Gram Car Carriers ASA

OSE:GCC

Earnings Call Transcript 2023-Q1

[Georg Whist, executive]

Good morning, and welcome to today's presentation of Gram Car Carriers Result for the First Quarter 2023. My name is Georg Whist, and I'm the CEO of Gram Car Carriers. I'm joined today by our CFO, Gunnar Koloen, will provide an update of our Q1 performance and recent market and corporate developments.

We're making good progress on execution of our strategy. It's our fifth consecutive quarter with increased earnings and shareholder distributions driven by charter contracts at higher day rates. Gram Car Carriers is the world's third largest car carrier tonnage provider. We listed on Oslo Børs main market in mid-December. The Board of Directors have approved a Q1 dividend of $0.224 per share, up from $0.169 for Q4 and in line with our current dividend policy.

Daily TC earnings increased for all vessel sizes in Q1, leading to higher net profit. We have a record backlog of our revenues end of Q1 of $874 million. We have good long-term earnings visibility. We only have 3% open days for the remainder of this year, 20% in 2024 and 24% in 2025. The market outlook remains positive with continued high charter rates and demand for long contract durations. In light of the above, we will increase our dividend payout ratio to 75% starting from Q2 this year.

The end user demand for cars remained strong with market expected to be back at pre-COVID levels in 2024. There's a continued shortage of vessels over the next couple of years and charter rates continue at record high levels. Q1 revenue was $41.1 million, up from $38 million in Q4. EBITDA was $27.7 million, up from $23 million in Q4. This reflects increased TC earnings across all segments. Net income was $13.1 million, up from $9.9 million in Q4, which we propose to return 50% to our shareholders in accordance with the current policy.

We booked new contracts worth $61 million in Q1, and the revenue backlog is up 2% year-to-date to $874 million at the end of March. Since listing early 2022, the average duration of all renewals have been 4.5 years in length. We have reduced the time charter breakeven going forward through reduction of the margin of our main credit facility.

The Board has approved a Quarter 1 dividend of $0.224 per share, up 33% since Q4. This is in line with our initial dividend policy of distributing minimum 50% of net profit. The distribution constitute a repayment of the company's paid up capital and it will be paid on or about the 23rd of May, subject approval at the AGM on the 12th of May.

The Board of Directors and management has revised the dividend policy based on a targeted 75% payout ratio. This reflects a significant increase in our revenue backlog during the past year and the related strong cash flow visibility. The new payout ratio will be effective from Q2 2023. We expect earnings and dividends to continue to increase over the next quarters.

Gram Car Carriers, we are a strong industry name. We have 40 years of experience in the car carrier space. We have extensive experience from chartering vessels to all major global operators and key regional operators worldwide. We're headquartered here in Oslo, but with our Singapore office, we manage a modern fleet of car carriers and we listed on the Oslo Børs main market in December last year.

The car industry is one of the world's largest industries, and we are an integral part of their logistic chain. We charter out our vessels to the operators who, in turn, sits on volume contracts with the manufacturers. Take GLOVIS, for instance, they operate about 90 ships. They charter in about 2/3 of that need and only own about 1/3. NYK, MOL, K Line operate about 100 ships each. They own about 2/3 of that and chartering about 1/3. Wallenius Wilhelmsen, on the other hand, only charters in about 10%.

Gram Car Carriers, we are a preferred partner who constantly deliver a high-quality service, which means all the stringent quality measures set by the car manufacturers. We have 3 main vessel types. We have the distribution vessels, serving regional markets like Northern Europe and the Caribbean. We have the mid-sized vessels, serving north-south trade-lanes and trade intra continents. We have the Panamax vessels, serving East-West trade-lanes, crossing the canals and major oceans. We also operate on commercial management, 4 newbuildings for global auto carriers and 1 for an NRP-led KS.

Now over to you, Gunnar, for an update on operations and our financial position.

[Gunnar Koloen, executive]

Thank you, Georg. The positive trend in revenue and earnings continue in 2023. The average fleet charter rate was $25,600 in first quarter, up around $3,000 from last quarter. This reflects higher average rates for all vessel types. We fixed 2 vessels on long-term contracts in the quarter, adding $61 million in backlog. These vessels will be delivered to the new charters in second quarter. Overall, we have good control over our operating expenses, and that they are developing in line with expectations.

Average cash breakeven rate has come down slightly to 16,900 across the fleet, mainly as a result of reduction to our interest margin. I'll get back to this later. Our 2023 vessel OpEx expectations are unchanged at $6,000 per day for the smaller vessels and $7,000 for the larger Mid-size and Panamax vessels. This is before overhead and docking cost. The fleet was fully operational during the quarter with the exception of Viking Ocean and Viking Sea, both undergoing the second special periodic survey and also the Viking Diamond, which was in for repairs covered by insurance.

Fixing activity has naturally slowed down following a very active 2022. But we have charted out the city of Oslo and Viking Odessa on 3-year contracts at attractive day rates. These are expected to commence mid to end of second quarter. The Viking Diamond and Viking Ocean were delivered under new charter parties end of February, and we expect redelivery of the Viking Destiny end of June. After which,, we will do an exhaust scrubber installation before delivering it under the new 5-year charter we have secured.

We now have only 3% open days in 2023 and good visibility for 2024 and 2025. We're expecting charters to redeliver vessels under the existing charters at the [ MAX ] states, given the market conditions and expect the Viking Queen to roll over on a new charter in Q1 2024. As I mentioned earlier, the average duration for contract signed since listing is 4.5 years per vessels. The average duration of the backlog as at the end of March was 3.4 years. The average duration is longer for the big Panamax and Mid-sized vessels, which have higher earnings and EBITDA contribution. They are around 4-plus years.

We see continued strong demand for our open vessels in the second half of 2024 and expect to announce further contracts, reflecting the strong market fundamentals in due course. Revenue backlog increased 2% in the quarter and stands at a record at the end of March. This reflects the net of the new contracts of $61 million and the revenue generated in Q1. We continue to fix open vessels at high rates, capturing the strong market. The graph on the right shows the revenue backlog split on year of expected recognition as of Q1. And as you can see, we have very good visibility going forward.

Revenue and earnings reflect continued strong operations and cost control. Q1 net income at $13.1 million versus $9.9 million in Q4. Book equity increased to 42% as at end March and the Board has proposed to pay 50% of net income as dividend for Q1. From Q2, the plan is to increase the payout ratio to 75% of net income. A higher payout ratio, combined with expectations of increased earnings in coming quarters as well as, as the vessel start new charters at higher rates, should point to higher quarterly distributions.

Lastly, in April, we agreed with our lenders to move from a fixed margin on our main facility to a grid-based pricing based on leverage ratio. This leverage ratio is measured as the net interest-bearing debt over EBITDA. This will reduce our margin by 50 basis points to 2.75% immediately. And subsequent revisions based on the leverage ratio will be done quarterly. You can find more details about this in the Q1 report.

With that, I'll hand it back to you on Georg.

[Georg Whist, executive]

Thank you, Gunnar. Charter rates have stabilized at record levels for Panamax and Mid-sized vessels, while distribution vessels continue to move up at a very limited availability. 180 vessels owned by the tonnage providers, there's only 2 open [ free ] contracting in Q2 this year. Open position for 2023 for recontract is very limited, only 25 vessels, down from 28 in February. For comparison, 65 vessels were fixed in 2022 and over 100 fixings per year were done pre-COVID. In conclusion, the market remained very tight.

Expectation for global auto sales have remained stable since end June 2022 despite increased interest rates and fare of recession. Volume growth is expected in 2023 and 2024 despite high economic uncertainty, lower growth expectations, rising interest rates, inflation, weaker consumer confidence in the U.S. and Europe and continued war in Ukraine. However, we're coming from historic subdued levels. New car sales is expected to be back at pre-COVID levels in 2024.

Auto manufacturers continue to prioritize the export models, U.S. inventories and import brands remain near record and less than 20 days inventory. China export continues to grow at record high, heavy volumes as well, given a tight market for car carriers. We are looking at a prolonged firm market. China's strong export trend continues into 2023 with China as the second largest export of cars in the world. The current export run rate indicates more than 4 million cars of export out of China. This compares to 3.2 million vehicles that were shipped in 2022.

Electric vehicles made up 36% of February export and 12 months average run rate is now at 30%. EV sales are growing exponentially and we are well underway to meet forecasters prediction of 50% EV share of all vehicle sales by 2030. China is expanding its position as a global EV powerhouse will lead to greater ton-mile demand.

China has some key advantages. They have modern production facilities, modern port infrastructure, well-established auto part supply chain, including EV battery production, a large skilled and cost-efficient workforce. And a lot of Western car manufacturers establishing their EV production into China like Tesla, like Pulsar, like BMW, et cetera.

High and heavy demand remained strong with high volumes and strong backlog extending into 2023. All the main sectors, agriculture, mining and construction are experiencing high demand. This is high paying cargo, which lifts demand for the entire car carrier segment. In our view, the supply side remains favorable despite the recent increase in the order book to above historic averages.

This is a response to the strong market fundamentals. We consider these market fundamentals to continue to support a long-term strong market. Net fleet growth has been negative since 2014. So far, only 1 new building has been delivered in 2023. The age profile of the fleet indicates a substantial recycling potential. Further vessels are needed to meet growing demand, replacement, requirements and reduce the fleet efficiency due to environmental constraints.

Gram Car Carriers, we are a unique investment opportunity. We are experiencing attractive market fundamentals. We have captured and are capturing the strong market uptrend. We had good visibility on growing earnings and cash generation. We are committed to deliver attractive dividends.

With that, we will open up for a Q&A session.

[Unknown Analyst]

Okay, and then I think we will start with some specific questions related to the Q1 report. So first, maybe the average realized day rates on the Panamax vessel seems a bit low versus stated day rates per vessel. Can you explain the effects here?

[Gunnar Koloen, executive]

Sure. I mean that is a pure timing issue. As you can see from our presentation, the contract overviews, we, in Q1 only had a venture on charter. And then Destiny commenced on the ninth of March, so only less than 1 month's revenue on her. And then bravery will start our new improved charter from July. So it's a pure timing issue. It's coming over the next couple of quarters.

[Unknown Analyst]

Do you -- I mean, you completed or you have refinanced -- not refinanced, but your new terms on your bank facility during Q1, which was a period of I'd say, banking turmoil. Can you share a little bit on how the dialogue with your lenders has been during the quarter?

[Gunnar Koloen, executive]

Yes, we've had a very good dialogue with the banks, and they are very supportive. And of course, this is on the backdrop of our -- the backlog that we have now built with strong counterparts. So it's been a constructive dialogue. And we're very pleased with what we achieved, strong support from the lenders. Yes.

[Unknown Analyst]

And can you go into a little bit more details on the thresholds for discrete-based interest rate pricing. A question here says, "Are you expected to maintain the 2.75% or could it go even lower based on -- given your backlog?" And I think just from to avoid you having to do too much forecasting here, I can say that from our estimates, we will see you at the lowest level by first half of next year, so 2.25%. Is that reasonably in line with what you are expecting at this point?

[Gunnar Koloen, executive]

That doesn't sound wrong, no. So we have -- we are immediately on 2.75%, and then we will have subsequent revisions every quarter after that. So we expect to have a revision second half of this year and then again in '24 to come down to the lowest level.

[Unknown Analyst]

Excellent. With regards to Q1, how is the docking schedule now looking for the remainder of the year and utilization impact from that potentially?

[Georg Whist, executive]

Yes. So we had a heavy docking quarter in Q1. So we're pretty much done with our dockings this year. We will be bringing in Viking Bravery for installation of a scrubber, which is part of the contract we have, the 5-year contract is going on in July. So we will go in for that installation. So it's more of an installation more than a regular docking, but there's no regular dockings anymore this year.

[Unknown Analyst]

Okay. And with regards to OpEx, there's been some inflation in the market. But for Q1, you seem to be very much in control. Is there anything to say around OpEx inflation going forward?

[Gunnar Koloen, executive]

No. I mean, we're in line during Q1, and we expect to stay there. So of course, there has been some cost increase, but we now feel that we have reflected that now in what we have indicated. So yes, we expect to stay on track.

[Georg Whist, executive]

I think what we have guided on this sort of big numbers, 6,000 for distribution, 7,000 for Mid-size and Panamax, that is still good numbers to use for people that want to calculate our business.

[Unknown Analyst]

Okay. And then we have a final question. Specifically on numbers, which banks are your major lenders?

[Gunnar Koloen, executive]

Currently, we have Danske Bank, SEB, Swedbank, Danish Ship Finance and SR-Bank, Hamburg Commercial Bank. Those are the of the main credit facility, and then we have, of course, the lease for the Viking Adventure and Viking Bravery, CSSC. And we have a facility with Pareto Bank for 2 of the smaller vessels Viking Princess and Viking Drive.

[Unknown Analyst]

Okay. And then I think we'll move over to some questions on your strategy going forward and a little bit on the market. So first, what's your plan for the Viking Princess?

[Georg Whist, executive]

Viking Princess is our oldest and smallest vessel. She's been since 1996. So it's very much of a game where we will probably either charter out for 3 to 5 years or we will sell her for further trading. So for us, it's coming as an end game. So we will just have to look at what we can achieve in the charter market versus what we can achieve in the S&P market, which is definitely on the way into the horizon.

[Unknown Analyst]

Yes. But built in 1996, so a 3-year, 5-year charter, I mean 5-year charter from now, then she'll be quite old. How many years do you think she has left?

[Georg Whist, executive]

I mean car carriers, when you keep them well, I mean, they can technically trade until they have 35 or even there is even one ship sailing today, which is 40. So -- but she's quite small, as I said. She is Japanese built very efficient with a small engine. So actually, from a CRI point of view and environmental regulation, she's one of the top performers. He hardly uses any fuel at all. So the charter is quite like her, but of course, she's getting old. So it will -- we'll have to then upgrade her and make sure she can do a 3- or 5-year charter, if that's the route we choose.

[Unknown Analyst]

Yes. Okay. So we have several market-related questions and questions regarding how the dialogue now is between you and your clients. So first, do you have any numbers, and I know you have this in the presentation, but do you have any numbers on available Panamax, Mid-sized distribution ships for 2023/'24?

[Georg Whist, executive]

Yes. So we have it on the slide, at the moment, there is vessels which are open for rechartering the rest of this year, and that is quite low. I mean, compared to last year, there were 65 vessels that was contracted for the full year. And in a normal pre-COVID years, it's about 100. So there's only a handful, and they are with major operators. And as we understand it, all of them want to keep them. So there will be a fight for these positions. And the rates seem to be sticking where they are. So I'm fully expecting them to be -- going to be fixed at similar levels that we concluded just a few months back.

[Unknown Analyst]

Okay. So one question here, is there still strong demand for 5-year charters or are charters pushing more for only 3 years given the outlook of more vessels in a few years' time?

[Gunnar Koloen, executive]

It's a bit mixed, I would say. I mean China, there, we see a clear tendency that there is a couple 2, 3 big companies that are sort of going to be the Chinese export providers. Just like GLOVIS is, [indiscernible] is for Korea and the -- Japanese in Japan. So these companies are obviously doing a mix of ordering, chartering. So for the bigger ships, I think predominantly, 5-year is still a going rate. On the some of the ones we have done 3, and I think that seems to be the sweet spot for those. So I don't think that has changed really.

[Unknown Analyst]

No. No. Okay. And I think this is -- this leads us on to the next question here because can you say more about current fixing activity and dialogue with customers? Or maybe the right way of asking you is, has there been any change in the tone or the dialogue with customers over the past 3 to 6 months?

[Georg Whist, executive]

Well, it's -- I mean, I think the number of ships and the positions coming open is all known and they're pretty much skewed towards the second half of this year. So the dialogue is ongoing and it's ramping up. And I expect there to be news on our friendly competitors' positions quite soon as some positions are coming open. So I think it's been maybe a bit quiet in Q1, but that was expected. There was not that many positions open. So I think we're developing pretty much as we had expected.

[Unknown Analyst]

So how much -- when should we expect news on your final Panamax then?

[Georg Whist, executive]

Well, we -- it will probably be in Q3 is my best estimate, yes. So about the same month.

[Unknown Analyst]

Same lead time as you've seen in the past.

[Georg Whist, executive]

Exactly, yes.

[Unknown Analyst]

When you do a 5-year charters now, how much flexibility does the charter have on the return rate?

[Georg Whist, executive]

This is just a normal plus/minus 30 days. It's -- there is no -- I haven't seen any change in that at all. So it's the norm, plus/minus 30 days, which is what they need to optimize their logistics system. So it's a very commercially sensible redelivery window.

[Unknown Analyst]

Then a question on the order book. Orders keep being placed. Are you at all starting to worry a little bit about how this market will be in 2, 3 years' time?

[Gunnar Koloen, executive]

I think let us go back and have a look at Page 22. I think it's -- because it's a very important slide, and we get quite a lot of questions on the order book. Between now and the end of '25, there's 103 newbuildings coming to market. Right now, there is probably between 20 to 25 vessels shortage. That's why we have a very, very tight market. And we also see some cars also going on suboptimal solutions like containers. So there is a shortfall already there.

And then [ CII ] is coming in big time this year and with ETS next year in Europe. If the world's fleet reduces by 1 knot, that's 25 ships of capacity. Why I just put 1 here, but it could easily be 2 knots, who knows? But just to show the dynamic of how to absorb the order book. Then there is another 26 ships, which are turning 28 years. So they are scrapping candidates.

Some of them are inefficient for CI purposes, et cetera. But then the big swing factor, which makes us quite comfortable with the order book is -- last year, there were just over 80 million cars sold globally. It's expected this year, and we're on to a run rate of this year, about 86 million. Then going to pre-COVID on 90 million, 95 million according to LMC Automotive. But every $5 million increase in sales and with the historic sort of 16%, 17% traveled by sea, you need 27 ships for each 5 million of cars.

So if the forecasts are right, we need 80 ships, then we don't have enough. But just by having 5 million, which were already on to the run rate, the entire order book is covered. So it's a big number, but it's actually -- it's needed. So it doesn't really give me any sleepless nights.

[Unknown Attendee]

And with regards to dividends now, you are raising the payout ratio to 75% from Q2, I assume this has to do with you having to go through the AGM and so forth to decide.

[Gunnar Koloen, executive]

Yes. I think we're pretty -- we try to deliver exactly what we say, and we told the market that we will come with a new policy together with the numbers today, which will then be ratified. And of course, the Board will get it's POAs to do the dividend. So this is just has been communicated, we will announce today. We will explain it on the AGM, and then we will be paying it from Q2.

[Unknown Analyst]

But given your backlog and expected cash flow from that backlog, I think you're -- even with the 75% payout ratio, you will almost been net debt-free by 2026, 2027 or at least 2027. What is a reasonable debt level we should expect over time? Are you comfortable being debt-free?

[Georg Whist, executive]

But I think that's how we looked at it. We have looked at this dividend policy from all the angles we could think about. For us, it's very important to have a solid business. And we -- I think we're comfortable to be net debt-free when the current known charters run off. Of course, if we renew things, of course, then we can have a bit more debt. But as part of also the changes with our banks, we have now converted more of our term loan to revolvers. So we actually pay that down and can redraw with 3 days' notice to also then save on the -- to just add more flexibility going forward.

But when we change our dividend policy, we are -- we want to change it and then stay there. We are not going to be a yoyo, up and down. We're going to stay there. We're going to make sure, and we haven't stress test this in many ways, that this, we believe, is the right sustainable good level.

[Unknown Analyst]

And then additionally, you could -- I mean, given the valuation of your share price, are you considering buybacks at all?

[Georg Whist, executive]

I mean we talked about that on the Q4 earnings call as well. And I think in a perfect world with perfect liquidity, then of course, we should be doing buybacks because the share, as we can see, we believe is undervalued. But there is also a balancing act between having a liquid stock and drying up the liquidity with buybacks.

So yes, we are thinking about it. It's on our mind, but we have to balance that and make sure that we get liquidity because liquidity, as everyone knows, is #1 for investors, they can trade in and out as they wish.

[Gunnar Koloen, executive]

I guess another element is that all the distribution that we are currently making is repayment of capital. So it's tax-free taxes.

[Unknown Analyst]

And then -- but newbuilds would not be on the agenda, I assume.

[Georg Whist, executive]

No. I mean we -- as communicated, we are all about vessels on the water, vessels with firm contracts, and we have -- we initiated global auto carriers where we have a 1% owner, but we can increase to 7. And those we have management for, and we will try to secure contracts. And then when those contracts are there, when the -- we're closer to delivery, it's, of course, very natural to see if there is a way to combine.

But if you can, fantastic, we'll do it if it's accretive shareholders. And if not, then we will not. But it's clearly, we will have that discussion and with the ambition to make it work. But that is further down the line and we need, as I said, to have a firm contract in place, so we know what we're talking about.

[Unknown Analyst]

And then yes, we just got a question here, "Potential [ fleet ] or are there a lot of deals out there to be made for vessels on the water?"

[Georg Whist, executive]

No is the short answer. I mean we look and analyze and talk and try obviously to find transactions, which are accretive to our company. And -- we have had a lot of discussions, but we haven't been able to finalize. And there are very few, which is quite normal in a strong market. Everyone feels strong and feels rich and, my ships are better than yours and all that stuff. So we're still looking. We're always open to do deals, which are good for our shareholders. And if they are not, then we will leave them.

[Unknown Analyst]

That's, I think, a good end because we don't have any further questions here on the chat. So I don't know if you want to have a few closing remarks.

[Georg Whist, executive]

No, I'd like to thank everyone for listening and all investors, which are on this call as well. Thanks for your support, and we hope everyone appreciates the new dividend policy we have announced today. And also, I would like to remind all our retail investors with Gunnar's point is that we are paying back capital, which means for its tax-free dividends.