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

Good morning, ladies and gentlemen. Welcome, and thank you for joining FSL Trust's Second Quarter Financial Results Slide Webcast. My name is Markus Wenker. I'm the Chief Financial Officer of FSL Trust Management, the Trustee-Manager of FSL Trust. I'm here together with Roger Woods, our Chief Executive Officer. We have announced the second quarter financial results for FSL Trust yesterday evening, and the relevant materials are available on our website www.firstshiplease.com as well as on the SGX website. During this webcast, we will give you an overview of the Trust's activities and operating and financial performance in the second quarter. After the presentation, we will take questions from the audience. Before we begin, please note that today's discussion contains forward-looking statements based on the environment as we currently see it and certain assumptions which are subject to risks, uncertainties and external factors. The actual future results may, therefore, differ materially from today's expectations communicated in the discussion, and you should read the disclaimer in the financial results presentation. With that, I will now turn it over to Roger, CEO of FSL Trust Management.

Thank you for the introduction, Markus. Good morning, everyone, and thank you for joining us in the earnings webcast this morning. During the second quarter of 2021, we've experienced continuously weak tanker markets driven by low oil production due to the impact of the pandemic as well as the summer seasonality, which weighed on freight rates for tankers across the board. Yet as we reported, a net profit of USD 0.5 million in the second quarter and USD 900,000 for the first half of the year, benefiting from the stable income generated from the fixed rate period charters at the majority of the Trust vessels in an otherwise weak market. As the net profit declined, the adjusted EBITDA also came in lower than in the same period last year, which does not come as a surprise as the first half of last year was an exceptional year for tankers with historically high freight rates, but also because of the maturity and subsequent disposal of the containerships last year. Overall, and in light of the very challenging tanker market environment, we believe the result is solid and proves our strategy of reducing the Trust market exposure over the last 18 months or so whilst focusing on those long-term employment contracts. The fleet utilization was continuously high at 98% with only a few days of [ hire ], which was impacted by the COVID-19 and the difficulties related to change in crews. On the financing side, we successfully closed the refinancing of the 6 vessels with Chailease in May 2021. We, furthermore, maintained a very robust capital structure for Trust with a strong liquidity position and 0 net debt at the end of the quarter despite the refinancing I just mentioned. Moving on to Slide 4, the operating performance review. The performance was affected by the weak tanker markets, as I already mentioned. In addition, the results are reflecting the reduced fleet compared to the same period last year, in particular, for the containerships which we sold. The adjusted EBITDA for the specialized tankers, which are all on long-term charters, were stable, and the results for the chemical tankers is only slightly lower due to some [indiscernible] due to the pandemic and the redelivery of 1 of 2 vessels at the end of the time charter period in June. These developments are [ myriad ] when we look at the operating performance by employment type on the next page. As the containerships which were previously employed under bareboat charters came off charter and were sold, the adjusted EBITDA for bareboat charter vessels subsequently declined by 70%, while the adjusted EBITDA from pools was hit from the weak tanker markets and declined by 94%. Moving on to the fleet employment. The contracted revenue as at 30th of June stands at approximately USD 22.3 million excluding optional periods, which could potentially generate a further $9.2 million. In the second quarter, from the charter, one of the chemical tankers matured and the second matured subsequent to the quarter end in July 2021. We have now entered into commercial management agreements with [ GSB ] who previously chartered the ship and we believe provide a good platform also for the commercial management of the vessels and the vessels are now trading in the spot market. Having the vessels employed in the spot market rather than fixing another long time charter provides flexibility, which we believe is valuable during a difficult market. Finally, as an outlook for the rest of the year, we will have the charters of 2 specialized tankers maturing in December where the charters have options to extend. On the next slide is the employment profile of our fleet as at 30th of June. As you can see here, the majority of the vessels are employed under multiyear fixed rate period charters, which helps us to manage the market exposure of the Trust. Other than the chemical tankers I already mentioned, we have also recently decided to take the vessel FSL Singapore, which is currently undergoing periodical dry docking and the installation of the compulsory ballast water treatment system, out of the Hafnia MR pool and book her under the technical and commercial management of Prime Marine, which again provides more flexibility to the Trust. Slide 10 highlights the significant improvement in the debt profile and subsequent deleveraging, especially in the last few years. We successfully closed the $15 million refinancing of 6 vessels in May this year, which is currently the only loan the Trust has, which means that 5 vessels are completely debt-free. Moreover, the trust currently has 0 net debt as the liquidity of more than $26 million exceeds the outstanding debt. With this, we've come to the last part of the presentation, the tanker market snapshot. As discussed, illustrated in the chart on this slide, the tanker markets remain challenging in response to the muted demand for oil and oil products. Oil production and refinery throughput remained below pre-pandemic levels, affecting the demand for seaborne transportation. In addition, the markets are currently experiencing the summer seasonality, and freight rates are reaching multiyear lows in some segments, not even paying the operating expenses of the ships. Whilst we are also seeing some positive signals in the market with OPEC+ slightly increasing oil production and air traffic slowly picking up again, uncertainties remain, especially the global spreading of the Delta variant and the tight control some of the oil-producing countries keep over oil production to support the oil price. This makes us believe that we will not see a quick recovery in the tanker markets in the near future, but rather a slow normalization as demand and supply of oil will normalize over time when the situation with the pandemic gets more under control. Leaving the rather sobering market outlook for the short-term aside, we believe that the medium- to long-term market fundamentals for tankers still look quite promising. The order books for most tanker sizes remain at historically relatively low levels, whilst the fleet is aging with 25% of the active tanker fleet reaching 20 years of age by 2023 when environmental regulation will likely push some of these vessels out of the market. In addition, the International Maritime Organization has recently adopted new environmental regulations: the so-called Energy Efficiency Index (sic) [ Energy Efficiency Existing Ship Index ], or EEXI; and the carbon intensity indicator, or CII, which are aiming at reducing greenhouse gas emissions by improving the operational efficiencies of existing vessels. We expect that these regulations will lead to many vessels, especially older tonnage, reducing speeds to comply, which will essentially reduce supply of transport capacity in the market. With this, I will hand you back to Markus. Thank you for listening.

Thank you, Roger. Ladies and gentlemen, this concludes the results presentation, and we are now open to any questions you may have. [Operator Instructions]

This is Vivian from Phillip Securities. Can you hear me?

Vivian, we can hear you.

Okay. Just a few questions. So first of all, I would like to do a clarification. So it was mentioned that the 2 chemical tankers are going to be treated in the spot market. So under the employment profile slide, it's still one in the spot and one under time charter. Is that because it hasn't been transferred to the spot trading? Or -- yes, I'd just like to do a clarification on that.

The reason for that is because the graph in the presentation shows a picture as at 30th of June, and the second vessel basically ended the charter in July. This is the reason. So as at the 30th of June, 1 vessel was trading spot, 1 vessel was employed under time charter. As of today, both vessels are trading spot.

Okay. Sure. And next question would be, we see that the revenue, if you were to compare quarter-on-quarter comparing to first Q '21, the revenue has slightly declined but the net profit or profit after tax has slightly increased. Could you explain more on the reasons behind that?

You mean compared to Q1 this year?

Yes.

That's basically due to a slightly better market than in Q1.

But the revenue -- why was the revenue down in that case?

On top of revenue, we are also keeping very tight cost control. As you can see in our financials, we have been able to reduce the other expenses as well. The management fees have reduced. So this is why the EBITDA was better. But we can take that off-line as well, and we can elaborate further.

Okay. Sure. That's a good clarification. And moving on then, if we were to look in the second half of 2021, would you say that it would be relatively -- like on a quarterly basis, would it be relatively closer to 2Q levels or still about the same level as first Q?

It's very difficult in the current market to make prediction as it really depends on how the pandemic plays out, how the different market constituents like the oil-producing countries behave. Overall, with the majority of our fleet being employed under fixed rate period charters, we believe that the second half of the year should be rather uneventful for us.

I could add that from a market point of view, I think Q3 will be probably quite similar to Q2. But we would always have a hope that seasonality plays its card a little bit in Q4. And if we get some -- not bad weather, but if we get more weather delays on ships, delayed in ports and things like that, that maybe Q4 was -- traditionally, Q4 would see a slightly higher market. I would say, generally, Q3 is one -- if you look through history, Q3 is always one of the worst periods of the year.

Okay. So may I then clarify that if we were to look from a historical perspective, Q3 would be generally weaker, but seasonality plays out such that Q4 will kind of recover a little?

Well, Q4 would be better off. And I would say, within a year, Q4 and Q1 are the better years. So -- because it's the winter in the Northern Hemisphere. So I think as much as Q3 might be a bit flat and not very exciting, Q4, I would hope, will be probably one of the better periods of the whole year because by then also, we would hope the pandemic -- the current situation with the Delta variant is obviously here in Asia. It's having a bigger impact, but it really depends how that pans out. If you're reopening -- the U.S. reopening continues and they don't get a setback, then those Western markets will be -- will have the traditional uplift in November, December, which will make Q4 probably the best period of this year.

Okay. Sure. Just one last question for me. So we have been seeing in the news, some U.S. airlines have been expressing positive opinions on the resumption of air travel. But I mean the COVID cases have been on the rise again, so I would like to ask your thoughts on that. What is exactly -- or not what is exactly, but like more of your opinion on what resumption in air travel pan out in the near, maybe the second half of 2021. Just your thoughts on that, yes.

[ Kerosene of jets just account for ] 15% to 20% of the total [ cargo ] for product tankers. So air traffic has been down more than 50% last year and this year so far, which means that essentially, the whole product tanker market was down more than 10% just from the impact of reduced air traffic. Now if we account for a gradual normalization of air traffic, you can make the math and say if air traffic returns to, say, 75% on average this year, the shortfall in the overall product [ trade ] just from this product will reduce from more than 10% to like 5%, less than 5%. So certainly, the uptick in air traffic gives us some hope that the product tanker market will be stronger in the near future, [ but ] in the nearer future. And one can already see that the product tanker markets are performing better than, for instance, the crude oil markets, which are more dependent on the oil-producing countries' decisions when you just look at the freight rates in the market. And the freight rates of product tankers have been better, which is also why our FSL Singapore has performed better than the FSL Hong Kong, which is a crude oil tanker, and a slightly negative EBITDA whilst FSL Singapore had a positive EBITDA.

Okay. Sure. And sorry, one last -- if I may, one last question. Has the net proceeds from the sale of the FSL Osaka been accounted for? May I ask if that was in first Q or second Q?

That was in the first Q. We delivered the vessel in Q1. So it was accounted for in Q1. Are there any more questions? It seems that there are no more questions from the audience. Thank you very much. This brings us to the end of the results webcast. Thank you for joining us today. We wish you a good day ahead. Stay safe, and we look forward to speaking next quarter. Thank you.