First Ship Lease Trust (D8DU.SI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for dialing in, and welcome to FSL Trust's Fourth Quarter and 2019 Full Year Financial Results Conference Call. My name is Ed Ion from Helix PR. We represent FSL Trust Management, the trustee manager of FSL Trust for investor and public relations. I have here with me this morning, I'm pleased to tell you, Mr. Roger Woods, our Chief Executive Officer; and Mr. Alan Mitchell, who is our Chief Financial Officer. FSL Trust announced their results last night here in Singapore. The relevant materials are accessible from the website at www.fsltrust.com or from, indeed, the SGX website. Mr. Woods will begin today's session with a presentation of our results, and thereafter, he will be joined by Mr. Mitchell to take your questions. Before we begin, please note that today's discussion contains forward-looking statements based on the trading environment as we currently see it and as such, does include both risks and uncertainties. With that, let me now hand you over with pleasure to Roger, the CEO of the Trust. Thank you. Roger?

Good morning, everyone, and welcome to our Q4 presentation. You should have the PowerPoint presentation, which has been uploaded on our website, and as Ed highlighted, is available on SGX website as well. So starting with the key highlights on Page 2 of the presentation. We highlight that we had a net profit of USD 3.5 million in Q4. This was despite vessels held for sale at the end of Q4, which would have been negative on the income -- on the P&L. The ongoing focus is on the balance sheet optimization. We've managed to record 4 consecutive quarters of profits. The reduced gearing, you will see later in the presentation, is significant. And cash has continued to be generated as positive. And on the operational side, the fleet utilization has been fairly stable at 99.3%. The revenue year-on-year increased 19.8%. This is primarily due to improved spot markets, especially within Q4. And we're very pleased to announce the first full year distribution since 2012, which is a significant step and one which we've all been waiting for, for a long time. We're laying the groundwork for further reduction in debt and to position the Trust to explore strategic alternatives for the unitholders. So moving on to Page 3 with the positive news that we were able to do distribution of USD 0.015, which will be payable on the 13th of March. On Page 3, you will have the timetable. And moving on, turning to our sort of business side. The use of preferential offerings we used for the further installment in newbuildings, and the small there -- the balance remaining, which will be used for the next installment of the newbuildings. Moving to Page 5, we have the performance review. Here, you'll see the growth in revenue, up to $22 million in the quarter. The operating profit and the profit for the quarter, and as you'll see, the cash generated from operations was significantly higher. We also made a repayment of loans. We're trading similar to the previous period. But here, you'll see the gearing ratio has now reduced to just under 26%, which I think everyone would say is quite healthy. Moving on to Slide 6. This is a slide you've seen before. And here, you can actually see where last time, we were witnessing the bareboat chartered income being almost the largest slice of income. And now you can see with the increase in spot markets, the pool and RSA and spot income has now overtaken the bareboat, become a bigger proportion. On Page 7, we can see the different sectors the fleet -- the company is exposed to. And there, you can see the main driver of improvement in earnings is the Aframax and our 2 sectors where you can see a very large increase, although there was a smaller increase but still a significant increase in the MR sector. On Page 8, you'll see the lease maturity where we will -- this year, we will hopefully see the extension of the chemical tankers, and we'll also enter negotiations with our bareboat customer for extensions on some of the smaller vessels. The remaining contracted revenue still stands at $26 million. And a significant proportion of that is this year, and that's mainly derived from the Yang Ming contracts. Page 10 gives you the statistics behind the vessel utilization, up to 0.5%, which is a very healthy utilization compared to many companies. So moving to Page 11, our direction and outlook. Firstly, we highlight the IMO 2020 regulations, which started on the 1st of January. All our vessels managed to switch to compliant fuel within time and are operating normally. We're determined to keep our balance sheet strong. We have the 2 newbuilding product tankers, LR2s, which were scheduled for delivery at the end of this year and early next year. The keel laying of both vessels has been completed. We have, however, noticed that there will be some further adjustment due to the coronavirus having an impact on the shipbuilding industry throughout China, and this may give us some delay. Currently, we only have the 10-day delay notice relative to what -- many of you will be well aware of the extended Chinese New Year holiday in China. We continue to explore further strategic alternatives and looking at sustainable projects, which will be strong for the long term for the Trust. And subsequent to the year-end, we've highlighted the FSL Piraeus and FSL Perth were successfully delivered to the new owners. Thank you very much, and that ends the presentation.

Thank you, Roger. Now ladies and gentlemen, that concludes the results presentation. And we are now open for any questions you may have.

[Operator Instructions] So let's have the first question, please. Are there any questions? We have one from [ Bart Delu ].

Yes. Roger, I have a question on the future strategy, the fleet renewal of the Trust I see because by now, your fleet has actually become quite small. At current rates, annual EBITDA is only slightly above $10 million. And you had indicated before you would want to do investments in low carbon emission or zero carbon emission ships. I wanted to know, given the state of the technology for zero emission ships and the regulatory issues, what is -- what kind of technology are you potentially looking at? And what is the time frame in which you plan to do such investments?

Thank you, [ Bart ]. This will be Roger answering your question, [ Bart ].

Currently, as you are probably aware, there's many, many different types of technology being investigated as to the future long-term fuel source for shipping. In the short term, dual fuel-type vessels where they're running on LNG, these are the sort of projects we would look at. But we have to take into consideration the high capital investment versus the employment opportunity and how secure that employment is. So it's not an easy task to find the right projects. And certainly, at this stage, when we are in this transition, which will take many years before it's clear what is the right fuel source long term could be for shipping.

I hope that answers...

Yes. Well, I understand that, but does that mean that -- does that mean you would rather take a wait-and-see attitude until there's more clarity on the technology and the regulatory framework? Or are you saying in this meantime, which may take a couple of years, we'll invest in some ships in the transition period and maybe LNG-driven ships just as a temporary investment? Do I have to understand it like that?

In a way, yes. If we -- we're in -- we're looking at projects all the time, and some of these projects are dual fuel. We would still consider with, let's say, extremely reputable counterparties, maybe entering other types of vessels, more traditional vessels if they have very secure employment and that residual risk is mitigated because what we see is one of the problems really is sudden changes in legislation, maybe Europe or California or somewhere, changing the rules of engagement for shipping unilaterally with very little notice. And you suddenly find that your traditional ship, which you thought -- a reasonable residual value disappears. So we're keen on finding things which either have very secure employment and have a very limited residual risk or maybe a transition-type vessel like LNG or other projects which are supported by employment. What we feel is wrong for us to just speculate effectively with unitholders' money in a transitional period where we don't know exactly what the regulatory framework will -- how that's going to develop. As we see, we're -- certainly with the changes in the U.S. already days, which maybe were given to people months -- 6 months ago and are suddenly being questioned now and maybe will change. We need to be just very careful not to be left holding assets that suddenly have very little value because the world has changed as quickly.

Thank you, Roger. Thank you for the question, [ Bart ]. May we have another question, please? We have time for another question. We have another question from [ Bart ].

Yes. Yes. Sorry. So I'll ask another one, actually, following up on my earlier question. I think it's understood, Roger, what you explained. But I'm wondering then the financing, given now your distribution level and the remaining cash on your balance sheet will maybe be USD 10 million, USD 15 million, does that mean that any investments you would make in those new ships in the future will be mostly debt financed?

I think there are 2 aspects that, obviously, whenever we buy a vessel, we will use -- as a matter of capital structure, we will use that. Otherwise, the cost of equity would basically destroy the profitability of any project for the time being. And as we don't have a project to immediately invest the money from a capital allocation perspective, we believe that it's better to distribute the funds to unitholders. But in order to invest in the future, and as Roger mentioned in the presentation, we are already in the process of refinancing 6 vessels where, as a result of the extension of the charters, we have a higher debt capacity. So as a matter of capital structure, we will use and we -- yes, we will use that as part of our capital mix.

Yes. And sorry, do you see some possibility -- do you also do green financing here, green bonds or other -- or bank loans?

But for a company of our size, I don't see bonds, to be honest. But green financing is undoubtedly playing an increasing role in ship finance and more and more lenders have signed up to providing principals, for instance. It is rapidly gaining relevance in the shipping space, so it might well be that for any project we embark on in the future, we will make use of green financing here.

Thank you for that question, [ Bart ]. Do we have another question? Roger and Markus are happy to take another question. Okay. Ladies and gentlemen, if there are no further questions, then I'd like to thank you for taking part today on a Monday morning. That brings us to the end of this particular results webcast. And as I said, I'd like to thank you all for joining today. May we wish you a good week ahead. Stay safe. And of course, we look forward to speaking with you all again in the next quarter. Have a very good morning. Thank you.