MPC Container Ships ASA
OSE:MPCC

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MPC Container Ships ASA
OSE:MPCC
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Earnings Call Transcript

Earnings Call Transcript
2019-Q1

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Operator

Ladies and gentlemen, thank you for standing by, and welcome to today's Q1 2019 Earnings Call. [Operator Instructions] And I would now like to hand the webcast over to your presenter today, Constantin Baack. Thank you. Please go ahead, sir.

C
Constantin Baack
MD & CEO

Thank you, operator. Good afternoon and good morning, everyone. This is Constantin Baack. I'm the CEO of MPC Container Ships, and I'm joined here by our CFO, Mr. Harald Wilke.Thanks for joining us to discuss the Q1 results of MPC Container Ships. This morning, we issued a press release with the first quarter results, and the release was accompanied by a presentation, which we will show you in the room, but which is also accessible on our website.I would like to provide a brief update on MPC Container Ships and then with a specific focus obviously on the first quarter, but I will also look ahead to 2019 and beyond.Please note that our discussion today also contains some forward-looking statements. Actual results may differ materially from those stated in these forward-looking statements due to risks and uncertainties associated with our business.As anticipated during Q4 2018 in our earnings call, the market in the first quarter 2019 remained challenging. This, in turn, is also reflected in our Q1 earnings. However, since March, we have observed positive market trends, with some positive elements such as a significant decrease in idle capacity and also improving charter rates in some of the sectors we operate in.When we started in 2017, we anticipated a recovery of rates over the next 3 to 5 years in the feeder segment, i.e., 2019-2021. And whilst we were obviously slightly ahead of the curve pre-summer last year, we are slightly behind the curve now. However, overall, our market thesis is still intact, and we believe the supply and demand fundamentals, in particular for the feeder market, remained favorably for 2019 and 2020.Now let me guide you through the highlights. Please turn to Slide #4, where we illustrate some of the financial highlights. At $46.7 million, our Q1 revenues came in slightly lower than we had expected. Time charter equivalent was around 750 days, lower than in Q4 2018. However, utilization was up slightly compared to the previous quarter.EBITDA was affected by some accounting effects in relation to the constructive total loss of one of our vessels, which we will explain in more detail as we run through the presentation, whereby expenses have been accounted for the [ box ] and corresponding income effects below the EBITDA line. Hence, we have shown an adjusted EBITDA figure in the presentation of around $6.9 million for the first quarter.Similarly, the operating cash flow has also been affected there. We have a shift between operating cash flow and investing cash flow as the effects around the constructive total loss have been factored in under the investment cash flow and, hence, reduced operating cash flow. We will get to that later in the presentation. End of Q1, we still remain with a solid cash balance of around $46 million whilst maintaining a very strong equity ratio of 63%. And in line with our strategy, we maintained a low financial leverage of 34% only.Please turn to Slide #5. Here, we provide an update on the fleet and funding capacity as well as some relevant highlights with regards to the market. The company presently owns 69 vessels. And in early Q2, we declared a constructive total loss in relation to 1 of our 1,300 TEU container vessels. This vessel is fully insured, and we expect to receive the proceeds in the course of the second quarter.IMO 2020 preparations are progressing. The first of, in total 1,0, scrubber installations commences end of May. Furthermore, we have initiated a share buyback program and have bought back shares. As you can see on this slide, around 170,000 treasury shares have been accounted for and have been acquired by the company since.Beginning of Q2, we have furthermore secured up to $40 million revolving credit facility at, in our view, very attractive terms, adding flexibility to our funding and capital structure going forward.On the container market, in general, you see a few bullets on demand/supply idle fleet developments in scrapping, et cetera, on this slide. However, I will elaborate in a bit more detail on this later in the presentation in the market section.On Slide 6, you'll find the highlights and the balance sheet and all our financial statements actually elaborating in a bit more detail on the various numbers the key highlights I have already explained as part of the introductory slide. I think it is worth noting that so far for Q1, we have been behind our own expectations. However, overall, we do expect that the year 2019, in anticipation of improved market developments, we will see a much stronger second half of 2019, which I'll elaborate on in a few minutes.When you then, please, turn to Slide 7, you can see a snapshot when it comes to the distribution of our fleet by trading region. You can basically see the 3 main Intra-Regional and feeder trading regions: Intra-Asia; Intra-Europe; and Latin America and Carribs-related trade as well as other trades where we have sub-summed the various other regions where our ships are trading. As you will see later on in the presentations, our fleet trades predominantly in the intra-Asian trades, where around 40% to 45% of our vessels are actually employed at the moment. 25% to 30% are employed in the intra-Americas and Carrib-related trades, whilst 15 are in intra-European or in other trades in terms of regional deployment.In light of that, we will also later on in the presentation, touch upon growth expectations by trade. And it's worth noting that our vessels continue to trade in those areas where we foresee the strongest demand forecasts for 2019 and also 2020.Please turn to Slide 8. And there, I mean since the beginning of MPCC in 2017, our strategy has always centered around a 3- to 5-year recovery path for the feeder container market. The 2 main pillars of our strategy have been, firstly, buying ships at a significant discount to newbuilding parity; and secondly, at the same time, to maintain a low financial leverage in order to maintain a low cash breakeven. And both of this is illustrated on the left-hand side, where you can see basically the upside to newbuilding parity and if you look at, first of all, the implied valuation of our fleet according to the capital market valuation and secondly, the book value perspective when it comes to our fleets comparison to -- in comparison to newbuilding parity.On the right-hand side, you see the low cash breakeven, specifically driven by also a low leverage as we had envisaged from the very beginning. The goal has been and is to be prepared for both: a volatile market recovery but, of course, to ultimately be in a position to benefit from a rebalancing of demand and supply in the years ahead.With this in mind, I would then like to guide you through the market section of our presentation. Please have a look at Slide 10, where we have illustrated supply and demand outlook and rebalancing of supply and demand going forward.From a demand perspective, this graph shows the total markets. And whilst demand projections have recently been revised downwards, there are still healthy growth expectations for the total market for the full year 2019.On the supply side, 2019 is expected to see limited supply growth. A few numbers on this. Full year fleet capacity growth is expected to come in at 2.7% compared to 5.6% in the previous year.Actually, these 2.7% are the lowest level for more than 10 years in container shipping. If you would also factor in impact of IMO 2020, which obviously is very difficult to foresee and hence has most likely been not factored in by most of the analysts going forward, in my view, this can only be a positive impact on tightening capacity, for example, by a slow steaming or inefficiency in certain container services and trades as a result of scrubber retrofitting, tank cleaning and phasing in and out of vessels into certain services. Therefore, overall, our view on fundamental supply and demand outlook remains positive, and we do expect a rebalancing already in the course of the second half of 2019 and certainly also for 2020.If you please turn to Slide 11, there you will see a more detailed picture for 2019 for the different clusters and respective trades. The demand side, in general, is obviously subject to quite some degree of uncertainty in times of U.S.-China trade tensions, general concerns about the global economy and also lower, slower growth in Europe. Overall growth expectations for 2019 have therefore been downgraded mainly on transpacific and Far East trades, which you can see on the top left of this slide.The driving force behind total growth remains Intra-Regional trades and some of the other East-West trades, which we expect to be in healthy growth mode for 2019. Hence, Intra-Regional trades growth is expected to be significantly better than the overall market, and this is the trade where for most of our ships are, in fact, employed.On the supply growth, on the right-hand side, you see for 2019 these figures are fairly limited, especially in the segments below 12,000 TEU. In fact, boxship deliveries are projected to fall by 35% year-on-year, which, again, is the lowest annual level for the last 15 years. And on Q1 specifically, slower pace of fleet growth during Q1 2019 was driven by a significant slowdown of deliveries and a pickup in recycling activities.A few numbers in that respect to add. Q1 2019 saw deliveries of 27 ships, which compares to Q1 2018 of 53 ships. So we have seen almost half the number of ships being delivered during the first quarter of this year. In Q1 2019, that has translated into a fleet growth of just 0.5% in capacity terms compared to roughly 2% in Q1 2018.The very large container ships, if you look at the 15,000 TEU and above, only 4 units have been delivered in the first quarter of 2019, which compares to roughly 12 units during the first quarter of last year.When looking at feeder ships delivered in Q1 2019, also that number came down compared to 1 year ago. We have only seen 14 ships being delivered during the first quarter compared to 23 ships during the first quarter of 2018. At the same time, more than 20 feeder ships have been scrapped, so we have seen more scrapping than actually delivery of new ships in the feeder segment during the first quarter of 2019. This is just a rough explanation on the 2 charts and what we expect for 2019 and why we are positive on a rebalancing, in particular when it comes to the smaller sizes and, more specifically, feeder vessels on Intra-Regional trades.When you then please have a look at Slide 12, you can see that the importance of Intra-Regional trades generally has increased. This chart gives you, on the top left, the composition of global container trades broken down into 4 different sections: Intra-Regional, Non-Mainlane, East-West, North-South and Mainlane trades.The CAGR between 2000 and 2018 on -- of global trade is 6.3%. During the same period, the Intra-Regional trades grew by almost 8%, and the relative share of Intra-Regional trade during the same time in terms of global trade has increased from 32% up to 42%. This obviously is a reflection of the growing importance of Intra-Regional trades for the global containerized volumes.We are positive, and we at MPCC, we hold active chartering relationships to all of the 10 large Intra-Regional operators, as you can see on the top right-hand side, where we have listed the main operators by number of container ships deployed as per Q2 2019.If we then turn to some other market parameters such as time charter rates, secondhand values and idle fleet's composition and development, we will see that on the top left, time charter rates have been improving slightly over the last couple of weeks, specifically from March onwards, which came in with a slight time lag compared to the developments of the idle fleet, which I will talk about in a minute. At the same time, secondhand values have remained fairly flat. However, that is still based on very limited transaction values in the S&P market during Q1 and also the last weeks of 2019.The total idle fleet, as you can observe on the left lower chart, came in -- came down significantly since March 2019, and this is basically a very steep drop. And if you more specifically have a look at the development of the idle feeder fleet on the bottom right, you'll see that the feeder fleet has come down from February to April. From 152 ships, it has basically halved to 75 ships in the course of April, according to Clarksons and Alphaliner data. This, in fact, has been the steepest drop in the feeder market over the last 5 years, which is a very positive market trend, in our view, and will also translate into improving rates for the second half of this year, is our expectation.If we then spend some time on Slide 14. Here, we have simply looked at the development of idle fleet statistics, which is illustrated on the, basically, left-hand side, left axis, where you see the percentage of idle fleet, which is the red line and how that has developed over time since January 2015 compared to the Clarksons average Containership TC Rate Index. And as you see, in times of low idle numbers, charter rates have increased correspondingly. And in times of higher idle capacity, rates have come down accordingly.We are now, in April-May 2019, in a situation where the idle capacity has dropped significantly. As I said earlier, in the feeder market, actually is the steepest drop in the last 5 years. However, rates have not yet translated into -- or into significantly higher rate environment. We, however, are positive for the next couple of months, and more specifically for the second half of 2019 and beyond, in light of the supply/demand dynamics, which I have mentioned a few minutes ago. So this is just a snapshot on where we are and how this has been over the last 3 years in terms of idle fleet and corresponding time charter rates.So what's ahead of us? We have done -- on Slide 16, you can see that we have done a very simplified supply/demand growth analysis looking at the different trade lanes. On the left-hand side, you see that we have looked at Tier A, Tier B and Tier C trades, more specifically the trades -- the largest trade where the larger ships are employed, being Far East Europe trades; Tier B or all other long-haul trades; and Tier 3, more regional and feeder trades. We have used various research from Clarksons, Alphaliner and Howe Rob and have added our own analysis to derive at a simplified supply and demand growth analysis.Looking from left to right on Tier A, you see that we have projected trade growth according to Clarksons with a specific trader -- CAGR and relevant volumes in terms of growth volumes, and we have then looked at the specific trading pattern of those trades. You have -- on the Far East Europe, you have voyages per annum of around 5. You have an assumed utilization based on load factors, and you can also see that from the footnote that we have basically looked at the blended trading profile per vessel in the different tiers and have assumed the average utilization, factoring in nominal capacity and also cargo weight and other trade efficiencies. And if you add that or multiply that accordingly, you see the required vessel capacity on a net basis in terms of demand and supply expectations in terms of growth in that specific sector.The over- and undersupply on each specific trade is then reflected on the right-hand side, where we have looked at blended size, which is 14,000 TEU vessel for Tier A. It's around 6,000 TEU vessel on Tier B trades and around 1.7 -- 1,700 TEU on Tier C trades. That, in turn, translates into an over- and undersupply on the basis of number of vessels. And as you can see, there is a significant kind of takeaway, which is that long-distance trades are rather oversupplied, while medium- to short-distance trades are rather undersupplied. This is obviously a simplified analysis. It does not factor in potential cascading effects which we anticipate, not to the full extent, that this would kind of bring the whole picture here into an equilibrium, but there will certainly be picking up of volumes by slightly larger ships on some trades. And secondly, it also does not factor in the here and now in terms of current utilization of the global fleet. It is rather an analysis looking at really the development of supply and demand over time for 2019 and 2020, illustrating what we foresee, which is an undersupply in the smaller segments.Now let me have a look at Slide 17 on some of the prevailing industry trends. More specifically, where are we on the time line? And what have actually been drivers in the different phases of container shipping? Let's start on the left-hand side, where we have basically looked at 4 main drivers: supply and demand, financial market environment, liners' strategic focus and also balance sheet implications.Obviously, the early 2000s, where basically shipping boomed, where attractive financing was available almost unlimited, and we had a situation where demand outpaced supply. A lot of speculative ordering in all sizes and segments was prevailing, with a boom of cheap equity from German KG market or other sources and certainly, cheap bank financing. And at the same time, the liners' focused there -- or laid their focus on capacity and network growth rather than -- or basically on the increasing demand rather than on cost implications.And from a balance sheet implication, obviously there was a lot of use made by chartering in vessels in off-balance-sheet financing structures by liner companies. Since 2008, '09, we obviously have seen a change in market environment, where a lot of restructuring took place. Supply was -- in light of the drop in demand in particular in 2009, the supply basically outpaced demand. A lot of flooring of large vessels by the liner companies in an attempt to bring down their cost per unit and certainly, stricter regulations in terms of financing, et cetera, became relevant and had an impact on the market development.Furthermore, a lot of consolidation was in the cards, in particular on the liner side, and there was severe competition for market share driven by bringing down unit costs at liner companies, mainly on the East-West trades, where big volumes -- big volume growth was actually observed.And finally, the focus was, in fact, then on using the balance sheet capacity for the very large ships and for consolidation. So what does that mean going forward? Obviously, we have started deploying capital in 2017 and '18 because we believe the market positioning has -- or the market has changed quite a lot. We do expect obviously the demand side remains uncertain for the time being in light of the elements that I have mentioned earlier. But the supply side, we believe, is limited. Supply growth is limited for 2019. Ordering, in our view, will be limited due to various factors, one being the uncertainty about the right proportion going forward. We believe that will limit speculative orders going forward and also limit financing available for speculative orders, in particular also for the smaller vessels.IFRS 16 will play a role, the lease accounting standards. And certainly, there are balance sheet constraints and also other constraints as a result of, for example, IMO 2020.Finally, when it comes to liners' strategic focus -- and just if you look at the last 3 or 4 liners, they have focused a lot of their balance sheet capacity also on shifting towards other parts of the logistical chain, be it on the terminal side, more integrated logistical solutions, et cetera. We believe that a lot of shifting around will take place with regards to the focus of liners around different types of -- or different parts in the logistical supply chain.And finally, and obviously not to forget, this obviously IMO 2020, with its implications, both on additional fuel build for the liner companies, but also with regards to investment capacity.This is just a summary of where we see the industry and why we believe having a solid balance sheet and being positioned to benefit from a tightening market is key and is a positive outlook for second half of 2019 and certainly for 2020.In order to wrap up my presentation and then leave the floor for questions, we have looked at kind of how our company is positioned, you can see that on the top left, and how that comes -- ties in with the expected market fundamentals and market developments. We believe that with our focus on the feeder market and the very clear and stringent capital allocation strategy as well as low cash breakeven and the low leverage, we are well positioned to look forward and to benefit from the market recovery. When you look at the market, we obviously spent some time in this call about some of the drivers. We believe, yes, there are economic uncertainties in particular in relation to the U.S.-China trade talks, but also more generally, the global economic development. We nevertheless see a solid and healthy demand growth for this year, in particular for those trades where we are involved, and we have already seen over the last 6 weeks a certainly positive development when you look at the development of idle fleet as well as, first, let's say, slight improvement in charter rates.And IMO 2020 and other impacts, like accelerated demolition, et cetera, will contribute positively to this development.In sum, we believe with our significant operational leverage we will be able to benefit from improving market conditions in the second half of 2019 and 2020 and look forward to basically make use of our strength and flexibility when it comes to pursuing accretive transactions, such as share buybacks and to the extent we deem appropriate also vessel investments or divestments.With that, I would like to hand over to the operator, and thank you for your attention so far.

Operator

[Operator Instructions] And we have a question that came through over the phone line, sir. The question comes from the line of Espen Landmark.

E
Espen Landmark Fjermestad
Equity Analyst

Just on the -- your relationship between charter rates and idle fleet that you show on Page 14, I mean surely suggesting a rebound in rates. And I guess we've seen some improvements already, but it seems maybe the feeders are lagging a bit behind the bigger vessels, both in the dollar per day and percentages moves. So the question is, are you surprised that maybe charter rates haven't moved more for the smaller vessel so far?

C
Constantin Baack
MD & CEO

Thanks for the question. In fact, not really because what we have seen is a very steep drop in idle capacity. And if you look back at January, February levels, the feeder tonnage, if you look at idle statistics, was -- the idle numbers were much higher in the feeder market than in other markets. So first of all, the consumption of the idle fleet took a bit longer and usually comes with a small time lag. And secondly, if you look at the pure number of ships and also the periods on which these vessels are chartered, this is completely different to -- compared to, let's say, an 8,000 TEU containership. If an 8,000 TEU containership is taken out of the market, it's chartered for 10 to 12 months.Some of the feeder ships are only chartered for 10 to 15 days, maybe 1 to 2 months. And in particular, since October -- between October and February, October last year and February this year, a lot of owners had to accept quite flexible redelivery periods. That means the availability of ships becoming available to the charter market has a completely different kind of dynamic when it comes to feeder vessels. So since March, we have seen more and more charters being concluded. So the availability ratio has come down a bit. That's why we expect and are not surprised by the time lag. So it's -- for me, it's a natural -- kind of it's inherent in the way period charters are structured when you look at the larger ships compared to the smaller ships. So the rebound of the 8.5, for example, that came up from 12,000 to 25,000 within only 3 weeks is something I would not expect. However, I would at least expect that once rates come up, this might be a much more sustainable recovery this time around than it has been in 2017 and early 2018 because of the fact that the period charters will then look differently and have actually already those that have been concluded are now more in the vicinity of 6 to 8 months or even longer. Hence, less of an availability cluster in the course of a certain time window, which was the case between February and April, I would say, where a lot of vessels had to be renewed.An example, out of our fleet with 69 ships, we had 50 fixtures during the first quarter. This gives you an idea of kind of the turnover, and that turnover was obviously also intentionally chosen by us because we didn't want to be locked in to charters where we had to have very flexible redelivery windows, but rather kept charters short in order to then be able to benefit from a market recovery, which we anticipate for the second half of 2019.

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Espen Landmark Fjermestad
Equity Analyst

Okay. That's very helpful. And I guess maybe related, I've seen the brokers are now quoting rates for eco-feeder vessels and there seems to be 2,000 to 3,000 a day of rate differentials there depending on the size. Is that fully reflecting the savings for modern vessels versus the 10-year-old-plus ones, you think?

C
Constantin Baack
MD & CEO

That is really dependent on the trades. I mean this is -- I would say the savings on -- from a fuel consumption perspective are probably in the vicinity of 30% depending on the trade and how the vessel is actually utilized. But that obviously does not yet factor in the additional cost. And to my point earlier, I believe ordering new ships is also a question or a decision of the right propulsion. So I -- again, I don't expect a lot of speculative order in the feeder market because people will run a 25-year technology risk with their newbuilds. And as a result of that, I think also on the financing said, it will be more difficult to finance ships if you don't have a very clear view on propulsion, which I'm not sure everyone has at this point in time. Therefore, we feel comfortable with our secondhand fleet, on average around 11.5 years compared to newbuilds.

E
Espen Landmark Fjermestad
Equity Analyst

All right. And finally, you had about $12 million of CapEx in the first quarter. Can you give broadly the CapEx schedule for '19, the drydocking ballast waters? I'm just trying to get a sense of your liquidity development over the year.

C
Constantin Baack
MD & CEO

I mean our CapEx budget is basically 2 matters. One is the schedule with dockings and the other one is obviously the scrubbers. On the scrubbers, we might be able to push some of the cash outflows to 2020, but I would expect for the full year roughly CapEx in the vicinity of $50 million, and that includes both scrubber, program and dockings.

E
Espen Landmark Fjermestad
Equity Analyst

Okay. And if you take the scrubbers away, how much is it for the other ones?

C
Constantin Baack
MD & CEO

We look -- and that is basically reflected on our cash breakeven slide. We look at around $800 per day for dock per day invested blended for dockings. So this is kind of the over-the-fleet envisaged docking number when you look at a ship per day basis.

Operator

[Operator Instructions] No further questions that came through, sir. Please continue.

C
Constantin Baack
MD & CEO

All right. Thanks, everyone, for their attention. Good to hear that no questions are open. I wish everyone a pleasant day. And yes, all the best. Many thanks for your attention. Bye-bye.

Operator

Thank you, and that concludes our conference for today. Thank you all for participating. You may now disconnect.