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

Good day, and thank you for standing by. Welcome to the MPC Container Ships' Q1 2023 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Mr. Constantin Baack, CEO; and Mr. Moritz Fuhrmann, CFO of the company. Please go ahead.

Thank you, operator. Good afternoon and good morning, everyone. This is Constantin Baack, CEO of MPC Container Ships. And as announced, I'm joined by our CFO, Moritz Fuhrmann. I would like to welcome you to our Q1 2023 earnings call. Thank you for joining us to discuss MPC Container Ships' first quarter earnings. This morning, we have issued a stock market announcement covering MPCC's first quarter results for the period ending March 31, 2023. The release as well as the accompanying presentation for this conference call are available on the Investor and Media section of our website. Please be advised that the material provided and our discussion today contains certain 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. Before we start with today's presentation, a few words from my side, reflecting on the start of the year and the first quarter of 2023. We are pleased to report another solid performance and strong quarterly results today despite prevailing macroeconomic and geopolitical uncertainties. The container market has clearly come down from the historical highs seen in 2021 and early 2022, yet the charter market is still at very healthy levels. The freight market has recently shown signs of stabilization and the charter market has actually improved during the past weeks and months to solid levels, well above historical averages, both in terms of charter rates and charter periods. At MPCC, we continue to focus on being agile and well equipped to adjust our operations and strategy to fit the prevailing market conditions, be a good and reliable partner to our customers and, of course, to create value to our shareholders. We have been able to capitalize on the strong markets by locking in long-term time charter contracts at very attractive rates and selectively sell vessels. We have placed a clear emphasis on returning proceeds from profitable operations to shareholders by way of significant dividends. And at the same time, we also continued to deleverage the company and currently operate with an industry low leverage. During the first quarter, as part of our ongoing strategy for selective portfolio optimization, we have announced several new and accretive portfolio measures, which include continued divestment from older vessels and investments in younger, larger scrubber-fitted vessels with existing charters attached. These measures are not only earnings accretive, but also important efforts to maintain the long-term competitive position of MPCC. We will now run you through the first quarter, the market and outlook for the company in more detail. And I would like to hand over to our CFO, Moritz Fuhrmann, at this point.

Thank you, Constantin. Looking at some highlights at the start of the presentation, we're very happy to report operating revenues coming in strongly at $180 million, mostly in line with expectations, adjusted for some one-off effects of $25 million concerning the redelivery of AS Carlotta. The net profit came in at $120 million, again, adjusted for some one-off effects in the quarter. We're talking about a net profit of close to $90 million, on which basis the Board has declared a recurring dividend of $0.15 per share. At the same time, since we're emphasizing on returning capital to shareholders, we continue to operate on an industry low leverage of 15%, slightly down from last quarter, which was 16%, and while we continue to return capital to shareholders, we also continue to optimize the fleet portfolio that we have. So we acquired 2 ships in the first quarter and took also delivery of one 2,800 TEU ship and one 2,400 TEU ship, whilst we were able to sell 1 older vessel in the portfolio, which was 20 years old and was part of the Bluewater joint venture. So from that perspective, also been able to streamline the corporate structure. Since the end of last quarter and earlier this year, the charter market or the container market in general has developed relatively favorable. There was a dull period starting into the year, but more recently, we have seen very strong fixtures, not only in our portfolio also in the wider market. So very happy to report that we've been able to lock in some strong charter rates, but also probably more important, strong duration of up to 1.5 years. Also despite some cloud at the horizon from a container market perspective, we strongly believe that MPCC is well positioned within the feeder segment that clearly shows a decent supply/demand fundamentals going forward. So despite the aforementioned market uncertainties, we are very well positioned with a revenue backlog of $1.3 billion. Also for '23, we already locked in almost 90% of open days. So very little exposure to potential market volatility, and on that basis, we are reconfirming the guidance that we put out in the last reporting of $610 million to $630 million revenue and $420 million to $450 million EBITDA. Looking at some company KPIs in more detail. Again, gross revenue came in strongly at $180 million, EBITDA $141 million. Adjusted for one-off effects, this is $110 million in net profit to $120 million, again, adjusted for one-off effects, $89 million. The balance sheet has grown slightly on the back of the acquisitions that we made in Q1, but also on some newbuilding installments that we paid. Net debt almost unchanged relative to last quarter, industry low. We're talking about $28 million, and the leverage ratio, as I mentioned, slightly down from 16% to 15%. On that basis, again, dividend per share of $0.15, in line with last quarter. We should mention that the $0.15 is excluding the $0.07 that we already declared and distributed event-driven dividend in February '23 to $0.22 in total. Operational KPIs. Very happy to report that OpEx has come down since we are seeing that COVID impact is slightly fading out. So historically, we have seen some one-off effects relating to COVID in operating ships that is now phasing out. Average TCE also mostly in line with last quarter. Utilization is slightly down due to a higher number of drydockings and some repositioning of vessels in our fleet. Looking at the commercial side of things. Again, very happy to report that since last reporting, and to date, we've been able to fix 7 vessels in the market. I think it's fair to say that both charter rates but also duration efficacy shows a very positive trajectory, and it's also above our expectation. And for the time being, there is no sign of slowdown as we continue, obviously, to talk to the operators in the market, and we see a decent demand for feeder vessels. That's on the chartering side. On the portfolio side of things, again, as mentioned before, we've been able to acquire 2 scrubber-fitted secondhand ships in the market and took delivery of them within the Q1. Both vessels obviously important to mention are accretive, both from an EPS and DPS long-term perspective to the overall portfolio, and we've been able to sell out 1 of the older ships in the portfolio. At the same time, we obviously continue to invest in the fleet also together with operators to make our fleet as fit as possible for the upcoming regulatory environment that will obviously have an impact on the shipping industry. Looking at the cash development over the quarter, not much to report, almost unchanged, slightly down $7 million. Obviously, strong operating top line translated into operating cash flow of $155 million. Investing cash flow, before mentioned vessel acquisition, newbulding installments but also drydocking related expenses of $17 million. Net interest expense, $2 million. We also drew down a new facility of $8.3 million in Q1 to support the vessel acquisitions we just mentioned. And we, at the same time, continue to pay down on the existing debt facilities of $15 million towards the HCOB facility. And most importantly, for investors, we continue to pay distributions in the tune of $66.6 million recurring and $31 million event-driven earlier in the year in February '23. Talking about dividends in more detail. Obviously, emphasis remains on returning capital to shareholders. So again, $0.15 declared for Q1 this year being paid out in June this year. What is important to mention in regards to the recurring dividend is that historically, we have been paying our dividends from our share premium account, which by now or while paying this dividend will be depleted. So for this time, but also going forward, we will pay $0.12 from the share premium and $0.03 from the retained earnings, whilst going forward, the dividend will be paid entirely from retained earnings. Over time, and since we embarked on the dividend journey, we have distributed more than $600 million to investors implying a 55% dividend yield if you were to buy in the stock Jan '22, and applying a 24% comparing dividend yield, if you were to buy in the stock in Jan '23. So from that perspective, very, very impressive value proposition to investors and on that happy note, hopefully, I'm passing over to Constantin to end the market section.

Thank you, Moritz. I would like to now continue with a brief market update. So please turn to Slide 9, starting off with some observations from the container freight market. The graph on this slide shows the key indicators for the ocean freight, namely the Freight Rate Index as dark blue line and the annual TEU throughput as a red line. What you can see is obviously the steep increase that we have observed in 2021 and peaking in mid-2022. And then obviously, coming down as communicated before, and as observed in the market, in particular in Q3, Q4 last year, but also still early this year. We now recently have observed somewhat of [indiscernible] relation of freight rates, at least on certain trades. And it's worth noting that we are still 15% to 20% above historical averages when you look at freight rates in general compared at least when you look at the CCFI composite index. Next to the CCFI, on intra-regional trades, the markets have come down, not as much. Admittedly, they were also not as high. So there, we have only seen around 40% drop from all-time highs. But that is just a high note, we'll touch on the, let's say, nuances of intra-regional trade versus the global market as we go through the market section. Let me spend a few words on inflation and interest rates. And of course, certain inflation indicators are still high. However, they have cooled off a bit, and in particular, energy and food inflation, core inflation remains a bit sticky. But at the same time, we also look at rather tight labor markets, in particular, in several advanced economies. And we have also seen central banks obviously increasing interest rates, although going forward, a more moderate approach is expected. In terms of GDP growth, we have basically seen a flat development compared to the last quarter that we reported on a slight reduction by the IMF. However, we still look at a growth for 2023 of around 2.5% to 3% on the GDP side. Container demand pretty much in line with GDP growth, also somewhere around 2.5% for this year. And for next year, it is expected to be significantly stronger. 2 important aspects when looking at the picture is also the question of regionalization and also intra-regional trades. We'll touch on that in a bit more detail as we go through the presentation. But I think what is worth highlighting is that exports out of China into the U.S., in particular, have come down, but it has been picked up to some extent by other Southeast Asian countries in terms of volumes going into the U.S. out of Asia. On that note, I would like to move on to the next slide, Slide 10. Please turn to that slide, where we now look at the S&P market and charter market dynamics in a bit more detail. It is worth when looking at the chart on the left-hand side, we come to find that S&P prices and charter rates have also come down quite significantly from historic highs. However, and that is worth noting, whilst they have dropped by around 70% to 75% charter rates, we are above 100%, more than 100% above historic leverages. So we're still in a fairly healthy market environment. And as you can see from this chart, this is obviously an index, index usually lags behind reality to some extent. So that is a reflection that markets have actually improved over the last couple of weeks and months. And that is both in terms of rates as illustrated here. But also in terms of periods, as Moritz has mentioned earlier when looking also at our very fixtures that we have concluded over the last couple of weeks and months. One reason for that is that some of the large operators are back in the market. MSC Hapag, the CMA in particular, have been pretty inactive most of Q3 and Q4 2022 and early 2023. A lot of these names have come back to the market and have chartered in more tonnage. And on the back of that, we have seen this upswing in rates and also in periods. On the right-hand side here, you can see illustration that we have been there for quite some time now, showing the vessel availability. One factor that at least during our Q4 earnings call, I did mention that this is at least a factor that might lead to a stabilization of rates even though the overall macro picture wasn't great. We currently see around 350 to 370 vessels still being available for the rest of this year in the charter market. I do believe that, that is one attributing factor to the stabilization in rates and periods that we've seen over the last couple of weeks and months. And it certainly is way below the levels that we've seen over the past couple of years. We also observed slower speeds, a very important factor as well, depending on the trades, up to 10% in speed reductions. And you can see at the second box from the right at the bottom is a desktop analysis from a few of the research houses. And if you reduce the speeds by 1 knot, we're just probably somewhere between 5% and 10% at current trading speeds that would be an effective supply reduction of 6% to 7%. So we are talking about quite some notable implications. Q1 is obviously now completed, but it remains to be seen how that will play out during the latter part of this year, but we certainly see capacity implications from slowed speed already today. Overall, we can conclude that we are observing a fairly robust charter market at present, and that is obviously a way more promising picture than we have seen in Q3, Q4 last year and before Chinese New Year earlier this year. Please turn to the next page, Page 11 of the presentation where we take a closer look at demand and trade growth and also the deployment structure by trade. On the left-hand side, we have illustrated mainlane trades, other East-West trades as well as North-South trades and intra-regional trades stacked in the different columns and a trade outlook according to MSI. The expectation is that the overall market will grow at a CAGR of around 4.6% over the next couple of years. Whilst that is the overall market picture, the intra-regional trades are expected to grow disproportionately stronger, as by the way, we have seen over the last 10, 15 years, with the exception of the COVID period 2021, 2022, where the mainlane trades grew quite significantly as well. But that is expected to be the case going forward, disproportionate trade growth, demand growth from intra-regional trade, also linked to the interconnectivity of this world that will, in our view, also benefit some of the Southeast Asian countries and in particular, India, and one driver behind that is supply chain diversification from a lot of shippers and other companies. On the deployment side, on the right-hand side, the pie chart, you can see, and that is something that tends to be underrated by market observers is the high relevance of intra-regional trade. You see the different trades here in pie charts. And in the middle of the pie chart, you can see the number of vessels deployed in the specific trade. And what you can see is in terms of number of vessels deployed intra-regional trade is by far the largest trade globally. And we're looking at around 50% of the global fleet of around 5,000 vessels actually being deployed in intra-regional trades. And you look at the intra-regional trades, specifically, around 98% of the vessels deployed in intra-regional trades are actually below 5,000 TEU i.e., in the sweet spot category that we are focused on. We believe that is a very interesting picture. We also see that, that hasn't changed over the last couple of decades despite certain cascading effects. And we believe this will be a very relevant aspect going forward when looking at trade development. Now on this slide, we have also put that in context with age structure also a very important criteria in our view. Now we have looked at the relevance of intra-regional trade and of the smaller tonnage below 5,000 TEU for those very trades. And if you now look at order book and age structure of the fleet on the water, on the left-hand side, we have shown the different size categories from larger than 17,000 TEU at the top down to smaller than 1,000 TEU at the bottom and different age structure brackets. What is an interesting figure to mention here is that more than 1,000 vessels below 3,000 TEU are actually above 20 years of age. And that is highly relevant when looking at the order book and at the replacement needs and also as the demand growth perfected that I just alluded to. When you look at the age structure and then in combination with on the right-hand side, the order book and the deliveries, yes, the order book is very significant on an overall perspective, yet, the order book is certainly underrepresented when looking at the smaller sizes. And we believe that there is a significant supply gap in the years ahead and probably not this year, probably not next year, but we believe over the next 3 to 8 years, there will be a shortage of smaller vessels. And actually, we will need more newbuildings in the smaller sizes, and that is a very important aspect. In addition, and what is also interesting to see 2M announced, so Maersk and MSC announced a few weeks back that they will deploy 9 additional ships of around 20,000 TEU in size in total around 200,000 TEU in their services. So they will basically absorb by adjusting to slower speeds and adjusting services accordingly, i.e., part of their order book will basically be digested by an adjustment of the service offering by the liner companies. So overall, yes, the order book is significant, but the devil is in the detail, and we firmly believe that the smaller vessels will not be as exposed as the larger part of the fleet. Now on the next slide, Slide 13, we have looked at some additional factors that will influence the supply side and are important, from left to right. On the left-hand side, we have shown the development of containership average speeds. This is obviously a large blended basket across sizes. And we can report that on average, on our vessels, we have seen quite a significant reduction in speeds compared to last year and year-to-date basically. And hence, we believe regulation will have further implications on vessel trading speed and slow steaming is obviously a potential instrument to further address that very aspect. And we firmly believe that on average, we will see slower speeds going forward. Secondly, in the middle of this slide, shipyard capacities, yard capacities are effectively maxed out for 2023 and 2024, and even for 2025 to a large extent, meaning that talking again about the number of vessels that need to be replaced over the next 3 or 5 to 8 years, particularly in the smaller sizes due to the age structure is that we firmly believe that there will be quite a full utilized shipyard capacity that will limit the number of newbuilds. Again, we will need newbuilds, and we will see newbuilds in the smaller sizes. But yard capacity certainly suggests that it will be very tight to actually replace the fleet, especially in the smaller sizes over the foreseeable future. And lastly, and obviously one important aspect, and I alluded to that a few minutes ago is the question of distribution of the order book and the question of cascading effect. So how will actually the large order book potentially trickle down and we believe that most of the vessels, 12,000, 17,000 or above 17,000 TEU in size will actually not be able and the trades will not really suggest that they can actually eat into the smaller sizes. And over the last 20 years, the proportion of larger ships in intra-regional trades has been very, very limited. So the cascading is not a perfect cascade where we will see 12,000, 15,000, 17,000 TEU vessels actually replacing smaller vessels. So we firmly believe that there is still an underrepresented order book in the smaller sizes, which needs to be addressed, especially given the age profile. Let me wrap up the market section with a quick summary and illustration on why we believe there is quite a robust midterm outlook for intra-regional trades. Firstly, on the top left, we can see a chart where on the Y axis we have shown the order book to fleet ratios for the different vessel sizes that we have just talked through. And on the X axis, we see the percentage of fleet on the water being 20 years or older. And what you can see is that a very significant part of the fleet in the bottom right corner here is actually the smaller sizes where we will see the need for replacement tonnage over the next 5 to 10 years. And at the same time, they are significantly underrepresented in terms of order book. That looks different for the, let's say, midsized segment, 6,000 to 8,000 TEU and 8,000 to 12,000 TEU and certainly completely different for the very large part of the order book and a small part of the fleet in an aging profile. Now in addition to that, the demand outlook, I went through that. There is a disproportionate growth expectation. And we also see and do believe that CII impact will be more pronounced for the smaller sizes. So we believe the overall picture in the midterm. And that doesn't mean this year, it doesn't mean next year. We, as a company, are well positioned for this next year, but we believe over the next 3 to 8 years, there will be a shortage of vessels in our very segment. And on that note, I would like to move on to the company outlook section, where I will kick off with the first slide and then hand over to Moritz. So please turn to Slide #15. That is, I believe, yes. And I would like to start with a short review of our capital allocation principles and development over the last 18 months, which is illustrated on this slide. Value for a shipping company, in my view, can be generated by obviously entering the market at good price levels, but also by executing the right chartering strategy and portfolio strategy. However, and that is very important, from our point of view, there's also a question of the right capital allocation approach and discipline, including returning capital to investors, but at the same time, also achieving a long-term value proposition for the company and its shareholders. Slide 16 now shows the development of a few key elements over time since Q3 2021. The graph on top shows one, the first is the red line, which is the reduction of debt from Q3 2021 around $350 million down to $150 million gross debt today. The blue line shows the execution of our dividend strategy from basically starting in early 2022 and now with a total dividend up to now of around $600 million. And at the same time, and that's at the bottom of this slide, we brought down the leverage ratio significantly down from 35% to 15% as per end of this quarter. And very importantly, we did all of that without compromising on our fleet. To the contrary, firstly, we have maintained a fleet of 66 vessels. And as you can see at the bottom, and we have, at the same time, replaced the number of vessels over time. So smaller, slightly older vessels and acquired younger, slightly larger vessels, including newbuilds with attractive charters attached. And we have also, at the same time, been able to free up a significant part of collateral that was encumbered under certain financings. So whilst we had only 3 unencumbered vessels end of 2021, we now have freed up collateral and have around 50% of our fleet unencumbered, providing us with both a high discretion in the decision about our capital allocation and also with a great balance sheet flexibility. And therefore, we firmly believe that finding the right balance between returning capital to investors, operating at a low to moderate leverage, yet being positioned to utilize market opportunities and optimize the fleet is the way to run a company and a very attractive operating model. And on that note, I would like to hand over to Moritz to run you through some more details in terms of company outlook.

Thank you. Turning to Slide 17 and a bit more detailed outlook on our very robust backlog of $1.3 billion on revenue side of things and $1 billion on the EBITDA side of things. As you can see, the remainder of '23 is almost covered from an open day perspective, only 10%, a bit more than 10% open days leaving little room for market volatility when it comes to the top line. But also going into '24, there's a decent amount of 60% of open days already covered with an average rate of close to $35,000, which again, from a historical point of view, it's a very, very strong number. Obviously, over time, and going forward, you will see that we will sort of be harvesting the backlog that we have on the books. But as you can see and based on the recent fixtures in the market, we feel relatively comfortable in the position that we're in, especially looking at the remainder of '23, but also going into '24 as the most recent fixtures that we have done in tune duration of 12 to 18 months and stretching well into '24. The backlog itself of the revenue backlog of $1.3 billion is well covered by a resilient and diversified book of operators, 2/3 is covered by the top 10 liner companies, good names, good credits, 7% top 20 liner companies, including Unifeeder Express Lines, and the fair share is covered by cargo backed operators. So 91% of our backlog is covered by good names, good credits, and there's a decent visibility on the backlog with the remaining average contract duration of 2.1 years. Looking commercially at the remainder of '23, you can see that there's a very limited number of open vessels that we need to fix, which is [ 10 2 ] for the remainder of this quarter, 5 ships in Q3 and 3 ships in Q4. And again, based on Constantin's comment on the market and what we have evidenced since the last reporting in terms of charter rates on our own fleet but also duration and looking at the size distribution of our open ships remainder of '23, we feel relatively comfortable for the position that we're in and being able to execute on accretive fixtures for the rest of the year. Looking at the company valuation. This slide is an evergreen, almost we do spend some time every call on the company valuation. You can see the net debt is almost not existing with $28 million and basis the market cap from yesterday, we're talking about an enterprise value of $744 million, which is 1.3x covered by the contracted backlog alone. This obviously is excluding any steel value of our fleet on the water, including the newbuildings, including the recycling value of the entire fleet, which needless to say, it's way too conservative to look at the enterprise value will be covered 1.6x. So from that perspective, we see a very significant and strong upside potential beyond the contracted cash flow that we have, not only on the steel value but also on the basis of what we see in the market right now and what we're being able to fix on open vessels in the coming quarters. Illustrating some sensitivities, and I should say that this is obviously a no forecast or financial guidance, but running some sensitivities both on the top line, but also on a net profit basis, Clarksons 10-year and 5-year historical average for open days in our fleet, you can see that there's very, very limited volatility in '23 and on the top line, but also on the net profit. And that volatility is increasing going forward, but especially looking at '25 and again, running some sensitivities on historical averages, you can see that the implied dividend yield remains to be very compelling between 22% and 34%, obviously coming down from close to 50% in '23. Again, basis on certain assumptions, both on the income side of things, but also on the cost side of things. But in conjunction with the Slide 20 that we just talked about a very, very interesting and compelling investment proposal and value proposition from our point of view. Last but not least, also looking at the company's balance sheet and the debt side of things, as mentioned before, we are emphasizing on operating on an industry low leverage. You can see that the leverage currently stands at close to $150 million and is expected to decrease below $100 million by the end of this year. Always bearing in mind that this is considerably below the recycling value of the fleet. So there is significant have room and very low risk from a debt perspective. I'm very happy to report that on our newbuilding, the Ecoboxes, the 5,500 TEUs that are being delivered in '24 from Hanjin. We've been able to sign a loan documentation for a plus 70% LTV financing that is ECA-covered. The lenders here are [indiscernible] and [indiscernible] and that includes a pre-delivery and the post-delivery facility. And it's, I think, a testament to the company and the plans of the company also being seen in the market. And also important to mention the flexibility that we have from a balance sheet perspective. We mentioned before that we started to look more actively in the markets in terms of fleet optimization, fleet renewals when it comes selling some of the older ships, but also looking at accretive acquisition from a portfolio perspective. So that illustrates very well that there is sufficient balance sheet capacity to potentially free up some liquidity for potential acquisitions, and at the same time, not jeopardizing the recurring dividend that obviously is being fed from the operating business of MPCC. To summarize, MPCC is very well positioned for further value creation. We continue to perform strongly from a financial but also operational point of view. We have a very low leverage on the balance sheet with more than 50% of the fleet being unencumbered and providing us with much needed flexibility when it comes to executing on fleet optimization strategy. Again, very comfortable position from a current market perspective, with recent fixtures strongly above historical averages and more importantly, also showing very decent duration of up to 1.5 years. And also from a wider market perspective, we feel very comfortable in the feeder segment with a decent supply/demand outlook. And going forward, again, we have a very strong revenue backlog of $1.3 billion, providing very high earnings visibility. And as mentioned before, with very low volatility when it comes to '23 and open days. And hence, I think that the company is very well positioned to capture any market opportunities when it comes to fleet optimizations and obviously, always being mindful in emphasizing on returning capital to shareholders. So on that note, I'm handing back to the operators for any questions, Q&A that might come in through the line.

[Operator Instructions]

If there are no questions through the line, operator, there are a few questions through the web that we could take up as a starter. There is a question by [indiscernible], pretty long question, so I will try to read the essence of it. Congratulations on another great quarter. In recent years, MPCC has done a significant repayment of debt. In the presentation, Page 22, it looks like this is about to change in the coming years, low repayment of debt in the quarter to come. But when I read the newbuilding program section report, I get another impression. So the main question is out of what will we finance our newbuilding program? And could you please also elaborate a bit more around the debt reduction in the coming years in combination with the payment of the newbuilding program. I would hand over to Moritz, I would basically address that question as far as I am concerned, but maybe you can quickly summarize how the aspects more, especially on newbuilds.