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

Good morning, ladies and gentlemen. Welcome, and thank you for joining FSL Trust's First Quarter 2022 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 this morning is Roger Woods, our Chief Executive Officer. We have announced the unaudited first quarter 2022 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 an overview of the trust activities and the operating and financial performance in the first quarter 2022. 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 the today's views and expectations communicated in this discussion, and you are advised to read the disclaimer on 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 tomorrow afternoon. With that, I will now turn it over to Roger Woods, CEO of FSL Trust Management.

Thank you for the introduction, Markus. Good morning, everyone, and thank you for joining us in the live earnings webcast this morning. Whilst the recovery in supply and demand on oil products continues to be slow, the first quarter of 2022 was characterized by a continuously challenging tanker market. Towards the end of the quarter, however, we have seen an improvement in the tanker market sentiment. This was primarily driven by the disruptions of the war in Ukraine and the international sanctions on Russia have created and which led to a reduction in available tonnage and certain changes in trade patterns. That said, the uncertainties in the market and the global economy remain as do the impact of the elevated geopolitical risks as well as the lockdowns in China, which is a major concern with commodities. In the first quarter, the Trust's fleet utilization was 91%, this was down from 98% in the previous quarter and primarily driven by the chemical tanker FSL London being held by customers in India, but I will come back to this later. Yet, the net profit of the trust slightly improved compared to the previous quarter. It was approximately USD 200,000 in the first quarter, up from the approximate $100,000 in the previous quarter. Similarly, adjusted EBITDA increased to USD 1.7 million from USD 1.4 million in the previous quarter. With 8 of the 11 vessels operating under fixed rate period charters, the trust contracted revenue stood at USD 33.8 million, including USD 26.7 million of firm contracted revenue and USD 7.1 million of optional contracted revenue linked to the discretionary options on some vessels. During the first quarter, we maintained the conservative financing approach. The trust has a very healthy capital structure with a low net leverage of 2x net interest-bearing debt to adjusted EBITDA, a low gearing of 24% and a strong equity ratio of 80%. Looking at the operating performance of the trust's vessels on Page 4 of the presentation, the adjusted EBITDA of our core fleet specialized tankers increased 13% year-on-year to USD 1.8 million. This was primarily driven by the addition of the vessel Pelican Fisher, which was acquired in September last year. In the Product Tanker segment, the adjusted EBITDA increased 167% year-on-year despite the lower fleet following the disposal of FSL Osaka a year ago. The improvement is primarily associated with improved market sentiment for this segment, as I've mentioned before. Similarly, the adjusted EBITDA for the crude oil tankers in the fleet increased 100%, but this was from a rather low level. For the chemical tankers, the adjusted EBITDA turned negative, whilst the fleet also reduced year-on-year with the sale of FSL New York in September last year, the negative adjusted EBITDA was primarily a result of the tanker FSL London being held by the customers in India. When we look at the operating performance by employment type on Slide #5, this picture is broadly mirrored. The adjusted EBITDA from bareboat charters, which comprise the specialized tankers increased 13% year-on-year. Adjusted EBITDA from time charters dropped to 0 following the maturity at the charters of the chemical tankers in the summer of 2021. In the absence of accretive alternative period employment, the vessels switched to spot trading and the vessel FSL New York was sold subsequently, leaving only one chemical tanker in the trust's fleet. For the vessels trading in the spot market or pools, we also recorded a decline in adjusted EBITDA from USD 0.3 million in Q1 last year to 0 this year. Whilst the product tanker and crude oil tankers both improved compared to previous year, the decline in the adjusted EBITDA was driven by the chemical tanker FSL London held by customs. Moving on to the fleet employment. The trust's contracted future revenue as at March 31, 2022, stood at approximately USD 33.8 million. The revenue spread over the next few years and includes USD 26.7 million of firm contracted revenue as well as up to USD 7.1 million of optional contracted revenue. The optional revenues are dependent on the charter of the vessels exercising those options to extend the charters. In terms of new employment, there is nothing to report, and we have no charters scheduled for maturity until the end of 2022. As I mentioned before, the chemical tanker FSL London is currently held by local customs authorities in India pending the outcome of investigations concerning the specifications of a cargo, a vessel carried for a customer. The customs' investigations are still ongoing, and the vessel is still held by the local customs authorities in India. There are no proceedings against the vessel or the trust and the trustee manager. We are not the cargo owner and not to be held accountable. We are in close contact with the authorities involved so that the vessel can leave again soon. In addition, we have commenced legal proceedings to claim damages from the charter of the vessel for the delays caused by the carriage of the particular cargo loaded by the charter and destined for India and the intended investigations of the cargo by the Indian customs authorities and the vessel being held. On the next Slide 7 is the important profile of the trust's fleet as at March 31, 2022. As we already discussed, 8 of the 11 vessels are employed under fixed rate period charters. The longest charter will mature in 2029, and the dollar weighted average remaining lease period is approximately 3 years, excluding the optional periods. The remaining 3 vessels trade spot 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 the development of the revenue and the adjusted EBITDA and the net income over the last few quarters and in comparison to the first quarter of 2021. Whilst revenue declined compared to the same period last year as the result of the smallest fleet, we recorded an increase by 23% quarter-on-quarter as a result of the improved freight rates for FSL Hong Kong and FSL Singapore in the first quarter of 2021. And despite the situation with FSL London. Similarly, adjusted EBITDA and net income improved quarter-on-quarter by 15% and 95%, respectively, whilst being lower than Q1 in 2021 when the trust had a larger fleet. Slide 10 highlights the capital structure of the trust. As in the previous quarter, the net leverage of the trust was a very healthy 2x adjusted EBITDA with net interest-bearing debt of USD 13.2 million only. Just to remind you, the trust has USD 26.7 million of firm contracted revenue. So the net interest-bearing debt is not even half of that. Additionally, 4 of the 11 vessels in the trust are debt-free. This does not only lead to a very healthy equity ratio of 80% but provides a low-cost base and cash breakeven rates for the vessels operating in the spot market or in the revenue sharing agreement, providing, a, downside protection, and b, the flexibility to increase leverage when we see a sustainable recovery in the tanker market, which supports a higher leverage or alternatively sell the vessels. With this, we come to the last part of our presentation on Page 10. You can see the development of the tanker charter rates in the recent past. As discussed before, there was no material change in the underlying market fundamentals during the first quarter. The OPEC+ keeping a rather slow pace of production increases, yet freight rates across the relevant segments improved towards the end of the quarter. This was triggered primarily by the sanctions on Russia, which have led to a reduction of tonnage supply and certain changes in the trade patterns supporting tonne-mile demand as the U.S. is releasing oil from its strategic petroleum reserve in an attempt to address the increased oil prices and mitigate the impact of the lower oil volume from Russia. Whilst it is unlikely that the sanctions on Russia will not go away anytime soon, even if Russia was to end the war in the Ukraine, geopolitical risks will continue to be high, and it remains to be seen how the impact on markets will be going forward. We also remain cautious on the overall global economy as the war in Ukraine merely adds to increased risk due to the global pandemic. In particular, the new lockdowns in China due to COVID-19 are likely leading to new disruptions in the supply chains and demand for commodities. Leaving the demand side aside, tonnage supply fundamentals continue to be rather positive in the medium term as contracting of new buildings remains muted given the uncertainties in the market and the changing environmental regulations. As a result, the order book continues to be at a historical low level. And in addition, the so-called EEXI and CII regulations will come into effect in 2023. These 2 new rules are expected to have a positive effect on the tanker markets, especially as older vessels and other higher polluting vessels will need to reduce their speeds to meet the lower emissions. What this essentially means for the market is that voyages will take longer, and this will reduce the available tonnage, which will have a positive effect on the supply and demand balance even if the demand has not changed at all. With this, I thank you for your attention and hand you back to Markus.

Thank you, Roger. Ladies and gentlemen, this concludes the first quarter financial results presentation, and we are now open for any questions you may have. [Operator Instructions] It seems we have no questions. That actually brings us to the end of the presentation. Thank you very much for joining us today. We wish you a good weekend ahead, and look forward to speaking with you again next quarter. Goodbye.