MPC Container Ships ASA (MPZZF) Q4 2023 Earnings Call Transcript

MPC Container Ships ASA (OTCPK:MPZZF) Q4 2023 Earnings Conference Call February 27, 2024 9:00 AM ET

Company Participants

Constantin Baack – Chief Executive Officer

Moritz Fuhrmann – Chief Financial Officer

Conference Call Participants

Operator

Welcome to MPC Container Ships Q4 2023 Earnings Call. For the first part of this call, all participants are in a listen-only mode. Afterwards, there’ll be a question-and-answer session. [Operator Instructions] This call is being recorded.

I’ll now turn the call over to speakers. Please begin.

Constantin Baack

Thank you, operator. Good afternoon and good morning, everyone. This is Constantin Baack, CEO of MPC Container Ships and I am joined by our CFO, Moritz Fuhrmann. I would like to welcome you to our Q4 2023 earnings call.

Thank you for joining us today to discuss MPC Container Ships’ fourth quarter earnings. This morning, we have issued a stock market announcement covering MPCC’s fourth quarter and full year results for the period ending December 31, 2023.

The release as well as the accompanying presentation for this conference call are available on the Investors & Media section of our website. Please note and be advised that the material provided and our discussion today contain 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 we start with today’s presentation, a few words from my side, reflecting on the fourth quarter and the full year 2023. We are pleased to report another solid performance and very robust financials today. The results underscore MPC Container Ships’ continued progress, resilience and ability to maintain operational excellence in a volatile market environment with modest growth and geopolitical challenges.

Fleet utilization remained high and we continue to adhere to our low leverage strategy with a leverage of 13% and a high number of vessels debt-free. Throughout 2023, MPCC has emphasized sustainability initiatives, working closely with our charter customers to conclude mutual projects and investments with an aim to reduce carbon emissions and foster a more environmental friendly maritime landscape.

MPCC recently set new greenhouse gas emissions intensity reduction targets in line with the IMO’s industry carbon intensity targets, demonstrating our dedication to decreased emissions. While we remain also strongly committed to our low leverage strategy and distribution policy. Another key feature of our performance is our commitment to shareholder returns, including the dividend declared for the fourth quarter, our total dividends distributed and declared over the last 12 months amount to approximately $350 million, representing more than 50% of the company’s market cap at the beginning of 2023. Looking ahead, our charter backlog reminds robust, providing us with significant earnings visibility and reinforces our confidence going forward.

With that said, I would like to hand over to my colleague and CFO, Moritz Fuhrmann, who will guide us through the first agenda point.

Moritz Fuhrmann

Thank you, Constantin. Turning to the first agenda point as just mentioned, being the full year 2023 highlights we have posted in our view, very strong full year financial figures with $711 million in gross revenues and close to $430 million in adjusted EBITDA.

We as a company have distributed $0.64 per share, leading to a dividend yield in 2023 of more than 40% and 10% already implied in 2024 as a dividend just announced by the board. While returning capital to shareholders, we have continued to delever the balance sheet with a current leverage ratio of 13%, which arguably is industry low from a container company perspective.

On the asset side, we have continuously worked on our fleet optimization as we went through 2023 and as we have divested 13 older vessels and acquired seven younger ships. From a market perspective, the container markets have seen a recent uplift fueled by the geopolitical events in the Middle East. However, it remains to be seen though how sustainable the entire situation is.

When turning to the next slide and looking at some of the fourth quarter 2023 KPIs, the quarterly financial performance is more or less in line with the previous quarters when adjusting for certain non-recurring items. In Q4, MPCC has taken further impairments on the fleet as well as CapEx write-offs in the tune of US$41 million.

Those effects have been normalized from a dividend calculation and consequently the Board declared another dividend of $0.13 per share. From a cash flow generation perspective, the performance remains strong and as mentioned before, debt has been reduced further, now standing at $4 million in net debt and with a low leverage ratio of 13%. Operationally, the fleet remains well employed with an average TCE of close to $27,500 per day for Q4. And at the same time, fleet utilization remains high with 98% being again a testament to the operational performance of our fleet.

Talking about operations and turning to the next slide. In 2023, we as a company have planned retrofits investments of a total of $23 million across a number of vessels, leading up to 20% improvements from an emission perspective and some of those retrofits are actually combined with an early charter extension as well as cost sharing arrangements with the respective operator.

On a new building side, we announced earlier this year, the investment into one additional new build being 1,300 TEU that comes with a seven-year time charter with Unifeeder being one of the largest feeder operator globally. The vessel itself will be owned in a joint venture structure, together with the operator. And I think most importantly this investment is in line with previous new building deals that we have done as this investment is also fully covered through the contracted EBITDA.

When it comes to the geopolitical situation in the Middle East and the Red Sea in particular, and in view of crew safety, MPCC vessels discontinued transmitting through the Red Sea and as of today, we have no exposure to the geopolitical events going on in the Middle East.

Turning to the next slide and looking at our portfolio, we have seen a short-term strengthening in the time charter market and consequently managed to fix a number of vessels at relatively attractive rates but also at decent durations up to 12 months. The most recent fixtures we can report were around $16,500 per day for 2,800 TEU and close to $18,500 per day for 3,500 TEU.

In addition, we have agreed early time charter extensions as mentioned before with rate blendings as well as early extensions in combination with retrofit investments. In those particular instances, MPCC agreed a floor ceiling structure with upside sharing for the extension period, especially with one particular customer. On the SMP side, we have successfully handed over the vessels AS Romina and AS Paulina, since we announced the sale late 2023 and in addition we have agreed the sale of As Clarita for US$10.3 million with dry dog due delivery in Q2 or Q3 and hence managing some of our CapEx positions in 2024.

Looking at the cash development on the next slide, again a very strong operational performance of $532 million in operations cash flow, setting the base for the debt reduction vessel investments as well as significant dividend payouts in 2023. The cash position remained almost unchanged relative to last year, despite significant investments, debt reductions and dividends.

The cash development is in our view testament to our ability and managing fleet renewal as well as shareholder return while maintaining a low leverage. In addition, at the end of 2023 we have added a new revolving credit facility which remains undrawn as of today and gives us as a company additional capacity in the tune of US$100 million.

Turning to the next slide, which is the dividend slide, and a fantastic graph to show. Again, a continued strong dividend performance as the Board declared another recurring dividend of $0.13 to be distributed in March. Full year 2023 dividend yields of more than 40%, which is more or less in line with 2022 and a year-to-date yield of 10% already basis the January share price. This brings the total distributions to shareholders to $790 million since we embarked on our dividend journey in early 2022.

And on that positive note, I’m handing over to Constantin for some market updates.

Constantin Baack

Thank you, Moritz. I would now like to run you through the market section of the presentation, so please turn to Slide 11. Before we cover some more specific container market parameters, I would like to start with a global perspective and looking at the global economy and some related macro topics.

On this slide, on the left hand side you can see a graph looking at GDP growth historically and expectations going forward. Global growth forecasts have recently been revised slightly upwards by 0.1 and 0.2 in 2023 and 2024 on the back of a robust U.S. economy and fiscal support in China.

Still growth rates remain below the historical averages and we’re looking here on the left hand side, the dotted line 2000 – 2019, which is of around 3.8% as interest rates in high debt are expected to weigh in on growth in 2024. On the right hand side, you can see a graph looking at world trade and consumer prices, the red line being the world consumer prices and the blue line being world trade volume.

World trade growth is projected at 3.3% in 2024 and 3.6% in 2025 below the historical averages, which are more in the vicinity of 4.5% to 5%. An element holding back world trade are rising trade distortions and certainly also geopolitical uncertainty. At the same time, global inflation is falling faster than expected and overall the macro picture provides a somewhat slightly more stable outlook going forward. But it is, as I said, below historical averages and yet, we continue to face quite a few macroeconomic and geopolitical risks that potentially affect the picture going forward.

Now please turn to the next page where we now move in a bit more detail into the container shipping markets, specifically the freight market and the charter and S&P market. Let’s start with the freight market on the left hand side. As you can see, volumes in terms of annual seaborne trade are up and spot rates have recently gone up as well, mainly driven by the ongoing Red Sea disruptions, and spot rates are significantly above historical averages today.

Long-term rates do not show such a strong response yet, as some of the shippers remain reluctant to agree on higher rates and how this will turn out remains to be seen and we will have to wait the next couple of weeks and months. The chart on the right hand side shows charter rates and secondhand prices, a steep upward trend corresponding to the freight rate development can be observed, but not only have charter rates improved significantly, the HARPEX Index has risen by 30% since the beginning of the year, but at the same time, charter durations are also following with vessels recently chartered out for longer periods, which we have now also seen on our fleet, as Moritz has alluded to earlier.

Secondhand prices moved sideways most of last year, but since February 2024, secondhand prices also responded to the strong charter market. And you can see that here on this slide as well, that secondhand price index has also gone up. Looking at the idle fleet, not illustrated here, but always a very important indicator when looking at charter rates and values, we have basically seen vessel inactivity peaking at 6.4% at the end of February 2023, and throughout the year with a bit of up and down that has gradually declined.

And today, we’re looking at an idle fleet of below 1% by end of January, which is obviously representing a very, very tight market and understandable given the increased demand due to the Red Sea disruptions.

Now please turn to the next page, where we now move into further details in terms of market fundamentals, especially the supply demand situation on the left hand side. Here you can see the development of demand and supply growth over the years. The blue line reflects the supply growth and the red line, the demand growth. If the net fleet growth projections are combined with the growth projections of container trade, it becomes obvious that the huge order book combined with subdued demolitions and record deliveries this year could lead to an oversupply in the market.

Even though, total demand growth is expected to recover from 2024 onwards, it will most likely be offset by relatively strong total net fleet growth. Hence, the supply demand gap could be relatively huge this year. A wild card in this respect is the duration of the Houthi attacks on merchant shipping. In the current quarter of 2024, the effects of the market disruptions are already quite evident, as we have explained throughout the presentation. Should the attacks continue to force merchant vessels to take a detour around the Cape of Good Hope for longer in 2024, the market fundamentals could prove to be more balanced than initially expected. However, this remains to be seen, and it’s certainly nothing that we base our business decisions on.

On the right hand side, you see the heat map that we basically show every quarter where we look at the fleet that is above 20 years of age on the TEU cluster and the ratio order book to fleet on the y-axis. As you can see, we believe there’s a particular interesting pattern and structure in the fleet when you look at the smaller vessel sizes going forward.

Now please turn to the next page where we move into more detail into the Red Sea situation and its implications on the market and on our business. I would like to start with some headlines. First of all, roughly around 10% of global seaborne trade volumes pass through the Suez Canal and around 30% of global container trade volumes actually pass through the Suez Canal. Those are two figures that already show that it is a very crucial sea passage through that canal for worldwide container shipping.

Now let’s look at the slide in a bit more detail. The left graph shows the Red Sea area and the implications of diversions around the Cape of Good Hope and the right graph shows only the physical vessel transitions through the Suez Canal. Latest assessments from Clarksons are that around 620 vessels are being diverted, leading to an additional TEU demand, ton mile demand of 10% to 12%, which is extremely sizable looking at the overall market.

Obviously the big question is the longevity of the situation, which remains unclear and as I said, certainly nothing that we base our business decision on. However, we are already seeing, as we mentioned before, a significant uptick in demand for vessels, partly a reshuffling of service offerings and we at this stage cannot rule out that the situation might last for a bit longer.

Some of the facts at the bottom right of the page implication that we’ve seen on freight rates, on charter rates, on asset prices and certainly on additional TEU demand. So there is quite a significant impact from the situation on the market as we speak today.

I would like to now turn to the company outlook section, so please turn to Slide 16. That is, I would say please or 15. Please move on. I would like to start with a short strategic brief looking at our strategic priorities today. It’s basically the key focuses are threefold. It’s the portfolio operations, it’s balance sheet management and capital allocation. When looking at portfolio and operations, it certainly is, as Moritz has alluded to as well, optimizing the fleet, potentially continuing to sell some older vessels, bring in some newer vessels on a selective basis and thereby create value down the road for the company without compromising, obviously, on our priority that I’ll get to in a minute and that is returning capital to shareholders. We are very excited about the operational performance of our vessels over the last couple of years and we continue to at the same time also reduce the fleet’s carbon footprint through investments in new technologies, new vessels, retrofits, et cetera.

Another priority is our balance sheet management or how do we deal with risks and opportunities in the market. We have taken a number of measures over the last years to create a significant flexibility in the balance sheet and at the same time reduce leverage in a world that is currently characterized by quite some geopolitical volatility, macroeconomic risks and opportunities for that matter. We believe it is the right approach to operate with a very rock solid balance sheet and we will continue to do that going forward. We believe that is the foundation for executing on our strategy.

And lastly, but certainly not least, the capital allocation question. We are finding in our view, a good balance between replacing ships, investing in our existing vessels and hence providing the company and its shareholders with a very solid fundament going forward from a value perspective, and at the same time returning significant capital to investors and reducing debt for that matter to operate on a very, very low risk profile. So these are the three key elements for our strategy going forward and we believe this will be the fundamental to create further shareholder value.

So let’s look at some figures and some key parameters on how we shaped and positioned the company over time and we believe that can be quite well described by looking at some key parameters over time. This is basically representing some of the points that I’ve just mentioned on the previous slide.

Looking from top to bottom and starting with the fleet composition and we have here compared the end of 2021 with the end of 2023 and looking at the number of vessels, 66, we have slightly shrunken the fleet to 60 vessels. We have increased the eco portion of our fleet by either doing significant retrofits or committing to significant retrofits, buying eco vessels and/or entering into new building transactions. So we have been and we are in process of optimizing our fleet profile.

Secondly distributions, we have over the last two years and a bit paid almost US$800 million in dividends, underscoring our commitment to returning capital to investors. And the same applies to our leverage ratio, which is the next two bars here, where, as I mentioned before, we have created a very high flexibility in our balance sheet. We have a new undrawn US$100 million RCF facility as Moritz has mentioned, and we have way more than 50% of our fleet debt free at this stage.

At the same time, we operate on a low leverage ratio, 13% only. And we believe the combination of low leverage and high capacity and flexibility in the balance sheet is key in these times. And to sum up the different elements on this slide, I think it shows that you can repay debt significantly, attain a very high flexibility in the balance sheet, and at the same time renew your fleet and pay out significant dividends. And we will, going forward also balance between those elements going forward.

So please turn to the next slide where we talk in a bit more detail on the fleet renewal strategy that we have executed. On the left hand side, you see vessel sales versus acquisitions for the years 2022 and 2023. We have sold 20 vessels, we have acquired 12 vessels. We have sold those 20 vessels at an average age of 17 years. At the same time, we have bought modern vessels or new builds with an average age of four years, considering new builds at a year of zero basically for that statistic. We have slightly upsized the average TEU, i.e., we have not just sold older vessels, but also relatively smaller vessels compared to the ones that we have taken in.

And an interesting element is the total days available. And that is obviously a reflection of having sold older vessels. So, despite having net sold eight vessels, we are basically gaining 30,000 additional days compared to maintaining the old ships. So we believe this strategically is a very solid move and provides us and our investors with further runway, further opportunity to gain from the market developments going forward.

Now, more specifically, on the fleet renewal and optimization investments and Moritz alluded to some of these aspects earlier. There are basically three pillars, and overall, we have committed an investment volume of more than US$400 million or around US$400 million on new buildings, second-hand vessels and retrofits, again underscoring our commitment to executing the fleet renewal exercise. We have ordered in total five new buildings, two 5,500 thousand TEUs and three dual fuel 1,300 TEUs, all of which come with charters attached. So the total CapEx – construction CapEx of roughly US$265 million is fully de-risked by contracted EBITDA through contracts that come along with these new buildings of more than US$285 million. And those contracts are seven and 15 years respectively. So, rational new builds, how we call it, we execute on that strategy and we will be going forward selective when looking at these kind of deals.

On the second hand path, we have also invested roughly US$115 million in new second-hand eco vessels, a series of five vessels, which allow us roughly 30% savings compared to similar conventional vessels.

And lastly, but certainly not least, and Moritz also mentioned that aspect, a significant retrofitting program where with retrofits across our fleet, around 18 vessels being involved and it includes hydrodynamic optimizations of the hull, new propellers, alternative power and various energy saving measures. We believe this will make our fleet competitive. This will make our company competitive. And we believe this fleet renewal strategy is a well-balanced exercise to create value going forward.

When we move to the next slide, we can look at the backlog in a format that we have presented over the years. We are obviously now looking ahead on 2024 and the following years. What you can see that we are presently looking at a revenue backlog of around US$1 billion and then projected EBITDA backlog based on a calculation. For details please refer to the appendix and the footnotes of around US$700 million. And you can see for each year respectively, the contracted revenue backlog accordingly.

Looking at 2024 specifically available trading days, we have around 78% of the days fixed. We have around 22% of the days open, which means we have a very high visibility on earnings for 2024 already in a market that is potentially seeing some volatility towards the latter half of this year. 2025, we have also been able to ramp up our positions there by executing a few charter extensions, forward extensions as Moritz has mentioned and we’re now looking at 36% of the days covered at a very attractive charter rate of above 28,000. And beyond we even have some coverage for 2026 and 2027, obviously linked to our new building program.

Let me now move on to the next slide where we are showing on the left hand side kind of how our enterprise value is protected through the fleet and the locked in contracts. From left to right we look at the net interest bearing debt as per end of this year, the market cap of the company arriving at the enterprise value. Compare that with a projected EBITDA backlog. The net sales that have not yet been concluded that gives us already an excess value above the current EV, meaning we are already covered through the projected EBITDA backlog. And on top of that comes the fleet value. We have here for illustrative purposes, looked at the fleet value as per vessel’s value of around US$830 million, providing a very significant upside potential.

Now on the right hand side, we have looked at the open rate sensitivity, basically coming from the open day fixed day logic that I just ran you through on the previous slide. And then look at 10 year historical average rates for our fleet basket or current market rates for our fleet basket for the open days. And that gives you an idea of where we end in terms of potential operating revenues and net profit.

Please note that this is an illustrative sensitivity analysis only, but it gives you an idea of the developments for the company, potentially for 2024 and 2025. At the bottom right, you see what that means in terms of implied dividend yields, applying our dividend policy of 75% of adjusted net profit being paid out. So we are looking at a very solid dividend yield for 2024 and certainly also for 2025 on that basis.

Now, let me conclude this presentation on the next slide with some summarizing comments and a bit of an outlook. So we believe it was a fantastic year 2023 for MPC Container Ships with positive financial and operational performance and a few measures that have further optimized our balance sheet. We will continue and have already continued with the execution of our fleet renewal strategy. This will create value going forward. We firmly believe in that. We will do that selectively and only where it is accretive and is rational to do so. But we do see, given our market position opportunities that contribute to this.

The container market improvement towards end of last year and certainly early this year is driven by the Red Sea crisis. The longevity of that situation remains to be seen, but for the time being we have been able to capture the benefits from that by chartering out vessels at elevated rates and improved periods.

The revenue backlog, as I mentioned, of US$1 billion and the contract coverage of almost 80% of available days for next year make us comfortable looking into – looking at 2024 and beyond. And finally and importantly, we are also targeting well-to-wake greenhouse gas emissions intensity reductions of 35.5% by 2030 from a 2022 baseline and to net zero by 2050 in line with the IMO’s carbon intensity targets. We’ll elaborate on that in more detail when we release our ESG report next month.

And finally, we are providing a financial guidance for next year. As we mentioned, the market is volatile. The second half of 2024 might see a different situation in the Red Sea, in which case there might be some more market volatility, lower charter rates, et cetera. So we have taken a stance to factor that into our guidance. We see revenues of US$435 million to US$470 million, potentially depending on market developments and an EBITDA of US$240 million to US$280 million.

And on that note, I’m happy to conclude today’s presentation and would like to hand back to the operator and I thank you for your attention so far. Back to you, operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] As no one has lined up for questions in this call, I’ll hand it back to the speakers for any written questions online.

Moritz Fuhrmann

Thank you, operator. There is a few questions through the web and we will go through them one by one. Starting at the top, a dividend question. Will the distribution be made as a return of capital or it is no longer share premium account to be paid out? If returns of capital are no longer possible, will there be Norwegian withholding tax for many investors?

The share premium account has been depleted in the first half of last year already. And to the second part of the question, it obviously depends on the jurisdiction from which you invest in – investing into the stock to answer the question on withholding tax.

The next question has been submitted in Norwegian, translated, it is, will dividends be paid in the current year every quarter?

On this question I can only refer to our dividend policy to which we stick, obviously, which is that we are distributing 75% of adjusted net profits on a quarterly basis.

Question number three is of operational nature. What is your expected average utilization NTCE for 2026?

I think normally we would say past performance is not an indicator of future guidance or estimates. But on the utilization, I can only refer to what we have been posting historically, which is a utilization between 95% and 100%. And when it comes to TCE, it’s even more difficult because we don’t have a crystal ball. So it’s very hard to predict any markets beyond six months. I would say so, very hard to say anything on time charter rates for 2026.

The next question is, could you please share the expected operating and growth CapEx figures for 2024?

Yes. Looking at the CapEx program for MPCC in 2024, when it comes to dry-docking expenditures as well as retrofit expenditures, we’re moving in the region of US$55 million to US$65 million. Then there’s also a running CapEx element through the OpEx, which is in the tune of around US$20 million. And on top, we have obviously also our new building program. So the outstanding installments in 2024 is around US$165 million, of which obviously the majority has already secured financing from European banks.

Constantin Baack

Okay, I’m happy to take the next one. There is a question regarding older vessels, specifically, how many older vessels from the current fleet are subject to sale? Should a good deal be available? Do we have a cut off age for vessels?

Let’s start with the latter part of the question first. We don’t have a cut off age for vessels. In fact, as alluded to during the presentation, we will carry out quite a significant retrofit program, which in our view will actually prolong the useful life of certain vessels that are subject to these retrofits. And we have done that to a large extent hand in glove with our chartering partners, meaning, have secured deployment against such retrofits.

We do believe that improvements of up to 20% from an efficiency standpoint, can be achieved, and therefore, I think it’s more the type of vessel, the status of the vessel that is relevant. And status means technical condition. Is the vessel retrofitted or not? Is it already eco or semi-eco? So those aspects play a key role. So there’s no age cut off to the second part of the question.

To the first part of the question, of course and we have shown that we will make use of opportunities. Of course, we would consider additional sales of non-strategic or let’s say less efficient vessels as part of our general fleet renewal strategy. Again, as alluded to during the presentation, we will not rush into it, but we will over time renew the fleet. And as explained, we have sold 20 ships over the last two years, bought 12 have added on a net basis available days, i.e., have rejuvenated the fleet quite significantly and we will continue that path. And that does include sales.

And certainly, and we have just today announced the sale of AS CLARITA. So once there are sale opportunities at a good price and where we can potentially also reduce the CapEx exposure, meaning cash outflows linked to dockings, et cetera, like is the case in – in case of AS CLARITA, we will definitely consider that. And hence sale of older vessels is certainly on the agenda. But we are not in a rush. We will do that selectively, just as we do acquisitions.

Next question, Moritz, you want to take that?

Moritz Fuhrmann

Yes. How many ships are going to dry-docking in the near future and how does impact the company financially?

So for 2024, we have 21 dry-dockings scheduled. Obviously it comes at a cost, and the cost varies a bit between geographical locations, whether you have to dry-dock the vessel in the Far East, be in China or in Europe, then probably being Turkey. So obviously there’s a cash outflow from dry-docking the ships. And I mentioned some numbers earlier in the call when it comes to both the dry-docking expenditure – the expected dry-docking expenditure, I should say plus retrofit investments into our vessels.

And next question. Do you think about repay debt down to zero?

If I look at the balance sheet today from a net debt perspective, we are already close to zero. However, mentioning the CapEx again going forward with the new buildings being delivered, which have financing secured, we will obviously incur then at least in 2024, a bit higher leverage. Important to note, this is only against four ships out of a total of fully delivered fleet of 63 ships. So the trading fleet, so to speak, excluding the new builds will also going forward be on a very low leverage basis. But from a total group perspective, will we go down to zero? The answer is probably no because of the new builds that are being delivered.

Constantin Baack

I can take the next one. There’s a question. Will the new builds be delayed?

We are – obviously most of the shipyards, certainly in Korea are facing delays at the moment. We expect on the first two vessels that we will receive, in terms of new builds, the 5,500 TEUs, we expect roughly 1.5 to two months delay. On the remaining vessels, we don’t expect any delays. And the delays that we expect are pretty much in line with what we have been seeing in Korea. The delay is being compensated through liquidated damages by the yard. So financially, we don’t expect that to be a disadvantage, but that is basically where we are.

Moritz Fuhrmann

So, next question is, can you elaborate on the cash breakeven of the company?

The answer is, obviously the cash breakeven varies from year-to-year given that dry-dockings are being factored into the cash breakeven, and there’s different number of dry-dockings each year. Looking at 2024, we are looking at a cash breakeven in the tune or around US$11,000 from a fleet perspective, obviously under certain assumptions.

Constantin Baack

Okay. Then there is a question. Could you indicate the lifetime for feeder vessels, and with regard to this and having new regulation as of 1st of January, could this hang on – could this in future change your view on vessel depreciation? So the question is whether new regulation and lifetime is affected and change our view on vessel depreciation.

We still see on average, a useful life of 25 years. In fact, looking at the age profile of the feeder fleet, and certainly the very, very slim order book with regards to the smaller vessels, we definitely continue to believe that the useful life will be at least 25 years. In addition, as I alluded to earlier, we have a significant retrofit program, which might even extend the useful life above, which will definitely make the vessels commercially, but more viable and more attractive, and we believe will also increase, potentially extend the useful life of the vessels. But 25 years is still our base case. That will still be the basis also for the depreciation scheme.

Moritz Fuhrmann

Next question is again on growth CapEx. So, am I right to assume that growth CapEx in 2025 will be much lower than 2024?

The simple answer is yes, because our four out of five new buildings will be delivered in 2024. So the lion’s share of the growth CapEx is assumed this year. The fifth new building is being delivered in 2026, without significant installments to be paid in 2025. So we will see a slight uptick in growth CapEx again in 2026.

Constantin Baack

And there’s one more question on the Red Sea situation. Does the Red Sea trouble have a negative effect on MPCC? Is there any cost for MPCC or is it covered by charter?

First of all, as explained during the presentation, the Red Sea situation is adding ton mile demand. More specifically, it has an effect on the trading pattern. It means rerouting of a number of vessels today around the Cape of Good Hope rather than through the Suez Canal. And that on the general market and hence also on MPC, has a rather positive effect.

In terms of cost implications and negative implications. We have also in consideration of the safety and well-being of our crew, which is the most critical element in our consideration. We have not gone into the Red Sea area since late last year in light of the dangerous situation for our crew and our ships, and we will continue to do so. So there is no negative financial effect from the current situation and on the overall market there is rather an effect of additional ton mile demand, i.e., a counter effect countering the significant supply coming into the market.

Then there is a question, what effect on revenues or profit? Higher margin, for example, do you expect due to your ESG measures, increase in daily rates, more days available or simply higher chances of ships being chartered out or other factors?

Definitely the commercial attractiveness of the ships is increasing with a retrofit investment and also with new builds. Of course, you can see that our new builds have seven and 14 year contracts respectively where the secured EBITDA exceeds the construction CapEx. So that is a significant benefit and we are renewing the fleet. Furthermore, there is obviously a consideration with regards to commercial attractiveness, it does might mean you get a higher rate, it might mean you get employment when the market is really bad. In any event, in our view it means that the relationship with the charterer becomes even more stickier.

And a reason why we believe this is clearly that we have already agreed as part of our joint retrofit investment program with many charterers, that firstly, they share some of the CapEx, so we have a shared CapEx investment program and secondly, we have been able to forward extend some of the charters. So we have an immediate payback on these measures. So we do believe that they are increasing the commercial attractiveness. They are also increasing our attractiveness vis-à-vis our customers.

And I would argue that in terms of the number of retrofits and the number of new build consolations amongst our tonnage provider peers, we have a very solid stand and we believe that that will be creating long-term value for shareholders and cash flow visibility as well. So overall, there is a lot of positive things that come hand in hand. It’s not just ESG measures for the purpose of doing ESG measures. It’s actually working hand in glove with your customers and benefiting also the company from a pure financial and cash flow standpoint.

Moritz Fuhrmann

The next question in line, the low range of guidance seems to be very conservative, implying a rate of US$4,000 per day on open days on an IFRS adjusted basis. Is this what you have applied?

Obviously we can’t comment on internal assumptions when it comes to open days, but it’s, I think fair to say that this is not the number that we have applied in our internal models, I think which is – I think important to note and you’ve already mentioned the IFRS adjusted basis when it comes to our new builds. But also important to note is again this year we have a heavy lifting to do when it comes to dry-docking and retrofits. So there will be a significant number of dry-docking [indiscernible] applied to our fleet.

And in addition, and Constantin mentioned during the earnings call, the expected volatility towards the end of Q3 and Q4, obviously yes, we are conservative when it comes to open days, but also conservative when it comes to repositioning of vessels between charters and also again when it comes to the dry-dockings of the vessel. You also need to factor in some repositioning of vessels from the actual trading region into the dry-docks be it in China or in Turkey.

The second part of the question also the cost guidance seems to be lifted versus US$162 million in 2023. What’s the reason for the increase to US$190 million to US$195 million?

Glancing at the numbers, it seems the US$162 million from 2023 is pure OpEx plus G&A, whereas the US$190 million to US$195 million also includes commissions as well as voyage expenditures. And the core OpEx, yes, is assumed to be going up in 2024. Simply basis that we have a change of capitalization policy. So we will capitalize less items in the OpEx going forward, but naturally leads to a higher IFRS OpEx. But this will be going forward offset by what we expect to be lower depreciation in the P&L.

Constantin Baack

Then there is a question around the Germany alliance. How do you anticipate the Germany alliance hub-and-spoke operation affects you? First of all, maybe a few basic words on the alliance itself and then the impact on us or non-operating owners in general. The cooperation will start February next year and the service set up is basically east, west. And I think in total, it’s 50 to 60 services and around 6,000 port calls. So it’s quite a significant alliance, roughly 290 to 300 vessels involved, 4 million TEUs.

So it really is a significant impact on the service offering and on the market. The network will be centered at least that’s what has been communicated so far around 12 key hubs and it will include simplified loops and fewer calls. So what does that mean? We expect a more firm announcement towards Q3 this year with first preliminary service details. I think for us or impact for non-operating owners, if there are simplified loops with fewer calls that would imply an additional need for smaller vessels for the onward transportation of cargoes. So that could be a net positive for feeder vessels and they will predominantly focus on the major trade routes, so they might depend on feeders to feed the main liners.

So those are the two aspects. Of course, it’s too early to really draw a conclusion on the actual implication. What we have seen that the Germany members, also likely triggered by the Red Sea situation, have taken in quite a number of additional charter vessels. It remains to be seen how they will actually treat the, let’s say, last mile of feeding leg once their service offering is put in place. But overall, I think there is potential upside for feeders or for intra regional vessel sizes, but it remains to be seen what that will actually mean.

There’s a question around there was some confusion regarding the largest owner, MPC Capital acquiring feeder vessels recently. Can you elaborate, Constantin? Yes, I don’t know if there was confusion. I think the media confused something that was at least not MPC Container Ships acquiring these vessels, and it was also no feeder vessels. It were kind of intra regional baby Panamax vessels that were acquired by a group of investors including MPC Capital, unrelated to MPC Container Ships. We have, as explained, a clear strategy with renewing our fleet, with buying selectively, rather more modern eco-tonnage and the vessels that were acquired were I think around 14, 15 years of age with an existing charter to CMA.

So if there was any confusion, that confusion was on the part of the media because we certainly haven’t announced anything and we certainly haven’t been involved in that deal as MPC Container Ships.

Then there’s a question around the order book. Given that shipyards are largely booked until 2026, do you see an advantage for MPCC? Additionally, do you think we might see a strong cycle in 2025, 2026 based on this information? What is your overall view on this?

I think it’s extremely difficult to forecast markets, as Moritz mentioned, with a reference to the chartering market further out in the next six months. Even three months out might be challenging sometimes, so we will have to see 2026 is way out. 2025. 2026 is a market where we will at least see fewer new buildings being delivered. So that means on a supply side, there’s less pressure coming from deliveries into the market. On the demand side, obviously that is linked also to the global development, GDP development, trade development. I personally think that we will at least see a rebalancing of supply and demand growth in 2025, 2026. Whether that will translate into a strong cycle, that remains to be seen because of course, we now have a situation where the sizable order book that is being delivered this year and that has been delivered last year is somewhat being digested by the Red Sea situation.

So we will have to see what happens on the demand side, what happens on the supply side, and is there any wildcard event such as the Red Sea situation or others that might affect the market. So it is very difficult, I think how do we treat or how do we address this? As MPCC, we address it by continuing our strategy. Low leverage, high number of vessels unencumbered and debt-free, stick to our distribution policy, but at the same time operate on a very low leverage and have liquidity available in order to make use of opportunities as they may arise.

So I think we have all the flexibility and we will be able to benefit from a market whether it’s a strong cycle or not a strong cycle. And therefore, we believe we’re well prepared.

Moritz Fuhrmann

Okay, next question. How many by percentage MPC vessels were heading through the Suez channel before? I think the question is not only Suez channel, it’s probably also the Red Sea situation. And before means probably before the Houthi rebels started attacking commercial vessels, the number of ships was five that we had been operating in that particular region. So from a relative perspective, less than 10% of the fleet. But as mentioned in the call, we have discontinued with our vessels transacting that specific region.

The next question is how do you consider asset sales versus entering into new contracts now?

Constantin Baack

Yes, the current market situation obviously is better than what we have anticipated. At the end of 2023, there seems to be a window now and we have acted on the AS Clarita when it comes to selling vessels. But you have seen that we have also fixed a number of ships in Q1. It’s not a simple straightforward answer because we will consider obviously also dry docking position of certain vessels, designed age structure of certain ships. There is assets that are considered more core relative to vessels that are considered probably more sales candidates.

The answer is really on an opportunistic basis. Will there more asset sales this year? Potentially yes. If the market holds up as it does now, it could be attractive for us to offload some of our older ships and managing further some of the dry docking positions in 2024. And on top, if some of the core vessels that we want to retain in the feed for longer, we can fix, or we can continue to fix at least 12 months at decent rates, we will continue to do so.

The next question is again on CapEx, how many dry docks do you have scheduled for 2025? The number of dry docks is eight, so it’s considerably less than in 2024 and hopefully less operational headache that we will have in 2024.

Then there’s another question. Congratulations for the work done. My simple and basic calculation, fleet value plus expected 2024 dividend point to a share value between NOC 20 and 24. It now stands at approximately NOC 14 after a small plunge earlier today. Would you risk an explanation for this? Thanks.

Well, it’s obviously always difficult to forecast capital market reactions, but maybe in terms of valuation, and since there is one additional question on my view or our view on share price, we have a slide in the deck where we explain how we see the protection of the value at the current share price valuation. So we truly believe that you can skin the cat left or right, you can look at fleet value and expected dividends, you can look at EBITDA backlog. We believe that the value of the company for shares is very well protected and provides significant upside.

Now, why is the share trading at 40 NOC, difficult to give you the exact answer because it’s for everyone to decide to buy or sell the stock. What I can just say is that looking at our assessment, that we see significant upside in the stock, I believe that currently there’s a lot of momentum, negative momentum, uncertainty out there, geopolitical risk, macroeconomic risks, a concern about a significant supply coming into the market in terms of containers for 2024 and beyond. So I think there is certainly not a positive momentum when you look at the container industry in general. Some of the liners have written red figures in Q4 and will likely do so in Q1. Q2 will definitely be a much stronger quarter for the liners.

We have, for example, had utilization wise, I think our best quarter ever, at least year-to-date, the first couple of months, and we have a very solid earnings outlook. So I do believe a lot of that is momentum, a lot of that is scrutiny and uncertainty. But in the long run, I think value will surface. We have shown that we make value surface by paying dividends and kind of honoring investors of their support, and we will continue to do so. And I truly believe that we will see an uplift in share price. But momentum plays a key role.

And there’s a question we hear about India as a massive upcoming economy. Any thoughts on the world market developments and containers regarding regions, especially in the feeder segment MPCC? Well, it’s obviously quite a diverse picture. There are economies that are getting stronger and stronger, and Indian to name the one that you have named here, is certainly one. We have already seen a significant inflow and outflow of box volumes with regards to India. We expect that will continue. We expect that demand in India, internal demand will increase, but potentially also exports will increase significantly.

So that is certainly a market segment to watch out for globally. I mean, we’re obviously still looking at U.S., China and Europe in terms of pure volumes as the key markets. But there are other markets picking up. Intra regional trade is picking up, so it’s a lot going on. And we have just also seen disruptions in the Red Sea leading to additional demand. We have seen the Germany alliance, as I alluded to earlier, slightly changing their strings, leading to more likely more feeder demand.

What vessel size remains to be seen? So I think overall regional trade is actually set to benefit from that. But I think it’s premature to kind of draw a conclusion or give any region, let’s say the wild card to be the most relevant one. But I think India, since you named it, is definitely a rising nation when it comes to containerized volumes.

Moritz Fuhrmann

Next question. Can you comment specifically on the magnitude and timing of changes for depreciation in OpEx given the change in capitalization policy? Timing wise, this is effective as of first of Jan 2024 on the magnitude, it’s a bit too early to sort of specify the numbers in the change of capitalization policy. However, you have seen that we have taken some further impairments in Q4, and that alone obviously will also have an impact on the depreciation in the years to come.

Again, not trying to be too specific when it comes to future depreciation, but we expect depreciation to be somewhat lower, in tune of between 10% and 20% going ahead relative to 2023.

And the next question is also related somewhat. Do you think the value, the ship will go down in the next quarters too, like you took down the appreciation in Q4? I mean, naturally shipping vessels are depreciating assets. However, we all know that shipping is a volatile market, so we will see values going up and down. We did take some impairments on a future view. That is correct. Do we expect to take further impairments in the next quarter? I don’t expect this to happen.

However, we talked about volatility before and the market uncertainty ahead. That is very hard to predict so by the end of 2024 and maybe start 2025, we will assess again. But in the foreseeable future, meaning in the next one or two quarters, I don’t expect any further write-offs on our vessels.

Then there’s a question on the cost of debt. Would you mind reminding us of your current average cost of debt expressed as a percentage? Assuming a fully delivered fleet, meaning the fully financed new builds, our cost of debt will be around on a weighted basis, I think 2.5% more or less. And our financing are packed to floating rates. So you would need to add the current three months so far to the tune of [indiscernible] and cost of debt for our fleet.

Constantin Baack

Then there is one more question that says, have MPC ever thought to be taken over as it fits perfectly with their vessel sizes to figure shipping lines? Are there any thoughts about that in the management? So I guess the question is, has there ever been interest raised with us by any liner companies to acquire the fleet or the company? No, it hasn’t. And I do agree it fits well with the needs of the liner companies.

But a lot of our ships obviously charted out to different liner companies, so we have not been approached. And I think at this stage in terms of capital allocation priorities, also of the liners, they would rather opt for new builds. That would be my expectation.

Rather charter in the vessels than owning the vessels in our fleet. And I think they still want to have also strong partners from a tonnage provider standpoint. At least that’s what we are discussing with our customers on a daily basis. So the answer is no.

Yes, I think that’s the last question, unless operator, there’s any question through the line.

Operator

No one has lined up for questions in the call. So I’ll hand it straight back to you.

Constantin Baack

Okay, very good then. I would like to thank all of you for your interest, for your questions, for attending. I can say we are excited about 2024. We believe MPCC is very well positioned to tackle 2024 and make use of the opportunities out there. And we are excited about the quarters ahead and looking forward to hearing talking in the next quarter. All the best. Take care.