Gram Car Carriers ASA

OSE:GCC

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Georg Whist, executive]

Good morning, and welcome to today's presentation of Gram Car Carriers results for Q1 2024. My name is Georg Whist, and I'm the CEO of Gram Car Carriers. And as usual, I'm Joined by CFO, Gunnar Koloen.

Today's presentation will be a bit different. This morning, we announced together with SAS Shipping Services, which is a subsidiary of the MSA Group, a recommended voluntary offer for all the shares in Gram Car Carriers. The offer is at NOK 263.69 per share. In addition, we are paying a dividend next week of NOK 9 per share for the Q1, which comes on top.

First, briefly about the quarter. The Board has approved a Q1 dividend of NOK 9 per share, equivalent to about $0.82. Increased daily time charter earnings for Panamax and midsized vessels plus vessel sale gains supported by Q1 net profit. Our strong revenue backlog provides long-term earnings visibility. We maintain focus on optimizing our capital structure, and we refinanced 1 vessel here in Q1 at lower interest rate costs.

And we continue to create additional value through asset transactions, and we see a continued positive market. There are also others which have positive view on the market and outlook for Gram Car Carriers. Reflected in the offer from the MSC Group announced this morning, which has been unanimously recommended by our Board.

Let's look at the details of the announced offer. It values Grand car carries equity at NOK 7.64 billion or approximately $695 million. The offer plus the Q1 dividend represents a 28.3% premium to yesterday's close. The Board recommendation is based on several factors, including an independent fairness opinion. The larger shareholders, the Board and management, representing 55.85% of the shares have pre-accepted the offer.

The intention of the MSC Group is to continue operation as it is under the same brand name with the same people delivering the same quality service to all our customers. The MSC Group is a privately owned conglomerate, led by the Aponte family who founded it in 1970. They're headquartered in Geneva and is a world leading in shipping and logistics.

The formula offeror SAS Shipping Agency Services, Sarl, is a wholly owned subsidiary of the MSC group. Some technical details about the offer. The offer period will start after publication of the offer document expected in May. The offer period will then remain open for 20 days, but MSC Group can extend this if they want to. Closing is expected in Q3. It's conditional on satisfaction or waiver of all the conditions in the offer. The intention then is to delist from the Oslo Stock Exchange, and we draw from trading on OTCQX in New York.

We consider this offer by one of the world's leading maritime groups as a validation of our unique position as a leading car carrier tonnage provider and the commitment put by the entire organization, our Board and our existing owners. Then let's go back to Q1. Revenue was $54.9 million, which is slightly down from $56.4 million in Q4 last year. EBITDA was $40.8 million, slightly down from $41.6 million in Q4. We -- the revenue reflects increased Panamax and midsized time charter earnings with the Viking Queen starting its new contract in February.

This was offset by vessel off-hire related to dry docking and repair. Net profit was $31.2 million, including a $5.6 million gain on the Viking Princess sale. Our Q4 net profit was $37.8 million and included a gain of $13.1 million on vessel sales. With all vessels on long-term charters, we did not sign any new contracts in Q1.

The change in backlog merely reflects the revenue generated in the quarter. The revenue backlog provides good earnings visibility with an average contract duration now of more than 3 years. The time charter breakeven is marginally changed, reflecting good control and operational -- OpEx expenses and financing costs. And for the quarter, we returned as per normal, 75% of net profit to our shareholders.

We will distribute $23.74 million by way of repayment of paid-in capital for Q1, a slight decrease from Q4, mainly due to gains on vessel sales of $5.6 million in Q1 versus sales gains of $13.1 million in Q4. Including Q1, we will have distributed more than $100 million since IPO. Just as a reminder, the offer of NOK 263.69 per share is after the Q1 dividend payment.

End-user demand for car carriers remained strong, and we -- and we're almost back at pre-COVID levels last year, and we're expecting to reach pre-covid levels this year. We see a continued shortage of vessels and the charter remains stable at current record levels. We continue to create value through asset transaction, fleet optimization and a keen focus on minimizing cost of debt. We will shortly hand over the Viking Amber to its new owner and will book a gain of $36.5 million here in Q2.

The vessel was sold at an attractive price in line with the Stern focus on optimizing returns for our shareholders. We have in Q4 and Q1 refinanced 3 vessels. Our average margin is now close to 2% with a further step down as our net debt-to-EBITDA ratio goes below 1.5, which we do expect later this year. I will now hand it over to you, Gunnar, for the financial section.

[Gunnar Koloen, executive]

Thank you, Georg. The average TCE rate for the quarter was up $1,400 to $33,700. The main contributor to this was the Viking Queen being delivered under the new 5-year charter in February and also the sale of 2 distribution vessels in Q4 contributed to a higher average. We're expecting a further positive impact in this quarter being second quarter with full quarter earnings from the Viking Queen new charter.

Operating expenses are developing in line with expectations with the cash breakeven rate remaining stable. Utilization for the quarter was somewhat lower at 94%, and this was mainly due to the planned docking of the Viking Drive and Hoegh Caribia. And these dockings were somewhat prolonged because of repairs and Chinese New Year celebrations in China where we docked one of the vessels.

Moving on to the next slide. Looking at the charter book. We have not agreed any new charter in this quarter, but one change here is that we have made an agreement to sell the Viking Amber. So she was the only vessel we had opened this year. So now the open positions are limited to the Viking Passero and Mediterranean Sea coming open in 2025. With this charter book, visibility on the revenues remain very good, which I will move on to on the next slide.

So as I mentioned, we didn't sign any new contracts in first quarter. So the charter backlog now stands at $794. On the bar chart on the right here, you see the revenue backlog and how it will be recognized over the next few years. So very good visibility on revenues and earnings.

Moving to the financial key figures. The revenue and earnings reflect execution of our strong backlog. As Georg have mentioned, revenue and EBITDA was slightly down from Q4. And we had higher TC earnings on the Panamax vessels, but this was, again, as I mentioned, somewhat offset by the prolonged off-hire period for the 2 vessels that docked.

Operation of the remaining fleet was very good, high utilization. EBIT is down somewhat. Again, as Georg mentioned, this is due to the -- we had a higher gain on the sale of the Viking Constanza in Q4. And then we booked a $5.6 million gain on the Viking Princess in Q1. Operating cash flow from operations was $41 million versus $48 million in the prior quarter.

We continue to optimize our capital structure and cost base to maximize profit and returns. Lower cost of debt supports our long-term cash flow visibility. We have now done 3 refinancing in the last 2 quarters. We did Viking Bravery and Mediterranean Sea in Q4, and we have completed the second Panamax vessel that was on a lease, which we have refinanced with a leading Japanese bank further expanding our group of banks.

Total debt outstanding at the end of the quarter was $269 million. And part of these refinancings, we have added to our liquidity reserves significantly, and we have added $15 million in revolver under -- with one of the refinancings. So end of the quarter, we had $118 million in liquidity reserve, including revolving facilities. I think with that, I'll hand it back to you, Georg.

[Georg Whist, executive]

Thank you, Gunnar. As you can see, there are very limited number of vessels opened for fixing in 2024. This reflects the tight market with most car carriers now booked on long-term charters. Volume growth, as I said, is expected in 2024 and 2025 despite economic uncertainty, lower growth expectations, weaker consumer confidence and also the conflict in Ukraine and the Middle East. New car sales are expected to be back at pre-COVID levels later this year.

Auto manufacturers continue to prioritize export models. U.S. inventories of import brands remain at low levels, although coming back. China's export continued to grow and record high heavy volumes gives a very tight market for car carriers. In sum, it looks still quite strong. The main drivers for the car carrier market is export from Asia to the world. The rest is predominantly backhaul trade. China is the main reason for the strong market and significant increase in Asian export since pre-COVID.

But clearly helped by Japan and South Korea, which is maintaining and slightly growing their market share. They are taking market share more from European seaborne export drive, but all of this drives the average sailing distance and ton mile demand. The increase from 2019 to 2023 translates into about 110 Panamax vessels of demand. More than 50% of 2023 export from Asia headed to North America and Europe, long-distance voyages. There is also the situation which is -- which have been a lot of focus lately about the potential consequence of an import ban on electric vehicles from China to Europe.

And as you can see in the middle bar chart, that's the green part at the top. It is a lot less than people envisaged. There is still a large volume out of Chinese internal combustion engine and also hybrid models going to world markets. So as you can see, the share going on battery electric Europe is actually a lot less than what people perceive when you read the popular press. Over 5 million Chinese vehicles were exported in 2023 and just 10% was EVs to Europe or to EU, and that's an important distinction because EU are the one scrambling with doing import duties.

The strong growth of Chinese vehicle exports. This compares to the rolling last 12 months EV share of 30% of total export. China has rapidly become the largest car importer in the world. We saw a little bit of easing because of Chinese New Year, but in March, we're straight back up again. Exports are seasonal predominantly driven by that effect. This implies further ton-mile demand growth. This is driven by Chinese car brands growing internationally, and international car brands such as Tesla, followed by Volkswagen, BMW, Volvo and General Motors investing in production in China.

In China, they're all benefiting from an established battery electric value chain, modern production facilities, modern port infrastructure, well-established auto-part supply chain and a large skilled and cost-efficient workforce. We continue to see a shortage of car shipping capacity. We have matched the AIS data of all the vessels leaving the Asian region, together with expert data.

And you can see that there's a clear deficit between and how is that possible? Well, we know that quite a number of cars are now leaving on dry cargo vessels, container vessels, et cetera, and even [indiscernible] vessels to fill this. There just isn't enough car carriers. So people who want to export have to choose inefficient means of transport. Closing this gap out of Asia would require if all move back to car carriers an extra 94 car carries on an annualized basis.

The order book has increased above historic average levels in response to the strong market fundamentals and this large export boom out of the Far East. The fundamentals remain in place and support a continued firm market. We are coming from almost a decade of negative fleet growth. Net only 11 new buildings were delivered in 2023. And so far in 2024, only 8 vessels have been delivered so far. We do expect and we do see certain slippage on some shipyards. So the order book, which you see on the graph, will most likely the way we see it, we pushed out somewhat in time.

When it comes to additional new buildings, the earliest available delivery dates for our order now is in '27 and '28, and we have now even seeing contracts delivering in '29 and options into 2030 and even 2031. Further vessels are needed to meet growing demand, replacement requirements and, of course, reduce fleet efficiency due to environmental regulation. The age profile of the fleet indicates a substantial recycling potential. So the PCD market should, as we see it should remain strong in the coming years. Grand Car Carrier is a unique pure-play investment opportunity.

We see attractive market fundamentals, and we have successfully captured a strong market through fixtures and value-adding vessel transactions. We have good visibility on growing earnings and cash generation. I think that is what is reflected in today's offer. We will now move on to our Q&A session. Thank you.

[August Klemp, analyst]

Thank you for the presentation Georg and Gunnar. My name is August and I'll be moderating this Q&A session. [Operator Instructions]. So as you mentioned, a little bit of a special conference call, obviously, with the offer and the first question we've gotten here is regarding that.

Can you please further develop why you believe the offer price is fair?

[Georg Whist, executive]

So I think the Board and us, we have considered this from, of course, different angles and also taking on third-party valuation advice. So I think as the press release and also what I mentioned, it's almost 18% premium to our all-time high. It's a 28% premium to yesterday's close. And it also stacks up quite well. If you also believe what analysts are saying on their recommendation and the value proposition. So when you balance all this, we think it's a fair offer. And I think that's also why you see such a high precommitment rate from existing shareholders and management and also anonymously recommended by the Board of Directors.

[August Klemp, analyst]

Yes. Sounds good. Then a few more questions pretty much all of them regarding the offer.

Congrats, what is your take on the timing of the offer versus your market outlook?

[Georg Whist, executive]

That's a tricky question. I think we -- they approached us and -- and I mean they do their homework, they have their analysis. So I think it's -- yes, I think they like what we have created. They like the stability of the business. So I think -- and they probably have seen that we deliver consistently dividends. So I think they -- I think it all came together, whether it was that week or the month or the quarter there after, it's difficult to gauge. But yes, they approached us. I don't know all the ins and as of that.

[August Klemp, analyst]

Yes. Sounds good. Then a bit of a detailed one. Can you clarify if the 54.5% block of irrevocables from shareholders remain binding in the event of a higher offer or if it can lapse like the 1.3% from the management.

[Georg Whist, executive]

Yes. I think -- hopefully, the press release is clear. The 4 largest shareholders, they have hard undertaking -- hard underwritings while the somewhat smaller bit by management is underwritten, but they have the upside or they can go if there's -- if potentially there is a higher bidder, yes.

[August Klemp, analyst]

Okay. Sounds good. And then there's one with a lot of exclamation points. Congratulations for the Q1 results, very happy investor. What is the required percentage for the voluntary offer to go through from the common shareholders? Thanks and once again, a very happy investor.

[Georg Whist, executive]

Well, I think I hope again that the press release is clear, they have made an offer and they have made a condition that they reach 90%, but they also reserve the right to weigh that in the event they should not reach that immediately. So it's -- yes...

[August Klemp, analyst]

That is clear. And then there's one in Norwegian, but I'll translate. Congratulations. Is there any plans about what management will do moving forward within shipping.

[Georg Whist, executive]

Yes, yes. I mean the buyer here is very clear. He is not just buying ships. He's buying a platform. He's buying all the DNA and the people at the Gram Car Carriers. So he's buying the -- he's going to continue with the name, the people, everything so far of our customers, they will not feel a difference for us in the company. We will now have -- go back to being a privately held company if this all goes through. We've been there before. We went public, now we go private again. I think the commitment of a wealthy shipping savvy single owner is extremely interesting.

[August Klemp, analyst]

Yes, sounds good. Then there is so far the last question. So if anybody has anything more, please feel free to type them. Is the unanimous board recommendation waivable or binding?

[Georg Whist, executive]

I mean it is binding. I think one has to expect that if there's a higher bid coming, then the Board, of course, considers and are working for all shareholders. So in the case, there is a higher bid, I would suspect the Board will then recommend the higher bid.

[August Klemp, analyst]

Yes. That makes sense. Then there is one did you speak to any other possible acquirers? Or was it a bilateral discussion with MSC that led to the offer?

[Georg Whist, executive]

This has been a bilateral negotiation.

[August Klemp, analyst]

Okay. Then so far, I can't see any further questions. Maybe we'll give people a minute or so to type in, and I can take one in the meantime. You mentioned obviously that a lot of cars are -- or have been moved on container vessels and continue to do so because it's a very tight market.

And now you have the biggest liner acquiring or attempting to acquire a car carrier company. Do you think that there will be sort of more of this moving forward with people and players in the different segments kind of looking at each other's sort of industries?

[Georg Whist, executive]

Well, I think we've seen it a little bit already, right? We've seen CMA, CGM have committed a few car carriers. I think in the past, we've seen it, I mean, AP Moller did it and then they exited and same with [ Salsa ve ] in Chile, they have also been looking at it. In Korea HMM Group, of course, have been in both segments. So I think we've seen it before. Yes, I think just looking at it, it seems like that there is something there, but it's -- I mean, this is early days for us. We are not privileged to the inner thoughts of our -- of this -- of the MSC Group.

[August Klemp, analyst]

No, of course, not. Still no questions. So maybe one to kind of run things off a bit. How do you see sort of car carriers going forward next sort of 5 years in terms of strategy, I'm thinking of the vessels that are coming up next year is sort of the thinking in general, I mean, dependent on the market, of course, to continue with long charters and kind of stable revenue streams? Or will you maybe look to mix things up a little bit?

[Georg Whist, executive]

No, I think we have had our strategy. I think I believe we have been very clear on what we have been after. Of course, if this offer goes through, I think that then we will sit down with a new shareholder and have a strategy session and hammer out the new strategy for the company. Whether that means we stay as is or he wants to change, go a bit shorter, I really don't know and then we shouldn't speculate.

[August Klemp, analyst]

Okay. Sounds good. Then there are no further questions. So I'll leave the floor to you.

[Georg Whist, executive]

No, but thanks, everyone, for listening. And if there is any questions to the offer of technical nature and so forth, please do reach out. The contact details are at the bottom of the press releases. So thank you all for listening, and I wish you all a great day.