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Global Ship Lease, Inc. (NYSE:GSL)

Q2 2014 Earnings Conference Call

July 28, 2014 10:30 AM ET

Executives

Ian Webber – CEO

Susan Cook – CFO

Analysts

Mark Suarez – Euro Pacific Capital

Eric Geller – Jefferies

Operator

Good day, ladies and gentlemen and welcome to the Global Ship Lease Q2 2014 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce our host for today’s conference, Ian Webber, Chief Executive Officer. Sir, you may begin.

Ian Webber

Thank you very much. Good morning, everybody and thanks for joining us today. I bet you’ve been able to look at the earnings release that we issued earlier on and been able to access the slides that accompany this call.

And as usual, I’d like to remind you that slides one and two comment, the call may include forward-looking statements that are based on current expectations and assumptions and are by their nature, inherently uncertain and outside of the Company’s control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the Safe Harbor section of the slide presentation.

We also draw your attention to the Risk Factors section of our Annual Report on Form 20-F, which we filed in April, and which you can find on our website or via EDGAR, the SEC’s website. 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 and for reconciliations of the non-GAAP financial measures to which we will refer during this call to the most directly comparable measure calculated and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning and that release is also available on our website.

I’d like to start the call by reviewing the second quarter highlights and then talk about our fleet. After that, I’ll offer some comments on the container shipping industry, including principal charter CMA CGM as well as on the activity level for acquisitions in the space. Following that, I’ll turn the call over to Susan for her comments on our financials. Then after some brief concluding remarks, I’d be pleased to take your questions.

Slide three shows our highlights for the second quarter. In the quarter, we made good progress on a number of important fronts. First, as per our strategy, we continue to generate strong cash flows for our shareholders. Notwithstanding receiving back Aquarius and d’Orion at 24,100 TEU vessels in late April and late May respectively, the conclusions of their charters CMA CGM. We’re pleased to have achieved an overall fleet utilization of approximately 97% of the quarter, earning revenue of $33.5 million and adjusted EBITDA of $19.8 million.

We’ve also made excellent progress in ensuring that our fleet continues to have strong contract coverage. I am pleased to report and we have issued press releases to this effect, but I am pleased to reaffirm that we’ve redeployed d’Orion and Aquarius on charters to Sea Consortium trading as X-press Feeders, a new customer for us and the world’s largest independent feeder operator. These contracts commenced on May the 7th for Aquarius and July the 17th for d’Orion. What we consider to be very satisfactory rates in the prevailing environment of $7,490 a day for the earlier fixture Aquarius and $8,000 a day for the second fixture on d’Orion.

Both charters, I’d like to note are in excess of the rates previously agreed on the last fixtures which were $7,000 a day. This re-chartering has enabled us to return the fleet to 100% contract coverage. We have expanded our contracted revenues stream and taken a good step forward in diversifying a charter portfolio.

Additionally, in mid-May two highly experienced container shipping veterans joined our Board of Directors expanding the Board to six members.

Slide four summarizes our financial results over the past five or six years. As we have noted previously, the significant volatility overtime that you see in the time charter index on the top part of the slide is not reflected on our quarterly results over the same period as a long-term – our long-term fixed rate time charters largely insulators from those dramatic swings.

By successfully executing our chartering strategy and having the majority of our vessels on such contracts, long-term contracts, we’ve been able to consistently maintain strong and predictable cash flows and the fleet utilization at or near 100% excluding dry dockings.

While the second quarter was impacted by the two re-deliveries that I’ve already mentioned and also was impacted by reduced level of hire on the Julie Delmas due to damaged crane we discussed on our last call.

Our quarter-to-quarter changes that you see are primarily related not the volatility of the market but rather to the loss of revenue from scheduled dry docking of vessels.

In Q2 this year, we have no vessels dry docked and looking forward, we’ve only got two vessels scheduled to be dry docked for regulatory purposes between now and the end of 2015.

On slide five, we show our fleets and the charter portfolio. The weighted average age of our fleet is approximately 10.3 years out of an economic life of 30 years. In terms of operating margin terms of contract coverage, we have significant forward visibility as our fleet’s average remaining contracted term is 7.3 years excluding the two 4,100 TEU vessels, which we now recognize to be in the short-term charter market.

In total, contracted revenue streams stands at $900 million as of June of the 30th, but that excludes about $1.5 million to $3 million for d’Orion depending upon whether she, her charter lasts for the 12 minimum or sorry the 6 minimum or the 12 maximum months.

Looking forward, we are substantially insulated from market volatility, as we have no charter explorations other than of course TEU spot vessels until late 2017.

Turning back to the Julie Delmas, I am pleased to report that the vessel has been fully repaired and return to full operational efficiency and consequently, the reduced rates of $10,000 per day and no longer applies from July the 14th, the charter rate moved back up to the contracted rates of $18,465 a day.

With the stable contracted revenue stream strong operational results and protection from market volatility, we believe that we are well positioned to execute on that growth strategy as discussed on previous calls and to which I will return shortly.

Slide six has the key point to our strategy. First, as we have demonstrated both by establishing a new commercial relationship with Sea Consortium and by expanding four existing contracts with CMA CGM earlier in the year with an aim to maintain strong contract coverage for our fleet with high quality counterparties are primarily on long-term fixed rates time charters.

Second, we are looking to diversify our charter portfolio to complement our strong relationship with CMA CGM. We are at the end of an existing contract as it was the case without 4,100 TEU vessels, that are now deployed with Sea Consortium or through charter attached acquisitions which we have disused before and I will come back to it in a moment establishing additional commercial relationships is a major priority for us.

Third, the transformative trend refinancing that we undertook earlier this year has strengthened our capital structure and positions us well to grow by extending our debt maturity profile adding $40 million of liquidity by virtue of our new $40 million revolving credit facility and giving us additional strategic flexibility by removing a number of governance that had significantly restricted our abilities to grow the company or to return capital to our shareholders in the form of the dividend.

Finally, we intend to take a disciplined approach to capital allocation. Between our cash on hand and our capacity under the revolving credit facility, we have got a little over $80 million also a capital that we are looking to deploy as previously discussed on the acquisition of charter attached mid-size and smaller vessels during the time of cyclically low asset values.

A little bit more on this to provide you with some color. We are actively engaged in this process and as I hope you would expect it receives the utmost priority. We’ve created financial flexibility by issuing the bond during the year and we highly focused on deploying our investment capital.

In terms of the current state of the acquisition market and the activity we’re seeing, there are some 35 to 40 containerships that changed hands in the second quarter. Now this is down by about a third on the activity in the first quarter which is not unusual as S&P activity does tend to be seasonal accelerating in the first and the fourth, first and the fourth quarters which are the low seas in the freight and spot charters markets and slowing in the second and the third quarters.

Since our refinancing in mid-March of this year, some 13 ships have been sold or committed for sale with charter attached, with charters attached or against charter commitments. Of these around half representing in aggregates of roughly $300 million of investment have been a potential interest to us. We have evaluated these transactions and have selectively participated in discussions on several deployments. We remain firm in our conviction not to grow for growth sake, but for to concentrate on generating immediate incremental cash flow patterning with high quality counterparties positioning the company to benefit from future appreciation in asset prices and charter rates and thus creating value for our shareholders. We remained highly disciplined.

Finally, on this topic we are encouraged by potential deals we are seeing in the market and remain confident in our ability to make accretive acquisitions in due course and within the parameters that I have described and meeting our investment criteria growing our fleet and expanding our earnings power.

On a related point as I’ve said on previous earnings calls, we have maintained our belief that returning capital to shareholders in the form of a dividend as an important components of the long-term Global Ship Lease value proposition. Well I’m refinancing earlier this year took us a big step closer to that goal, we feel that the optimal manner for us to see a sustainable dividend at present is to focus on vessel acquisitions to expand our fleet and our cash flow. This in term would increase both our capacity to pay a dividend under our current bond covenants and strengthen our long-term ability to maintain and sustain such dividend. As such we will continue to pursue attractive acquisition opportunities in a disciplined and accretive manner.

Over the next several slides, I’ll discuss the positive acquisition environment and it was state of the market overall and the current freight rates environment. Slide seven, eight and nine which you’ve seen before are provided an overview of supply and demands and opportunity we have to capitalize on attractive asset values.

Slide seven shows the supply/demand dynamic over the last few years on the left hand side and more importantly on the right hand side at the same time with forecasts for 2014 and 2015.

You’ll see that for 2013 a cellular capacity has estimated to grown 5.4% a little ahead of demand growth which was 4.9%. For this year 2014 and next 2015, the relationship reverses with demand growth exceeds supply growth which is good news for the industry in the medium term although we would expect existing surplus capacity to continue to weigh on spot rates and asset values in the near term.

Slide eight, looks at freight rates and CMA’s financial performance. The message remains as much the same as through the last couple of years. The freight rate environment is volatile and fragile however we’re seeking general rate increases which stake for a while and then erode. As CMA CGM continues to outperform delivering operating margins well above the average adverse line of companies that published the submission data to complete the analysis. And of course CMIC Gen continues to perform charter obligations with us providing us with a stable base and strong cash flow from which to develop the business.

On slide nine, you can see the spot market charter rates and asset values which I closely correlated with those charter rates remain at cyclical lows.

The good news is that we’re largely insulated by our term charter coverage on over two of the vessels from these depressed spot market rates. And furthermore continuing good news for us the continued download pressure on asset values in most containership segments presents attractive opportunities to profitably deploy our investment capacity. This is from sense of how we’re spending our time and as already highlighted we will target immediately accretive transactions and maintain a highly disciplined approach.

I should also mention that other sophisticated and well capitalized players are also active in this space. I’d like to turn the call over to Susan now for comments on the financials.

Susan Cook

Thank you Ian. Please turn to slide 11 for a summary of our financial results three months ended June 30, 2014.

We generated revenue of $33.5 million during the second quarter down $2.4 million from revenue of $35.9 million in the comparative period in 2013. The decline in revenue is due mainly to reduced revenue of the four vessels following charter expansions by three years as a low daily rate of $15,300 per day compared to $18,465 per day previously and this was effective from February the 1st this year. As well there was a total of 48 days idle time in the quarter for Ville d’Aquarius and Ville d’Orion from their redelivery by the previous charter of CMACTN in late April and in late May respectively.

Until the commencement of the new charter on May 7, 2014 Ville d’Aquarius and after the end of the quarter Ville d’Orion which then started a new charter on July 17, 2014. These 48 days has one day of unplanned off-hire during the three months ended June 30, 2014 resulted in utilization rate of 96.8%. In the comparable period of 2013 there was one unplanned day for utilization of 99.9%. There were no off hire due to schedule dry docking in the second quarter of this year with only two vessels unscheduled to undergo dry docking during the rest of this year and next year.

Vessel operating expenses was $12.1 million for the three months period, with an average cost per ownership day in the second quarter $7,853 compared to $7,504 for the same period in 2013 up $349 or 4.7%. The increase was primarily related to high end maintenance spend on the phasing of generator overhauls and from the cost of fund continued while the two 4,113 TEU vessels were idle or repositioning prior to new charter commencement.

Our interest expense for the three months ended June 30, 2014 was $12 million and this included interest on the note and the $45 million of preferred shares. The amortization of deferred financing cost and of the original issued debt discount on the note, the commitment fee on the company’s new and undrawn $40 million revolving credit facility.

In the prior year period, interest expense was $4.8 million on average borrowings of $407.9 million under the company’s credit facility and the $45 million preferred shares. Our derivative hedging instruments which were terminated on March 19, 2014 had no effect on the results for the three months ended June 30, 2014 and this compared to a realized loss of $2.9 million and a $5 million unrealized gains in the comparative period last year.

Net loss for the second quarter was $2.3 million. For the prior year quarter net income was $10.1 million also the $5 million non-cash interest rate derivative mark-to-market gain. Normalized net income adjusted for non-cash items was $2.3 million for the three months ended June 30, 2014 and $5.1 million for the comparable period last year.

Slide 12, shows the balance sheet. Key items as at the end of the quarter include cash of $72.1 million. Total assets $893.1 million of which $798 million is vessels. Total debt $459 million including the preferred and shareholder’s equity of $399.1 million.

Slide 13, shows our cash flows. The items to mention here are net cash provided by operating activities of $17.5 million in the second quarter and net cash used in financing activities was $0.5 million.

I would now like to turn the call back to Ian for closing remarks.

Ian Webber

Thanks Susan. Before we move on to your questions, I’d like to draw your attention to slide 14, where we briefly summarized our core strengths and reiterated our strategy of creating value for all shareholders.

Firstly, excluding our two 4100 TEU vessels, the fleet is fully contracted as through late 2017 with contracted revenue of sum $900 million and the weighted average remaining contract duration of 7.3 years.

Close to about 4100 TEU vessels have been successfully redeployed with sea consortium returning our fleet to 100% contract coverage and diversifying our charter portfolio. The strong contract coverage and ford visibility on cash flows provides us with the stable platform for growth and significant insulation from market volatility through the cycle.

Secondly, we continue to generate strong cash flow based on our contracted coverage as just discussed.

Third, our refinancing earlier this year not only created the flexibility for us to grow and to contemplate dividend but substantially strengthened our capital structure by pushing back any refinancing requirements to 2019 and eliminating restrictive maintenance covenants including loans to value.

Finally, we’re well positioned to grow our fleet by pursuing attractive accretive acquisition opportunities at the time of cyclically low asset values. We continue to see good opportunities in the market I’m actively engaged in evaluating them. We intend to remain disciplined in this approach and are confident in our ability to acquire vessels in such a way as we’ll expand our contracted revenue further diversify our chart portfolio build our capacity to pay us sustainable dividend and create value for shareholders.

With that comments, I’d like to hand the call back to the operator who can explain the Q&A process.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of [Steve Ron] from Sabra Capital. Your line is open.

Unidentified Analyst

Thank you. A couple of quick questions as it relates to the vessel operating expenses of 78-50 for the quarter. If you back out some of the – what seems to be one-time cost with the repositioning of Aquarius what would it be operating expenses have been for the quarter?

Ian Webber

We normally get this wrong if we calculate stuff only on the fly. But I think the total to the puncture cost that we incur that we wouldn’t double it around $250,000 in the quarter. So, if you spread that over the fleet over the 90 days so that will give you an answer.

Unidentified Analyst

Okay, fair enough. And then as it relates to acquisitions please to hear that you’re sticking to being discipline and trying to achieve the IRRs of that you’re looking for, but can you give us more color on the discussions that you had for the vessels that did change hands during the second quarter as to why you didn’t move for with it was it because it didn’t hit the IRR hurdle was it the counterparty. Can you give us some more color as to why those opportunities weren’t pursued further?

Ian Webber

Yeah, thanks for that question. It’s difficult to comment specifically. We have been re-establishing our credibility as an active purchaser, potential purchaser in the containership sector and what we can’t do is talk about, talk publicly about individual transactions that we may or may not have been involved with. However, what I can say is that there have been transactions out there that have met our investment criteria, they are the right type of vessels they we believe generate the right types of returns. Patiently as we haven’t announced anything it – watch out for us yet but we remain confident for the future we are continuing to see a pipeline of potential transactions that meet our criteria. What we don’t want to do is get carried away in the chase grow for growth sake and move away from the disciplined approach that we have adopted here.

Unidentified Analyst

And a follow-up to that question, would it be your preference to do one bulk transaction that represents a number of vessels at one time or just to do one-off transaction overtime.

Ian Webber

I think weren’t different really, there is an advantage, we’ve got a limited amount of investment capacity $80 million odd as I mentioned on the call, there is an advantage in deploying in all of that one go. The accounts to that is, let’s spread the risk a little and have multiple transactions. We have to assess each deals on its merits and if there is a package deal or one ship deal but the sub-part a lot of that capacity then we would certainly look at it.

Unidentified Analyst

Okay, thanks so much.

Operator

Thank you. Our next question comes from Mark Suarez with Euro Pacific Capital. Your line is open.

Mark Suarez – Euro Pacific Capital

Good morning, guys. Thanks for taking my call. Ian you talked about acquisitions and we talk this, we talked about it in the past at Lance and I am just wondering now at this point of the cycle are you guys gating now that you have that cash deploy are you getting more calls from the stressed owner so, are you seeing maybe a trend that you’re beginning to see owners that are financial distressed go ahead and maybe start selling – trying to get rid of those assets out of their balance sheet is that a trend you are seeing now or is that –?

Ian Webber

Yeah, kind of. We don’t keep statistics on inbound calls and that sort of stuff that our sense is that there is more distressed purchase opportunity out there and then there has been for a little while now is that pressure on often German owners from German banks we don’t quite know but certainly there is a level of activity there but just to remind you, we’re less interested in the distressed, the distressed type of transaction because that doesn’t generate incremental cash flow out of the gate and a key part of our strategy is to build the EBITDA, build cash flow which drives us down towards the charter detached transactions which represent a smaller portion of the done deals than distressed opportunities.

Mark Suarez – Euro Pacific Capital

Got you. And just maybe to go back and see some of the trends like you know we – I guess over the past four or five months we have seen vessels in the sub-2000T range especially the geared vessels where they manage beginning to pick-up relatively strong. Do you think that could be a good opportunity for you guys to maybe go and check those out in the 1500 to 2,000 TEU range is that something that you guys have taken look at?

Ian Webber

Well we’ve said Mark that we are looking at mid-sized and smaller and then we’ve sort caveat that by saying $22.5 thousand to $77.5 thousand. Yeah, for particular transactions we would look outside of the envelope would we be inclined to go smaller probably not? Would we go larger maybe? So, I think 1,500 TEU and below probably isn’t the type of asset for us.

Mark Suarez – Euro Pacific Capital

Okay, and would that be charter attached or free charter. I am wondering if you maybe you can go for assets and get yourself some spot exposure like going with a charter six months or so is that a possibility or you want to lock it in for a more than one year what sort of this charter and strategy?

Ian Webber

Well the driver for us is less duration but I’ll come back to that and more incremental cash flow out to the gate distressed transactions which would normally bring with either no charter at all or only a short charter, would barely cover operating costs less alone generate free cash flow so, we wouldn’t be looking at distressed and therefore we would likely not be looking at shorter charters either I would suggest that we have the minimum that we would look at would be 18 months and really and reality we would like several years of cover if we can achieve it.

Mark Suarez – Euro Pacific Capital

Got it. And I think you also mentioned a newly domain that’s back full year operation as for the third quarter. Is that correct?

Ian Webber

That’s right. Fully repays and returns of full operational capability on the 14th of July and is earnings her contracted rate of nearly $18.5 thousand a day.

Mark Suarez – Euro Pacific Capital

Okay, great. And just maybe go back in to the daily open expenses question. I know you had a repositioning. Do you think that is driving the different of that I see that you came in here around 7800 in the past it’s like 7500 is that the whole different? Or is there something –

Ian Webber

I cannot share I mean I’ve done the math very quickly and $250,000 of bunker costs which we don’t normally incur but we are still the vessels are idle and we have to pay to keep the lights on and also we incurred costs for repositioning Aquarius $250,000 of bunker costs in the quarter over 90 odd days and 17 vessels is a $160 per day.

Mark Suarez – Euro Pacific Capital

Okay.

Ian Webber

$160 per day of the daily cost is due to those that sort of exceptional expenditure if you want to.

Mark Suarez – Euro Pacific Capital

Okay. That’s makes sense. That’s all I have for now. Thanks.

Ian Webber

Just on that, we do tend to see that operating costs can be a little higher in the first half of the year as our Ship Manager is looking to maintain actively the fleece get on top of the jobs that we need to have done during the course of the year and then it tends to drop a little in second half.

Mark Suarez – Euro Pacific Capital

Great. Thanks.

Operator

Thank you. (Operator Instructions). Our next question is from the line of Eric Geller from Jefferies. Your line is open.

Eric Geller – Jefferies

Hi, guys. Thanks for taking the call. Can you talk a little bit about the dividend policy what are the metrics that you’re looking at before you’ll start paying the dividend?

Ian Webber

Well our focus Eric is on growth and for the moment discussion about dividend and dividend policy is moved the Board has determined that we should be investing and growing the business to generate incremental cash flow, to generate incremental net income all of which will allow us to pay a larger dividend when the time is right. So for the moment we’re focused on growth and not on dividend payment.

Eric Geller – Jefferies

Okay. Thank you.

Operator

Thank you. And at this time I am showing no further questions. I would like to turn the call back to Mr. Ian Webber for any closing remarks.

Ian Webber

Thank you very much. Thanks everybody for listening to our comments and for your questions and we look forward to providing you a further update on GSL for the third quarter. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now all disconnect. Everyone have a wonderful day.

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