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

Good morning, ladies and gentlemen. Welcome, and thank you for joining FSL Trust's Fourth Quarter and Full Year 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. Here with me is Roger Woods, our Chief Executive Officer. We have announced the fourth quarter and full year 2021 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 live webcast, we will give an overview of the Trust's activities and the operational and financial performance in the fourth quarter and the full year 2021. And 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 reviews and expectations communicated in this discussion. And you are advised to read the disclaimer and the financial results presentation. Please also note that this live webcast, including the Q&A session, will be recorded. And the recording will be available on our website from Monday afternoon. With that, I will now turn it over to Roger Woods, CEO of FSL Trust Management.

Thank you for your introduction, Markus. Good morning, everyone, and thank you for joining us for this live earnings webcast this morning. The tanker markets continued to be rather weak during the fourth quarter and winter, which usually leads to a seasonal increase in demand. We've seen a slight temporary improvement in freight rates for sizes relevant to the Trust. But the market is disappointed overall, and we're well below the expectations of the market participants and analysts. This continued weakness of the markets was primarily driven by the continuously low oil production levels, which led to disappointing ton-mile demand and has weighed on the tankers in the Trust operating in the spot market pools. On the positive side, following the completion of the dry-docking of FSL Singapore in November 2021, the fleet utilization increased to 98% again, up from 91% in the previous quarter. Despite the weak overall tanker market environment, we ended the fourth quarter with a small profit of around USD 88,000, supported by the vessels operating under the fixed-rate period charters. The result for the full year is negative, unfortunately, with a net loss of around USD 1.5 million. This was primarily driven by the noncash impairments on vessels as a result of the impact of the weak tanker markets on the values. The adjusted EBITDA for the fourth quarter and the full year of 2021 was USD 1.4 million and USD 6.8 million, respectively. This is a 53% and 77% lower compared to the previous year and driven by the smaller fleet size following the disposal of 2 operating vessels in 2021 and again, the weak overall tanker markets. During the fourth quarter, we agreed the extension of the charter for the vessel Clyde Fisher with James Fisher Everard. Including this extension, the contracted revenues now stand at USD 28.6 million as at 31st of December 2021. In terms of our capital structure, we completed the refinancing of the vessel Pelican Fisher in October 2021. The financial ratios of the Trust are very solid with a very low leverage of 2x net interest-bearing debt and low gearing of 25% only and very robust equity ratio of 79%. Looking at the operating performance of the Trust vessels on Page 4 of the presentation. The adjusted EBITDA for the specialized tankers increased 19% to USD 1.9 million, and this was a result of the acquisition of the Pelican Fisher in the third quarter of 2021 as well as increased charter rates for some of the other vessels. The specialized tankers are the small tankers, which are on long-term charter to James Fisher Everard. In the product tanker market, the adjusted EBITDA declined 50% year-on-year. Whilst the product tanker market in the fourth quarter was not much different compared to the previous year, the decline of the adjusted EBITDA was primarily driven by the sale of one product tanker, FSL Osaka in March 2021, which reduced the product tanker fleet by 50%. For the chemical tankers, we recorded a decline in adjusted EBITDA of 138% to approximately minus USD 300,000, driven by 3 factors: firstly, the time charters for both chemical tankers matured in the summer of 2021 and the vessels switched to spot trading. Secondly, we sold FSL New York, one of the chemical tankers, in September 2021. And thirdly, the remaining tanker, FSL London, is currently held by local customs authorities in India pending the outcome of investigations over the specifications of a cargo, which we carried for a customer. In relation to the crude oil tanker market, which is represented by the vessel FSL Hong Kong, we've seen further decline in freight rates compared to the previous year, which resulted in a negative adjusted EBITDA of circa USD 400,000. Finally, for the containership segment, where we sold the vessels in 2020 following the maturity of the long-term bareboat charters, we recorded a small negative adjusted EBITDA, which related to a claim we have against the former charterer, Yang Ming. This picture is broadly mirrored in the operating performance by employment type on Slide 5. The adjusted EBITDA for the vessels and bareboat charters increased 12%, broadly in line with the increase in ownership days in this segment. This reflects the addition of the Pelican Fisher, which was acquired in the third quarter of 2021. Adjusted EBITDA for time charters reduced 88% following the maturity of the charters of the 2 chemical tankers in the summer of 2021. As mentioned before, the reason why this is slightly positive is that we collected some income after the end of the charters. The vessels trading in the spot market or pools have recorded a combined negative adjusted EBITDA of minus USD 300,000. This is a result of the weak market environment. Moving on to the fleet employment. The contracted revenue as at the 31st of December 2021 stood at approximately USD 28.6 million, excluding the optional periods, which can be potentially generate a further USD 7.1 million of revenue in the next few years if exercised. In the fourth quarter, we've reached agreement with James Fisher Everard on the continuation of the bareboat charter of the vessel Clyde Fisher for 1 year until the end of 2022. Both parties have certain early termination options and the charterer has the option to extend the charter by another year until the end of 2023. With this charter extension, we have no scheduled charter maturities before the end of 2022. I mentioned before that the chemical tanker FSL London is currently held by local customs authorities in India, pending the outcome of their investigations related to specifications of a cargo the vessel carried for a customer. We are not the cargo owner and not held accountable. We are in close contact with the authorities involved so that the vessel can leave again, and we are also claiming damages from the charterer who was our customer. On the next Slide 7 is the employment profile of the Trust's fleet as of the 31st of December 2021. As you can see here, 8 of the 11 vessels are employed under fixed-rate period charters with a dollar-weighted average remaining lease period of approximately 3 years, excluding the optional extension periods and early termination options. The remaining vessels trade spots or in the case of FSL Hong Kong, in a revenue-sharing agreement. This provides greater flexibility compared to a period employment and allows the Trust to participate in any potential market upside. Moving on to the financial performance review. You can see that the development of revenue and adjusted EBITDA and the net income over the last few quarters in comparison to the fourth quarter of '20. Whilst revenues declined as a result of the smaller fleet but also the weaker tanker markets, adjusted EBITDA improved in the preceding quarter, primarily as a result of lower voyage expenses. Supported by the vessels on period charters, the net income in the fourth quarter 2021 was slightly positive despite the weak tanker markets. This compares to net losses of USD 2.5 million and USD 2.2 million in the preceding third and fourth quarters. In those 2 quarters, the net results were impacted by noncash impairments in addition to the poor tanker markets weighing on the top line. Moving on to Slide 7. We give an overview of the highlights of the strength of the Trust balance sheet. As you can see in the diagram on the left-hand side, we have significantly delevered the Trust over the last few years. This was well supported by the healthy tanker markets we have seen in 2019, in the first half of 2020, but also the disposal of older tonnage at firm prices in the last 24 months or so. With the completion of the refinancing of some of the vessels that are in period charter, the distributions of excess liquidity to unitholders, net leverage increased to 2x adjusted EBITDA. We consider this very healthy in the current market environment. Moreover, we have 3 vessels completely debt-free. This provides resilience as the cash breakeven rate on these vessels is very low, providing significant downside protection. Also, the gearing of 25% as well as the strong equity ratio are very healthy and add to this resilience, which is essential for shipowners like FSL Trust in a volatile, cyclical market environment. With this, we come to the last part of the presentation. On Page 10, you can see the development of the tanker earnings in the last 1.5 years. As discussed before, the winter season disappointed as we only saw a slight improvement in the relevant segments but not a meaningful improvement that was anticipated by the market participants. The key driver for this was the continuously low oil production, which weighed on the ton-mile demand for tankers. Oil production has slightly increased in the fourth quarter. Just this week, OPEC announced another slight increase by 400,000 barrels a day in February. However, we do not expect that this will be sufficient to give the market a significant push ahead. And combined with the global spreading of the Omicron variant that weighs on oil demand, we remain very cautious. As in the previous quarters, the tonnage supply fundamentals for the medium term look brighter than the short-term market outlook. Contracting of new buildings remains subdued, and the order book is at a historically low level. This is not only driven by the currently difficult tanker markets, but also the technological risks related to environmental regulations, the reduction of carbon emissions, in particular. In 2023, the so called EEXI regulations will come into effect, which we expect to have a positive effect on the tanker markets. And this will essentially force older vessels to reduce speed to lower their emissions. This will not only make older vessels less attractive. But as voyages will take longer, this is expected to reduce the supply and have a positive effect on the supply and demand balance. Thank you very much for listening this morning. I will now hand you back to Markus.

Thank you, Roger. Ladies and gentlemen, this concludes the fourth quarter financial results presentation, and we are now open for any questions you may have.

[Operator Instructions] We have got one question. Vivian, please go ahead.

I'm Vivian from Phillip Securities. So firstly, 2 questions. So my first one would be -- do the high oil prices benefit the FSL Trust in any way? And the second question would be that would you say that the current fleet is the most optimal? And the third one, what would be the main reason for canceling the sale of the chemical tanker a few months back?

Let me take the first 2 questions, probably. In terms of oil price, I don't think that the high oil prices particularly benefiting the shipping markets right now for 2 reasons. Firstly, the high oil prices discourage the oil producers to increase their production because, obviously, this would likely lower the oil price again. So it's -- from an economic perspective, for the oil producers, it's better to have strong oil prices. But secondly, it also has an impact on the trading dynamics of the global oil traders when it comes to spot market versus future markets. So the currently high oil price probably contributes to the relatively low muted ton-mile demand for tankers. On the second question, which was the fleet. In terms of optimal fleet, I think the right answer to that is that in the current market, we believe we have a relatively strong fleet in the sense that the majority of our vessels is employed on fixed-rate period charters that provide the resilience that we need in such very challenging markets as we currently see them. We only have the 3 vessels, which are currently traded spot on revenue-sharing agreements and exposed to the currently relatively weak markets. Whether it's the optimal fleet is a question. When we look from a portfolio strategy perspective, with different segments, you can always debate what's the optimal fleet as, but we feel comfortable with the current fleet as it is. And as we have said in the past as well, we are very actively looking at the performance management and portfolio management of our fleet. So we capitalize on opportunities in the market.

I can take the third one, so that -- the chemical tanker that we had agreed to sell, basically, when we do a sale, we have a specific window of time to deliver that vessel to the buyer. And we could see that because of the delays discharging the cargo aboard the vessel, that we were going to miss that window. So it's a mutual sort of agreement that both parties sort of agree to cancel the sale and, let's say, return the deposit because we couldn't make the delivery window. But I would add to that is that particular buyer is still very interested in buying the ship. And currently, the market for those ships has not -- has actually gone up.

And generally there, our idea is we consider the vessel a noncore asset. So our idea is that we sell her once she is free again and the Indian customs have completed their investigations. So the vessel is still held for sale.

For that, so can I add on to that? So the vessel under the balance sheet, there is this asset held for sale. So it's this certain chemical tanker?

Yes. Yes.

Exactly. Yes.

Okay. Okay. And last question for me would be for this quarter, if we compare either year-on-year or maybe comparing to the first 2 quarters of -- first few quarters of FY '21, the revenue-wise, it's lower. And I mean Roger also explained about the reasons. So can I ask if the lower revenue is more due to the lower revenue from those impacted due to employment in the pool and the spot markets? Or is it due to a smaller fleet as compared to the first 2 quarters of the year?

I think it's a combination of both. It's a fact that our fleet has reduced and that obviously contribute or has an impact on both the top line but also certain cost and expenses. But the weak markets obviously also contribute.

We also -- on the weak market front, not only do we have a weak demand side from oil, let's say, oil that needs to be carried, we also are hit by a higher fuel cost for the fuel the ships use. So you end up sort of squeezed from both ways a little bit. But I think that, as Markus highlighted, we sold 2 ships last year. So we end up with quite a large percentage in a way of our spot-exposed fleet or market-exposed fleet.

And it's good that we sold those vessels because if we still had them, they would basically have an adverse impact on our bottom line results in the currently weak market. So we are actually very glad we sold them as part of our portfolio management, both in terms of fleet but also market exposures. So by selling them, we have reduced our market exposure and this strategy has proven very right in the last 18 months. Do we have any more questions? It doesn't seem so. So thank you very much for joining us today. This brings us to the end of our results webcast, and we wish you a good weekend and look forward to speaking with you again next quarter. Thank you, and goodbye.