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

Good morning, ladies and gentlemen. Welcome, and thank you for joining FSL Third Quarter and 9 Months 2022 Financial Results and Live Webcast. My name is Roger Woods, and I'm the Chief Executive Officer of FSL Trust Management, the Trustee Manager of FSL Trust. We have announced the unaudited financial results for the third quarter and 9 months period ended 30th of September of FSL Trust yesterday evening, and the relevant materials are available on our website at www.firstshiplease.com as well as on the SGX website. During this live webcast, we will discuss the Trust activities and the operational and financial performance in the third quarter and the first 9 months of 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 today's views and expectations communicated in this presentation, and you are advised to read the disclaimer in the financial results presentation. Please note that this live webcast, including the Q&A session, will be recorded. And a recording will be available on our website on Monday, the 7th of November. Let me begin the presentation by walking you through the operational and financial highlights of the third quarter 2022. On the operational side, we have seen a continuation of the strong product tanker markets, which we'd already seen in the second quarter. As an effect of the Russian-Ukraine conflict and the international sanctions on Russia, the markets continued to benefit from cargo dislocations and changed trade patterns, which led to increased ton-mile demand whilst the demand for oil and oil products improved at the same time. This has particularly supported the earnings and market value for our MR product tanker FSL Singapore, which operated in the spot market and which we agreed to sell in August with delivery to her buyers in October 2022. At the beginning of July, we also successfully sold the chemical tanker FSL London after the situation we faced with her in India. She was a lad to leave in June. This resulted in a net sales proceeds of approximately USD 11.1 million and an unaudited net gain of approximately USD 2 million. The fleet utilization during the third quarter was almost 100%, up from 89% in the preceding second quarter, where we felt the impact of the situation with FSL London. Going forward, we expect fleet utilization of 100% as the remaining 8 vessels are all employed on period charters, which generate contracted revenue of the Trust. The future contracted revenue is up to USD 30 million as at 30th of September. This includes circa USD 22.9 million of firm contracted future revenue and circa USD 7.1 million of operational -- optional contracted revenue and which is more than double the Trust's current outstanding loans. On the financial side, we ended the third quarter with a net profit of USD 5.4 million, including the USD 2 million net gain from the sale of FSL London. This is the third highest quarterly profit in the history of FSL Trust and compares to a net loss of circa USD 2.5 million in the third quarter last year when the pandemic and the low demand for oil products were weighing on the tanker markets. For the 9 months period ended 30th of September 2022, we reported a net profit of approximately USD 7.7 million compared to a net loss of USD 1.6 million in the same period last year. The adjusted EBITDA also improved in wake of the strong product tanker markets and despite the smaller fleet compared to last year. In the third quarter, the adjusted EBITDA increased year-on-year to USD 4.5 million and year-on-year $7.6 million for the 9-month period. In terms of capital structure, the liquidity position of the Trust at the end of 30th of September was USD 11.1 million while the net interest-bearing debt to adjusted EBITDA was only 0.4x. As we sold FSL Singapore post quarter end in October 2022, the liquidity position further increased, and we are now having essentially 0 net debt. Taking a look at the operational performance of the fleet on Page 4 of the presentation. Adjusted EBITDA for the Trust core fleet, the specialized tankers, increased 12% year-on-year to USD 1.9 million. This is driven by the acquisition of the vessel Pelican Fisher in September last year. This acquisition also resulted in an increase in the ownership days by 11% -- by 12% year-on-year. In the Product Tanker segment, adjusted EBITDA turned from negative last year to USD 2.4 million in the third quarter this year. As I mentioned, this represents the improved freight rates we could realize for FSL Singapore trading in the spot market in the third quarter. The ownership days in this segment were unchanged year-on-year. For the chemical tanker market, the adjusted EBITDA was slightly negative as a result of the situation we were facing with the vessel in India and the ballasting to Singapore, where we sold her in July. Following the disposal of the Trust last crude oil tank FSL Hong Kong in June this year, we collected further demurrage payments from before the vessel sold, which led to a positive adjusted EBITDA this segment. On the next slide, we show the operating performance by employment type, which broadly mirrors this picture. The adjusted EBITDA and ownership days for the vessel under bareboat charters, which are all specialized tankers, increased year-on-year as a result of the addition of the Pelican Fisher in September last year. The time charters, the adjusted EBITDA and total ownership days went to 0 as none of the vessels were operated under time charters following the charter expiries of the chemical tankers in the summer of 2021. The adjusted EBITDA from spot and pool employment turned from negative last year to positive this year. This is despite the lower ownership days following several sales of vessels without period employment and the results of the strong tanker markets we have seen in the third quarter this year, which benefited the vessel FSL Singapore. Moving on to the fleet employment. The Trust contracted future revenue as at the 30th of September stood at approximately USD 30 million. The revenues are spread over the next few years and include USD 22.9 million of firm contracted revenue and up to USD 7.1 million of optional contracted revenue. The optional revenues are dependent on the charter and the relevant vessels extending those charters. In terms of employment, we have the charters for 2 specialized tankers maturing at the end of this year. We are now in discussions with the charter of these vessels on the extension of the charters for both vessels and hope we will be able to report positive news. On the next Slide 7 is the employment profile of the Trust as at 30th of September. As we've already discussed, 8 of the 9 vessels at the end of the third quarter were employed under the fixed rate period charters with the longest charters maturing in 2029. Following the disposal of our vessels in October, the entire fleet of FSL Trust is now employed under period charters. The dollar weighted average remaining lease period is approximately 3 years, excluding the optional period. 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 third quarter of 2021. Generally speaking, the financial results are a reflection of the strong tanker markets with healthy freight rates and further market values. Despite the smaller total fleet with 9 vessels compared to 11 vessels last year, the revenue increased by 5.6% year-on-year and reached USD 7.6 million. The adjusted EBITDA increased strongly year-on-year to USD 4.5 million. Alongside earnings for FSL Singapore, this significant increase is also driven by the fact that voyage and operating expenses were lower compared to last year as the vessels we sold were operated in the spot market. The net profit for the third quarter '22 was USD 5.4 million compared to a net loss of $2.5 million last year. As we discussed before, this was due to the strong earnings of FSL Singapore and the gain on the sale of FSL London in July. But the last year's loss was also affected by noncash impairment on vessels. In terms of financial leverage of the Trust, which is presented on the graph on the left-hand side of Slide 9. The net interest-bearing debt at the end of the third quarter was USD 3.2 million and only 0.4x the last 12 months adjusted EBITDA. As we sold FSL Singapore post quarter end, which led to an increase in cash position, the Trust has effectively 0 net interest-bearing debt as of today. In terms of balance sheet on the right-hand side of the slide, the equity ratio was very healthy at 75% at the end of the third quarter. With USD 30 million in contracted future revenue, the financial position of the Trust provides downside protection in the face of the macroeconomic headwinds. With this, we come to the last page of the presentation on Page 10. You can see the development of the tanker charter rates in the recent past. As discussed before, the markets have substantially improved since the Russian invasion of Ukraine, and we have seen strong freight rates and market values across all segments relevant to the Trust. The war has led to cargo dislocations and changed trade patterns, which has had a positive impact on the ton-mile demand for tankers whilst the demand for oil products has also been relatively robust compared to a year ago. That said, there are some downside risks for the demand of tankers as we have seen macroeconomic headwinds amid the high energy prices and OPEC's recent announcement of a production cut. In addition, there is uncertainty as to the effect on the supply of tonnage available in the international markets once the EU ban of Russian crude oil kicks in. Generally, however, we remain cautiously optimistic for the tanker markets as the supply fundamentals look relatively healthy with a record low order book currently at 5% of the active fleet. Alongside, new environmental regulations, which kick in, in 2023, are also expected to lead to slow steaming and to reduce emissions vessels, which is anticipated to have a positive impact on the effective supply. Ladies and gentlemen, this concludes the third quarter and 9 months ended 30th September financial results presentation, and we are now open for any questions you may have.

[Operator Instructions] Okay. We have 2 written questions through the system, which I will read out and give you answers. The first one is, the question is the revenue and profit of the freight rates of the 8 vessels is proportionally low compared with the profit of sales of tankers. My question is how FSL is going to maintain the level of profit it was in selling tankers moving forward. Is selling further ships an option in the near future to maintain the profit? Reply to that is the -- in the past, the selling of vessels was to take advantage of particularly high prices at that time. And the reason distributions were made was due to the lack of projects, which we could invest in at that particular time. So the profits going forward will depend on the negotiations with the 8 remaining vessels and obviously future projects, which we are examining continuously at the moment. A further question we had mentioned that freight rates have improved. So how is FSL going to expand the fleet to capitalize on the higher fleet rates? Reply to that question is that we've basically been taking advantage of these high rates, which have driven up the asset values of the vessels. And obviously, now with the possibility of a global recession, we now face a situation where, fortunately, we don't have so much exposure if the markets change suddenly due to the economic headwind. Okay. Thank you for all your questions. We've come to the end of our results webcast today. Thank you for joining us, and we wish you a good day, and look forward to speaking to you again at the next quarter. Goodbye.