefit of listeners who are new to GSL,
Slide 11 is intended to highlight the ship sizes on which our business is focused, which will help put the subsequent slides in context. GFL is focused on mid-sized and smaller ships, which is shorthand for ships ranging from about 2000 TU up to about 10,000 TU, which is effectively the liquid charter market.
The top map on the left shows the deployment of quote-unquote hour sizes of ship, i.e. ships under 10,000 TU, and emphasizes their operational flexibility, which is especially valuable in uncertain times. As you can see, they're deployed everywhere.
The bottom map on the up hand where the big ships, i.e. those larger than 10,000 TU, 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% of global containerized trade volumes, in fact 72% in 2022, are moved outside the main lanes in the north-south, regional and intermediate trades, served predominantly by ships like ours rather than by the big ships. As George touched on in his opening remarks, the macro and geopolitical outlook that were all currently facing remains challenging and uncertain.
Unsurprisingly, given the Russia-Ukraine conflict, substantial inflation and negative consumer sentiment, global containerized trade volumes are estimated to have fallen year on year in 2022 by a little over 1%. Marking only the third year of negative growth in the industry's 60-plus year history.
However, to offset the bearish tone of that statistic, the comparison year of 2021 was one of extraordinary growth driven by peak COVID consumption habits.
Anyway, our crystal ball is no better than anyone else's on how the forces driving consumption and thus containerized demand will play out in 2023 and beyond.
So, as usual, we prefer to focus on the supply side where we do have forward visibility and against which investors and others can set containerized trade or GDP growth projections as they feel appropriate.
Slide 12 then shows the metrics that tend to be used as a measure of supply side tension. The top chart shows idle capacity, which at year end was around 1.9%, which is slightly up on where it had been for the preceding 18 months or so.
Idle capacity incidentally has since risen further reaching around 3.3% in late February of this year. The bottom chart tells the similar story of exceptionally tight supply through 2021 and 2022. Containership recycling, scrapping.
was very limited in 2021 and almost nonexistent in 2022 when fewer than 4,000 T.E.U. of capacity was scrapped out. I would note however that scrapping activity is now beginning to pick up a bit and should rate normalization continue, the deferred scrapping of the last two years or so would imply a sizable segment.
lower specification older ships in the global fleet that would in again quote unquote normal conditions be expected to be retired.
Let's turn to slide 13, which looks at the order book. Here you can see on the left the composition of the order book by size segment, covering all deliveries currently scheduled to take place, not only this year in 2023, but also in 2024, 2025 and 2026. The overall order book to feet ratio as at December 31, 2020.
highlighted in the red box have a significantly lower ratio of a little over 14%, one 4%
And there are two important points to keep in mind when assessing the order book. One, that the relevant metric here is the net change to the absolute size of the fleet. That is, the delivery's minus prospective scrappings. And two, that when we talk about the supply of ships in the global fleet.
where ultimately using that is shorthand for how those ships are actually used, how many boxes can be moved over a given distance, over a given time frame, and slowing the speed of containerships within the system decreases effective supply and vice versa. On the first point, the mid-size and smaller container fleet is aging.
As you can see from the chart on the right, if scrapping were to continue to be deferred, by the end of 2026, which is the delivery horizon of the existing order book, a substantial slice of the sub-10,000 TU capacity on the water, almost 2 million TU's worth, would be at least 25 years old and potential candidates for the recycling yards in a softening market. However, if you net this out against the total order book,
of sub 10,000 TU vessels due to be delivered over the same period, you would get implied net growth in these sizes of just 1.1%, which itself would be spread out over the coming three or four years. By the way, performing the same exercise for 2023 in isolation would imply a net 1.3% reduction of sub 10,000 TU fleet capacity. On the second point,
2023 marks the implementation of new decarbonisation regulations from January 1st, 2023, which, according to broad industry consensus, is expected to cause a slowing down of the global fleet to reduce emissions, reducing effective supply. The year is still young and the implementation of the relevant rule is gradual and tightens over time, but we have already seen the operating speed of our fleet.
reduced by around about 8% versus the same period in 2022. And I'll come back to this in a couple of slides time. In the meantime, let's look at slide 14, the charter market. 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 sharply.
Furthermore, charter durations are currently shortening, with recent fixtures of only a few months to a year, or so at best. And the forward fixture market is effectively on hold. Having said all that, availability of ships in the charter market remains comparatively limited, especially for larger sizes, as nearly all of the ships that would ordinarily have come into the market in recent months had already been forward fixed or extended before coming open. So hard representative data is still a bit thin.
But few would dispute that a normalization of charter rates and logically also of asset values is currently in progress. And that's a neat segue to slide 15, which provides an update on decarbonization, which is expected to have a favorable impact for us charter owners on supply-side fundamentals over time, working through the slide. In the top box is a snapshot of the evolving regulatory environment. This is by no means an exhaustive list, by the way. It admits.
for example, the ever tightening regulations in California. Nevertheless, it addresses the regulations which are most imminent, broadest in their application, and on which there is currently most clarity. Let's start with EEXI, the Energy Efficiency Existing Ship Index.
This is tied to a ship's technical characteristics and is binary in nature, pass or fail. A non-EEXI compliant ship will not be permitted to trade past its first annual IAPP survey, which is an air pollution survey, after January 1, 2023. This is CII, the carbon intensity indicator.
This is an operating measure and is to be determined annually on a backward looking basis by the ship's actual operating performance. CII is calculated as a function of actual CO2 emissions divided by vessel dead weight times distance travelled.
The first assessments will be performed in 2024, based on 2023 data, with CII ratings ranging from A to E. E-rated ships, or those rated D for the first three years in a row, will require corrective action, and it's worth noting that CII parameters will tighten progressively over time.
Next up is EU ETS, the European Union emissions trading system. This will attribute a cost to greenhouse gas emissions from ships trading to, from, or within the EU. Phase-in is scheduled to begin in 2024, but detailed regulatory guidelines have yet to be published.
In the next box, we have laid out some of the high level implications of decarbonisation regulations expected for the global container fleet. These are reduced operating speeds to reduce emissions.
Vessel operating speed has a disproportionate impact on CO2 emissions as the relationship between speed and fuel consumption and thus emissions is logarithmic.
An important byproduct, as we've already mentioned, of slowing the global fleet down, is a reduction in effective supply. And to put this in context, a reduction in average operating speed of 1.0 is estimated to reduce effective supply by around about 6%. Vessel operations will be optimized for the CII, algorithm and ratings.
In addition to slungships down, efforts will be made to improve their operational efficiency, so an overall smoothing of operations and increased incentive to utilize well-specified, fuel-efficient and well-maintained vessels. Increasing investments will be made in energy-saving technologies and retrofits in developing clean or at least clean air fuels and propulsion and in carbon capture and mitigation technologies.
So, what are the actions we GSL are taking to preserve and improve the commercial positioning and trading flexibility of our fleet in a decarbonizing world? Our first priority, naturally enough, is to ensure regulatory compliance. For EXI, this is relatively straightforward. When needed, we're installing engine power limiters, EPLs on our ships.
at a cost of just under $100,000 per ship, which will ensure compliance. CII is a bit more complex as it's determined not only by the inherent efficiency of the underlying ship, but also, actually primarily in truth, by how the ship is operated by the chasera. In the final form we have the r? to???ate from the surrounding ship without drivers and no actions whatsoever. In the final form we have the r? to???ate from the surrounding ship without drivers and no actions whatsoever.
Consequently, we're applying technologies and protocols to enhance cooperation between owners and charterers to facilitate CII-optimized vessel operations. Indeed, cooperation and partnership between owners and operators will be key to successful decarbonization. We're well positioned in this respect, as a partnership approach with our charterers has long underpinned the GSL business model.
Consistent with this approach, we're also retrofitting energy saving technologies, or ESTs, to our ships, subject to commercial agreement and incorporation with the charters. These agreements are commercially sensitive and vary on a case-by-case basis. But the underlying rationale is that we will only invest in discretionary ESTs that will enhance the value and the earnings of the corresponding ship. So that's the crux of it, but for those of you who would like to know more, may I-
debt service, capex and dividend.
through 2024 are already fully covered without any need for additional charter renewals. We have built a very strong balance sheet.
and are rated BB stable and B1 positive by Stadt and the Purs and Moody's respectively. We have proven diversified access to capital and a very attractive and competitive cost of debt with a floating rate exposure fully hedged. We have a high quality fleet in the sweet spot of the market.
high-refer, mid-size post-paramax and smaller content-ships that play a critical role for our Adulcapacity remains relatively low in the global fleet, though it is beginning to creep upward. Meanwhile, a large backlog of older
and perhaps even negative on an effective basis over the next few years. There is no question that macro headwinds and negative sentiment are causing a market normalization from the extraordinary conditions of the last two years, and charter market fixtures are increasingly shorter term and tactical in nature for the slim subset of the global fleet that has recently come into the charter market. Now to illustrate this, since October 1st, 2022, we have had four charter fixtures representing aggregate revenues of little under $22 million and ranging between 4 to 16 months with an average of 10 months. That's a significant turnaround from earlier in 2022 when rates were ever increasing.
of decabolonization and to ensure that we are in a position to be opportunistic and disciplined acquires of ships for the right combination of immediate accretion. Low downside risk and high upside potential.
With that, we'll be happy to take your questions. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Amit Meiratra from Doja Bank. Please go ahead. Your line is open. We'll pause for a moment to compile the Q&A roster.
Hi, good morning, good afternoon. This is Chris Robertson on for MIT. How are you? Hi, Chris. Good. Yeah, good. Good to hear that. Yeah, I mean, I think you guys have laid out really well here, just the resiliency in the earnings with your time charters here. So one of the questions that we often get here is on the renegotiation risk from the liner side, which was seen in kind of previous cycles, but could you kind of compare and contrast?
Where the liners sit now in terms of their cash balances and resiliency and and kind of like the willingness that they would actually renegotiate and I mean it's not like you guys have booked at the very top of the market here so I don't think that your rates are really at risk But could you kind of assuage some of the fears that are out there? Let me start by saying my opinion then don't can can jump in as well
The previous times the financial situation of our counterparty, the Scoutsartis, were completely different today. They are today in the best shape they have ever been since the inception of containerization, I would say.
So that's one positive. Second is in general in our industry the top names do not tend to renegotiate and they haven't done so in the past. Even in the most difficult situations like 2009 when the financial crisis broke out, still there were no renegotiations from the first class counterparties. Of course,
As in every market there is first class, second class, third class. So far we have seen some third class names, gone back up and you know, not performing. But we haven't got any such names in our, you know, let's say, charters. And we don't feel that such a thing would be there. Now, having said that, although we do not expect any renegotiations,
Sometimes it's commercially viable and it's commercially better for win-win as the Chinese say for both. To amend an extent, sometimes charters and owners agree to reduce the charter rate and elongate the charter period. And that is not the case.
negotiation that is something that both parties might agree for the mutual benefit. So we should not confuse these kind of transactions with charter negotiations. I will let them get into that more.
Yeah, thanks George. I would just echo those words and Chris I would say that you know GSL when we took the company public back in 2008, shortly before Lehman Brothers went bust in the world went into a sort of synchronized global downturn, global financial crisis.
and during the whole of our history, all of our charters have performed and there haven't been renegotiations of any sort. Other than as George says, selectively on a bilateral basis where it suited both parties to do so, and we've never had a bad debt. So I think, you know, the...
the business model has been quite well stress tested. Yeah, I definitely think the history of the company speaks for itself there. Follow up question, you guys spent quite a bit of time talking about the older end of the fleet spectrum here with possibility of scrapping. Can you talk about just the types of owners that generally have these vessels that are 25 year plus? What type of owners are they? What...
thoughts. We used to provide a slide and sadly it's not included here that shows the age profile of the global fleet by size segment and as a general rule the smaller the ships in a size segment the older they are. So you know if you look at the very smallest ship sizes the average age of those segments tends to be higher than that to the larger sizes simply because
of the up-sizing of the fleet over time. Now, what tends to be a catalyst for scrapping ships out is if owners are confronted by the need to put more money into them to keep them going. So as you know, Chris, every five years or so, there's a regulatory dry docking that ships are obliged to go through, and those can cost anywhere between one and a half to say three million, depending upon the size of the ship, the age of the ship, the spec of the ship, et cetera, et cetera, et cetera. So when you are approaching such an investment, that tends to be a catalyst for either.
saying, okay, we can see good earnings potential for this vatletize going forward, so we will invest, or we don't in which case we will potentially scrap the ship out. So it's a fairly rational, economically driven decision. Yeah, one point that is interesting for the audience to know.
The scrapping of scrap metal comes at one third of CO2 emissions versus new iron. You know, new steel. So it's more environmentally friendly with respect to CO2 emissions.
to use scrap steel than, you know, the classical brand new steel. That, in my mind, could keep scrap prices high in the long term. And the higher the scrap prices are, the more you can keep the scrap steel.
I'm talking to you, it becomes for openness to scrap the ships of the old divisors. Yeah, interesting. Thank you for that color. I'll turn it over. Our next question comes from Liam Burke from Be Rylee. Please go ahead to line is open. Yes, thank you. Good afternoon. Good afternoon.
You've got 92% or 93% of your charters locked in for 2023. Are there any discussions with the other 8% of your fleet to move off the spot market and negotiate, as you pointed out, shorter but multi-month contracts? Yes, we'll always.
discussion with our charters the possibility to fix our ships and we always try to get the longest possible period as you have seen over the past couple of years It's not like there is no demand there is demand of course and there is an ongoing charters and then as we have mentioned since last turning school we fixed four ships those were the four ships coming open
But what happens right now is that charters are waiting a little bit closer to when the SIPs are becoming open to charter them, whilst before you could forward fix SIPs. So you could forward fix a SIP to this year that was going to be open next year, and we've been doing that. As the market stands now, charters wait for like two, three months before the charter expiration to enter into discussions for, you know,
renewals of of charters and that's because they want to see themselves also what's their demand than from from their clients in the seepers and so forth. Great. Thank you George and on your utilization rates. I mean it obviously bounces around with dry docking and then unscheduled off hire. How are you looking at?
utilization rates as we move into 23 is there anything I mean you give us a dry docking schedule but is there any thought on the on the unscheduled part of the utilization not really this is this is Ian it's unpredictable these accidents and breakdowns machinery failures or whatever and by their very nature we can't forecast what they'll be
Right, but is it, I mean, you do have older ships and that's part of your strategy, but is that, I mean, does that tie into the unscheduled heart? No, not necessarily. It's a question of how well the ships have maintained and we believe that we maintain our ships to a very high standard. But accidents do happen. Stuff does break, but I wouldn't say that an older ship is inherently more susceptible to significant or higher than a new ship on unplanned offer.
Great. Thanks, Anne. Thanks, George. Our next question comes from Omar Nocta from Jefferies. Please go ahead. Your line is open. Thank you. Hey, guys. Good afternoon. I wanted to just ask about the balance sheet and how you guys are seeing it evolve here. You've obviously got a very nice backlog of just over $2 billion. It gives you that nice stream of cash over the next several years. And I think if you just throw in some conservative assumptions on vessels that roll up higher here in the next few years.
There's a real shot that GSL could get into a net cash position within say the next three years. I guess one, do you agree with that type of math, but GSL is on that trajectory to become debt free here in the next couple of, call it say three years. And then two, is that an aim for you guys to get GSL into a net cash position or do yourself investing along the way.
could get into a net cash position within say the next three years. I guess one, do you agree with that type of math but you know GSL is on that trajectory to become debt-free here in the next couple of, call it say three years and then two, is that an aim for you guys to get GSL into a net cash position or do you see yourself investing along the way? Hey, Omar.
This is Tom. I mean, yes, we're building cash and we see delevering as an important part of de-risking, but I don't think we would ever look to be debt-free. But we do see ourselves as entering an interesting point in the cycle, just as George said in his prepared remarks, where asset values are coming off, and thus the potential to make accretive acquisitions is increased at a far more attractive risk, i.e. lower risk profile, than was possible during the 18 months of the sort of the super cycle, when of course we didn't make any acquisitions at all. So yes, we're in this business for...
working capital requirements and some cash resilience for any kind of needing in a difficult market.
and compliance with new regulations, so it's been made also. Thank you. Yeah, well, that's interesting and I guess.
I think it was in response maybe to Chris's question about the liners. It is definitely a very interesting setup at this point. You're talking about cash resiliency potential to be in a net cash position at assuming you do nothing which you won't. But yeah, we're definitely talking to you mentioned, you know, the Lehman crisis shortly after you came public. I mean, yeah, it looks like this downturn that we're seeing if this is indeed a downturn, both the liners and the owners are in a much stronger cash position than they were back then.
So I guess when we think about the capital that you've got and you want to put that to work, is there any segment of the industry that you want to be investing in when the time is right? Or is it more about just the transaction? And whether it's a creative or not.
Well, the first point that we always look at is risk. Every transaction we look at is viewed by us from a risk respect. First of all, we do not want to take risk on board. We want to take the minimum.
Then, we want the transaction to be immediately accretive. So we want the cash to hit or balance it very quickly. So that means that as of today we're looking at, in this market, because the market has not bottomed, the prices of ships have not bottomed, we are looking at deals where we would have some kind of an...
of a charter together with it or we can put it right away into a charter so we can ensure growth of Arribida and cash flow and be a deal that is accretive immediately. Now our sweet spot of ships, since we said always it's the post-Pana Maxis, this is what we like the most, let's say, without saying that the rest of the ships we don't like, but if you ask me what's my favourite, it's the post-Pana Maxis because these ships always offer the best economy of scale to the liner companies. And that's where we have been focusing always.
But I would say that we're focusing on mid-sized ships between let's say two and a half thousand to eleven with more razor focus on the post panamax, which is like 5,000 and above. But again, it's a deal by deal.
Thanks, George, and maybe just one final one. I think maybe for Tasos, you mentioned the cash position and the restricted part of it, and I think it was $118 million that is advanced charter hire that's been paid. Can you just remind us how much of that – what does that constitute in terms of recognizing those revenues in the future?
This has to do with the way we have initially recognized and received the money. And as far as I remember now, we are going to build up some more cash in that case. So, increase the deferred revenue until next year, the same period. And then this will start running through our revenue. Okay, so just I just want to double check the 118 million. I think the.
Is that basically what you're going to be receiving in the years time? Oh, sorry, within the next couple of weeks. No, we've already got it. Correct. Oh, sorry. We've collected, we've started on the wide, correct? We've collected, we've collected the cash. And then the Charterer will still pay a little bit more than the headline Chartererede. And that cash will build a bit. But then the Charterer starts paying less than the headline Charterede. And we start...
is leaking if you want to use that word, at advanced receipt of cash through the income statement. Okay, thank you. So it's the timing difference between recognizing revenue and receiving cash, that's all. Yeah, and then is that the duration? It's obviously very good credit practice from our perspective as well. Absolutely, yeah, I just wanted to just make sure for modeling purposes, I'm not double counting.
the incoming revenue stream. No, no, no, no, just look at the charge rates in our tables and ignore the balance sheet. You can just to assist you, you can a little bit much the $118 million with the two lines which are in our current light billet and long-term light billets which refer to different revenue. Just to much, let's bid the liability to offer the service. Yeah, and the thing that we wanted to make clear Omar to everyone, particularly for modeling purposes, is that...
Yes, we have a certain amount of cash on our balance sheet, which is always good news, but a very substantial slice of that is tied up either as prepaid charter hire as we've just discussed or for other purposes. So there's not a huge amount there that's available as, quote unquote, free liquidity, let's say.
Well, thanks for that. Very helpful. I'll pass it over. As a reminder, if you'd like to ask a question, please press star followed by the number one. Our next question comes from Clement Mullins from Value Investors Edge. Please go ahead. Your line is open. Your line is open.
Good morning, thank you for taking my questions. Following up on Omar's question regarding vessel acquisitions, do you have a preference for modern eco ships or are you agnostic in that regard and think that there is, let's say, a right price for all assets? I would say that we do not have a preference as long as the deal and the price are the same.
is the right one. We are not there to, so opportunistically, acquire SIPS yet without a charter. We don't feel the prices have bottom to the point that we would be buying SIPS even opportunistically. So far, at this point, we are looking at the combination of cash flow and acquisition price.
So in this respect whether it's an ecosystem or an existing design, let's call it, an older design whatever you want to call it, it's not that relevant as long as we're looking at ships that have either good potential or a good spec always, the top tier specs, some maybe enhancements.
of their characteristics. Maybe they have some modifications to make them more eco-friendly. But more or less ships that can operate in the foreseeable future very successfully.
And just to be clear, Clement, we're not talking about new buildings. We are talking about existing ships that could be acquired and would be immediately accretive to cash flows from the time of acquisition. Just as a sort of...
to be clear, Clement, we're not talking about new buildings, we are talking about existing ships that could be acquired and would be immediately accreted to cash flows from the time of acquisition, just as a sort of parenthetical.
Yeah that's helpful, thank you. I also wanted to ask about the CAPEX related to energy savings and emissions reduction. Could you provide some commentary on the paybacks you are seeing on those investments? It's difficult because they vary a huge amount on a sort of deal to deal, charterer to charterer basis, but there is I would say almost invariably
commercial agreement with the charterer such that we're confident that whatever money goes into the ship to enhance it will be more than recovered either by way of an uplift in the value of the ship or by way of increased earnings or both. Makes sense, thanks for the call. And final question from me, you've been clear you'd like to continue strengthening the balance sheet to withstand market volatility going forward and I was wondering how do you plan to balance this with additional...
uses of capital under reviewers, we've demonstrated in the past if we think it's appropriate to return capital to shareholders by way of buybacks then we will do so. But as we said in that, prepare the marks we also in this time of microeconomic uncertainty and potential opportunity for growth as some asset values normalize. We want to have a lighter potential for growth and therefore build some liquidity.
not only for those opportunities but just for good practice, good balance sheet management and resilience as George I think mentioned in the prepared remarks. So we would hope that we would continue to allocate a certain portion of capital to buybacks but we can't guarantee it depending upon what the alternate uses of capital may be from time to time. But we've demonstrated our willingness to do so over the past 18 months.
Indeed, makes sense. That's all from me. Thank you for taking my questions and congratulations for the quarter. Thank you. We have no further questions. I would like to turn the call back over to Ian Webber for closing remarks. Thank you very much. Thanks everybody for listening. Thank you for your questions and your support.
We look forward to giving you a further update in three months time or so when we publish our first quarter 2023 earnings. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.