Gram Car Carriers ASA

OSE:GCC

Earnings Call Transcript 2023-Q2

[Georg Whist, executive]

Good morning and welcome to today's presentation of Gram Car Carriers' results for the second quarter 2023.

My name is Georg Whist, and I'm the CEO of Gram Car Carriers. And as usual, I'm joined by our CFO, Gunnar Koloen.

To summarize Q2. We continued to make good progress on executing our strategy. We delivered the sixth consecutive quarter with increased earnings and dividends. This is driven by charter contracts at higher day rates in a strong car shipping market.

Gram Car Carriers. We're the world's third largest car carrier tonnage provider. We listed in Oslo Børs main market since mid-December last year and started trading on OTCQX in New York since June 2023. We have a clear commitment to provide attractive shareholder distributions. The Board has approved a Q2 dividend of $0.47 per share, a more than doubling from Q1 and in line with the new dividend policy.

Daily time charter earnings increased for all vessel sizes in Q2, leading to a higher net profit. Fixed-revenue backlog at the end of Q2 was $826 million and provides good long-term earnings visibility. In early Q3, we sold 2 distribution vessels, capitalizing on high asset prices. And we acquired a controlling stake in a mid-size vessel at a favorable price point. The market remains positive with continued high charter rates and demand for long contract durations.

We will distribute $13.6 million for Q2, equal to 75% of net profit. $0.47 per share is a 110% increase from the $0.224 distributed in Q1. This reflects a combination of higher net earnings and higher payout ratio. The distribution represents a repayment of paid-in capital, which is tax efficient.

End user demand for car remained strong, with the market expected to be back at pre-COVID levels in 2024. We see a continued shortage of vessels over the next few years. And charter rates have stabilized at the current record-high levels.

Q2 revenue was $48.4 million, up from $41 million in Q1. EBITDA was $32.9 million, up from $27.7 million in Q1. This reflects increased TCE earnings across all segments. Net profit was $18 million, up from $13 million in Q1, of which we returned 75% to our shareholders.

The change in revenue backlog reflects the contract revenue generated in the quarter. The fixed-revenue backlog provides good earnings visibility with an average contract backlog of 3.2 years. Time charter breakeven remained stable, as lower margins on our credit facilities are partly offset by higher SOFR interest rates.

Gram Car Carriers. We're a strong industry name with more than 40 years engagement in the industry. We have extensive experience from chartering vessels to all major global operators and key regional operators worldwide. We're headquartered in Oslo. And with our office in Singapore, we manage a modern fleet of car carriers. We've listed on Oslo Børs main market since mid-December 2022, and our GCC shares commenced trading on OTCQX Best Market in New York in June this year.

The car industry is one of the world's largest industries, and we are an integral part of that logistics chain. We chart our vessels to the operators who in turn sits on volume contracts with the manufacturers. Take GLOVIS for instance. They operate about 90 vessels. 2/3 of that, they charter in; and they own about 1/3 themselves. NYK, NYK Line, each operate about 100 vessels. They own about 2/3 of that themselves and charter in 1/3 of their tonnage needs from tonnage providers like us. Wallenius Wilhelmsen, on the other hand, they own most of their vessels and charter in only about 10%. Gram Car Carriers, we're a preferred partner who deliver a consistently high-quality service, which means all the stringent quality measures set by the car manufacturers.

We have 3 main types of vessels. We have the distribution vessels serving regional markets like Northern Europe and the Caribbean. We have the mid-size 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 operate on commercial management, 4 newbuildings for global auto carriers.

For those of you with attention to detail. There are some changes on this slide related to a transaction we announced in July. And going into details: In July, we assumed a 70% ownership of the mid-size vessel Mediterranean Sea. We bought 75% of the shares or -- in the single-purpose company which owns the vessel for $17.8 million in cash. Gram Car carrier is the commercial manager, and we had a 1% ownership before the acquisition. The vessel is on time charter until May 2025 at $25,500 per day, adding $18 million to our revenue backlog here in Q3. The acquisition is expected to support increased dividends and distribution.

Also in July, we agreed to sell 2 distribution vessels: Viking Constanza and Viking Princess, a cash consideration of USD 43.5 million. We modernize fleet and capitalize on historically high secondhand value prices. We expect to gain $19 million upon completion, contributing to net profit and dividend capacity. Viking Constanza will be delivered to our new owners in Q4 2023, and the Viking Princess in Q1 2024, on completion of existing charter contracts. The transactions support our strategy of owning and operating a modern fleet.

We divest a 20 -- 28-year-old small distribution vessel. We also divest a 13-year-old distribution vessel for a higher price than what we effectively are paying for a 13-year-old mid-size vessels. This confirms our ability to capture additional value in historical strong shipping markets.

Now over to Gunnar for an update on operations and finance.

[Gunnar Koloen, executive]

Thank you, Georg.

Second quarter has been yet another quarter with increased revenue and earnings. The average time charter rate for the fleet was $28,770 in second quarter, up $3,150 from last quarter. This reflects higher average day rates for all vessel types.

Overall, we have good control of our operating expenses, which are developing in line with expectations. We recognized close to $1 million in nonrecurring expenses related to repairs during the quarter. These repairs did not impact utilization. The average cash breakeven remained stable from the previous quarter, as lower margins on the main credit facility offset the impact on -- of higher interest rates. We expect OpEx at around $6,000 per day for the distribution vessels and $7,000 per day for the mid-size and Panamax vessels for the rest of the year. For the year seen as a whole, we expect to exceed these numbers only very slightly due to the nonrecurring expenses in this quarter.

The fleet was fully operational during second quarter, only with the exception of Viking Sea completing its second special periodic survey at the end of the quarter -- excuse me, at the beginning of the quarter; and the Panamax vessel Viking Bravery, which started on a scrubber installation at the end of the quarter. Overall, this resulted in 99% utilization for the fleet. The Viking Bravery scrubber installation was completed on budget and ahead of schedule in late July, before commencing on its new 5-year charter. As a result of an incident Hoegh Caribia was involved in, in July, we expect to incur around 30 days off hire to carry out repairs during third or fourth quarter.

As reported last quarter, fixing activity has naturally slowed down following a very active 2022 and limited open capacity. Taking into account the sale of the 2 distribution vessels we have reported in July, we are effectively sold out in 2023. The 2 vessels we have sold will be delivered to the buyer after they complete the existing charters, and there will be no impact on backlog. The acquisition of Mediterranean Sea, on the other hand, will add $18 million in backlog and will be consolidated into our financial statements from 1st August 2023.

We see continued strong demand for our 2 vessels with open days in 2024, the Viking Queen and Viking Amber. We expect these 2 vessels to roll over on contracts with higher earnings in first and second quarter next year, as we expect the charters to make use of the vessels until the max dates, which are January and April, respectively. All this considered, we have very good visibility on revenues with such a large portion of the fleet fixed on long-term contracts, which I will get back to on the next slide.

So revenue backlog remains near record high at $826 million. The graph on the right shows the revenue backlog as at end of June, split on the year when we expect to recognize the revenue; and this demonstrates the good visibility we now have on earnings, yes. And I -- as I mentioned earlier, the acquisition of Mediterranean Sea; and fixing of the 2 2024 open vessels, Queen and Amber, will further add to the backlog. We continue to focus on longer charters, providing good visibility on cash flow and dividends to shareholders.

Then looking at the key financial figures. Revenue and earnings reflect continued strong operations. Second quarter net profit was $18.1 million, up from $13.1 million in first quarter. The Board has approved to pay 75% of net profit as dividend, and this is to be paid out of the share premium and in line with our new dividend policy. This represents a 110% increase compared to last quarter and, as Georg has mentioned, is a result of higher earnings combined with the higher payout ratio.

In April, we agreed with our lenders in the main facility to move from a fixed-margin to a grid-based pricing based on leverage ratio measured as net interest-bearing debt over EBITDA. With a net interest-bearing debt-EBITDA ratio below 3x, at 2.8 as per 30th of June, the margin on our main facility will now reduce from 275 to 240 basis points.

With that, I will hand it back to Georg to give an update on the market. Thank you.

[Georg Whist, executive]

Thank you, Gunnar.

Charter rates have stabilized at record levels for Panamaxes and mid-size vessels, while distribution vessels continued to move up on a very limited availability. 180 vessels owned by tonnage providers; only 2 are open for re-contracting in 2023, in Q3. Total open position for the remainder of 2023 for re-contracting is also very limited. Only 8 vessels are currently open. This is down from 25 open positions in April. For comparison: 65 vessels were opened -- or fixed for 2022 and over 100 were fixed pre COVID. Looking into 2024, the picture is the same. The conclusion is that the market remains very tight.

Expectations for global auto sales have remained stable since June despite increased interest rates and fear of recession. Volume growth is expected in 2023 and 2024 despite high economic uncertainty, lower growth expectations, 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 are expected to be back at pre-COVID levels in 2024. Auto manufacturers continue to prioritize their export models. U.S. inventories of import brands remain near-record lows and less than 20 days inventory. China's export continued to grow, and record high and heavy volumes gives a tight market for car carriers. In sum, we're looking at a prolonged firm market.

So what's driving this market? It's a story of China but also Japan and South Korea and about increased ton-mile demand. The main driver of the car carrier market is export from Asia to the world. The rest of the trades are predominantly backhaul trade. Asian vehicle producers, led by China but supported by South Korea and Japan, are set to grow their exports by an estimated 37% in 2023 versus pre-COVID 2019. They are taking market share and are outperforming European seaborne exports, driving up average sailing distances. The increase from 2019 to 2023 of 3.6 million cars export from Asia to the world translate into about 100 Panamax of vessel demand. More than 50% of expected 2023 exports from Asia are heading to North America and Europe. This is driving up ton-mile demand and is resulting in this current tight market.

Looking closer at China. The strongest export trend continues with China established as the second largest car exporters in the world. The current export run rate indicates more than 4 million annually, up from 3.25 million vehicles shipped in 2022. Electric vehicle exports 12 months average run rate stands at 31%. China expanding its position as a global electric vehicles powerhouse will lead to further growth in ton-mile demand. Driven by both 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. Benefiting from an established battery electric value chain, China has modern production facilities; modern port infrastructure; well-established auto parts supply chain, including EV batteries; and of course, a large skilled and cost-effective workforce.

High and heavy demand remained strong with higher volumes and strong backlog in 2023. All the main sectors agriculture, mining and construction are experiencing high demand. This is high-paying cargo which lifts demand for car carriers overall. We continue to see a favorable supply side despite the recent increase in order book to above historic average levels. This is a response to the strong market fundamentals. The current market fundamentals are set to continue to support a long-term strong market.

Net fleet growth has been negative since 2014. So far, only 3 newbuildings have been delivered in 2023. And the age profile of the fleet indicates a substantial recycling potential. Further vessels are needed to meet growing demand, replacement requirements and reduced fleet efficiency due to environmental requirements.

To sum up. Why invest in Gram Car Carriers? Well, we are a unique investment opportunity. The market fundamentals remain attractive. Capturing strong market, this includes value-creating asset transactions. With our fixed-revenue backlog, we provide good visibility on growing earnings and cash generation. We are committed to deliver attractive dividends and being good stewards of capital.

With that, I would like to open up the floor for a Q&A session.

[August Klemp, analyst]

Okay, thank you very much for the presentation, Georg and Gunnar.

My name is August. I work here in equity research at Pareto. And I will be moderating this Q&A session. [Operator Instructions]

[August Klemp, analyst]

So we've had a few here already, starting with, "Georg and Gunnar, congratulations on the Q2 results and on a very positive quarter overall. Have you given any thought on revamping the share buyback program since the shares are trading below the average price of the previous buyback program?"

[Georg Whist, executive]

Yes. So thank you for that. As we have discussed on previous calls as well, we are always looking into striking a balance between building the liquidity in the stock versus buyback. And right now we still prefer to increase the liquidity in the stock. Saying that, we have now increased our dividend to 75%. And just to remind everyone: that this is a return of paid-up capital, so it is very tax efficient. So the way we see it at the moment is it's better to pay the dividends, to pay it as a return of capital, and then rather try to build the liquidity instead of straining the liquidity by doing more buybacks. The buybacks we did was -- as we also announced, was to fill up the share incentive program for the employees, so it had a slightly different purpose.

[August Klemp, analyst]

Yes. Then there's another question kind of related to this, saying that the liquidity of the stock remains very low. What's being done to increase this? And what's the advantage of being listed with such a low turnover?

[Georg Whist, executive]

Yes. So we remind everyone again that we've been listed now for 1.5 years on the Euronext Growth but really just 9 months or 8 months on the main market in Oslo. We are engaging with investors. We have put also more efforts into the United States and we'll follow that. That's why we also went for a OTCQX trading platform, where people in the United States can trade in the U.S. opening hours. And we will be intensifying our marketing efforts towards new investor groups. So by that -- and I also believe -- by constantly delivering on the dividends, which we are -- have been doing, now having our sixth consecutive increased dividends and now with 75%, we believe that people will soon get this. And that will also drive more interest and more liquidity in the stock.

[August Klemp, analyst]

Okay. And then there's one. How is the rechartering of Viking Queen progressing? Have charterers started to grow hesitant due to increased deliveries next year?

[Georg Whist, executive]

Yes, no, there's no hesitation whatsoever. And as we showed on one of the slides, there are very few open position for rechartering next year. Let me just bring up that slide. I think I passed it, actually. There it is. As you can see and for the Panamax for the rest of this year's, there are only 6 ships. Or that -- and that was end of Q2. A couple of these have now been covered. There's also ships opening for next year that's starting to cover. There's discussions on all of these ships that are coming open for the next or the rest of this year. We're in discussions and the market is staying put and firm. And we do not see any weakening signals in the chartering market at the moment.

[August Klemp, analyst]

Okay, that's good. Another one kind of touching up on this, but the order book to fleet is now well above 30%. Are you worried at all about newbuilds coming to the market in 2025 to 2027?

[Georg Whist, executive]

I think we touched of that on this presentation as well, I think, on -- you can see this on the right-hand corner. Between now and the end of '25, there's 103 vessels hitting the waters. At the moment, there is at least 20 or 25 ships [ too little ], so there is cargo. We know there's cargo left behind. We hear from the operators they're all sold out. And ideally, we'd like to have more vessels. So there is already a deficit. With the new regulation that came in this year with the CII. A 1-knot decrease in the world fleet requires an additional 25 vessels. So 1 knot, 25. Maybe 2 knots is 50, so there's quite a lot of need just because of environmental regulation. Then there is ships that's coming of age. There's about 26, 27 of them which are good scrapping candidates, so that's another 26. And then just by increasing the world sales and derivative and seaborne traffic generated by that -- last year, 80 million cars sold worldwide. This year, we're on to 86 million. Just a delta of 6 million cars translates into about 27, 28 car carriers, so only with that, the book is covered, but we are not even back to post -- pre-COVID levels, sorry. If we're back at 90%, which is pre COVID, or even 95% from the year before, we need about 80 ships that this graph shows. So in our opinion, the order book, although it's large, it's quite natural, but it's actually it might be that it's not even enough. People have to remember: This is the graph on the left, but there's been underinvestment in this sector for -- since 2014, so there is quite a big overhang that needs to be filled up. So we're watching it closely, but we're not terribly concerned.

[August Klemp, analyst]

Okay. Then I think we'll just stick with this one on Viking Queen. What rate would you estimate Queen to get based on, I think it says, 5- and, respectively, 3-year charters? And what period are you aiming for?

[Georg Whist, executive]

So we are working with our customers. And it seems that, both us and then, we're homing in on the 5 year, so -- and that's what we would like to do. We could also do longer. We could consider doing 7 or even 10 years. So that will be a discussion with our customers, but the rates have been reported to be in the $60,000 to $65,000 per day range. That's the recent concluded transactions. And we see no softening, so that's my best I -- estimate. I don't have a crystal ball, but that's at least last [ done ].

[August Klemp, analyst]

Yes. Sounds good. Then sirs, what would it take for you to sell more ships? And if you did, what will be use of proceeds?

[Georg Whist, executive]

Yes. So I think what we just recently did is a very good example of how we approach things. I mean, of course, one vessel, the Viking Princess, she's built 1996. She becomes 28 years in -- when she comes off charter, so that is more of a selling to another buyer at the end of life. We will typically be selling ships when they are between 20 and 25 years, so this is a very natural and -- evolution on that ship. Then we have the Viking Constanza, which we did a lot of calculation. We were offered a price which we thought was very -- or we think and believe and -- is very good price. And you need to believe in a very firm market for the remainder of her life, so we said, well, we should sell her and which we did, but on the other hand, we turned around the market. And we saw an opportunity to acquire parts of the Mediterranean Sea, which is built exact same age as the Constanza. She's 5,000 versus 2,000. And we're buying a 5,000 ship built the same year at a lower price than what we sold at 2,000, so to me that demonstrate that we are very focused. We are good keepers of your capital. And there will be prices that we sell at when we believe that we have maximized the profit. And there are prices we buy at when we believe we can create further shareholder value, so we will have a pragmatic, opportunistic approach to asset sales and asset purchases, but it needs to -- as we've always said, needs to create shareholder value and increased earnings per share and dividend per share capacity.

[August Klemp, analyst]

Yes. [Operator Instructions] We have a few more for now, one about the dividends on the unadjusted numbers versus adjusted. Like how will this work with the sales gains that you just talked about going forward?

[Georg Whist, executive]

Yes. So we are selling the vessels and we will have a book gain of $19 million on those 2 disposals. So 75% of that will be distributed as dividends in Q4 and Q1 next year, so we're sticking to our planned. It will work itself through our P&L and then 75% of that P&L will go to investors. So sort of big numbers is that about $0.50 will come to -- per share will come to the investors via dividends in Q4 and Q1 next year.

[August Klemp, analyst]

Okay, yes. There was another one here. Any plans to order newbuildings? Do you see any chance to purchase secondhand ships at price [indiscernible] creating sufficient positive cash flow? So 2 questions, I guess.

[Georg Whist, executive]

Yes. So we are evaluating newbuildings and secondhand with the same kind of approach. What does our customers want? Where can we create shareholder value? And I think that's what we also demonstrated by we bought -- we have now 76% of Mediterranean Sea. And we believe that creates great shareholder value because the charter rate we need to achieve post the current charter is comfortable with and obtaining the dividend yield which we have at the moment. So we will approach that with the same philosophy that we've always done. We have -- as you know, we are managing 4 newbuildings. They are not for us because they're unfixed and they don't generate cash, but as we also said, we will have a discussion with them closer to delivery and when the cash flow is known to see if there is a combination to be done. But it has to be at least neutral but preferably accretive to our dividend yield.

[August Klemp, analyst]

Yes. And then there is one and just like, yes, as you touched upon here. How do you avoid conflict of interest with global auto carrier [ movers ]?

[Georg Whist, executive]

Yes. So we don't have any newbuilds ourselves. And the timing, when it comes, we don't really have any open positions when those are in negotiations, so we don't see that as a big -- we handle that quite fine. We have -- as those of you who have been with us for a long time, we have managed ships for other people for more than 10 years and we have been handling that perfectly. Our chartering people view our third-party vessels which we manage as our vessels; and make sound, good business decisions based on that. So yes, there is in theory a conflict of interest, but we handle it. And we have handled that for, yes, more than 10 years, so I think that is well taken care of.

[August Klemp, analyst]

Certainly. Then there's one on -- in Norwegian here, but I'll translate. How has the interest been for Gram Car Carriers in the U.S. following the listing?

[Georg Whist, executive]

So it's, yes, we had a sort of non-deal road show or investor lunches and meetings in June, just before the Scandinavian summer break. And yes, very -- people like it. I think where the Americans maybe are slightly different than Scandinavians and some Europeans is that they are -- they really like and I think they arguably understand our dividend yield story even better. They get it. I mean we have -- you can calculate with extremely high precision what your dividend checks will be over the next 2 to 3 years. And then they look at the share price and they see that dividend yield, and they really like it. So they are studying. We're also in discussions to come back in the autumn. So we will do more investor calls, more investor meetings. We do see in our -- when we take out and look at our investor list through the VPS system, that there is gradually coming more and more U.S. custodian accounts into our shareholder group. So it's moving slowly and surely, and this is long-term work. We will work on it brick by brick and take the calls, do the hard work. And then slowly but surely, I'm convinced, they will come.

[August Klemp, analyst]

Yes. Sounds good. Then we have no further questions here for now. [Operator Instructions] And then I have one in the meantime, which is kind of these vessels that you're selling. Like you talked about the Princess being quite old. It's a small vessel as well. What do you think kind of the buyer is seeing or sort of disagreeing with you, where they're willing to take on this ship at a price that you're very happy to sell at? Is there a different priority? Do they have different needs? Or are they kind of, yes, seeing something else?

[Georg Whist, executive]

Yes. I mean this is an European, quite new operator. I mean they have a contract portfolio. They're obviously optimizing that. They have some short-sea Europe. So they are more -- they are an operator, so they're buying for their own needs and building that and with their -- I don't have insight into the full details of their contract mix. So they saw this as an opportunity and have been putting it together. And the ships, as we understand, are going to trade for one of the OEMs, so it's just very interesting. And for us it's about selling ships when they come of age and selling ships when we get a very good price.

[August Klemp, analyst]

Yes, yes, makes sense. Then there was one more coming in here. Any plans to diversify into other segments such as ROROs provided they comply with your policy of being fixed and give shareholder value, et cetera?

[Georg Whist, executive]

No, we don't do -- we believe shareholders can diversify themselves and invest in RORO companies, so -- and tankers and bulk [ as in others ]. So we are really good at car carriers. We've been doing it for 40 years, and that's what we know. We -- so we'll stick to what we're good at and create value for shareholders and try to grow the business as a dedicated tonnage provider in the car carrier space.

[August Klemp, analyst]

Okay, sounds very good. Then there are no further questions. I'm sure, if there's anybody afterwards, they can reach out to you guys -- okay, as I said it, there was one more here. Georg, what's your view about the safety of transporting electric vehicles in view of recent events?

[Georg Whist, executive]

Yes. It's obviously something we spend quite a lot of time on. And there are quite a lot of safety measures already coming in, although we are a bit disappointed that the legislation is lagging behind, but the operators are coming in with standard procedures, maximum charge levels. One operator having can -- not have an EV onboard which has more than 30% charge. Because the fire is all about the releasing energy, so you need to have as little charge as possible in the car, yes, to have it in the most safe, but when you look at statistics, EVs don't burn -- I mean there's a lot less fire in EVs than in conventional cars, so that also helps. There are development. We -- some of our vessels, we have these blankets. You can cover the electric vehicles if they catch fire. The recent event is a very sad story. And there's loss of life and so it's really, really bad, but I think the operator there has been quite transparent, has been publicizing statements of what is really happening. I encourage, like with most news stories, people to stay away from the public heated sort of press like [ The Sun ] and stuff like that. Stay on the or read up on the serious press. And the last we heard is that the fire was from 8th deck and upwards. And actually all the EVs were parked lower in the ship, so let's see what the investigation says, but early signals is that it was not EV fire on that ship. It was actually combustion engine, but that's just early reports. Let's see when the full investigation continues, but it is an important issue. And we have training programs. And the most important: The crew needs to feel safe. And if they feel safe, then I think we have good procedures. So it's something new. It's we need to work on it, and we are. And the industry is taking it very, very seriously, so I think we -- I think it will be okay.

[August Klemp, analyst]

Yes. Sounds good. Then there are no further questions. And I think we will draw the line there, so if you have any final remarks, please.

[Georg Whist, executive]

I think we are continuing to, as you know, delivering on our story. And we have, as we said, the sixth consecutive increase in dividend. And then there is more to come, as your analysts will guide you and tell you. I cannot, unfortunately. And if there are questions or specific things on the financials, please reach out. Gunnar is here well prepared and ready to answer any detailed questions on the financials. And -- look forward to present more news and also the Q3 in a few months time.