MPC Container Ships ASA (MPZZF) Q1 2023 Earnings Call Transcript

MPC Container Ships ASA (OTCPK:MPZZF) Q1 2023 Earnings Conference Call May 23, 2022 9:00 AM ET

Company Participants

Constantin Baack - Chief Executive Officer

Moritz Fuhrmann - Chief Financial Officer

Operator

Good day and thank you for standing by. Welcome to the MPC Container Ships Q1 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speakers today, Mr. Constantin Baack, CEO; and Mr. Moritz Fuhrmann, CFO of the Company. Please go ahead.

Constantin Baack

Thank you, Operator. Good afternoon and good morning, everyone. This is Constantin Baack, CEO of MPC Container Ships, and, as announced, I am joined by our CFO, Moritz Fuhrmann. I would like to welcome you to our Q1 2023 earnings call. Thank you for joining us today to discuss MPC Container Ships' first quarter earnings.

This morning, we have issued a stock market announcement covering MPCC's first quarter results for the period ending March 31, 2023, the release, as well as the accompanying presentation for this conference call are available on the Investors & Media section in our Web site.

Please be advised that the material provided and our discussion today contain certain forward-looking statements and indicative figures. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business.

Before we start with today's presentation, a few words from my side reflecting on the start of the year and the first quarter [technical difficulty] We are pleased to report another solid performance and the strong quarterly results today despite prevailing macroeconomic and geopolitical uncertainties. The container market has clearly come down from the historical highs seen in 2021 and the early 2022, yet the charter market is still at very healthy levels. The freight market has recently shown signs of stabilization, and the charter market has actually improved during the past weeks and months to solid levels well above historical averages, both in terms of charter rates and charter periods.

At MPCC, we continue to focus on being agile and well-quipped to adjust our operations and strategy to fit the prevailing market conditions, [including reliable partner] (ph) to our customers and, of course, to create value to our shareholders. We have been able to capitalize on the strong markets by locking in long-term time charter contracts at very effective rates and selective fleets of vessels. We have placed the emphasis on returning proceeds from profitable operations to shareholders by way of significant dividends. And at the same time, we also continue to de-leverage the company, and currently operate with an industry-low leverage.

During the first quarter, as part of our ongoing strategy for selective portfolio optimization, we have announced several new and accretive portfolio measures, which includes continued divestment from older vessels and investments in younger, larger scrubber-fitted vessels with existing charters attached. These measures are not only earnings accretive, but also important efforts to maintain the long-term competitive position of MPCC.

We will now run you through the first quarter, the market, and an outlook for the company in more detail. And I would like to hand over to our CFO, Moritz Fuhrmann at this point.

Moritz Fuhrmann

Thank you, Constantin. Looking at some highlights at the start of the presentation, we're very happy to report the operating revenue is coming in strongly, at $180 million, mostly in line with expectations, adjusted for some one-off effects of $25 million concerning the [indiscernible] of AS Carlotta. The net profit came in at $120 million, again adjusted for some one-off effects in the quarter, we're talking about a net profit of close $90 million, on which basis the Board has declared the recurring dividend of $0.15 per share. At the same time, since we're emphasizing on return capital to shareholders, we continue to operate on an industry-low leverage of 15%, slightly down from last quarter, which was 16%.

And while we continue to return capital to shareholders, we also continue to optimize the fleet portfolio that we have, so we acquired two ships in the first quarter, and took also delivery of 2,800 TEU ship and one 3,400 TEU ship, while we were able to sell one older vessel in the portfolio, which was 20 years old and was part of the Bluewater joint venture, [indiscernible] also been able to streamline the corporate structure.

Since the end of last quarter and earlier this year, the charter market or the container market, in general, has developed relatively favorable. There was a [indiscernible] starting into the year, but more recently we have seen very strong pictures, not only in our portfolio, also in the wider market. So, very happy to report that we've been able to lock in some strong charter rates, but also probably more important, strong durations of up to one-and-a-half years. Also, despite some [clouds] (ph) at the horizon from container market perspective, we strongly believe that MPCC is well-positioned, whether the feeder segment that clearly shows that decent supply-demand fundamentals going forward.

So, despite the aforementioned market uncertainties, we are very well-positioned, with a revenue backlog of $1.3 billion. Also for '23, we already locked in almost 90% of open days, so very little exposure to potential market volatility. And on that basis, we are reconfirming the guidance that we put out in the last reporting of the $610 million to $630 million revenue, and $420 million to $450 million EBITDA.

Looking at some company KPIs in more detail, again, gross revenue came in strongly at $180 million, EBITDA $141 million, adjusted for one-off effects this is $110 million in net profit, and $120 million again adjusted for one-off effects, $89 million. The balance sheet has grown slightly on the back of the acquisitions that we made in Q1, but also on some new building installments that we paid, net debt almost unchanged relative to last quarter, industry low, we're talking about $28 million, and the leverage ratio, as mentioned, slightly down from 16% to 15%, on that basis, again, dividend per share of $0.15, in line with last quarter. We should mention that the $0.15 is excluding the $0.07 that we already declared and distributed the event-driven dividend in February, '23, of $0.22 in total.

Operational KPIs, very happy to report that OpEx have come down since we are seeing that COVID impact is slightly fading out, so, historically, we have seen some one-off effects relating to COVID and in operating ships, that is now phasing out. Average TCE, also mostly in line with last quarter, utilization is slightly is slightly down due to a higher number of dry dockings and some repositioning of vessels in our fleet.

Looking at the commercial side of things, again, very happy to report that, since last reporting and today, we've been able to pick seven vessels in the market, I think it's fair to say that both the charter rates, but also duration, as you can see, shows a very positive trajectory, and is also above our expectations. And for the time being, there is no sign of slowdown as we continue, obviously, to talk to the operators in the market, and we see a decent amount for feeder vessels. That's on the chartering side.

On the portfolio side of things, again as mentioned before, we've been able to acquire two scrubber-fitter secondhand ships in the market, and took delivery of them within Q1. Both vessels, obviously important to mention, are accretive both from an EPS and DPS long-term perspective to the overall portfolio. And we've been able to sell out one of the older ships in the portfolio. At the same time, we obviously continue to invest in the fleet, also together with operators to make our fleet as fit as possible for the upcoming regulatory environment that will obviously have an impact on the shipping industry.

Looking at the cash developments over the quarter, not much to report, almost unchanged, slightly down $7 million. Obviously, strong operating top line translated into operating cash flow of $155 million. Investing cash flow, aforementioned vessel acquisition, new building installments, but also the dry-docking-related expenses of $17 million, net interest expense $2 million. We also draw down a new facility of $8.3 million in Q1 to support the vessel acquisitions we just mentioned. And we, at the same time, continue to pay down on the existing debt facility, so $50 million towards the HCOB facility. And most importantly, as for investors, we continue to pay distributions in the amount of or in the tune of $66.6 million recurring, and $31 million event-driven earlier in the year, in February '23.

Talking about dividends in more detail, obviously emphasis remains on returning capital to shareholders. So, again, $0.15 declared for Q1 this year, being paid out in June this year. What is important to mention in regard to the recurring dividend is that, historically, we have been paying out dividends from our share premium account, which by now or by paying this dividend will be depleted. So, for this time, but also going forward, we will pay $0.12 from the share premium, and $0.03 from the retained earnings. While, going forward, the dividend will be paid entirely from retained earnings.

Over time, and since we embarked on the dividend journey, we have distributed more than $600 million to investors, employing a 50%-55% dividend yield if you were to buy in the stock term '22, and implying a '24 compelling dividend yield if you were to buy in the stock, in January '23, so, from that perspective, very, very impressive value proposition to investors.

And on that happy note, hopefully I'm passing over to Constantin, and the market section.

Constantin Baack

Thank you, Moritz. I would like to now continue with a brief market update, so please turn to slide nine, starting off with some observations from the container freight market. The graph on this slide shows the key indicators for the ocean freight, namely the freight rate index as a dark-blue line, and the annual TEU throughput as a red line. What you can see is, obviously, the fleet increase that we have observed in 2021 and peaking in mid 2022. And then, obviously, coming down as communicated before and observed in the market in particular in Q3, Q4, and last year, but also still early this year.

We have now recently have observed somewhat of the -- obviously relation of freight rates that is on certain trade. And it's worth noting that we are still 15% to 20% above historical averages when you look at a freight rate in general at least when you look at the CCFI Composite Index. Next to the CCFI, on the intra-regional trade, the markets have come down not as much. And admittedly, they were also as high. So, there we are only seen around 40% drop from all-time highs.

But that is just a side note. We'll touch on the let's say nuisances of intra-regional trade versus the global market and as we go through the market section. Let me just spend a few words on inflation and interest rates. And, of course, certain inflation indicators are too high. However, they have cooled off a bit and in particular energy and food inflation. Core inflation remains bit sticky. But at the same time, we will also look at rather high labor markets in particular in several advanced economies. And we have also seen Central banks obviously increasing interest rates although going forward a more moderate approach is expected. In terms of GDP growth, we have basically seen a flat development compared to the last quarter that we reported on the slight reduction by the IMF. However, we still look at a growth for 2023 of around 2.5% to 3% on GDP side. Container demand is pretty much in line with GDP growth also somewhere around 2.5% for this year.

And for next year, it is expected to be significantly stronger. Two important aspects when looking at the picture is also the question of regionalization and also intra-regional trade. We will touch on that in a bit more detail as we go through the presentation. But I think what is worth highlighting is that exports out of China into Asia in particular has come down, but it has been picked up to some extent by other Southeast Asian countries in terms of volumes going into U.S. and out of Asia.

And on that note, I would like to move on to the next slide, slide 10. Please turn to that slide where we now look at the S&P market and charter market dynamics in a bit more detail. It is worth looking at the chart on the left-hand side becomes evident that S&P prices and charter rates have also come down quite significantly from historic highs. However and that is worth noting, whilst they have drop around 72%-75% charter rate where we were about 100% more than 100% above historic leverages.

So, we are still in a fairly healthy market environment. And as you can see from this chart, this is obviously an index. Index usually lags behind reality to some extent so that it's a reflection that markets have actually improved over the last couple of weeks and months. And that is both in terms of rates as illustrated here, but also in terms of period as Moritz mentioned earlier when looking also at [indiscernible] that we have concluded over the last couple of weeks and months. One reason for that is that while the large operators are back in the market MSC, Hapag, CMA, in particular has been pretty inactive most of Q3 and Q4 2022 and early 2023. A lot of these names have come back to the market and have chartered in more tonnage on the back of that we have seen this upswing in rates and also in periods.

On the right-hand side here, you can see illustration that we have in there for quite some time now showing the vessel availability. One factor that at least during our Q4 and earnings call, I did mention that this is at least a factor that might be due to stabilization of rate even though the overall macro picture wasn't great. And, we currently see around 350 to 370 vessels still being available for the rest of this year in the charter market. And I do believe that that is one attributing factor to the stabilization of rates in periods that we have over the last couple of weeks and months. And certainly, this is very below the levels that we have seen over the past couple of years. We also observed slow speed, a very important factor as well depending on the trades up to 10% in speed reduction.

And you can see at the bottom -- the second box from the right at the bottom, it's a desktop analysis from few of the research houses. And you few reduce the speeds by 1 knot versus probably somewhere between 5% and 10% at current trading speed that would be in the technical supply reduction of 6% to 7%. So, we are talking about quite some multiple implications and Q1 is obviously now completed. But, it remains to be seen how that would pave out during the latter part of this year. But, we certainly see capacity implications from slow speed already today. Overall, we can conclude that we are observing a fairly robust charter market at present. And, that it's obviously a way more promising picture than we have seen in Q3, Q4 last year and before Chinese New Year earlier this year.

Please turn to the next page, page 11 of the presentation where we take a closer look at demand and trade growth and also the deployment structure by trade. And on the left-hand side, we have illustrated main lane trades, other east-west trade as well as north-south trade and intra-regional trades and sect in different columns and trade outlook according to MSI. The expectation is that the overall market will grow at around 4.6% over the next couple of years. And whilst that as the overall market picture, the intra-regional trades are expected to grow disproportionately stronger. And by the way, we have seen over the last 10-15 years with the exception of the COVID period 2021-2022 where the main lane trade grew quite significantly as well. But, that is expected to be the case going forward. Disproportionate trade growth -- demand growth from intra-regional trade also linked to the interconnectivity of this world that will in our view also benefit some of the Southeast Asian countries in particular India.

One driver behind that is supply chain diversification from a lot of shippers and other companies. And on the deployment side, on the right-hand side, the pie chart, you can see -- and that something that tends to be underrated by market observers is the high relevance of intra-regional trade. You see the different trade here in pie charts. In the middle of the pie chart, you can see the number of vessels deployed in the specific trade. And what you can see is in terms of number of vessels deployed the intra-regional trade is by far the largest trades.

Globally, we are looking at around 50% of the global fleet of around 5,000 vessels actually being deployed intraregional trade. And you look at it intra-regional trade specifically around 98% of the vessels in intra-regional trade actual below 500 TEU, i.e., in the sweet spot category that we are focused on. So, we believe that it's a very picture. We also see that that hasn't changed over the last couple of decades despite certain cascading effect. And we believe this would be a very relevant aspect going forward when looking at trade development.

Now on this slide, we have also put that in context with age structure. And also very important criteria in our view, now we have looked at the relevance of intra-regional trade and the smaller tonnage below 5,000 TEU for those very trade. And if now look at order book and age structure of the fleet on the water, on the left-hand side we have shown the different five categories from larger than 17,000 TEU at the top, down to smaller than 1000 TEU at the bottom and different age structure bracket. And what is an interesting figure to mention here that more than 1000 vessels below 3000 TEU are actually above 20 years of age. And that is highly relevant when looking at the order book and at the replacement need and also at the demand growth perspective that I have alluded to. So, when you look at the age structure and then in combination with on the right hand side, the order book and the deliveries, yes, the order book is very significant on overall perspective.

Yet the order book is certainly underrepresented when looking at the smaller sizes. And we believe that there is a significant supply gap in the years ahead, and probably not this year, probably not next year, but we believe over the next three to eight years, there will be a shortage of smaller vessels and actually we will need more new buildings in the smaller sizes. And that is a very important aspect.

In addition, what is also interesting to see, 2M announced, so, Maersk and MSC announced a few weeks back that they will deploy nine additional ships of around 20,000 TEU in size, in total, around 200,000 TEU in their services and so they will basically absorb by adjusting to slower speeds and adjusting services accordingly i.e. part of the order book will basically be digested by an adjustment of the service offering by the liner companies. So, overall, yes, the order book is significant, but that is in the detail and we firmly believe that the smaller vessels will not be as exposed as the larger part of the fleet.

Now, on the next slide, slide 13, we have looked at some additional factors that will influence the supply side and are important from left to right. On the left hand side, we have shown the development of containership, average speeds. This is obviously a large blended basket across sizes. We can report that. On average, on our vessels, we have seen quite a significant reduction in speeds compared to last year and year-to-date, basically. And hence we believe regulation will have further implications on vessel trading speeds. And slow steaming is obviously a potential instrument to further address that various spec. And we firmly believe that on average, we will see slower speeds going forward.

Secondly, in the middle of this slide, shipyard capacities, the yard capacities are effectively maxed out for 2023 and 2024, and even for 2025 to large extent, meaning that talking again about the number of vessels that need to be replaced over the next three, five to eight years, particularly in the smaller sizes due to the age structure, is that we firmly believe that there will be quite a fully utilized shipyard capacity that will limit the number of new. Again, we will need newbuilds and we will see newbuilds in the smaller sizes, but the yard capacity certainly suggests that it will be very tight to actually replace the fleet, especially in the smaller sizes over the foreseeable future.

And lastly, and obviously one important aspect, and I alluded to that a few minutes ago, is the question of distribution of the order book and the question of cascading effect. So, how will actually the large order books potentially trickle down? And we believe that most of the vessels 12,000, 17,000 or above 17,000 TEU in size will actually not be able, and the trades will not really suggest that they can actually eat into the smaller sizes. And over the last 20 years, the proportion of larger ships in interregional trades has been very, very limited. So, the cascading is not a perfect cascade where we will see 12,000, 15,000, 17,000 new vessels actually replacing smaller vessels.

So, we firmly believe that there is still underrepresented order book in the smaller sizes which needs to be addressed, especially given the age profile. Let me wrap up the market section with a quick summary on an illustration on why we believe there's quite a robust midterm outlook for interregional trades.

Firstly, on the top left, you can see a chart where on the Y axis, we have shown the order book to fleet ratios for the different vessel sizes that we have just talked through. And on the X axis, we see the percentage of fleet on the water being 20 years or older. What you can see is that a very significant part of the fleet in the bottom right corner here is actually the smaller sizes where we will see the need for replacement tonnage over the next five to 10 years. And at the same time, they are significantly underrepresented in terms of order book. And that looks different for the, let's say, mid-size segments, 6,000 to 8,000 TEU, 12,000 TEU, and certainly completely different for the very large part of the order book and small part of the fleet in an aging profile.

Now, in addition to that, the demand outlook I went through that there is a disproportionate growth expectation and we also see and do believe that CIM impact will be more pronounced for the smaller sizes. So, we believe the overall picture in the midterm, and that doesn't mean this year, that doesn't mean next year. We as a company are well positioned for this next year, but we believe over the next three to eight years, there will be a shortage of vessels in our very segment. And on that note, I would like to move on to the company outlook section where I will kick-off with the first slide and then hand it over to Moritz.

So, please turn to Slide number 15. That is, I believe, yes. And I would like to start with a short review of our capital allocation principles and development over the last 18 months, which is illustrated on this slide. Value for a shipping company, in my view, can be generated by obviously entering the market at good price levels, but also by executing the right charging strategy and portfolio strategy. However, and that is very important from our point of view, there's also the question of the right capital allocation approach and discipline, including return of capital to investors, but at the same time also achieving a long-term value proposition for the company and its shareholders.

Slide 16 now shows the development of a few key elements over time since Q3 2021. The graph on top shows one. The first is the red line, which is a reduction of debt from Q3 2021 around $350 million down to $150 million gross debt today. The blue line shows the execution of our dividend strategy from basically starting early 2022 and now with a total dividend up to now of around $600 million. And at the same time, and that's at the bottom of this slide, we brought down the leverage ratio significantly, down from 35% to 15% as per end of this quarter.

And very importantly, we did all of that without compromising on our fleet. To the contrary, firstly, we have maintained a fleet of 66 vessels, as you can see at the bottom. And we have at the same time replaced a number of vessels over time, sold smaller, slightly older vessels, and acquired younger, slightly larger vessels, including newbies, with attractive charters attached. And we have also at the same time been able to free up a significant part of our collateral that was encumbered under certain financing.

So, whilst we had only three unencumbered vessels, end of 2021, we now have freed up collateral and have around 50% of our fleet unencumbered providing us with both a high discretion in the decision about our capital allocation and also with a great balance sheet flexibility. And therefore, we firmly believe that finding the right balance between returning capital to investors operating at a low to moderate leverage, yet being positioned to utilize market opportunities and optimize the fleet is the way to run a company in a very attractive operating model.

And on that note, I would like to hand over to Moritz to run you through some more details in terms of company outlook.

Moritz Fuhrmann

Thank you. Turning to slide 17 and a bit more detailed outlook on our very robust backlog of $1.3 billion on the revenue side of things and $1 billion on the EBITDA side of things, as you can see, the remainder of '23 is almost covered from an open day perspective, only 10%, a bit more than 10% open days, leaving little room for market volatility when it comes to the top line. But also going into '24, there's a decent amount of 60% of open days already covered, with an average rate of close to $35,000, which again from an historical point of view is a very, very strong number.

Obviously, over time and going forward, you will see that we will sort of be harvesting the backlog that we have on the books. But as you can see, and based on the recent pictures in the market, we feel relatively comfortable in the position that that we're in, especially looking at the remainder of '23, but also going into '24 as the most recent fixtures that we have done in tune of tune duration of 12 to 18 month, stretching well into '24. The backlog itself of the revenue backlog of $1.3 billion is well covered by a resilient and diversified book of operators. Two-thirds is covered by the top-10 liner companies, good names, good credits, 7% top 20 liner companies, including [Uniceta] (ph) Express Lines. And a fair share is covered by cargo backed owners operators.

So, 91% of our backlog is covered by good names, good credit, and there's a decent visibility on the backlog with a remaining average contract duration of 2.1 years. Looking commercially at the remainder of '23, you can see that there's a very limited number of open vessels that we need to fix, which is two for the remainder of this quarter, five ships in Q3 and three ships in Q4. And again based on Constantin's comments on the market and what we have evidenced since the last reporting in terms of charter rates on our own fleet, but also duration and looking at the size distribution of our open ships for remainder of '23, we feel relatively comfortable for the position that we're in, and being able to execute on accretive fixtures for the rest of the year.

Looking at the company valuation, this slide is an evergreen almost. We do spend some time, every call on the company valuation. You can see the net debt is almost not existing with $28 million and basis the market cap from yesterday, we're talking about an enterprise value of $744 million which is 1.3 times covered by the contracted backlog alone. This obviously is excluding any steel value of our fleet on the water, including the new buildings, including the recycling value of the entire fleet, which needs to say it's way too conservative to look at. The enterprise value would be covered 1.6 times. So, from that perspective, we see a very significant and strong upside potential beyond the contracted cash flow that we have not only on a steel value, but also on the basis of what we see in the market right now and what we're being able to fix on open vessels in the coming quarters.

Illustrating some sensitivities, and I should say that this is obviously a no forecast of financial guidance, but running some sensitivities both on the top line, but also on a net profit basis. Clarkson's 10 year and five year historical average, four open days in our fleet. You can see that there's very, very limited volatility in '23 and on the top line but also on net profit and that volatility is increasing going forward. But especially looking at '25 and again running some sensitivities on historical averages, you can see that the implied dividend yields remains to be very compelling between 22% and 34% obviously coming down from close to 50% in trying to see again basis on certain assumptions both on the income side of things but also on the cost side of things.

But in conjunction with the slide 20 that we just talked about a very, very interesting and compelling investment proposal and value proposition from our point of view. Last but not least also looking at the company's balance sheet and the debt side of things as mentioned before, we are emphasizing on operating on an industry low leverage. You can see that the leverage currently stands at close to $150 million and is expected to decrease below $100 million by the end of this year. Always bearing in mind that this is considerably below the recycling value of the fleet, so there is significant headroom and very low risk from a debt perspective, and very happy to report that on our newbuilding, the [indiscernible] 5,500 TEUs that are being delivered in '24, from [Hyunjin] (ph) we've been able to sign a loan documentation for a plus-70% LTV financing that is ECA-covered.

Then there's here [indiscernible] and that includes a pre-delivery and a post-delivery facility and it's, I think, a testament to the company and the strength of the company also being seen in the market. And also important to mention the flexibility that we have from a balance sheet perspective. We mentioned before that we started to look more actively in the market in terms of fleet optimization, fleet renewals, when it comes selling some of the older ships, but also looking at accretive acquisition from a portfolio perspective. So, that illustrates the very low, that there is sufficient balance sheet capacity to potentially free up some liquidity for potential acquisitions. And at the same time, not just [indiscernible] the recurring dividends that, obviously, is being fed from the operating business of MPCC.

To summarize, MPCC is a very well-positioned portfolio, the value creation. We continue to perform strongly from a financial, but also operational point of view. We have a very low leverage of the balance sheet, with more than 50% of the fleet being unencumbered, and providing us with much needed flexibility when it comes to executing on fleet optimization strategy. Again, very comfortable position from a current market perspective, with recent pictures strongly above historical averages, and more importantly, also showing very decent duration of up to one-and-a-half years. And also from a broader market perspective, we feel very comfortable in the feeder segment with a decent supply-demand outlook.

And going forward, again we have a very strong revenue backlog of $1.3 billion, providing very high earnings visibility. And as mentioned before, with the very low volatility when it comes to '23 and open date. And hence, I think that the company is very well-positioned to capture any market opportunity when it comes to fleet optimization, and obviously, always being mindful and emphasizing on returning capital to shareholders.

So, on that note, I'm handing back to the operators for any questions, Q&A that might come in through the line.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Constantin Baack

If there are no questions through the line, operator, there are a few questions through the web that we could take up as a starter.

There is question [indiscernible], pretty long question. So, I will try to read the essence of it.

Congratulations on another great quarter. And recently, as MPCC has done a significant repayment of debt, in the presentation, page 22, it looks like this is about to change in the coming years a slower repayment of debt in the quarters to come. But when I read the newbuilding program section, in the report, I get another impression. So, the main question is out of what will we finance our newbuilding program, and could you please also elaborate a bit more around the debt reduction [in the coming year and culmination] (ph) of the payment of the newbuilding program?

I would hand over to Moritz, who had basically addressed that question, as far as I am concerned. But maybe you can quickly summarize how the aspects, Moritz, especially in the newbuilds?

Moritz Fuhrmann

Yes, happy to do that. I think there is -- that they look at our fleet as two-folds. Obviously, there is the fleet on the water with a different average age, where we have a clear intention of retaining the low leverage that you can see right now. Whereas when we're looking at newbuildings, younger, more modern [Eco] (ph) vessels that [technical difficulty] always have a very strong charter backlog. We feel comfortable enough to incur higher debt.

And to your question in terms of funding, so as it's structured right now, both newbuilding projects are probably being financed through debt in the tune of 70% to 75% of construction value. And the remainder is being funded through equity. That obviously is much different than to the existing fleet on the water, where again we will try to retain a relatively low leverage, and hence the low-cost breakeven.

Constantin Baack

There is another question in terms of the JV.

In the recent quarters there has been a significant decline in the number of joint venture vessels owned by JV. This has been interpreted as portfolio optimization. Can you elaborate about the future plans for the JV and MPCC? Will be a portfolio optimization for MPCC to sell the remaining vessels in the JV or to buy them wholly in MPCC?

Both could be an option. We have sold vessels in the JV. We have two more vessels left. Around 12 months ago, we had eight. So, the trajectory is probably more on the exit course when you look at the JV vessels. And we are currently exploring our options, and when it comes to the last two JV vessels, together with our joint venture partner. But both options are available to possibly -- or actually three options to possibly continue to trade the vessels, to sell them, and/or to possibly find an agreed solution with our joint venture partner for one of the partners to continue. But the path has shown that we will find good ways forward on the JV. And I'm not at all concerned about that.

Then there is a question around share buyback, and that the share premium account is empty.

Basically, as Moritz has also explained during the call, does this mean that share buyback are more likely in the near-future in combination and ordinary dividends. And yes, we have some clear about that in the past. And again, we have done share buybacks in the past. What we will continue to do is to have a reliable recurring distribution on a quarterly basis, 75% of adjusted net profit, that will continue, that will also, in all likelihood, continue in from off dividends, then out of retained earnings, as explained.

But in instances where we, for example, sell ships or have other event-driven effect, we would continue share buybacks as an ingredient into the mix as well, obviously subject to market environment, share price, et cetera. And it is important when looking at share buyback that it's also a question what do you buy back. If you buy back our own share you would obviously buy back to a large extent the larger part of our slightly older fleet. Whereas if you enter into very attractive charter-backed newbuilding consolidation, as we have done in the past, that is nothing that you can directly buyback in form of share buyback, that is only one part of the portfolio.

And therefore, we have continued to also acquire vessels at the right price, with the right attitude, and always with a focus on being EPS and DPS-accretive to shareholders, and hence enhance the value of the company.

There is another question around the quarter reports. And that is more a question around the long-term future for MPCC.

What are the strategies for the company in the long-run? Where are MPCC in this time? What are the priorities in different phases of the business cycle, in particular when it comes to fleet renewals, vessel sales, debt levels, and joint ventures, green corridors; those are a few buzzwords that have been raised here.

As I've explained earlier, we will continue to execute our, as we deem, prudent capital allocation strategy and principles we will achieve through them. And that is a mix of returning capital to investors as a focus, especially in a market environment like this where we have a strong backlog. And at the same time, we will continue to operate on a low leverage, as Moritz have alluded to, we are -- even with the newbuilding financing, we are operating at a significantly lower debt level than the scrap value [indiscernible], so, industry-wide, very, very low level. However, we are also well-positioned to act on opportunities.

And we have done that over the last years that we have selectively sold, selectively bought vessels. And as I've explained in with the introduction slide on the company outlook, we have maintained a similar fleet size. We have paid, in the interim, $600 million, and we have the level of the company. And we will continue that path going forward. So, we would be agnostic and adjust our strategy to the market environment, as you should do. And we will continue to be a good steward of capital in the best interest of shareholders. So, I think green corridors, lower debt levels, fleet renewals and vessel shares are all ingredients that play a key role.

And we will just continue to execute on that basis. And then I think that's what people can expect for 2023, and also for MPCC in 10 years time from now.

We look at some additional questions, and there's one question regarding the stabilization of the charter market. For the stabilization of the charter market, has slowed down on the last two weeks according to [indiscernible]. And next, do you expect increasing, flat, or decreasing charter rates going forward?

Well, the charter rates are at very healthy levels as I've explained. If our fleet, which is not the case, would be completely free of charters today and we would charter all the vessels out at today's levels, we would probably look at a dividend yield of 20%. And that is kind of disregarding the $1.3 billion backlog that we already have in the books. So, that gives you an idea of where the charter market is. The charter market is at healthy levels. The charter market, over the last weeks, I wouldn't say have slowed down just because the HARPEX index has slowed down, and the index is not always 100% up-to-date.

And we have seen the market already increasing slightly earlier. Whoever has attended our February earnings call, I already indicated that there are some positive developments in the market that we have seen subsequently. We expect the rates, this year, potentially to be a bit bumpy; it really depends. However, at the moment, [indiscernible] now have a very low and idle fleet globally, so high utilization of the global fleet. And you know rates and periods have gotten longer and longer. Does that mean we will see a clear trajectory towards a very good market? That I'm not sure, but we believe that we will not see a disastrous market for the reminder of this year. And again, we are at very healthy levels at the moment.

There is another question around share buyback. We discussed that. Then there is a question around transferring share capital to share premium, does that make sense?

That doesn't really make sense in our view. We have looked at it. Let me check. And it's also not that easy under Norwegian law. And obviously it would require also consent from our financing partners. We don't think that transferring share capital to share premium account is a viable path forward.

And there is another question from [indiscernible]. In this current market environment does it make economic sense for companies to place orders for new builds? What are the rate levels or other key indicators that need to be considered for us to be financially viable with the current newbuilding prices? And apart from rate levels, are there any other triggers such as regulatory changes or technological advancements that can significantly impact the decision to order new builds?

As we have done in the past, I mean, we have ordered new builds once we have been able to secure a charter. And once we have visibility on de-risking of the significant investment that a new building would mean. And, obviously, ordering new builds, if you find the right charter, does make sense. We truly believe that there is a significant need for replacement tonnage when it comes to the smaller sizes, and it could be a path forward to look at new builds together with partners.

Having said that, we want to be very selective on that, we will certainly not be running to the shipyards. We would be in close dialog with our partners to consider and to consider possibly new if we get the right de-risking attached in terms of charters.

There's one question around new building deliveries. At what point in time during 2024, are the four new bills expected to be delivered throughout the year, basically first half of the year two vessels and second half of the year two vessels. This is roughly the schedule. And there's a question on yard capacity. What is your outlook on yard capacity and prices in the coming years, especially considering the demand from other sectors dry bulk and tank?

As I mentioned during the presentation, we believe that there will be quite a constraint on yard capacity going forward. There are a lot of LNG carriers and large container vessels in the books of the shipyard. There is a limited capacity. So, we believe to my point earlier, that the replacement of the aging fleet, especially in the smaller sizes, cannot be addressed by the current yard capacity over the next three to five years, in our view.

So, that is a very relevant factor. And in addition, in terms of prices, obviously prices have gone up quite a bit. Labor costs have gone up, commodity prices have gone up, et cetera. Labor shortages is also an issue, so we don't necessarily expect and sorry new building prices to come down anytime soon.

There's another question around share buyback we discussed that. Yes, next question is around recent results and performance from a line offer raters which are our counterparts especially for Maersk and Lynn. Could it possibly be that existing contracts are being renegotiated? So for the time being there's no sign whatsoever of any renegotiation in terms of charter contracts.

I mean as mentioned before and try to explain in our deck, we feel very comfortable with the distribution of our exposure across variety of counterparts and despite the steep drop in liner companies and as we all know Maersk has recently reported their Q1 results. I think it's very important to mention to emphasize that despite the steep drop in earnings, the companies are still posting or guiding results for full-year which is significantly above the last 10 years. So, from that perspective, we feel relatively comfortable with our exposure towards especially those two names being Maersk and [Lynn] (ph).

Constantin Baack

Okay, there is another question around extra taxes in the Panama Canal. Would that whether that will affect MPCC, all kinds of taxes and maybe it's related to the trading of the vessels are generally with the charterers, so it will not have an impact on us. Then there is a question around the management team that shareholders are fairly happy with the management team where we see ourselves in three years. Well, we will continue to grow the company obviously and we look forward to pave along.

Then there's another question in terms of how we see our market position compared to competitors. Being a young company, you were able to acquire market share quite fast, but do you expect to keep gaining market share or do you regard -- who do you regard as your strongest competitor?

I think that's a difficult question or maybe not a difficult question. It's actually a good question because who are the competitors? And obviously when you look at tonnage providers in the smaller sizes, we are the largest [indiscernible] owns a few ships, but the market is super fragmented still. I mean, even with our 66 vessels, including the new buildings, we are only very minor owner of ships, when you look at the global capacity.

In our segment, we focus on intraregional vessels. They're around 2,500 vessels. So, owning 66 out of those doesn't make us, we are one of the largest, if not the largest, but it doesn't really make us dominating that market. So, I think it really boils down to also when you have bought the ship at what price, how is your chartering strategy? How do you allocate your capital going forward? And it's not necessarily all about gaining market share for us.

It's around executing or conducting a profitable business and making sure we do the right thing at the right time rather than necessarily gaining market share. There are obviously benefits from certain sizes, and I think going forward, with more and more regulation, if you are a sizable owner, you certainly have benefits and also in terms of access to funding, debt, et cetera. But in principle, I think that can be achieved if you have at least 40 ships. 40 ships, 50 ships maybe. And we are well beyond that point. And again, it's not about gaining market share. It's about taking the right decisions in this market when it comes to the fleet. So, maybe I hand back to the operator to see whether there are any further questions through the line. There are at least at this stage, no further questions through the web.

Operator, is there any further question on your side?

Operator

There seems to be no questions from the phone lines.

Constantin Baack

Okay, we're seeing no further questions through the web either. So, I would like to take the opportunity to thank everyone for their interest. And obviously, we are very happy with a very solid first quarter. We look forward to continuation and to continue operating in 2023, well into 2024. We are excited and very positive about the outlook, and we thank everyone for their support and look forward to what is ahead of us. Thank you very much, Moderator and on that basis, back to you. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.