MPC Container Ships ASA (MPCC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the investor call MPC Container Ships. [Operator Instructions] I would now like to turn the conference over to your speaker today, Christian Baack. Please go ahead, sir.

Thank you, operator, and good morning, everyone. This is Constantin Baack, CEO of MPC Container Ships, and I would like to welcome you to this market update call. We are very [Audio Gap] market now with an update on a series of important measures that we have progressed on over the last couple of weeks and months. And on that note, I would like to kick off with the presentation, Slide 3. We have basically continued to work on the priorities that we have communicated to the market with our -- in connection with our Q2 announcement in August. We have since observed a continuously strong market, container market momentum. That has not just been good during the first 6 months of this year, but continues to strengthen. We have seen longer periods, more firm rates over the last couple of weeks and solid fundamentals for the remainder of this year and also going into 2022 and 2023. On the back of additional fixtures, we have been able to build up our EBITDA backlog to now more than USD 700 million, which is a testament to the strong market and our ability to lock in solid rates at solid periods. Furthermore, we have taken a strategic decision to sell and dispose 6 smaller vessels out of our fleet between 1,000 and 1,500 TEU for in total USD 135 million. We'll elaborate on that in a bit more detail. Finally, we have today announced that we have agreed on a new financing at what we deem are very attractive terms, putting MPC Container Ships in a position to have a very optimized balance sheet moving forward with a lot of optionality and flexibility. And as a result of executing on that financing, we will end up with a significant part of the fleet being unencumbered. We see all these steps as key steps in the transition from our growth phase into a very strong value proposition where we expect to generate significant cash and are well positioned for a very strong dividend capacity whilst maintaining an extremely low risk profile from a balance sheet and market risk perspective. Now looking at some of the measures and at the market in general, obviously, the macroeconomic outlook. The IMF has just released new figures, so the growth for this year is almost 6%. The expected growth for next year, GDP growth is around 5%. Overall, very solid fundamentals moving into next year. On the container market specifically, as I mentioned before, we look at very solid market fundamentals, good demand growth for this year and also expected for next year. And certainly a very limited supply coming to the market in the course of 2022 and also 2023, in particular, for the smaller vessel sizes in which we operate. Furthermore, the container market situation has and continues to be affected by port congestion, hinterland congestions and other constraining factors, which have pushed up freight rates and certainly had an impact on the market and will continue to have such an impact over the quarters to come in our view. Finally, when looking at the market, the charter and S&P market has also developed further. We have seen a much more tight charter vessel availability in the market as we speak today. The activity has come down somewhat compared to pre-summer and over summer. But thare is predominantly a result of fewer vessels being available and hence, less chartering activity taking place. The fixtures, and we'll get to that in a minute, that are being concluded in very firm rates and vary firm periods. And in addition, we look at very low idle steps and high time charter rates. Furthermore, the secondhand market activity has picked up. And the gap between, let's say, the time charter values of assets and realizable asset prices in the S&P market has narrowed. You will recall that when we announced the acquisition of Songa Containers AS, we have anticipated and have actually been able to execute on that dislocation between charter values and asset values. We see that, debt gap has closed somewhat. That's why one has to be very selective in taking the right decision on a charter employment versus a potential vessel sale. I'll elaborate on that in a few minutes in a bit more detail. Looking at the operational update and fixture activity. We continue to look at a very solid utilization for this year and in particular, the last couple of months. If you look at the fixture activity at the bottom of this slide, you see first half, we fixed roughly 35 vessels at a rate of around $22,000, around 2 years of charter periods, and that has grown to much higher rates in the second half of this year. These are fixtures between July and today. We have concluded another 13 fixtures at a rate north of $35,000 in 3 years in charter duration, basically a reflection of the continuous firming up of the market and very strong market environment. As an example, we have illustrated 2 fixtures. One of the smaller vessels, 1,300 that we fixed for 3 years and 26,000 and one of the larger vessels or midsized vessels in our fleet, the 2,800 TEU, we fixed the AS Constantina for 3 years at $40,000. Now let me look at some of the considerations around the portfolio that I alluded to earlier in terms of ongoing fleet optimization, another aspect that we have articulated as one of our key priorities in our Q2 update in August to -- not just lock in additional cash flows by chartering out vessels but also selectively looking at opportunities in the market. We have sold in total 6 ships in addition to the AS Cordelia, which we have already announced as part of the Q2 announcement, at prices which we deem attractive, especially looking at the parameters that are, in our view, important such as drydock cycle, potential implications from new regulation and the ability to actually generate an attractive price. Especially when you compare these asset values with the current share price, all these vessels were sold at what we believe are implied values of around NOK 35 to NOK 40 per share as an implied value for each of these vessel sales. So overall, we have bought these ships for around USD 60-plus million, and we have been able to now achieve sales or will be able to achieve sale proceeds of USD 135 million. This is also part of our overall strategy to optimize our balance sheet. So the vessel sales in combination with the new loan facility, which I will explain in a few minutes, constitute the basis for us to be able to get a very flexible and optimized balance sheet structure with a high number of unencumbered vessels and as such, a high discretion over our capital allocation decisions going forward. Now looking at the middle part of the slide here where we illustrate some of the key features of our new financing, it's USD 180 million bank financing at LIBOR plus 335 bps composed of a term loan element and a revolving credit facility element, which we deem a very attractive combination. It's a 5-year term. And as I mentioned before, in combination with the vessel sales, this constitutes a very important step to optimize our balance sheet structure. We are able with this, with the execution of this facility to reduce our cost of debt, extend our maturities and very importantly, free up a significant part of our collateral base currently encumbered. In the course of Q4, we will now use this facility. We are still in process of executing the details. And together with, as I mentioned, part of the proceeds from the vessel sales, we will refinance the existing DNV acquisition finance, which we took out in order to facilitate the acquisition of the Songa container fleet earlier this summer as well as the outstanding USD 200 million bond. Finally, we will then end up with more than 30 vessels unencumbered. If you then look at the kind of financial and revenue and EBITDA backlog that we have been able to increase. We are now looking at around $975 million of revenue backlog and more than $700 million in EBITDA backlog from Q3 2021 onwards. Now let's look at the kind of forward fixing and coverage of the fleet. At the top left slide, you see the fixtures or the backlog in terms of the fixed days in dark blue and open days in light blue for the rolling -- basically for the next 4 quarters, from left to right, Q4 2021 to Q3 2022. And next to it, you see the coverage for the respective years 2021 to 2024. We do have charter coverage into 2025. However, we have illustrated those 4 years here. And in the red circles above the columns, you see the fixed revenue component based on those fixed days. What you can see that for next year, we have already secured more revenues than we have for this year. And that's on the basis of roughly 3/4 of the days, available days fixed for next year and 40% and roughly 20%, respectively, for 2023 and 2024. On the right-hand side, you can see the basically assumed available days as a basis of those fixed days. And the fixed time charter equivalent for 2021 and 2022 as well as for the Bluewater JV vessels, which are not included in the figures at the top left. Now looking forward, we have also looked at the indicative upcoming charter renewals at the bottom left. There, you can see Q4, we expect another 2 fixtures based on latest redelivery expectations and another 6, 7 and 9 vessels for the 3 quarters ahead. What we have done based on current period charter market status, which is illustrated at the bottom right, basically from Clarksons, for our classes, what are the kind of rates and periods that you would currently get in this market. It's basically 3 years. For the larger vessels, you might be able to get slightly longer than 3 years. But as a rough indication of what is achievable rate and period, and we have applied those rates in periods to the respective fixtures that are upcoming on the left-hand side. And that will translate into respective additional revenue backlog in the gray circles above the respective columns. So as you can see, there is a significant potential for additional fixing. It is worth noting that those columns do not necessarily mean that these vessels will only be fixed in that specific quarter. We are, in fact, in discussions with our customers on various forward extensions even well into 2022. So that picture might actually materialize in the not-too-distant future on the basis of a stable market. And we, as I mentioned before, expect the next quarters to be firm on that basis. Now before I wrap up, let me spend some time on this Slide 7, where we have illustrated a derisking of our enterprise value based on the market cap of the share price as per 18th of October. From left to right, we start with the market cap, look at the net interest-bearing debt as per end of June, i.e., the last debt -- net interest-bearing debt figures we have communicated to the market. Have added net interest-bearing debt related to the Songa acquisition to arrive at an enterprise value. That enterprise value is then taken down and derisked for the purpose of this illustration by the expected net proceeds from vessel sales and all to be conducted in 2021. This figure slightly deviates from the $135 million that we have mentioned before because it also includes 50% of proceeds, i.e., of the dividend that we will get out of the Bluewater JV. So the results of the sale of AS Cordelia, which in the meantime, has already been handed over to new owners. In addition, we look at the secured EBITDA backlog of USD 717 million. And what we expect, we will be able to fix with the 2 vessels that are still to be fixed in the course of Q4 this year another $57 million. That leaves a scrap component on the basis of $400 per lightweight tonne that would translate into $253 million in scrap value. Current scrap values or current scrap prices are more on the $600 per lightweight tonne, which -- if that was applied, the whole company would have been derisked already on that basis. However, we took a conservative approach for this purpose. Meaning, the residual EV risk resulting from that analysis is around USD 170 million, which on the basis of open charter days until 2025, and now I'm referring to the right-hand side that where we have shown on the B, basically the risk that needed to be covered from operation until end of 2025. And remember the vessels, the fleet at that point in time will be 17, 18 years of age. So there is still a significant remaining useful life ahead. Means that if we fix all open days for $9,700 for that period, the EV would be derisked. And if you apply a 20-year lifetime and the 25-year lifetime, i.e., until 2027 or 2032, the respective TCE that would be required remains significantly lower. In turn, that means that on the basis of current charter rate environment, we would obviously have a significant upside even if we only look until 2025. In my book, these vessels will be operated for at least 25 years given the current market environment and my expectation on useful life of these assets. So overall, to wrap up this slide, we believe the company is very well positioned from a risk perspective and obviously also from the perspective of being able to not just derisk with EBITDA, but going forward, derisk by returning capital to investors and therefore, be able to pay a significant dividend back to investors in the course of the next 1 to 2 years. On that note, let me summarize the measures and the outlook, and then I'm more than happy to take questions and enter into discussion. You see that the steps that we will now execute until the end is the execution and the drawdown of the new credit facility that we have announced today, handover of the vessels where we have agreed the sale, which will take place also in the course of Q4 this year. As a consequence of that, we pay the bonds and the DNV acquisition finance, thereby delevering the company, reducing collateral that is secured on behalf of certain debt, gain more balance sheet flexibility and, of course, continue to renew the charters on open positions. And I expect that not just to be the case for the Q4 positions, but then we will also be able to also conclude some forward fixtures in the month ahead. And that constitutes a very solid fundament for our capital allocation priority, which is distribution of capital to shareholders by way of either dividends or share buyback. The target payout ratio, as we've said in previous market communication, is to return 75% of net profit to investors from Q1 2022 onwards. And on that note, I'm happy to hand back to you, operator, and look forward to receiving questions from the participants.

[Operator Instructions] We have one question on the line from the line of Frode Morkedal.

Yes. Just a quick question here on the vessels you sold. They are all to be delivered in Q4?

Yes.

Yes. So they're sold with charters attached?

Well, a number of these vessels are rolling off charter. And some of them are getting sold either with charters attached or maybe even to someone who is the charter in some instances.

Okay. Sure. I was curious about this slide you had on Page 6, I think where you showed -- yes, Page 6. Given the chartered rates you have there, in this chart, what would be the EBITDA for 2022?

For 2022, the EBITDA based on those rates is -- would certainly be north of $400 million. It obviously depends whether these rates are, therefore, for the period that we have shown this indicative charter renewals for. But it would be somewhere between $450 million to $500 million, probably.

Okay. Sure. Okay. That's good. Just for modeling purposes, what -- could you just give me roughly the depreciation when you sold the ships? I guess these ships don't appreciate that much. But...

On the [indiscernible]

Yes. I'm just trying to map up the net profit, so depreciation [indiscernible]

Maybe just to jump in. It's worth noting that some of the vessels have been acquired as part of the Songa transaction that we have now sold. So there are purchase price allocation accounting effects that have to be considered. We have benchmarked it against the acquisition price. But we will be more kind of transparent on that as part of the Q3 announcement when you will basically see further details on that. But in particular, the 3, 1000 TEU vessels have basically been bought at a price that slightly deviates from the accounting value as a result of a purchase price allocation because it has been a share deal. So there are some accounting intricacies that need to be considered as well.

Okay. I'll wait for the Q3 report then.

Thank you. There are no further telephone questions at the moment.

All right. Then there are a few questions through the web, which I will read out and then provide my answer. The first question from Stefan Bloom who asked, with the level of earnings you are currently seeing, what kind of dividends can shareholders expect for next year? I mean we have been clear that the intention is to return 75% of the net profit to shareholders. So I mean there are obviously different research out there. We have not yet articulated the exact figure. But if you look at the net profit expectations for next year, you can run the numbers. So 75% of that, which is a significant number. And it obviously, even depends on being able to lock in the remaining 25% of the days. There's a second question by I'm just trying -- a bit longer because I'm trying to summarize. So during the recent presentation and Investor Conference with some of your peers have stated that the window of opportunity to forward fix has widened. Obviously, it is more narrow for smaller tonnage and you have been restricted to do the significant forward fixing in the past. Has there been any recent developments in forwards fixing recently? As I said during the presentation, there is the opportunity to selectively forward fix vessels also in our size bracket. We have forward fixed Q1 positions. We are in dialogue with some of our customers to even forward fix positions that go beyond that, Q2, Q3 positions for next year. This is not possible throughout the bench. However, there is an active dialogue. And we would, of course, when looking at rates and periods to do forward fixtures, we would, of course, cater for that and consider that. And what we are seeing is that, that might not even be at a significant discount to current rates, which is obviously an encouraging signal from the discussions and from the market. So we would, in any event, consider forward fixing vessels. And as I said, we have done that for Q1 positions already. There's another question then from Marcus Would it be possible to share the secured TCE rate for your pool vessels in 2022? We have that in the appendix. So we have the rates in the appendix, yes. I don't have that here with me. Happy, Marcus, if you reach out to our IR desk. We are happy to provide that. But I don't have the exact rate here with me for 2022 coverage on the pool. There's another question regarding inform market about new charter employment and sales. Of course, we are going to inform the markets. And we have in the past sticked to our rule to inform the market quarterly or between the quarterly announcements about it. A new charter employment, it's very important to understand that there's obviously the necessary needs of investors to be informed about charter fixtures, but we also need to balance that with the commercial needs of our discussions with our customers in concluding good charters. So we need to be -- and everyone needs to be aware that there is a balance between informing about every single charter whilst maintaining a very good negotiation position also vis-a-vis our customers. So we are always balancing that. And I believe we have so far been quite straight on how we deal with it, i.e., quarterly announcements. And since this year, where we have had a lot of chartering activity also in between market update, and that is the way we would proceed going forward. But thanks for the question. Question of asking about the estimate of how much in percent slow steaming would decrease the supply side from 2023 onwards. That is a pretty complex question and way more complex in container shipping then, for example, in dry bulk and tankers where you had point-to-point operations. This is a matter of the whole liner network and the trading profile of vessels. And not all of them trade at high speeds, so not all will be affected. Having said that, every 1% in kind of -- sorry, 1% in slower speed is probably translating into 3% to 4% of capacity being bound. However, that is just on paper, and that's not factored in the actual trading profile. Therefore, the answer to that question is very challenging. We are currently conducting an analysis on our very own fleet. And there, I clearly see that there will be a related impact on the supply side. However, if people really quantify that, I would be very happy to see their research because I think it's not that easy to answer that question from the trading profile. Then there's a question by Peder Jarlsby at Fearnley from -- any numbers on the debt profile, please. Yes, happy to share that. We have -- obviously, we will use the combination, as I said, from new financing and proceeds from vessel sales to refinance the DNV and the bond. In fact, the feeder will mean we will take up $180 million in debt to refinance that in combination with the vessel sales. We will have a very steep repayment profile. We will have a pretty front-loaded repayment profile to match our EBITDA backlog on a specific pool of vessels that are being provided as collateral for this financing. And we will have around $20 million in repayment per quarter for the first year. And we will have another roughly $15 million per quarter for the second year. That means, we'll remain with the revolving credit facility part thereafter. We intend to do this. Our intention by doing so is also to derisk the balance sheet further, gain more flexibility and apply the EBITDA on a specific pool of vessels to derisk the company whilst having high discretion on the unencumbered vessel portion in terms of returning capital to investors. There's another question from Does dividend AS from Q1 2022 mean that the first dividend will be paid in Q1 for Q4 or in Q2 or Q1? The intention is to pay a dividend in Q1. So that is the answer to that question. There's another question from Lars [ Autring ] at Artic. Are you considering further vessel sales? How are you thinking about fleet renewal going forward? For the time being, we are, as I mentioned, explore or compare the auction of chartering our vessels and compare that with a possible vessel sales when we roll over charters, for example, but also selectively, obviously, for other vessels in the fleet. Given the continuously strong charter coverage that we are able to secure. There is a certain pool of vessels that are possibly -- can possibly be developed for sale. So we are considering that. Having said that, in this instance, it was also a strategic decision around the docking cycle for those vessels around regulatory implications that we expect as well as certainly the ability to actually wrap that into a bigger scheme of refinancing and ahead of measures that puts us in a position to be ready for a dividend. Your question on fleet renewal, what I can say is that we can rule out new builds at this point in time for MPC Container Ships. Our clear intention and goal is to now return capital to investors and actually also not just derisk the company by harvesting EBITDA and charters, but by returning capital to investors and making investors decide on the next capital allocation on their part. So we have, therefore, set the bar fairly high on what we intend to do with our capital, and that is to return that to our investors. There's another question from [ Paul Mazen ]. How do you evaluate the benefit of share buyback in relation to dividends? At what discount do you see advantage to buy back shares? In our market announcement, and let me repeat that, we have been clear that returning capital to investors will certainly take place by way of dividends. But a share buyback, considering always the market environment, in particular, the share price, is an option that is available that we would analyze and explore. And the share buyback can be of a very significant benefits to all shareholders and the company. And therefore, I mean I wouldn't put a clear number to it. It certainly also depends on the overall circumstances of the market and certainly share trading. But also share buyback is something that should not be ruled out at all, and it's certainly a very interesting instrument looking at where the share is trading in particular. And let me repeat that what I said earlier in the presentation when looking at the vessel sales on some of the smaller vessels that we have been able to achieve, which would imply rather a valuation of more NOK 35 to NOK 40 per share. And obviously, looking at where the share is trading, a share buyback could be an instrument to make use of going forward. Furthermore, there's a question by Albert Carlsen. When do you think the $200 million bond will be finished? Well, the goal is, as I said, the clear intention is to repay that in the course of Q4. So sometime in late November, early December, the latest is our current expectation on that basis. There's a question by How safe are the charter counterparties, i.e., credit quality? Obviously, in this market, where the strong value proposition is based on our charter backlog and our contract counterparty risk is one of the key, let's say, risk that we carefully monitor and address, we assess, obviously, each of our counterparties and take the decision on every single charter overall. When you compare that with the past, the overall situation of industry participants has changed dramatically, especially if you compare it with 2009, '10, post the financial crisis. All our customers and the charters earn a lot of money in this market environment. The balance sheets are way more robust than they have been 10 years ago. In addition, there is a degree of also longer visibility on the part of our customers, which is also beneficial. And if you look at our, let's say, charter book, 80% to 85% of our revenue backlog or charter backlog is with counterparties that I would argue not in, let's say, technical credit rating terms but in our internal credit rating terms are a counterpart. So we would rate them as A, so very solid. And we believe this is something that it is well addressed in our risk management and also when you look at our counterparties. In addition, and if you look at end of the presentation, we have also illustrated that on a few charters. We have been able to front-load some of the charter earnings. Just an example, we have the 1,700 TEU for 3 years at $30,000, which is current market. We have been able to agree with certain counterparties to have $60,000 to be paid in the first year and then a reduced scheme for year 2 and 3. Thereby derisking our exposure vis-a-vis counterparties front-loaded, which, in our view, is a very appropriate measure to manage counterparty risk in a way, in addition to what I said earlier. Again, this is obviously not possible on each charter. Yet it also matches the visibility of some of the -- in particular, small operators with their obligations. And we believe this is a win-win situation. There is another question from [indiscernible] Charter rates seem to be flattening out. Do you see it likely that we would see a charter period close to 48 months next year for ships around 2,800 TEU. It seems that periods are getting longer and rate staying at this level. Well, it's a good question. We have, obviously, over the last 12 months always seen rates climb and then period stretched. For 2,800 TEUs, I certainly think that a period above 3 years are on the cards and are possible. There's always a bit of a jump in periods and potentially a jump in rates. I also believe that rates mainly related to a bit less activity because simply there are fewer fixtures being concluded, have flattened out somewhat. But don't forget, they have flattened out at a very high rate. And the momentum is still very positive, maybe not the momentum in terms of step-up from 1 charter to the next. But what we clearly see is very firm period and very firm rate. There's another question when do you think the amount of dividend or buyback in Q1 2022 will be decided. We will approach the market on that. Obviously, as I had mentioned, the execution of the measures that we have now agreed both on the vessel sale and the financing side will be implemented in the course of Q4, and we will definitely get to the market in due course. I have a question by [ Ray Bruno ] He's also curious about the dividend. First month of payback, when will that typically take place for shareholder accounts? Well, again, that's probably the same answer than the previous question that will -- and it's expected to happen in Q1. For a dividend, we would obviously approach the shareholder assembly as well. And that will be in the not too distant future. Last, [ Avalant ] asked a question about the value of the company for the shareholders. Have you considered changing reporting standards to real market value? We believe that the way we report under the IFRS scheme is the most appropriate way. I mean obviously, you can reach out to analyst reports. There are certain metadata available freely to the market, and I think everyone can form their own opinion. And if you look at it, for example, the data points that we have provided with the vessel sales, and I alluded to NOK 35 to NOK 40 implied value for these vessels. And if you then compare that with, I don't know, Clarksons reports or others, you will get a good glance of the current true value of our business. That is at least the end of the question is that have now been posted. Operator, I don't know if there are any further questions through the line. Otherwise, I would pause here for a second to see whether further questions will come in. But back to you to see whether there are any further questions through the line.

At the moment, there are no further telephone questions. [Operator Instructions]

Operator, I'm just seeing that there is another question that came in through the web by . He asked about the company's current position with regards to a second listing in the U.S. I mean for the time being, we feel very comfortable with the listing in Norway. Obviously, a U.S. listing is something to consider. Yes, we believe that with our Oslo listing, we are very well positioned for the time being. Finally, there's another question then of [ Ray Bruno ] What is your view on the new normal for rates? I think this is it's pretty difficult question to answer. What I can say is that I believe the cost of transportation over the last 12 years have been too low. Have certainly been way lower than they should have been. Obviously, we're now seeing a combination of effects, including the whole congestion and supply chain disruption, which is accelerating the overall situation. But I certainly believe that we will see elevated rates compared to the last 12 years for the time moving forward. One thing is the current situation that, in my view, will last for a couple of quarters, affected also by congestion and supply chain disruption, furthermore, the very limited supply growth over the next 12 to 24 month, which will mean vessel charter vessel availability will remain very limited. And lastly, and there is more of the big picture the next, let's say, 5, 10, 15 years ahead. The whole energy transition will result in higher cost of transportation, and that will have to be reflected somewhat in the rate levels. And therefore, I believe we will continue to see elevated rate levels also in light of the necessity for a decarbonization of the industry over the next 5 to 15 years. That's the last question on my list. Operator, I don't know if there are further questions through the line. At least, as far as the Q&A list is concerned, we are complete.

No telephone questions.

All right. Then thanks for everyone's interest and participation. We are, as I said, excited about the measures that we have now initiated and will execute over the next couple of weeks and months until the year-end. And we are even more excited to be in a position to pay back capital to investors in the very near term. Many thanks.

That does conclude the conference for today. Thank you all for participating. You may now disconnect.