MPC Container Ships ASA

OSE:MPCC

Earnings Call Transcript 2019-Q4

[Operator]

Thank you all for standing by. Ladies and gentlemen, welcome to today's Q4 2019 earnings conference call. [Operator Instructions]I would now like to hand the call over to your speaker, Mr. Constantin Baack. Thank you.

[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. Thanks for joining us to discuss MPC Container Ships fourth quarter earnings call today. This morning, we issued a press release announcing MPCC's fourth quarter results for the period ending December 31, 2019. The related release as well as the accompanying presentation for this conference call are available on the Investor and Media section of our website.During this call, I would like to provide an update on MPCC with a specific focus on the fourth quarter 2019. And I will of course also look forward to 2020 and address recent developments.Let me please remind you that the material provided and our discussion today contains both forward-looking statements and indicative figures. Actual results may differ materially from those stated or implied by forward-looking statements due to the risks and uncertainties associated with our business.Before I guide you through the presentation, let me start with my take on 2019 and the recent developments globally and in the shipping market. 2019 has been an intensive year with volatile container markets and IMO 2020 preparation works, which have been CapEx-intensive and time-consuming for various market participants, including ourselves.Financial year 2019 was therefore impacted by subdued charter markets and fairly low utilization, especially in the second half of 2019 due to our scrubber projects. The main effects were on the top line and voyage expenses with corresponding impact on liquidity and consequently results.However, we strongly believe our balanced IMO 2020 approach has been the right step, and we presently generate solid cash flows from our scrubber charters.Going forward, fundamentals are still favorable for container ships in general and for feeders in particular, but short-term market uncertainties definitely prevail, especially also contributed by the current coronavirus situation.In February, we have executed a private placement as a preemptive measure to strengthen the company and to put MPCC in a good position in the current market environment. The transaction received strong support from existing shareholders. At the same time, we will, and we have shown that we continue to focus on accretive measures in the best interest of shareholders, for example, disposing assets at prices that are accretive on a per share basis.We have done so with the latest sale of 2 1,000 TEU container ships at an implied NAV per share, substantially above the share price.I'll elaborate on that in a bit more detail later on. The equity measure has had a volume that, in our view, will ensure the company is able to continue smooth sailings, even in a more challenging market environment that we have in front of us at this very moment, and it puts us into a position with a very strong balance sheet and a solid cash position.We believe a strong balance sheet is also better to actively pursue and/or consider possible strategic options going forward.Now let me guide you through the highlights in Q4 and for the financial year 2019. Please turn to Slide #3 of the presentation, where we have set out the financial, operational highlights and balance sheet details. Whilst revenues in Q4 at $44.2 million came in slightly lower than in Q3, the Q4 EBITDA of USD 4.5 million was slightly better than in the previous quarter. Adjusted for the lower utilization due to IMO 2020 preparation, i.e., the scrubber installations, the EBITDA for the fourth quarter would have been USD 9.1 million.At USD 8,500 per day, the time charter equivalent was slightly below Q3 levels. The Q4 utilization of 89% was better than in Q3 but it was still affected by extraordinary off-hire due to the company's scrubber program.During Q4, 7 vessels were undergoing scrubber installation works, class renewals and upgrades. Normalized for these effects, the utilization would have been at a decent level of 94%. The Q4 operating cash flow of $12.7 million was also affected by the low utilization due to the scrubber program. Adjusted for these effects, operating cash flow for Q4 would have been $17.4 million.As per the end of Q4, the company had a cash balance of $40.2 million, whilst maintaining a strong equity ratio of 57%. And in line with our strategy, we maintained a low financial leverage of 39%. More details on the financials for Q4 and full year 2019 can be found in the appendix of this presentation and on our website in the Q4 report.Please turn to Slide 4, where we provide an update on key developments and activities for Q4 and the financial year 2019. 2019 has been the first year with all vessels in operation. We have continued to place a strong emphasis on the vessel operations in a volatile market. It has been a busy year with 157 individual charter fixtures with 42 different operators, underlining our strong industry network as well as a high degree of logistical complexity due to the high number of charter renewals. We have continued to deliver solid operational KPIs as well as competitive and reliable operating expenses across the fleet during 2019.Furthermore, we have a strong focus on sustainable and safe operations and stringent governance both of which are key values of our corporate DNA.Since early 2019, we have been preparing for the IMO 2020 to ensure a smooth transition. We have executed our balanced approach in terms of compliance options, and installation part of our scrubber retrofitting program took place in the second half of 2019 and has been completed successfully in the first quarter 2020.Whilst this has affected utilization cash flows in the second half of 2019, in particular, today, all scrubber vessels are chartered out at attractive terms generating solid cash flows for MPCC. You will hear more about our scrubber vessels in the course of the presentation.Despite the intensive CapEx program, we preserve a moderate financial leverage of 39%. Secured charter revenues for 2020 amount to approximately USD 100 million. And at the same time, we continue to maintain our low cash breakeven strategy across the fleet.I would now like to run you through the market section of the presentation, so please turn to Slide #5. Looking at the top left chart, you can see the developments of the idle fleet. Going into 2020, the idle fleet was at similar levels than in the beginning of 2019. Over the last few weeks, however, the idle fleet has increased significantly, especially in Asia as a result of the coronavirus.In TEU terms, a major fraction of the idle fleet is presently very large container ships, which can be related to blank sailings and delayed scrubber retrofits in Asia.As you can see on the top right chart, going into 2020, overall, charter rates for feeders, we had improved levels compared to 20 -- early 2019. However, the rise of the coronavirus has most recently also put pressure on charter rates, which have trended south over the last couple of weeks.The S&P activity on the bottom left continues to be extremely thin with hardly any transactions. And hence, the indices do not probably reflect asset values on a willing buyer, willing seller basis. Just as a reference, and I'll elaborate on that in a bit more detail later on and also to illustrate that the indices not always reflect reality, we have recently sold 2 of our smaller units of 1,000 TEU, and the index shows an asset value of $4.8 million for a 10-year-old 1,000 TEU vessel, and we were able to sell these units at $6.5 million each, representing a premium of 35% compared to the index. And in addition, our vessels were 2 years older than the benchmark here.Please turn to Slide #6 now, which shows the latest demand of supply forecast from Clarksons. Overall, the container shipping industry continued to endure macroeconomic uncertainty throughout 2019 as a result of low economic growth, trade war, geopolitical tensions and also the impending IMO 2020 low-sulfur regulations.As a consequence, demand forecast during 2019 have been constantly revised downwards. For the full year 2019, demand growth came in at 1.8%. Whilst the outlook for 2020 is better than the figures for 2019, the demand side, in particularly affected by the recent coronavirus implications, at least in the short term, is definitely the big uncertainty and presently constitutes a key risk for the shipping industry. Yet, even in a scenario of modest growth of around 2% to 3% for 2020, the rebalancing is still expected due to favorable supply and capacity developments.In the chart on the Slide 6, we have included a line, which based on the expected supply growth for 2020 also factors in implications of, for example, scrubber retrofitting and inactive capacity as a result of that. This is based on research from Clarksons and it shows that the combination of the 2 effects points towards a market rebalancing.In addition, the coronavirus will not only affect the demand side but also the supply side due to shipyard delays for scrubber projects but also new builds, and we expect more scrapping and fewer new orders for the year to come.Now please turn to Slide #7, which, on the top left, shows the expected growth figures for different trade lanes. Solid growth is expected in our key markets, the Intra-Regional trades with a CAGR of 4% over the next 5 years. We have intentionally focused over -- on a longer period and of course 2020 figures, in particular, intra-Asian trades will be affected as a result of the corona situation. But we strongly believe that there's a very solid fundamental in terms of demand growth over the next couple of years going forward.However, even following the corona situation, we expect a rebound will take place as the consumer demand is not gone, but it is certainly temporarily constrained. This compares also favorably to the supply side, see top right, where the feeder segment grows at a slower pace with 1.3% over the next 5 years.The age profile of the fleet, see on the bottom left please, suggests further scrapping of age feeder tonnage, which we believe will accelerate in 2020 as a result of the market environment, regulatory environment and age profile of, in particular, the feeder fleet.With this, please turn to Slide #8, where we have focused on scrapping, contracting and order book to fleet. On the top left, you see the scrapping developments in 2018 and 2019. And whilst overall recycling volumes have been rather low in 2018 and '19, more scrapping is expected going forward for the reasons I have just explained. This also illustrates -- this is also illustrated in the chart where you see that 66% of the vessels scrapped in 2019 were actually feeders, putting more pressure on scrapping in that segment.The chart in the middle shows a steep decline in ordering activity in 2019 across sizes. I strongly believe that the continued uncertainty about the right propulsion will keep ordering low also uncertain global economic outlook. The order book for container vessels is at a historical low, both in relative terms, i.e., order book to fleet ratio of 10% but also in absolute terms.With that, please turn to Slide #9. Slide #9 shows the asset appreciation potential and also the upside based on actual achieved vessel sales. The chart on the left illustrates the significant asset depreciation potential by comparing the implied fleet value versus book value and versus new billing parity. It shows the respective upside to those figures. The chart on the right shows the accretive sale of the 2 vessels, which we've sold in the course of February. These 12-year-old 1,000 TEU container ships, and we sold these ships for $6.5 million apiece to an Asian operator. And the chart on the right compares this to scrap value to the Clarksons second-hand value for a 10-year-old ship and also to the implied ship value based on the share price according to market close yesterday. And it shows you that there is a significant upside in terms of sale price versus these 2 values of around 35% plus/minus a bit.It does show that the indices as provided do not accurately reflect willing buyer, willing seller scenarios, and it also shows that there is significant upside even in the smaller assets when you look at our portfolio and our current capital market valuation.Please turn to Slide #10, based on -- where we have shown based on the normalized cash breakeven levels of MPCC, which is shown on the top left, $6,950 per day, excluding CapEx and $800 more, including CapEx. We have calculated a few indicative annualized free cash flow sensitivities on the top right. It shows that even in a low market environment, we can generate solid yields and that the scrubber vessels constitute a good foundation for a strong free cash flow generation going forward.Calculating the savings share mechanism of 10 scrubber vessels over the whole fleet results in additional time charter equivalent premium of around $750 per day across the whole fleet based on the current consumption of these vessels and the spread of $200 today.In an upside scenario, we can obviously generate extremely attractive returns as you can see in the table with the different free cash flow yields in the different scenarios. At the same time, we are also prepared for a more restrained charter market environment going forward.Now let me turn to Slide 11, before I conclude and open the floor for questions. We have -- basically given the developments over the last 2 months, we have decided to provide also an update on major developments year-to-date 2020.Let me start with the markets. Whilst the market has started with a more encouraging picture and -- into the year, better rates than 12 months ago, better utilization than 12 months ago, it has soon, in connection with the extended Chinese New Year and as a result of the coronavirus, had adverse effects on the charter market in particular.We have seen a significant increase in idle fleets, obviously, more relevant for the larger ships. However, we have seen a decrease in time charter rates across the sector in February 2020. Chartering and S&P, as the next point, we've already been able to conclude 25 vessel fixtures year-to-date, including numerous fixtures in Asia and total secured or fixed charter revenues for 2020 is around USD 100 million.We have taken measures to derisk our corona, let's say, employment exposure by charting, for example, multiple vessels in the package deal with a major operator and also concluding early in the year charter extensions on vessels that will become or that have become open in China and the region. We have sold the 2 1,000 TEU ships, as explained earlier, which also trade in Asia to partly derisk the fleet portfolio.In terms of IMO 2020, so far, the whole fuel changeover program has been completed without any disruption and all vessels operating on low-sulfur fuel oil operate smoothly. The 10 scrubber vessels have been completed. They are fully certified and technically operable and generate cash flows and all 10 are charted out, and we have secured revenues of around $110 million for these 10 ships until 2022. On the corporate and finance side, as explained earlier, we have executed a NOK 125 million overnight equity placement on February 14, which is still subject to approval by the extraordinary general meeting, which is scheduled for the 9th of March 2020.The transaction was backed by large shareholders and the equity raise ensured us to provide additional liquidity reserve in a continuously volatile market.Now let me wrap up the presentation on Slide 12. As explained, demand continues to be impacted by uncertainty, especially in the short term, most prominently and recently due to the implications of the coronavirus. And at the same time, there are, however, some positive developments on the supply side that, in my view, will limit supply growth going forward.However, whilst we believe the coronavirus implications will of course affect the first half of 2020 and possibly the logistical chain even for a slightly longer period, the overall fundamentals in the mid- to long-term remain intact. We have taken measures to place MPCC in the best possible position in the current market environment. We will continue to enhance our operations, both technically and commercially, and we will maintain our strategy of moderate financial leverage, strong balance sheet and stringent capital allocation.With this, I would like to hand over to the moderator, and I'm looking forward to receiving your questions and thanks for your attention so far.

[Operator]

[Operator Instructions] We do not have any questions as of this moment, sir.

[Constantin Baack, Chief Executive Officer]

All right, moderator. Then unless there is a question coming up in the next couple of seconds, I suggest we conclude, and I thank everyone for participating in this call and wish everyone a healthy and good rest of the week and a pleasant weekend.Thank you very much.

[Operator]

Thank you. That concludes our conference for today. You may all disconnect. Thank you all for participating.