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 and First Half 2022 Financial Results Live Webcast. My name is Markus Wenker. 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 second quarter and first half 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's activities and the operating and financial performance in the second quarter and first half 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, uncertainty and external factors. The actual future results may therefore differ materially from today's views and expectations communicated in this presentation, and you are advised to read the disclaimer in 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 this, I will now turn it over to Roger Woods, CEO of FSL Trust Management. Roger?

Thank you for the introduction, Markus. Good morning, everyone, and thank you for joining us in the live earnings webcast this morning. Let me start by walking you through the operating and financial highlights of the second quarter 2022. On the operating side, we have seen significant improvement in the product tanker markets benefiting from cargo dislocations and changed trade patterns as a result of the Russian-Ukraine conflict, and the international sanctions on Russia as well has increased demand and refinery margins. Whilst the majority of our vessels are employed under fixed rate charters, our MR product tanker, FSL Singapore benefited from the improved market environment and could command healthy charter rates during the second quarter. The situation with the chemical tanker FSL London, which was helped by Customs in India, weighed on the trust fleet utilization. As a result, fleet utilization declined 89% in the second quarter compared with 98% in the same period last year. The vessel was finally allowed to leave India in June and sold in July. So we expect the fleet utilization will normalize again going forward. In June, we successfully sold the Aframax Tank crude oil tanker FSL Hong Kong for a price, which we consider very strong, netting an unaudited gain of USD 1.9 million. For the FSL London, which we sold post quarter end of July, we realized an unaudited net gain of approximately USD 2 million. This gain will be recognized in the third quarter financial results. Looking ahead, the contracted future revenue of the trust from the 8 vessels operating under fixed rate period employment stood at a total of USD 31.8 million as at the 30th of June 2022, which is more than double of the trust loans outstanding. On the financial side, we ended the second quarter with a net profit of USD 2.1 million and in the 6 months of the year with a net profit of USD 2.2 million. This is 280% and 154% higher than last year and reflects the improved tanker market environment as well as the disposal of FSL Hong Kong. Whilst we recorded an increase in profitability, adjusted EBITDA came in lower than last year with USD 1.5 million in the second quarter and USD 3.1 million in the first half of the year. In terms of the trust capital structure, we ended the quarter with a very strong liquidity position with almost USD 25 million, which has further increased since then as we sold the chemical tanker FSL London in July. As a result, the trust has 0 net interest-bearing debt. And as part of our approach to capital allocation, the Board of Directors has approved a distribution to unitholders of USD 1.6 per unit, which is approximately USD 28.3 million in total. Now taking a deeper look into the operating performance of the trust vessels on Page 4 of the presentation. Adjusted EBITDA for the specialized tankers, which we consider the trust core fleet increased by 13% year-on-year to USD 1.8 million. This increase was primarily driven by the addition of the vessel Pelican Fisher, which we acquired in September last year and resulted in an increase of ownership days. In the Product Tanker segment, adjusted EBITDA increased 300% year-on-year driven by the improved freight rates for product tankers. As this vessel is operating in the spot market and directly participates in the market upside. For the chemical tanker, the adjusted EBITDA turned negative, whilst the fleet has reduced year-on-year with the sale of FSL New York in September 2021, the negative adjusted EBITDA was primarily the result of the situation of the FSL London, which was held by Customs in India until June, as I've mentioned before. Finally, for the crude oil tanker, adjusted EBITDA declined despite the improved tanker markets. This was due to some unfortunate operational and technical issues the vessel experienced weighing on her results. As I mentioned before, we sold the vessel to a third party for a very strong price in June, just ahead of her third dry docking and special survey, which led to a small decline in ownership days, but would have otherwise cost us a few million U.S. dollars. When we look at the operating performance by employment type on Slide 5, this picture is broadly mirrored. The adjusted EBITDA and ownership days for the vessels under bareboat charters increased year-on-year as a result of the addition of the Pelican Fisher in September last year. On the other hand, the adjusted EBITDA and total ownership days of vessels under time charters or operated in pools or the spot market declined year-on-year due to the situation with FSL London in India and the operational issues of FSL Hong Kong, despite the strong results for FSL Singapore. Moving on to the fleet employment. The trust contracted future revenue as at the 30th of June 2022, stood approximately USD 31.8 million the revenue spread over the next few years and includes USD 24.7 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 relevant vessels extending those charters. In terms of vessel employment, I've already mentioned that the FSL London was able to leave India in June as it was subsequently sold in July. There have been no proceedings against the vessel or FSL Trust and we are pursuing a damage claim against the chargers for the losses we suffered due to the delays caused by the carriage of the particular cargo loaded by the charter and destined for India and the attendant investigations pass the cargo by the Indian Customs and the vessel being held and delayed. We have no scheduled charter maturities until the end of this year when the charters for the Clyde Fisher and Speciality will mature. The charter has an option to extend the charter for the Clyde Fisher for another year at a pre-agreed fixed rate, and we will be considering our options for the Speciality as she comes closer to the charter maturity. On the next Slide 7 is the employment profile of the trust fleet as at 30th of June 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. FSL Singapore is trading in the spot market and is enjoying a robust freight rates. We are currently seeing FSL London, which is included in this overview as at 30th of June has been sold since then. Moving on to the financial performance review. You can see the development of the revenue, the adjusted EBITDA and the net income over the last few quarters and in comparison to the second quarter of 2021. On the back of the improved tanker market sentiment, revenue has been increasing considerably and even surpassed the second quarter of last year, and we had a larger fleet than this year. At the same time, adjusted EBITDA is lower than last year and others around the same level as in the preceding quarters, which is primarily driven by the fact that we had more days trading in the spot market compared to last year as a result of some of the charter maturities in the summer of 2021. Secondly, the situation with the FSL London was weighing on the results and adjusted EBITDA and net profit in particular. Speaking of the net profit. The net profit for the second quarter substantially increased compared to both the same period last year and the preceding quarters. As I've already mentioned, this was driven by improved tanker markets benefiting Singapore as well as the sale of FSL Hong Kong for a net profit of USD 1.9 million. In terms of capital structure of the trust, which is discussed on Slide 9 of the presentation, we ended the quarter with 0 net interest-bearing debt as the liquidity position of the trust exceeded the loans outstanding following the disposal of the FSL Hong Kong. The equity ratio is 81%, which is very healthy. And in addition, the trust had 3 vessels unencumbered as at end of June. We sold one of these 3 unencumbered vessels, FSL London in July, adding to the liquidity position, combined with USD 31.8 million in contracted revenue, the healthy financial situation provides resilience and strong downside protection in uncertain times as well as opportunity for the future. Given the strong liquidity position and to bring the leverage to a level where we feel comfortable without compromising the risk profile of the trust, the Board of Directors has approved the distribution of excess liquidity to unitholders. Specifically, the Board approved this distribution of USD 1.6 per unit. Notice of Books closure was yesterday and the units will trade ex distributions on the 12th of August 2022. Book closed year-to-date will be the 15th of August at 5:00 p.m., and the distribution will be paid on the 13th of September 2022. Including this distribution, total distributions to unitholders over the last 3 years has been USD 9.6. With this, we come to the last part of the presentation on Page 11. You can see the development of the tanker charter rates in the recent past. As discussed before, we have seen a significant improvement in the tanker market sentiment, particularly for product tankers. This is reflected in both freight rates and market values that we've seen going up in the last few months. The currently strong market was primarily driven by the Russian-Ukraine conflict and the international sanctions on Russia that followed the Russian invasion of Ukraine. This has led to cargo dislocations, change trade patterns and higher ton mile demand. In addition, we have seen a further recovery in demand for oil products from the pandemic and increased refinery margins that particularly helped the product tanker segment. On the crude oil side, incremental production growth remains at a rather slow pace as OPEC+ is continuing their production policy of gradual increases despite the higher oil prices. With uncertainty around the Russian-Ukraine conflict and geopolitical risk being a multi-tech aid higher. It remains to be seen what the medium to long-term impact of the conflict and sanctions will be on the markets. We also remain cautious on the overall macroeconomic outlook, which is not only influenced by the war in Ukraine, but spiraling energy prices and inflation as well as increasing interest rates and reducing business and consumer confidence. In terms of supply fundamentals, we continue to be optimistic in the medium term as contracting of new buildings is continuously muted due to the uncertain geopolitical and macroeconomic environment as well as the changing environmental regulations. As a result, the order book continues to be at a historically low level, whilst we expect the effective tonnage supply to reduce next year as the so-called EEXI and CII regulations will come into effect in 2023, which are likely to need to slow steaming of particularly older vessels to lower their emissions that will, therefore, extend the voyage time at the fleet. With this, I thank you for your attention and hand you back to Markus.

Thank you, Roger. Ladies and gentlemen, this concludes the second quarter and first half 2022 financial results presentation, and we are now open for any questions you may have. [Operator Instructions] It seems we have no questions. Any questions? We have come to the end of our results webcast. Thank you for joining us today. We wish you a good day, and look forward to speaking with you again next quarter. Goodbye.