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

Good day, and thank you for standing by. Welcome to the MPC Container Ships Investor Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Mr. Constantin Baack. Thank you. Please go ahead, sir.

Thank you, moderator, and good morning, everyone. This is Constantin Baack. I'm the CEO of MPC Container Ships. I would like to welcome you to this company and market update webcast. We've issued a stock market announcement yesterday, including an accompanying presentation for this conference call, both of which are available on the Investors & Media section of our website. Please be advised that the material provided, and our discussion today contain forward-looking statements and indicative figures. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. On that note, I would like to kick off the presentation with Slide #3 with an executive summary of some of the key market parameters as well as the latest corporate developments. Let's start with the markets. The container markets have started even stronger in 2022 than it has ended in 2021. Various indices such as the HARPEX time-charter rate index are at historical highs. Furthermore, and this is quite a shift over the past 4 to 6 -- 4 to 8 weeks, actually, we have seen more and more forward fixtures in the market. Whilst vessels usually get extended 20 to 30 days prior to expiry of a charter, we're now looking at somewhere close to 300 days, which reflects a sharp increase from 1 month to more than 9 months ahead of charter expiry. More on that phenomenon later on. Looking at MPCC, I can report that we have completed our balance sheet optimization in December 2021 and now look at more than 30 unencumbered vessels, providing a lot of flexibility. One more vessel from our 50-50 JV has been sold in the meantime, and we have furthermore, in the course of the past few weeks, concluded several additional multiyear time charters at attractive rates, in most cases, quite in advance of the actual charter expiry. Consequently, the revenue and EBITDA backlog has increased to $1.2 billion on the revenue side and more than $850 million in terms of EBITDA backlog. Finally, we have now completed the handover of the 6 vessels that we had agreed to sell end of last year, providing significant events distribution capacity -- our event-driven distribution capacity of around $150 million to $160 million or roughly NOK 3 per share. More on that later on. As communicated last year, the emphasis is on capital allocation and will be placed on executing our distribution plan. And we've, hence, convened an EGM for end of January in order to implement the distribution plan and obtain the authority from the shareholders to pay dividends in order to commence returning capital to investors shortly. Now let me turn to Slide 5, where I would like to start with a market update. It is worth noting, as I mentioned earlier, that the year has indeed started stronger than the last year's end, and that is fairly unique for this time of the year to have a very strong and fairly active year. Starting with some key parameters: box rates; secondhand prices; and charter rates; and as illustrated on this slide, the top left, we illustrate the freight rate and freight volumes, which are at historical highs. In addition, also periods for freight contracts, which is not illustrated on that slide, but it's important to note, has become longer as well. Today, 3-year contracts are being fixed at fixed prices. And previously, years 2 and 3 were index-linked. So this provides more visibility for our customers, the liners. Continuing with the S&P market and the secondhand prices on the top right, you can see that the secondhand prices have also increased. This is the example of a 15-year-old 2,800 TEU vessels, and here, you can see that the market continues to rise on the back of improving parameters, including charter rates and periods. On that note, if you look at the bottom left, you can see the time-charter rate index, HARPEX, which is index and others are illustrating a similar picture. We look at very high levels. And what you can see there is there was a slight bend in the curve in November-December last year. However, it is worth to note that all these indices, in general, only reflect short-term contract, so 6 to 12 months' time charter contracts. And hence, the kind of softening in the market that is basically indicated by this line must be put in context because it is somewhat misleading. And the main reason for that is that the general structure of the charter market has changed, and we are moving from a half year to 12-month spot market towards a forward market with a longer period. And hence, the longer period market has actually continued to increase as can be illustrated by some of its fixtures that we have concluded and some of the fixtures that can be observed in the market. On that note, let me move to the next slide, where we have also illustrated some additional market parameters, which, in our view, are very important to consider and besides the kind of pure short-term spot in charter rate index. Most participants mainly look at these indices, 6 to 12 months' time charter rates, but we believe there are more market indicators that are important, in particular, when predicting market developments going forward. And as I said, I argue that the market has seen somewhat of a structural change and as such, other parameters need to be considered. Two parameters that we have looked at and shown regularly in our market sections over the last couple of quarters are the charter periods and redelivery spreads that you can see on the top right. And the other one is the vessel forward availability, which you can see at the bottom left. In terms of top right, we have observed longer periods as illustrated by the red line and tighter redelivery spreads, as illustrated by the dark blue line. And you can see that over the last 12 to 18 months, this has improved, at least from an owner's perspective, significantly. In addition, the vessel forward availability, as shown at the bottom left, has come down quite dramatically. And that is obviously a result of the longer period fixtures, i.e., vessels being taken out of the market for prolonged periods. Now if you look then at the top left, and I think this is somewhat of a new feature. And that has started basically, we have seen a step-up in November in terms of forward fixing activity. And let me explain this chart. So at the back, you can see the bar, which illustrates a number of fixtures. And you have seen -- and you can see the line which illustrates the average forward days of a fixture. And forward means in advance of the actual charter expiry. And usually, charter expiry, you get a redelivery notice roughly 30 days ahead of a charter expiry, and that's the point in time when a new charter is being negotiated. This has changed significantly over the last, I would say, 3 to 6 weeks, in particular. And you see that spike in the dark line, up to 279 days. So we are now seeing charters which are being discussed basically for the whole year of 2022 already, not on all charter positions, but on many. And this is a key indicator that there's a scarcity of assets expected throughout the year of 2022 and by the liners and other operators because they want to secure tonnage. This is a new phenomenon, and that's like in fixing activity -- forward fixing activity. This is very important to note and also assess when looking at the market outlook. Now what does that mean for our very own activity over the last couple of weeks and months. So let's move to Slide 7, where we provide an update on the most recent portfolio developments in the continuously strong container charter market environment. As you can see at the lower part, since our last update, mid-November 2021, we have fixed 7 vessels between 1,300 and 3,500 TEU. All these fixtures are at fairly strong rates, actually above the last done of the respective vessel class and also in strong periods, 3 years-plus. And on average, these fixtures were done somewhere between 7 and 9 months ahead of the actual charter expiry. So a number of these fixtures are actually forward fixtures, underlying the point that I made earlier as an observation in the overall market and providing improved visibility, not just for 2022, but way beyond 2022, as we are concluding 3-years' charters, for example, on Q4 to Q4 position, meaning we cover the charter well into 2025 on that basis. In addition, we have been able to sell 1 more vessel. We have sold the JV vessel, which is held in our 50-50 JV, for Patricia for USD 34.3 million. The handover is expected to take place still during the course of the first quarter. Finally, from a portfolio and operational standpoint, we have also handed over the 6 vessels that we had reported sold end of 2021. All of these vessels have been successfully handed over and have basically generated significant cash in our accounts. I'll get to the exact composition of that very position shortly. Now let me look at the -- besides the portfolio development, let me look at the -- some of the corporate development and most recent corporate developments. As mentioned earlier, we have now completed the balance sheet optimization late of last year. As a result, we have now simplified our balance sheet structure, yet with more than 30 unencumbered vessels and fairly flexible balance sheet structure on that basis, with very high discretion regarding capital allocation decisions. And that has been a backbone and the key ingredient to preparing and now implementing our distribution plan as we have communicated already end of last year. The focus or the emphasis of the company's capital allocation going forward will be on returning capital to investors. And consequently, we have, last week, convened an EGM for end of January to implement and authorize a distribution plan consisting of 2 different pillars. One pillar are recurring quarterly distributions, which will be based on 75% of adjusted net profit; and event-driven distributions, which are based on other proceeds, for example, vessel sales in form of dividend and/or share buybacks. I think very important that we want to commit to this distribution plan to be very clear and stringent and clear to the market in that respect. And therefore, we are excited about the upcoming EGM and hopefully receive the authority by shareholders to implement and execute on that distribution plan. Finally, in terms of leverage, strategy and growth, we will continue to deleverage through regular debt repayments and cash buildup. In terms of growth, we will look at disciplined growth to be always looking at accretion per share, make sure that we do the best for existing shareholders. And we will, therefore, pursue selective growth and only if it is accretive, for example, the summer transaction that we have carried out last year, which we deemed as having already paid off and being highly accretive to existing shareholders. So we would, on an instance-by-instance, carefully consider any growth steps on that basis. Now let me move to the next slide, where we provide some more details on vessel sales and consequently event-driven distribution capacity. Please turn to Slide 9. Let me run you through this bridge from left to right. The very left, the 5 vessels of around $91 million were the vessels that we had already sold, and proceeds were received by the company at the time of last earnings call, second half of November. And since then, and as I mentioned earlier, we have handed over and received proceeds from those sales another 6 vessels, meaning another $163 million of gross sale proceeds have been received by the company until today. And in addition, we have sold the AS Patricia, which is the third part of the bridge, $34 million, which, again, is still to be handed over to the new owners in the course -- expected in the course of Q1 this year. This brings the overall gross sales proceeds to $288 million for the 12 vessels. And we would then obviously have to deduct the 50% joint venture caution for the sale of joint venture vessels as we have sold 3 joint venture vessels and some transaction costs, bringing us to net sales proceeds of roughly $230 million that we have received or will receive subject to the handover of AS Patricia. Part of those proceeds have been used to execute the refinancing, namely $66 million, which we deduct in this bridge, resulting in a total event-driven distribution potential and capacity of somewhere $150 million to $160 million. Again, one part that is still open is the handover of AS Patricia. That reflects roughly NOK 3 per share in terms of distribution capacity and subject to EGM authority, we actually have to hand over. And finally, once the EGM approves is given, also the BoD has to implement that, the event-driven distribution potential is intended to be paid out to shareholders by way of extraordinary dividend within very short. So this is our commitment to the distribution plan and the user proceeds of the executed and the pending vessel sales according to our distribution plan. Now let me move forward to the next slide, where we now look at the earnings capacity and chartering activity and certainly charter revenue backlog. We have shown the similar slides during the past quarters. Let me just run you through the overview on the top left, where you can see, from left to right, first of all, 4 quarters of 2022 and then annual columns 2022 to 2025, and with the respective open days and fixed days. You see the assumed overall days available are roughly 22,000 based on our existing fleet, and we have already fixed 82% of the revenues -- sorry, of the days for 2022, 57% of the days in 2023 and so on. The top circle -- the red circles on top of each column represents the locked in revenues per annum, showing that we have fixed revenues of more than $450 million already ensured for 2022 and $340 million for 2023 and so on. On the right-hand side in the comment section, so top right, you can see the respective time charter equivalent on those fixed dates. And as we continue to charter our vessels, we will be able to increase the TCE equivalent on the basis of improving charter rates, that's at least our expectation. Now the more charters we fix, and I alluded to the forward fixing activity earlier, and at the bottom left, you see the upcoming charter renewals. We have another 19 vessels up for charter renewals, and you can see that illustrated by quarter. As I mentioned, in a market where forward fixing has become the normality or the base case, so to say, you can assume that on a lot of these positions, there are already ongoing dialogues with potential charters. So it's not just that you should look at Q1, but as we have shown in the fixtures that we have concluded recently, there are also ongoing discussions about forward-fixing potential Q2, Q3 or even Q4 position. On the basis of the current charter market and at the bottom right, you can see this is a 3-year time charters by Clarksons, just as an example, these things tend to be outdated very quickly. But we wanted to show that as a reference, nevertheless, as an example, on the 3,500 TEU containership, 3-year charter here where Clarksons still says $47,500. We concluded the AS Nadia for $61,000 for the same period. So you can see that we have been able to already generate a significant premium. Nevertheless, we applied those rates in order to reflect and represent the potential -- the revenue potential for each of these upcoming charter renewals on the left-hand side, and you can see the gray circle, which represent the revenue potential for each of these fixtures based on the Clarksons reference rates. Again, and especially for the slightly larger vessels, we believe there is a significant premium actually available in the market if you fix today, even on -- particularly on forward fixtures, but this is just meant to be a guidance. Also to show what we have done on the next page, where we have based on the fix and open days from the previous page, run a few sensitivities to calculate certain, yes, indicative revenue, EBITDA and net profit figures, adjusted net profit for a vessel sales, et cetera. So the basis for a potential recurring and dividends going forward. And that, again, is based on 75% of adjusted net profit. So the top columns are shown on the basis of the previously illustrated Clarksons 3-year time charter rates. So those would be concluded for our vessel basket. And you can see that at the bottom right of the top left chart, the blended TCEs for our basket of vessels is roughly $36,300 per day. And that is implied on the open days as illustrated on the previous page, utilized at the respective revenues, EBITDA and net profit figures, which would in turn represent the potential for the 75% of the adjusted net profit driven for the quarters moving forward. On the bottom of this page, we have then applied the 20-year historical average charter rate, which, as we can see is for our market is around $14,000 per day, and that again translates into certain adjusted EBITDA and net profit figures. On that basis, on the back of the current revenue and EBITDA backlog and, of course, subject to market conditions and developments for 2022, we expect the quarterly dividend accordingly to distribution capacity of around $50 million to $65 million or roughly NOK 1 per share and quarter, and that can be expected to be distributed in the quarters ahead. This will, as I mentioned before, done on a quarterly basis and then paid out at distribution to shareholders. And we plan to commence this once the EGM has authorized the distributions end of January. We plan to commence this March 2022 based on Q4 2021 financial results, which are to be released end of February this year. And this brings me to the end of the presentation, the run-through market update, our recent portfolio activities as well as ahead of our upcoming EGM, the distribution plan and potential and capacity and what we envisage to do. And on that note, I'm happy to hand back to you, operator, in case there are any questions through the line. Otherwise, we will look at the questions on the web.

[Operator Instructions]

If there are no questions through the line, moderator, I'm happy to take the first question here through the web. This is a question by [indiscernible] inquiring about the AS Nadia, so our 3,500 TEU vessel, which was fixed at $61,000 for 3 years. He says that is well above the new context index for vessels of the same size for 2021, are the indices misleading compared to the fixtures actually being concluded? This is the question. And the answer to that is pretty easy. First of all, indices are usually always with a time lag in good and in the bad markets, and more certainly, in the markets of such a dynamic that we observed at present, they are lagging behind quite a bit. And as I said, the 2 and a 3-year market is a completely different ball game. We have seen the last time fixture actually forward vessel of that nature was $44,000 for 3 years done in December last year. So we now in January, fixed $61,000 for 3 years, which is a very steep increase. So to your point on indices, they obviously represent fixtures in the market. And as long as the fixture has not reported, the indices will remain on the basis of last time. And we expect to see a step-up in indices. We are actually in the process of preparing or considering to prepare our own index also for more period and fixtures because we believe this is more representative rather than a 6 to 12 months or even a 24-month context and index. But yes, to that point, things always lag behind, and this is why there is such a gap between the index and what we actually conclude in the market. So then there's a question by [ Yadiel Nagel ] asking, is it likely to believe that the dividend paid out first quarter will be NOK 4? And again, as I have mentioned in the call, the clear intention is to distribute the liquidity from event-driven distribution capacity being roughly NOK 3, plus the quarterly recurring dividend of around NOK 1. So it is a fair assumption that this is going to be paid out during the first quarter. Of course, we still have the EGM. So the authority needs to be brought into place by the general assembly, which will be held next Friday, so 28th. So I'm confident that we will get the approval on that basis, and then you can expect that this liquidity will be returned to investors. There's the next question. How do you see the implementation of IMO 2023 impacting the container market in general and MPCC in particular? The impact on the market in general, I think it is not just the IMO 2023 that has to be considered. It's obviously also other disruptions in the market, in particular, that will affect the market going forward. But more specifically on IMO 2023, of course, with the implementation of EEXI, the CII and other measures, we will see one thing, at least in my book, which is for certain and slightly on an impact on fleets in general. So this will have an impact on capacity, just like the disruptions have at present. There might be investments needed to comply with the EEXI as a starter and then subsequently potentially also for CII. For MPCC, I mean, we have catered as good as possible for this in our charter parties, which is a very important ingredient, of course. And at the same time, we will carry out certain measures in terms of EEXI investments, which will be limited to engine limitation measures, small investments at this point in time, and we believe speeds will go down, but it will not have a significant impact, at least not for the next, let's say, 1 to 3 years going forward. There's another question by [indiscernible]. Do you see any occurring general market challenges in 2024? And further regarding the escalating number of new builds or will this not touch the segment? And of course, the order book has grown significantly, 2021 has been a record year in terms of new orders. The order book is still dominated by the very large ships. We see, at least in my view, an underbuilt smaller segment. I would expect more orders as we have actually seen over the last, let's say, a couple of months also in the smaller sizes, which, however, are desperately needed. There will certainly be an increase in newbuilding deliveries coming to the markets as of 2024 or second half of 2023-2024. Yet looking at the growth and looking also at the age profile of the fleets, I think, especially in the smaller sizes, the order book is actually needed, and we actually need even a few more vessels on that basis in order to cope with the expected volume. So there will certainly be an impact from newbuild orders, but I do not expect that, that will completely adversely impact the market in particular on the smaller size. And there's another question by [ Albert Carlton ]. When do you think the share buyback program will start? We have not started the share buyback program. The share buyback program is certainly one of the ingredients, and that's why we have also, as part of the EGM, asked for a renewal of our authority to that effect to be able to act if a share buyback is an attractive and accretive opportunity, which it certainly was during the course of last year. We have had to take certain steps, as I have alluded to, in terms of our balance sheet optimization, some chartering activity, et cetera, in order to put us into a position to then execute on our distribution plan. And in the distribution plan a potential share buyback is one ingredient. Yet, for the, let's say, immediate step, as I've said earlier, we expect that a dividend is on the cards rather than a share buyback program. However, it always depends on share price and other parameters to define what is the more appropriate measure to create value for shareholders. Another question by [indiscernible]. How do you see OpEx for the 3-year period? Of course, we have seen a bit of a development in OpEx, in particular, related to crew costs as a result of basically also COVID to some extent, crew travel costs have increased, crew costs in general have increased as it has been more demanding to actually make crew changes and also to cater for safety and other aspects of the crew, which is a very important and key element on our agenda. And therefore, I do expect that we might see a further increase in OpEx, let's say, a few percentage between 1% and 3% per annum is potentially on the cards. But it's very difficult to foresee any significant jump in OpEx over the next 3 years, at least from today's perspective. Again, I would assume a kind of inflation-related increase and certainly with regards to crew costs, in particular, in an environment where we are still surrounded with COVID and the implications of COVID on our operations. There is 1 more question by [indiscernible]. Any ongoing negotiations regarding further vessel sales in the current top secondhand markets? Yes, on that point, I would like to comment as follows. The question always is, can you generate more value by chartering out vessels or by selling vessels? And I think the last year has been a very good indicator to that effect. Because we have, for example, ourselves been an active buyer of vessels. So last year, we bought 12 vessels and we sold 12 vessels. So I mentioned that during the last earnings call already, the market is so dynamic that you need to decide on this case by case. When we did the Songa acquisition and concluded or at least agreed end of May last year, we were fairly confident that we -- that the charter value of these vessels was higher than the secondhand value and hence we bought the ships. It turned out that, that in hindsight was the right decision, and we were able to arbitrage between obtaining very attractive charters that within short have repaid and the acquisition of that very fleet. So we had a gap of charter value and asset prices. Now in Q3-Q4, we have seen that trend reverse. We have actually seen that the market was pricing assets very accurately. And on the back of that, we have been an active seller of certain ships because the proceeds in an S&P transaction as a seller were basically, in our view, more attractive than chartering out these vessels. And that has somewhat reversed. At the moment, I would argue on most of the cases, chartering out these vessels is the better value. And at this point in time, however, the market is so dynamic that, that gap between charter value and asset value or secondhand, realizable secondhand value, might close again. And therefore, we believe we need to be very switched on in taking the right decision on behalf of the company and for shareholders and take a decision to either charter our vessels or sell vessels very selectively. What does that do with your question? That means we are, of course, considering sales. But if a charter just as an example, the 3,500 TEU level that we've just charted out for 3 years at $61,000, this is a price we would have been all likelihood not been able to achieve in the S&P market in terms of the locked in EBITDA plus scrap value. And hence, we decided to go ahead and charter it out. But selectively, case by case, this is the way to go about it, and we will be very cautious and prudent in taking these decisions. One more question by [indiscernible]. Can you comment on ship sales of AS Patricia, sold for $34.3 million compared to my estimate of $40 million? Can you comment on JV? So 3 out of 8 vessels, will we see more ship sales from the JV? To answer of your question, of course, the question is when was the sale concluded? What was the discussion at that point in time? And obviously, this was a sale of a vessel that is still on an existing charter, which might give a bit of a hint on the potential buyer, but existing charters have obviously to be factored into that equation and also the point in time when that deal was concluded. You can probably today sell the spot vessel of similar specifications at a shade below $40,000, I wouldn't disagree, but we need to find a buyer. And every ship is different. We believe and believe that this was a fair price given the charter options that were available at that point in time. And of course, in a JV, you also find common ground usually with your JV partner. And that is basically in reply to your next question on the JV. We have 3 out of 8 vessels were sold. This was also linked to the respective charter position and charter expiry and the ability to actually execute on the sales on that basis. And we have now -- and you can see that from the 7 vessels that we have communicated fixed as part of this presentation, 3 of these vessels, the Carpathia, Cimbria and Cardonia are actually JV vessels, which are now fixed on 3-year charters, well into 2025, actually, for all 3 vessels. And that means that all of the remaining JV vessels are actually fixed out for a longer period and are hence very unlikely sale candidates going forward. There's a question by [ Albert Carlton ], what is happening with the pool ships, if this dissolved? Yes, we decided to dissolve the pool, which was a pool that we had with 1 third-party owner. So it was a 2-owner pool and focused on a certain region and segment with 1,300, 1,500 TEU pool. We decided to dissolve that since each of these vessels were running very attractive rates. And we believe that a pool in this market environment is not necessarily beneficial to both parties. And as a result of that, the pool has been dissolved. And that is also now illustrated, if you look at the appendix of the presentation that we have concluded, where we have not shown the individual rates and no pool rates anymore and that gives you an insight as to the rates that we have concluded for the vessels accordingly. At least on this is -- and the last question raised so far. Moderator, back to you just to see whether there are any further questions through the telephone lines. And otherwise, we'll wait 1 more minute and see whether there are further questions coming in. But are there any questions through the line, moderator?

Still no further questions on the phone line. Please continue.

Okay. Since there are no further questions also through the web, I would like to thank everyone for their interest and for their participation. And we are certainly looking forward to the upcoming EGM and to hopefully receiving the authority and to commence with returning capital to investors. And it's fair to say that we are indeed in an exciting container shipping market environment, and we are looking forward to 2022 and beyond. And again, thanks for your participation. Thank you, moderator.

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect. And speaker, please standby.