MPC Container Ships ASA

OSE:MPCC

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the MPC Container Ships Q2 2020 Earnings Presentation. [Operator Instructions]And I would now like to hand the conference over to your speaker today, Constantin Baack. Thank you. Please go ahead, sir.

[Constantin Baack, Chief Executive Officer]

Thank you, operator, and good afternoon, and good morning, everyone. This is Constantin Baack. I'm CEO of MPC Container Ships. And I'm joined here by our CFO, Mr. Harald Wilke.Thank you for joining us to discuss MPC Container Ships second quarter earnings. This morning, we issued a press release announcing MPCC's second quarter results for the period ending June 30, 2020. The release as well as the accompanying presentation for this conference call are available on the Investors and Media section of our website.Let me please remind you that the material provided in our discussion today contains forward-looking statements and indicative figures. Actual results may differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with our business.Before I guide you through the presentation, let me start with a few general remarks. Very few events have impacted the world we live in like the COVID-19 pandemic, which clearly marks a historic and unprecedented break into the private and professional life of everyone. The global economy has been disrupted to an extent that comparisons are being drawn with the 1930s Great Depression and the 2008 financial crisis. The implications on the world economy and the international trading system are severe.During the course of this call, I will elaborate in more detail on the implications this has on the container market in general and MPC Container Ships specifically. In these difficult times, our top priority continues to be the safety and well-being of our employees and the crews serving onboard our vessels. Equally important is protecting the company's downside risk and values for all stakeholders.Over the past months, we have, therefore, carried out a number of measures, including a comprehensive recapitalization of the company to further strengthen MPCC's liquidity position and balance sheet in the best interest of all stakeholders. Now let me guide you through the presentation in which I would like to provide a recap of key events in Q2, give a market update, followed by an outlook for the remainder of 2020 and beyond. I would like to start with some of the key figures of Q2 2020.Please turn to Slide 4 of the presentation. Affected by lower utilization and charter rates due to the COVID-19 implications, revenues in Q2 came in at $39 million and, therefore, below Q1 2020 levels of USD 46 million. Consequently, with USD 1.4 million, the EBITDA also decreased compared to the previous quarter. The Q2 fleet utilization of 87% was below the Q1 number of 89%, reflecting the implications of the pandemic on world trade, box volumes, demand for container tonnage and, hence, an increase in idle numbers for the global fleet.At just below $8,000 per day, the time charter equivalent in Q2 2020 was notably lower than Q1 levels. Consequently, the Q2 operating cash flow of USD 2.5 million was also below the previous quarter. Overall, during the first half of 2020, we have been able to reduce OpEx levels compared to those seen in 2019. As per the end of Q2, the company had a cash balance of $29 million, which does not yet include the effects of the recapitalization of the company that took place after balance sheet date, specifically in July 2020. The key balance sheet figures remain solid with an equity ratio of 56%. And in line with the company's strategy, the financial leverage is moderate with around 40%. More details on the Q2 financials can be found in the appendix of this presentation, amongst others, Slide 18.Please turn to Slide 5, where we can -- where we provide an update on key developments and activities for Q2. Let me start with market developments. We actually saw a rather encouraging start to the year with moderate GDP growth expectations of 3.3% for 2020 and charter rates at solid levels, well above the levels at the same time of the previous year. But this changed dramatically in the wake of the COVID-19 pandemic and the subsequent economic downturn. Some key figures comparing December 2019 and June 2020 figures and expectations are shown at the bottom of the page, which reflects the dramatic shift in market expectations.The consequences of the COVID-19 pandemic affected various indicators leading to a global recession comparable to the 1930's Great Depression or the financial crisis. This, of course, also left the footprint on the activities and financial results of MPCC in Q2 2020, in particular, in the charter rates and utilization of our fleet. Therefore, financially, the key focus continued to be on liquidity preservation. As reported previously, the initial buyer of AS Leona and AS Lauretta did not perform under the contract, and legal actions are in progress in that respect. In the meantime, the 2 vessels have been sold to alternative buyers at accretive prices. Furthermore, in order to strengthen the liquidity and balance sheet of the company, a recapitalization program has been carried out in mid-July. More details on this will be provided the course of this call.Operationally, the second quarter has been extremely busy. In this challenging market environment, we have benefited from our strong relationships and market position in the charter market. We have concluded a number of fixtures in the second quarter 2020. Year-to-date 2020, we, in fact, look at 129 charter fixtures with 45 different operators, reflecting the intense activity on the chartering side this year. At the same time, we have been able to reduce the OpEx significantly and have commenced with the rollout of another cost optimization program to further bring down the cash breakeven per vessel and improve the profitability of the company.The key focus has been and will continue to be ensuring safe and reliable operations and improve KPIs in a still challenging COVID-19 market environment, with port closures, lockdowns and abrupt limitations regarding crew changes. We are pleased with the operational performance in this difficult environment to date, but the challenges will continue for the months ahead. What has been achieved was only possible with the tremendous efforts and flexibility of the crews onboard our vessel for which I'm grateful. Going forward, there will be continuous operational challenges due to the implications of COVID-19 on the world, which we can only be successfully meeting in with joint efforts of land and sea personnel. As briefly mentioned, in response to the unprecedented market situation and unpredictable outlook, a substantial recapitalization has been carried out in July 2020.Please turn to Slide 6, which provides an overview of the key recapitalization measures. Measures included a significant improvement of the liquidity position and liquidity runway for the company to address increased market risk in this market environment. In addition, waivers have been obtained to address potential covenant risk for the company. Furthermore, the maturity of the $200 million secured bonds has been extended until 2023. Key component was an equity placement in combination with amendments to certain credit agreements. The recapitalization has been an important step, and I firmly believe that it has strengthened MPC Container Ships in the best interest of all stakeholders.I will now provide an update on key market dynamics. So please turn to Slide 8 of the presentation. As mentioned before, 2020 will see a global recession that is almost unseen historically. Slide 8 shows from left to right the development of GDP growth, world trade and container trade demand and supply balance from 2016 to 2021 based on IMF, WTO and Clarksons forecasts and actuals. Global GDP is expected to decrease by almost 5%, the U.S. economy to decline by 8%, the euro area by above 10% and the Chinese economy to grow by a modest 1%, while trade is expected to decrease by at least 10% and world seaborne trade by 5.2%. Following the ease of lockdowns in major Western economies, positive signals are visible. But further developments and the extent of a recovery are highly uncertain.For 2021, analysts expect an increase in global GDP of 5.4% and international trade of more than 8%. Consequently, a rebalancing of container trade is expected as well. The GDP and world trade forecast for 2021 have to be taken with some caution as the world is navigating uncharted waters of extreme uncertainty and, hence, the market remains fragile. However, the expected recovery does not seem unrealistic, should the recent positive trend continue and be sustainable, which, however, remains to be seen. Looking at the container trade supply and demand balance, the year 2020 will not surprisingly see an extensive excess supply situation with global container capacity expected to increase by 1.5% and by 2.9% in 2021. Subject to growth of GDP and world trade, the rebalancing of container trade and demand is expected for 2021.Please turn to Slide 9, which shows further details of the demand and supply developments by trade and vessel sizes. In 2020, around 180,000 TEU are expected to be traded, less than in 2019. For 2021, respective growth is expected. While intra-regional trades provided a share of 38% in 2016, the share is expected to increase to 40% in 2021. In 2020, container trade on intra-regional routes is expected to decrease by 3%, a significant decrease, but still the lowest compared with other trade lanes. The strongest drop in container trade is expected for mainland trades with just above -- just below 6% in 2020.For 2021, intra-regional trade is forecasted with a strong positive 8.6%, similar as the expected mainland trade growth. Some additional comments on the supply side. The global fleet currently comprises 5,380 vessels with a total capacity of 23.2 million TEU. 18% of the container capacity is supplied by feeder tonnage. The share decreased continuously from 20% in 2016. Until the end of 2021, total container fleet is expected to grow to 24 million TEU. And the strongest increase is expected for the larger vessel segment.Now please turn to Slide 10, which provides an overview or further details rather on key indicators for the supply outlook, namely the order book to fleet analysis on the top left, the composition of the order book by cluster on the top right and the age structure by vessel size at the bottom left. Starting with the order book to fleet. The blue columns represent the world fleet on the water; the red columns, the order book; and the black line, the order book to fleet ratio, which currently stands at an historically low level. Another interesting fact is the comparison between the order book in 2008, 2009, i.e., during the financial crisis and how that compares to today's situation. The order book is both in relative and absolute terms significantly lower than in 2008.Looking at the composition of the existing order book on the top right and the fleet age structure at the bottom left, it is worth highlighting that, firstly, the existing order book is strongly geared towards the very large container vessels. Secondly, at the same time, compared with the global fleet, the smaller container segment is relatively older, with 30% of the existing fleet being above 15 years of age and 12% older than 19 years.Looking ahead, it can be highlighted that 2020 will be one of the years with the lowest ordering activity on record. Only 2009 was a year with similarly low new order activity. While shipping players are not known for their discipline when it comes to ordering new ships, in my view, this time, it can be different in light of the unpredictable economic outlook in wake of COVID-19 and increased regulatory risk as well as uncertainty about the right propulsion. However, whether it will be different this time around remains to be seen. However, the supply side certainly provides for a positive outlook on the sector.Please turn to Slide 11, where we focus on the most recent market developments in terms of charter rates and utilization. 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. The graphs show that both charter rates and utilization have been significantly under pressure in Q1 and even more in Q2 2020 as a result of the COVID pandemic. As a consequence of a significant number of blank sailings, the idle statistics have planned up to 550 available units at the end of May 2020, reflecting more than 11% of the global fleet.Recently, following the ease of lockdowns in the Western economies, demand has picked up and the trend has reversed with now only 223 units being idle as per mid-August, reflecting around 4% of the global fleet. With the slight time lag charter markets also started to improve initially for larger tonnage, but also for smaller units. Current rates are, in fact, well above the reported July index figures shown on the top left. As an example, 1,700 TEU container vessel presently gets fixed between $7,000 or rather 8,000 TEU -- $8,000 per day and a 2,800 TEU container ship gets fixed at levels above $10,000. With the start of the charter market recovery, also the min/max redelivery spreads decreased, supporting the positive trend. Whilst charter rates have already improved, secondhand values, as shown on the bottom left, have not yet recovered. However, SnP activity has recently started to increase during the last few weeks.Following the market section, I would like to turn to Slide 13, where we zoom in on some of the more company-specific aspects. On the top left, we have benchmarked the MPCC charter performance versus Alphaliner as the common reference for idle fleet, applying the Alphaliner idle fleet definition to our fleet. Whilst the negative trend reflects the increasing idle fleet globally, recently, the MPCC fleet has performed well compared with the benchmark, especially most recently. On the top right, we divided the charter fixtures of MPCC in 3 categories, always compared to the last done fixture: firstly, fixtures that came in better than last done; secondly, fixtures that were at the same level or roughly the same level as the last done; and fixtures that were lower than last done.If you see the trend, you can also see that certain dynamics have reversed recently. This shows that, firstly, the rate levels reflected by the Clarksons Index decreased notably in the last 2 quarters, and that this also translates into the charter rates we were able to fix in Q1 and Q2 for the MPCC vessels. Secondly, the positive trend that can be observed in the markets, looking at the Clarksons Index in Q3 so far, has also been confirmed with our improved fixtures during Q3 until today. As explained previously, with 129 fixtures year-to-date, we have been an extremely active party in the charter market with significant market share in terms of number of fixtures of around 40% in the feeder segment compared to global number of fixtures. We have been able and will continue to build upon our great network and relationships with operators in regional markets.Now let me go to the next slide, which is Slide 14, where we have looked at the cash flow potential and deleveraging capacity of the MPCC fleet. During the past few quarters, the cash breakeven levels were affected by one-off CapEx related to the scrubber costs. The chart on the left shows the normalized operating and investing cash breakeven of MPCC, which is around $7,800 per day, including financing costs. The chart on the right illustrates free cash flow and EBITDA sensitivities based on the cash breakeven levels and different charter rates.From left to right, it shows the annualized EBITDA free cash flow expectations based on: firstly, actual time charter equivalent earned by MPCC in Q2 2020; secondly, Clarksons average for the last 3 years -- Clarksons levels pre COVID basically and MPCC actual levels from 2018 as well as the newbuilding parity rate levels. The sensitivity table highlights the significant operational leverage, whereby USD 1,000 per day in additional TCE translates into roughly $20 million in additional EBITDA per annum.Please turn to Page 15, where we have looked at some valuation scenarios with regards to the MPCC fleet. At the very left, we start from the current capital market valuation of around NOK 2 or a market capitalization of around USD 80 million. We have compared this with values taken from Clarksons and considering the MPCC TEU cluster to reflect the potential development from the market recovery. We have simply used various asset value references like the pre-COVID asset values, respected average values in 2019 and our newbuilding parity values and translated that into an implied market share price. The respective sensitivities are shown on this slide.Now please turn to Slide 16, as I would like to sum up my presentation. The global economy and container shipping markets have experienced an unprecedented disruption. The effects on world trade are severe, and, undoubtedly, the year 2020 will go into the history books in the same breath as the Great Depression and the financial crisis. MPCC -- MPC Container Ships 2020 financials and operations have been and will be affected by the spread of COVID-19 across multiple continents, causing lockdowns, port closures and restrictions imposed on crew changes.The abrupt economic downturn prompted us to take certain measures and secure additional liquidity in order to safeguard values for all stakeholders. With the support from shareholders, creditors and other stakeholders, we successfully completed our step-wise recapitalization process in July 2020. As a result, MPCC reemerged with a longer liquidity runway, debt covenant waivers and a bond maturity extension, all to address the market uncertainties. Yet the world is navigating uncharted waters of extreme uncertainty, and the environment remains fragile.However, while it is challenging to take a firm view on the industry's near-term outlook and the charter rebound, everything is conditional upon a continued COVID-19 recovery as explained. However, we do see encouraging signs of improvement in several important industry indicators such as idle fleet or charter rates, and we can already feel that in our charter fixtures over the last couple of weeks. The market position and operational expertise of MPC Container Ships, together with the recapitalization measures taken, constitutes a very solid fundament for the time ahead. With a robust liquidity position and covenant waivers, I feel the company is well equipped to sustain a continued challenging COVID-19 market environment. And I firmly believe MPC Container Ships is furthermore very well positioned to benefit from a much anticipated market recovery in 2021.On that note, I would like to hand back over to the moderator, and I'm looking forward to receiving your questions. Thank you.

[Operator]

[Operator Instructions] No questions that came through over the phone lines at this time, sir. You may continue.

[Constantin Baack, Chief Executive Officer]

There is a question raised in writing. I don't know if you can see that, operator. Otherwise, I'm happy to read that out.

[Operator]

Yes, sir. I think we have one question on the web platform.

[Constantin Baack, Chief Executive Officer]

Okay. The question raised, which I will read out now, is from [ Alexander Agura at Paladin Asset Management ]. And the question is the Shanghai Container Freight Index (sic) [ Shanghai Containerized Freight Index ] has been rising sharply for several weeks now with both year-on-year and year-to-date well into positive territory. How are charter rates in the feeder segment currently developing for MPCC? And what is expected for Q4? Are similar effects to be seen? Or is it just a local phenomenon? Well, first of all, as indicated and explained during my presentation, we have seen some encouraging trends over the last couple of weeks also in terms of charter rates. And just as an example, a 1,700 TEU container ship received a charter rate of $5,500 to $6,000 in May, June, up until July and has recently been fixed at around $8,000. So there is already a significant increase in current charter rates for larger vessels, but also for some of the feeder segments. Another example is a 2,800 TEU container ship that you can currently charter out at levels well above $10,000 in Asia and probably a shade below in Europe or Mediterranean, up from USD 7,500. So there clearly is a trend, and the idle fleet obviously supports that trend, which is now significantly below the levels seen early this year in January, when we have seen fairly solid rates. So at the moment, the trend is also visible for tonnage providers in the charter market.However, as I mentioned, the sustainability of this trend is obviously to be seen. And in my view, it is premature to basically see this as a sustainable trend. Most of the indicators are pointing into the right direction, and a much tighter demand/supply situation is obviously supportive of that. But it remains to be seen whether or not this will be a sustainable development or whether this is a catch-up effect post COVID. So long answer to this question, but I think it needs to be differentiated between the current market shift, and that is clearly positive, and the question of the sustainability of this development. However, overall, key parameters in the market in terms of supply/demand, especially the supply side, is extremely favorable for the sector. And on the demand side, we have all observed what can happen during this year in terms of complete revision of forecast and expectations. However, if the world continues in the same direction as we've observed over the last 6 to 8 weeks, the rebalancing for next year is certainly expected. And with that, I would like to hand back to the operator.

[Operator]

[Operator Instructions] Still no questions over the phone lines, sir. You may continue.

[Constantin Baack, Chief Executive Officer]

There's another question through the web, [ Olav Kuretski, OK Consult ]. And the question is how many legal risks do you see arising from the last offering at NOK 1, down 98% since the initial offering price? And the answer to that is that I don't see any legal risk at all with regards to this very clearly and well-structured capital raise. So there's no risk that we see whatsoever with regards to this capital raise. Any further questions through the line, operator?

[Operator]

Still no questions that came through over the phone lines, sir. Sir, seems like no questions have came through over the phone.

[Constantin Baack, Chief Executive Officer]

Okay. There are no further questions coming in through the web. So if that is the case, many thanks. And yes, with that, I would like to hand over to you to wrap up, operator, and many thanks, everyone, for attendance.

[Operator]

Yes, sir, thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect.