MPC Container Ships ASA

OSE:MPCC

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to today's Q1 2020 earnings call. [Operator Instructions]. I must advise you that this webcast is being recorded today. I would now like to hand the webcast over to your presenter today, Constantin Baack. Please go ahead, Sir.

[Constantin Baack, Chief Executive Officer]

Thank you, operator, and good afternoon, and good morning, everyone. This is Constantin Baack, CEO of MPC Container Ships, and I'm joined by our CFO, Mr. Harald Wilke. Thank you for joining us to discuss MPC Container Ships' first quarter earnings call. This morning, we issued a press release announcing MPCC's first quarter results for the period ending March 31, 2020. The release as well the accompanying presentation for this call are available on the Investors and Media section of our website. Let me please remind you that the material provided and our discussion today contains forward-looking statements as well as indicative figures. Actual results may differ materially from those stated or implied by forward-looking statements due to the various risks and uncertainties associated with our business. Before I guide you through the presentation, let me start with a few words on the recent developments and present market environment in 2020. The outbreak of COVID-19 that has been declared a pandemic in March 2020 clearly marks the historic and certainly unprecedented break into the private and business life of everyone. During the Q4 earnings call in February 2020, I did mention that the coronavirus constitutes a new layer of uncertainty, but the magnitude of the implications were certainly unclear at that point in time. The implications on the world economy and the international trading system are severe, and I will elaborate in more detail on the implications this has on both the container markets and MPC Container Ships specifically. In these difficult times, our top priority continues to be the safety and well-being of our employees and crews serving onboard of our vessels. Equally important is to protect the company's downside risk. Over the past months, we have, therefore, carried out a number of proactive measures to further strengthen MPCC's balance sheet and liquidity. Given the magnitude of COVID-19 implications, we do expect further adverse impact on the container market. This will also affect our liquidity and our ability to be in compliance with covenants under some of our debt agreements. We will, therefore, approach our creditors and other stakeholders to implement measures to stabilize the company. With that, I would like to start into the presentation with a snapshot on MPCC, and please turn to Slide #3. MPC Container Ships, we are client-focused. As the largest owner of feeder container ships globally, we are an integral part as asset provider globally, and we have a very close tie with key liner operators and companies. We are transparent. We have a competitive cost structure. This means low cash breakeven levels and a lean corporate setup, and we operate on solid operational KPIs and chartering performance compared to benchmark. We have furthermore, as you can see at the lower part of Slide 3, implemented a number of proactive measures with regards to cost charter activity and liquidity preservation during the first month of 2020. On the cost side, we have sustainably improved our cash breakeven through the implementation of a cost optimization program. The CapEx side was still affected by some of the scrubber costs that we incurred in connection with our scrubber program. On the chartering side, we have been one of the most active tonnage providers with 67 fixtures year-to-date, with more than 35 different counterparties. This is obviously a reflection of the pretty volatile market environment. We have a roughly 15% market share in the feeder segment, looking at charter fixtures. From a liquidity preservation perspective, we have executed a few proactive measures in Q1. We have carried out an equity placement, $13.5 million in February. We have sold 2 vessels in February, and we have agreed on a package deal, just ahead of the COVID crisis for 3 of our ships with one top-tier liner operator to take out certain charter risks. We will continue to proactively navigate through the challenging times, and I'll elaborate in a bit more detail about the market and our position and our measures going forward. Now let me guide you through the key figures of Q1 2020, and please turn to Slide 4 of the presentation. Revenues in Q1 came in at $46 million, slightly above the previous quarter. With $7.5 million, the Q1 EBITDA improved compared to the previous quarter, which was obviously significantly affected by off-hires due to the scrubber program. The Q1 utilization was 87% and was slightly below the one in Q4 of the last year. But it was still affected by some remaining extraordinary off-hire effects due to the company's scrubber program. At USD 8,970 roughly per day, the TCE was above Q4 levels. The Q1 operating cash flow was at shape below $13 million and slightly above Q4. And that's also affected by the lower utilization. As per the end of Q1, the company had a cash balance of roughly USD 41 million, whilst maintaining an equity ratio of 57% and in line with our strategy, a leverage -- balance sheet leverage of around 40%. More details on the Q1 financials can be found in the appendix of this presentation on Slide 15 or on the company's website. Please turn to Slide 5. Where we will now provide an update on the key developments year-to-date. Let me start with the market development. Whilst the market saw a rather encouraging start to the year and charter rates at solid levels, well above the levels at the same time in previous year, the consequences of the COVID-19 pandemic with regional lockdowns and tumbling demand is expected to cause global recession in 2020. In February, idle fleet increased significantly and charter rates decreased due to lower box volumes, which also puts pressure on the liner companies. Operationally, we've been very active, and we have seen some positive developments. The scrubber program was completed in Q1 and commenced -- and we commenced our long-term scrubber-related employment. Whilst the start of the year saw a spread between low-sulfur and high-sulfur fuel oil of $250 and above, which exceeded our expectations, it come down significantly in line with the drop in oil price. Despite this, the long-term scrubber charters well above market rates from today's perspective certainly serve as an important contributor to earnings visibility in the current market environment. Based on current spot rates for the scrubber fleet, we expect extra earnings above market for this year even without the scrubber savings on the spreads of around $8 million per annum based on current spot rates. Furthermore, in this challenging market environment, we have benefited from our strong relationships and market position in the charter markets. In Q1 alone, we concluded 40 fixtures with 23 different operators. And at the same time, as I mentioned before, we have implemented various cost optimization measures and have been able to further bring down the cash breakeven per vessels.Financially, the key focus remains liquidity. On the revenue side, the charter market development negatively -- were negatively affected. And the earnings and the first half of this year, we will also expect to be affected by the remaining CapEx program from our scrubber installation projects. In order to bolster the liquidity, we have carried out a NOK 125 million equity measure in February, and we had sold 2 ships at accretive prices. The buyer of the 2 ships has unfortunately defaulted under the contracts in light of the market environment, and we are in the process of enforcing our legal rights at the very moment. In the meantime, and despite an almost nonexistent S&P market, we have been able to firm up the sale of one of the ships, AS Leona, with a new buyer with handover expected within the next 6 weeks. I'll elaborate on that in a bit more detail later on in the presentation. I will now provide an update on the market. So please turn to Slide #6 of the presentation. Driven by COVID-19 pandemic, 2020 will see a global recession, comparable with the financial crisis and The Great Depression in 1930s. Global GDP is expected to decrease by 3% and also other parameters like the U.S. economy is expected to decline by almost 6% and the Euro Area by 7.5%. World trade is expected to decrease by at least 13% and world seaborne trade, as you can see from this illustration, by 5.5%. Depending on how fast the western economies will reemerge from lockdown, a recovery is expected, but timing and extent of the recovery are highly uncertain. Beyond 2021, as you can see from the chart, analysts expect an increase in global GDP of 5.8% and international trades of more than 20%. Hence, the rebalancing is expected, yet highly uncertain. Please turn to Slide #7, which shows further details on the demand and supply development by trades and vessel sizes. On the top left, you see the trade development, and you can obviously see that a significant drop is expected to levels that are somewhere between 2016 and 2017 volumes from 2019 to 2020. This is across the board, but particularly relevant on the Mainlane trades, which are expected to grow the most -- to decrease the most, apologies. Intra-Regional trades provided a share of 40% in 2016, and they are expected to continue to increase throughout 2020 and 2021 in relative importance, which is obviously an important factor for our activities. If you then look at the fleet growth, only moderate fleet growth is expected in the feeder market in 2021. And at the same time, Intra-Regional trades are expected to recover. Please turn to Slide #8, which illustrates the charter market, which is significantly under pressure in light of COVID-19. Please note that the chart at the top left shows the charter rate development and the chart on the top right, the development of the idle fleet. Around 450 sailings have been blanked, year-to-date, most of them on the Mainlane trades, and you can see from the chart at the top left that all rates have come down quite significantly, but even to a larger extent, the larger sizes. The idle statistics climbed significantly over the last couple of weeks and at a historic high at the very moment. With the impact of blank sailings not yet fully reflected in the idle fleet, the idle statistic is expected to increase even further from today's point. The decrease in time charter rates since January has been, as I mentioned, more pronounced on the larger sizes. Now let me please turn to Slide #9, which sets out newbuilding prices, secondhand prices and S&P activity as well as the development of scrap prices. Since January 2020, newbuilding prices developed fairly stable, however, with very, very few new orders being actually placed. In April 2020, the price for roughly 2,800 TEU gearless vessel is $31 million, which is pretty much in line with the previous month. Secondhand container vessel prices developed relatively stable as well, came down a bit since January, and the price for a 10-year-old 2,750 gearless vessel stayed at around $9 million. But especially after February, almost based on no S&P activity whatsoever. The price for 1,000 TEU gearless container ship, as you can see on the chart, of $4.25 million, is a value we will get back to later in the presentation because that's the reference for the latest vessel sale that we have conducted yesterday. Scrap prices decreased significantly since January, in India, Pakistan and Bangladesh, roughly 25%; and in Turkey, by around 20%. However, scrap yards have basically been shut down as a result of COVID-19 and are now slowly reopening. Following the market section, I would now like to turn to Slide 10, where we zoom in on the short-term market risk and how they affect MPCC. On this chart, you can see on the top left that we divided the quarterly charter fixtures of MPCC in 3 categories, always compared to the last time fixture. First of all, fixtures that came in better than the last done. Secondly, fixtures that were the same level as the last done. And thirdly, fixtures that were lower than last done. This can be seen in the columns of the graph, whilst the red line reflects the Clarksons TC Rate Index over the same period. What this shows is that, firstly, the rate levels reflected by Clarksons decreased notably in the last 2 quarters and that this is also visible when you look at our charter fixtures, where, especially in Q2, all fixtures were either at the same level or worse than previous fixtures. On the top right, we have benchmarked the MPCC charter performance versus Alphaliner, as the common reference for idle fleet. Applying the Alphaliner idle definition to our fleet, whilst the negative trend obviously reflects the increasing idle fleet, as mentioned before, adjusted MPCC has been able to outperform the markets. Looking at the charter activity in the media charter exposure of MPCC, which is illustrated at the bottom left, you can see that whilst we have prudently managed open charter exposure throughout 2020 year-to-date, including charter package deals earlier in the year, and hence, we have been able to reduce the open charter exposure for the next 30 days, there's still a notable short-term charter market exposure. And we have quite a few ships in spot position. Generally, as I mentioned before, with a high number of fixtures, we have been extremely active in the market. 67 fixtures and a market share of 15% in the feeder segment year-to-date. Whilst the short-term demand outlook is characterized by market uncertainty and challenging -- and so it is certainly challenging, the supply side provides some more favorable dynamics. In a market with the reduced container volumes, shifting trading patterns, and in which logistical chains are critically reviewed, potentially resulting in increased near-shoring, there will, in our view, be a need for flexible vessel types going forward, in particular, feeders. At the same time, there is a clear hesitation to order new vessels in light of the market uncertainty and questions about the right propulsion in the future. The chart on Slide #11 shows the age structure of the feeder fleet divided into 4 main clusters. Cluster one, from top to bottom, vessels on order. The order book is at in historical low. And as I mentioned, the expectation is that there will be very few new orders entering into the books in the foreseeable future. The second cluster are vessels built post 2010, mostly Eco-vessels, slightly more competitive compared to standard design, built earlier, but given the current oil price, only very limited charter premiums can be earned. The red numbers at the sides of this Christmas tree illustration shows the relative proportion of these vessels compared to 100% of the existing feeder fleet. Cluster number three, this is the cluster where the whole MPCC fleet is positioned. Vessels built between 2002 and 2010. If you look at our specific portfolio, all vessels of MPCC are in that cluster and around 54% of the world feeder fleet is older than the average ship of our fleet. We believe that despite the negative short-term market outlook, due to COVID-19, the age structure of the feeder fleet and the continuous need for flexible vessels in future provides a positive midterm outlook for the MPCC fleet. As such, vessels above 19, 20 years of age that are approaching the fourth class renewal, we expect, will be subject to demolition in the near term, and there has been quite a large number of vessels that are already waiting to be scrapped outside India. Please turn to Page #12. The chart on the right illustrates the significant asset appreciation potential by comparing the implied fleet value based on the current capital market valuation versus the newbuilding parity. But how does that compare to real life? The S&P market is extremely dried out at the very moment, and we have recently observed vessel sales close to scrap value, for example, on standard CV1100 designs. In this market environment, only selective sales are possible. It takes time, and it is crucial to understand the intricacies of the feeder market and to understand who is the best, and potentially, only taker for a certain vessel type in a market like this. Therefore, we have recently sold the AS Leona, and we have been able to sell a ship that is 12 years old at a significant premium of around 30% compared to the Clarksons Index, I referred to earlier, which reflects the value of a 10-year-old vessel. Based on this recent sale of AS Leona, there is a significant upside. However, you need to know whom to sell to, and this is certainly not available for all the fleet in our portfolio. The cash breakevens of previous quarters, as you can see from the -- on the left-hand side, they were affected by one-off CapEx related to scrubber costs and this chart shows the normalized operating and investing cash breakeven of MPCC, excluding financing costs that we were able to reduce quite notably as part of our cost optimization plan. Now let me sum up my presentation. So please turn to Slide #13. Obviously, the big headline is the disrupted market environment. The global economy and container shipping markets have experienced an unprecedented disruption due to COVID 19. Undoubtedly, the year 2020 will go into the history books. Events -- effects on world trades, I expect to be only temporary, but the timing and shape of any recovery is highly uncertain at this stage. The disruption in the market will have an adverse effect on the financial situation, cash flow visibility and ability of covenant compliance of MPCC. In this challenging market, MPCC will continue to implement various internal and external measures. As an integral part of the container market, we will continue to benefit from our market position and the close links to our customers, the line operators. We will maintain a lean cost structure and continue to place a very strong emphasis on stringent cost control, whilst exploring accretive asset sales to the extent available. As explained before, and given the severity of the present situation, we will also engage into dialogue with key stakeholders and creditors to address COVID-19 cost covenant and liquidity challenges. All of these measures constitute the fundaments to position MPCC in the best interest of all stakeholders for 2021 and beyond. And with this, I would like to hand back over to the moderator, and I'm looking forward to receiving your questions.

[Operator]

[Operator Instructions]. And we currently don't seem to have any questions from the phone lines. [Operator Instructions] And we have no questions. Please continue.

[Constantin Baack, Chief Executive Officer]

Thank you, operator. If there are no questions, I will give it 30 more seconds and otherwise close the presentation.Okay. And there's one question coming in via the Q&A is a question of [ Olaf Kowalski ]. The question is, how are you planning to repay the bond, vessel sales or not? As I explained, vessel sales are certainly something we consider in the current market environment, but you really need to have the right assets to the right counterparty and therefore, finding the right counterparty is key. We have explored a few vessel sales. We have actually executed a few vessel sales and the latest one that we have announced just now and carried out yesterday is an example that you find the right buyer, you can generate an accretive price on the vessel sale. However, the market is extremely dry. As I've explained on one of the slides, and therefore, the activity in the S&P market is very, very dry. But certainly, sale of vessels is one option. The bond still have longer runway. So it matures in September 2022. And it's certainly too early to think about complete refinancing of the bond. Therefore, selective vessel sales might be an option. Are there any further questions, either through the Q&A section or via telephone operator?

[Operator]

There are no questions from the phone lines.

[Constantin Baack, Chief Executive Officer]

If there are no further questions, I would like to thank, everyone, for participating and listening in on our earnings call. Thank you, operator, for guiding us through this presentation. And I wish everyone a good and healthy rest of the day. Many thanks.

[Operator]

That does conclude our webcast for today. Thank you for participating. You may now disconnect. Speakers, please stand by.