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

Good morning, ladies and gentlemen. Welcome, and thank you for joining FSL Trust third quarter 2021 financial results live webcast. My name is Markus Wenker, and I'm the Chief Financial Officer of FSL Trust Management, the Trustee Manager of FSL Trust. Together with me is Roger Woods, our Chief Executive Officer. We have announced the third quarter financial results for FSL Trust yesterday evening, and the relevant materials are available on our website, fsltrust.listedcompany.com, as well as on the SGX website. During this webcast, we will give an overview of the trust activities and the operating and financial performance in the third quarter 2021. After the presentation, we will take questions from the audience. Before we begin, please note that today's discussion will include 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 our today's views and expectations communicated in this discussion, and we advised to read the disclaimer and the financial results presentation. With that, I will now turn it over to Roger, CEO of FSL Trust Management.

Thank you, Markus, for the introduction. Good morning, everyone, and thank you for joining us in the earnings webcast this morning. During the third quarter of 2021, we've experienced continuously weak tanker markets driven by lower oil production that has not substantially improved and remains below pre-pandemic levels. In fact, we've actually witnessed a further softening of freight rates for tankers during the third quarter, which has affected the trust vessels operating in coals or in the spot market, and that could not be really fully compensated by the vessels operating under the fixed rate period employment. In addition, from an operational perspective, the fleet utilization reduced as a result of an extended dry dock involving an incident for FSL Singapore that led for a longer period out of service. As a result of the weak tanker market environment, but also the smaller fleet following the disposal of older vessels for that period employment, adjusted EBITDA declined to USD 600,000 compared to USD 3.3 million in the third quarter of last year. including noncash impairments that we booked due to the poor market environment. The net income was a negative USD 2.5 million. For the 9-month period, the adjusted EBITDA declined from approximately USD 26 million to USD 5.3 million, and the net income was negative at USD 1.6 million compared to a net profit of USD 8.5 million during the same period last year. On the positive side, we acquired one new vessel, the Pelican Fisher, in September 2021. Upon delivery of the vessel, it has commenced an 8-year bareboat charter to our longstanding customer, James Fisher Everard. The charter is expected to generate an adjusted EBITDA of approximately USD 8 million over the 8 years period and adds to the contracted revenue, which increased to USD 29.8 million at the end of September 2021. We also arranged a USD 3.95 million loan with our existing lender, Chailease, to refinance the acquisition of the Pelican Fisher, which was closed post quarter end in October '21. Despite the weak tanker markets and the impacts on our financial performance during the third quarter, we maintained the solid capital structure of the trust and ended the quarter with a robust liquidity position of USD 28.1 million and 0 net interest-bearing debt. On that basis, the Board of Directors has approved another distribution to unitholders of $0.015 per unit for the third quarter, which will be paid in December. Moving on to the detailed review of the operating performance on Page 4 of the presentation. The adjusted EBITDA for the specialized tankers increased as a result of the acquisition of Pelican Fisher, but also the increase of the charter rates for some of the other specialized tankers where options were exercised. Similarly, the adjusted EBITDA for the chemical tankers slightly increased, despite the maturity of the transfers in June and July. This is when they enter the spot market. Contrasting these 2 segments, the adjusted EBITDA for the product tanker and the crude oil tanker fleet took a dip and turned negative driven by the low freight rates for this type of tanker. Looking at the operating performance from a perspective of charter types on the next slide. The adjusted EBITDA for vessels on bareboat charters reduced by almost 50% compared to last year, which is primarily driven by the maturity of the charters of the containerships and the subsequent sale last year. The adjusted EBITDA for the time charters reduced as a result of the maturity of the charters of the chemical tankers, which, as I already mentioned, moved to trade in the spot market. Therefore, it also led to an increase in ownership days for the core or spot trader vessels. Despite the addition of the chemical tankers to the pool and spot trading fleets, the aggregate adjusted EBITDA turned negative driven by the weak freight rates for the product tankers and crude oil tanker. Moving on to the fleet employment. The contracted revenue as of 30th of September stood at approximately USD 29.8 million, excluding any optional periods, which can potentially generate another USD 8.3 million of revenue. During the third quarter, we entered into the 8-year bareboat charter for the new acquisition, Pelican Fisher. And the charter of the speciality, the option was exercised to extend the charter to the end of 2022. We have one other specialized tanker, the Clyde Fisher, for which the charter matures at the end of this year. The charter has an option to extend this charter as well, but the option has not been exercised yet, and we are in discussions with the charter. Finally, as I already mentioned, the charters of the 2 chemical tankers matured in the summer, and these vessels have been deployed in the spot market since then. At the same time, we've already disposed of one of the chemical tankers to limit our spot exposure in this very specialized market. We have also agreed to sell the second the with delivery to her buyer as expected in the fourth quarter. On the next Slide 7 is the employment profile of the trust fleet as at the end of September. As you can see here, 8 of the 11 vessels are employed under fixed rate period charters, with the dollar weighted average remaining lease period of approximately 4 years, excluding the optional extension periods and the early termination options. The remaining vessels are currently employed in the spot market, which allows us to participate in any market upside as we head into the winter season, which is particularly important for this type of tankers. Moving on to the financial performance review. You can see the development of the revenue and the adjusted EBITDA and net income over the last few quarters in comparison with the third quarter of last year. Whilst revenue increased quarter-on-quarter as a result of the switch from pool to spot employment for some vessels, adjusted EBITDA declined as the voyage expenses for these vessels increased as a result. Yet we believe this switch will be beneficial in the near future, and the negative effect on the adjusted EBITDA nearly is a transitional period as we believe the time charter equivalent rates will be higher than operating these vessels in the pool. Moreover, operating these vessels in the spot market provides the trust with the additional commercial flexibility that we do not have when operating in pools. In comparison with the third quarter of last year, both revenue and adjusted EBITDA were also impacted by the smaller fleet of 11 vessels compared to 14 vessels on the water 1 year ago. In terms of net income, the third quarter was impacted by negative earnings for the product tankers and the crude oil tanker, but also the noncash impairments as we previously discussed. Slide 10 highlights the significant improvement in the debt profile and the subsequent deleveraging, with currently 0 net interest-bearing debt resulting in a very healthy balance sheet metrics. Post quarter end, we also successfully completed the refinancing of the acquisition of the Pelican Fisher. As I already mentioned, the Board of Directors approved the distribution to unitholders of USD 0.015 per unit for the third quarter of 2021 on the basis of the strong liquidity position. The notice of books closure was made yesterday evening. The units will trade ex distribution on the 9th of November, and the books closure date will be 1 business day after that on the 10th of November, with the distribution being paid to unitholders on the 10th of December. On a positive note, we move now on to the tanker market snapshot, which is the last part of this presentation. As we discussed and illustrated in the chart freight rates for different types of tankers on the right-hand side the tanker markets remained challenging in the third quarter. This was primarily driven by the continuously muted oil production, which remains below pre-pandemic levels. Whilst demand for oil and oil products actually increased, as the world got a breather from the pandemic and air traffic increased, although demand remained below pandemic levels. Additionally, the higher demand did not feed through to increase demand for tankers, but was rather met by using oil inventories, which has led to higher oil and energy price. With the winter season approaching and as the inventories in some major economies worldwide will need to be restocked, we have recently seen improvement in the ton-mile demand, and the expectation is that freight rates for tankers will further improve in the coming months. Leaving the current picture aside, we believe that the medium- to long-term market fundamentals for tankers continue to look quite promising. Contracting of new buildings for most tanker sizes remains muted, amid the current regulatory uncertainty related to future fuel technologies, resulting in order books that are at historically relatively low levels. At the same time, the existing tanker fleet is aging, with 25% of the active fleet reaching 20 years of age by 2023. When these tankers reach 20 years of age, owners will need to spend money to install mandatory ballast water treatment systems on their vessels, which make these commercially less attractive, unless the markets are supportive and pay for the investments. In addition, new environmental regulations, which come into effect in 2023, which likely force vessels, especially older vessels, to reduce speed to compliance, which, again, makes older vessels less attractive. But even more importantly, this reduces tonnage supply and the transport capacity as voyages will take longer as a result of slower speeds. With that, I thank you, and back to Markus.

Thank you very much, Roger. Ladies and gentlemen, this concludes the third quarter financial results presentation, and we are now open for any questions you may have. [Operator Instructions] So far, no attendees indicated to ask a question. [Operator Instructions] It seems we have no questions. With that, we come to the end of the results webcast. Thank you for joining us today. Stay safe, and we look forward to speaking with you again next quarter.