Gram Car Carriers ASA

OSE:GCC

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Georg Whist, executive]

Good morning, and welcome to today's presentation of Gram Car Carriers results for third 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.

Today, We are visiting our customer NYK's terminal in Zeebrugge. And as you can see, it's a busy terminal with several ships unloading and a lot of cargo on the deck. This is their brand-new really fancy ICO Terminals.

To summarize, we deliver now our seventh consecutive quarter with increased earnings and dividends in line with our strategy. This is driven by charter contracts at higher day rates in a strong car shipping market. At Gram Car Carriers, we are the world's third largest car carrier tonnage provider with a clear commitment to provide attractive shareholder distributions.

The Board has approved a Q3 dividend of $0.645 per share, up 37% from Q2. We have increased daily time charter earnings for distribution and Panamax vessels, which are driving our higher net profit. We have a record fixed revenue backlog now of $908 million, which provides good, long-term, very visible earnings.

We execute several business transactions that have created additional value and dividend capacity. The market outlook remains positive, with continued high charter rates and demand for long contract durations. We distribute $18.7 million for Q3, which equals 75% of net profit. $0.645 per share is a 37% increase from the $0.47 we distributed in Q2. This reflects the higher earings as vessel starts on new contracts with higher day rates.

We distribute our capital in a tax-efficient manner by way of repayment of capital. We have a clear dividend commitment in joining the Euronext growth in January 2022, and we are delivering on this, distributing $50.8 million total, including our Q3.

The annualized Q3 distribution implies a 14% dividend yield. Dividend is set to increase as a function of the earnings locked in through our contract backlog. According to the analysts and their consensus, this indicates an 18% dividend yield at current share price for 2024 and 2025.

End-user demand for cars remain strong, with even the recent increase in the forecast. Volumes are expected now to be back at pre-COVID levels next year in '24, and we see a continued shortage of vessels. And charter rates, they are now stabilized at record high levels.

The Q3 revenue was $54.9 million, up from $48 million in Q2. EBITDA was $40.5 million, up from $32.9 million in Q2. This reflects increased time charter earnings for distribution of Panamax vessels. The latter reflecting the Viking Bravery, which started this new contract in the beginning of July.

Net profit was $24.9 million, equaling $0.86 per share, of which we returned 75% to our shareholders. Our backlog has been increasing with a 5-year fixing of Viking Queen and the acquisition of Mediterranean Sea, and of course, less than the recognized income for the quarter. The fixed revenue backlog provides good earnings visibility with an average contract duration now of 3.5 years. Our time charter breakeven remains stable.

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

The car industry is one of the world's largest industries, and we are an integral part of their logistics chain. We charter our vessels to the operators who in turn sets some volume contracts with the manufacturers. Let's take a couple of examples. GLOVIS, they operate a service of about 90 ships. They own 30 ships themselves, and they're chartering about 60 ships from tonnage providers like us.

NYK, MOL, K Line, each have about 100 vessels service. They own about 2/3 of this themselves, they charter in about 1/3 of that. But [indiscernible] on the other hand, will scale. They only in about 10%, they own 90% themselves. So Gram Car Carriers, we are a preferred partner to deliver a consistently high-quality service, which means all the stringent quality measures set by our manufacturers.

We have a service with 3 main types of vessels, [indiscernible] the distribution vessels, serving regional markets like Northern Europe, Caribbean, between Mexico and the U.S. We have the Mid-size vessels, serving the North Sail trade links and trade intra continents. And then we have the Panamax vessels, serving East West trade lengths, crossing all the canals and the major oceans.

We own now a fleet of 19 vessels after we delivered the distribution Viking Constanza to its new owner in October. We operated commercial management 4 newbuildings for global oil carriers.

We also create value through asset transactions, which we focus on accretive growth and fleet optimization. We executed 2 vessel transactions in Q3. Effective what we've been doing, we've been selling a 13-year-old distribution vessels for a higher price than what we've paid for a midsized vessel of the same age. This confirms that there are prices where we sell and there are prices where we buy, always optimizing shareholder return as our focus.

The transaction supports dividend capacity through sales gains and increased backlog. The booked gain for Viking Constanza was $13 million and is recognized in Q4 in this year. Our strategy of owning and operating a modern fleet is also kept in mind. This confirms our ability to capture additional value in an historic strong car shipping market.

I'll now hand over to Gunnar now for some of the financial highlights.

[Gunnar Koloen, executive]

Thank you, Georg. So we continue to deliver quarter-on-quarter revenue and earnings growth, which is in line with expectations as higher rates on new contracts materialize. The average time charter rate for the fleet was $31,370 in the third quarter, and this is up $2,600 compared with last quarter.

This reflects higher average day rates for the distribution in Panamax vessels. And we had the full impact of the new contracts for Viking Constanza and City of Oslo, the 2 distribution ships in third quarter. And we also delivered the Viking Bravery to the new charter end of July, so that ship is now earning $64,900 per day. We're expecting the next increase in the Panamax average rate next year when Viking Queen start on the new contract that we just recently announced.

Operating expenses are developing in line with expectations, and the cash breakeven rate for the fleet is unchanged from last quarter. Utilization was at 98%. We had 28 planned off-hire days for the Viking Bravery in connection with the scrubber installation, which was completed in July. And we had 7-day and planned off-hire days in connection with Hoegh Caribia incident that we mentioned in the last quarter presentation.

We're expecting around 30 days of hire end of Q4 or beginning of Q1 to carry out some requests on this vessel. As per end of September, we are reporting a record revenue backlog at $908 million. We added $132 million of new contracts this quarter, $114 million from the 5-year fixing of Viking Queen and another $18 million as a result of the Mediterranean Sea acquisition. We see a lot of interest on the Viking Amber, which is the next vessel open in Q1 next year -- sorry, Q2 next year.

Open capacity for the 2 next year is now limited to the Viking Amber in '24, Viking Passero and Mediterranean Sea in 2025. And the overall contract duration for the fleet is 3.5 years, as Georg mentioned, with the Panamax duration now at 4.8, years. which is part of the fleet with the higher earnings. Visibility on revenue is very good, which I'll get back to on the next slide.

So we've signed -- now signed more than $1 billion of new contracts since we did the listing in January '22. And the bar chart here on the right, showed backlog allocated over the next years, how we will recognize this backlog. And this quite clearly demonstrates the visibility we now have on revenue and earnings. The Amber fixing, which we are working on will further add to this backlog. We continue to focus on longer charters, providing good visibility on cash flows and dividends to shareholders.

Then looking at the key financials. Revenue and earnings reflect continued strong operations. Revenue was up 13% this quarter compared with last quarter, at $54.9 million. EBITDA and net profit is up 23% and 37%, respectively. And vessel operating expenses and admin expenses were lower in third quarter compared to second quarter. The Board has approved to pay 75% of net profit as dividend, in line with our revised dividend policy announced last quarter. And this will be paid out of share premium accounts.

Cash flow from operating activities was $45.4 million in third quarter, which was up from $38 million last quarter. As at 30th of September, we have a net interest-bearing debt EBITDA ratio of 2.1. And once this leverage ratio go down below 1.5, which we're expecting next year, then the margin on our main credit facility will reduce from the current level at 2.4% to [ 2.25% ].

Yes. With that, I'll hand it back to you, Georg, to talk about the market.

[Georg Whist, executive]

Thank you, Gunnar. So charter rates have stabilized at record levels for Panamax and midsized vessels, while rates for distribution vessels continue to reflect very limited availability. Also the 180 vessels, which is all by the tonnage providers, there are no vessels open for recontracting for the remainder of this year.

Total open positions for 2024 for recontracting is also limited with 23% vessels currently open, and this includes new buildings. So it's very few, very limited and it looks very tight. For comparison, 23 vessels have been fixed so far this year. 65 vessels were done last year. And pre-COVID, normally, there's about 100 fixings per annum. So this shows how tight and how few vessels are really available next year for operators.

Looking into 2025, it's the same picture. So the conclusion must be that the market remains tight. Expectations for global auto sales were increased in September despite high 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 geopolitical complex. However, we are coming from historic subdued levels.

New car sales are now expected to be back at pre-COVID levels next year in 2024. Auto manufacturers continue to prioritize their export models. And as you can see, U.S. inventories of imported brands remain near record low at around 20 days inventory. China's exports continued to grow at record high and heavy volumes gives a tight market for car carriers. In sum, we're looking at a prolonged firm market.

The market is driven by increased ton-mile demand, with rapidly growing export from Asia to the world. Asian vehicle producers led by China, but supported by South Korea and Japan, are set to grow their export by estimating 43% in 2023 versus the pre-COVID levels of 2019. We're taking market share and outcompeting European seaborne export, driving up average sailing distances. The increase from 2019 to 2023 is more than 4 million cars of export from Asia to the world markets. These translate into about 114 Panamax vessel in demand.

More than 50% of expected 2023 export is from Asia, is heading for North America and Europe. This is driving up ton-mile demand and explains the current tight markets. China has rapidly established itself as the second largest and, soon, the largest car exporter in the world. The current export run rate indicates a 4.8 million vehicle ships annually, up from 3.25 million shipped in 2022. Electric cars share for the last 12 months is about 32%. China is expanding its position as a global electric vehicle powerhouse, and this will drive further ton-mile demand growth.

Driven by both Chinese car brands, growing internationally and international car brands, such as Tesla, followed by Volkswagen, BMW, Volvo and General Motors, which are all investing in production in China. China is benefiting from an established battery electric value chain. They have modern production facilities, modern port infrastructure, a well-established auto parts supply chain, including EV batteries, and of course, a large skilled and cost-efficient workforce.

High-end heavy demand remained strong with high 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 overall for car carriers.

There's a clear shortage of car shipping capacity at the moment. We're matching [ ARS ] data tracking all car carriers departing from Asian ports with customs data from the same regions, both for new cars and high & heavy. We estimate a deficit of approximately 1.7 million units in the 8 months from January to August this year. To get these cars to market, the manufacturer must utilize inefficient and unwanted transport methods, such as containers, dry cargo vessels with racks and even multipurpose vessels.

These suboptimal solutions are predominantly used to carry used cars from Japan and Korea and low double-digit percentages of new cars from China. Closing this gap out of Asia on an annualized basis would require an additional 85 car carriers.

We continue to see favorable supply side despite the recent increase in the 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. The net fleet growth has been negative since 2014. So far, only 5 newbuildings have been delivered this year. The [indiscernible] indicates also a substantial recycling potential. Further vessels are needed to meet growing demand, replacement requirements and reduce fleet efficiency due to environmental regulation requirements.

To sum up, Gram Car Carriers, we are a unique pure-play investment opportunity. We are experiencing very attractive market fundamentals, and we have been and we are capturing this strong market through fixtures and value-adding vessel transactions. We have good visibility on growing earnings and cash generation, and we are committed to delivering attractive dividends to our shareholders on a quarterly basis.

Thank you for listening from a wonderful Zeebrugge. And now I will hand over to August for the Q&A session.

[August Klemp, analyst]

Thank you, Georg. [Operator Instructions] So we have received quite a few ones. Starting, I guess, with maybe Viking Amber. The next vessel coming up in Q2 next year. You show in the presentation very few vessels opened globally. So how are contract negotiations progressing here? And what kind of terms do you expect for the vessel?

[Georg Whist, executive]

So we are in discussions with several of our customers on that vessel at the moment. As I showed on the slide, there's only 23 ships open next year. So there is a decent line outside our door who wants to talk about that vessel, and we expect to announce contracts on that vessel to the market over the next weeks or at least before Christmas.

[August Klemp, analyst]

Okay. Thank you. And then one here that says, with contract activity slowing down going forward, what will be the next focus for the company? Growth? Fleet optimization? If so, is global auto carriers a potential M&A candidate?

[Georg Whist, executive]

Yes. So the answer to that question is all of it. I mean we are obviously working on -- and now that we have secured this wonderful fixed visible cash flow, of course, we are working very hard to make sure that all the ships are running smoothly, that our customers are happy with the service they're paying top dollar for. So we will, of course, spend a lot of time making sure that, that part of the business is intact. We are constantly looking and calculating various transactions.

We have said all along, we will have a discussion with global auto carriers once those vessels are fixed. We will have a serious discussion on that. And if we can agree a deal with those shareholders at a neutral or accretive valuation to you and to our shareholders, we will go ahead with that. If we cannot agree, they will stay separate.

[August Klemp, analyst]

Okay. Thank you. And then one here saying we're seeing some deck cargo vessels being converted to car carriers. Do you see any disruption of such units to ease the tight market, especially within the distribution vessels?

[Georg Whist, executive]

I think the -- I have that on one of my slides, I showed the deficit. I mean right now, in particular, Chinese producers have not really built up their strategic fleet of car carriers yet. So we are seeing suboptimal solutions. We did -- I spoke to one of the importers in Norway a couple of weeks back, and they are receiving now new cars in container boxes, and it's causing a lot of trouble. It's coming to the wrong port. When you open a container, there is no ventilation or humidity control. So you need to clean the cars thoroughly, spending $2,000, $3,000 on this.

So at the moment, the exporters don't have enough ships. So yes, you will see suboptimal solutions in this tight market. That just -- product needs to be moved. So you will see that. And -- but once the newbuilding orders are delivering, I would fully expect some of the suboptimal solution then to fade away again.

[August Klemp, analyst]

Yes. That makes sense. Then another, I guess, a kind of strategic question. You've been active in both buying and selling vessels recently. What are you seeing in terms of S&P opportunities going forward?

[Georg Whist, executive]

So I mean, as we try to explain is that we are agnostic to this. We will charter our ships. But if there are people out there who wants to buy vessels at elevated levels, which we don't see that can be defended by the current charter market, then we will sell. I mean we are in a business of running a great operation, but of course, always with the shareholder in mind, making sure that we create shareholder value. So we can sell. We can buy. We can charter. These are the tools available to us, but of course, with the customers -- our customers in mind, giving them also good service.

[August Klemp, analyst]

Yes. The next one here, the freight cost per car has ramped up significantly. How do you see the cost difference between less-efficient transporting such, as containers and racks? Do pure car carriers freight rates have to move down significantly for these cargoes to return?

[Georg Whist, executive]

No. As I said, I think the only reason there is suboptimal solutions, like boxes and racks, [indiscernible] being used is because there is just there isn't enough car carriers. And the manufacturers, and in particular in China, needs to move the cargo. They want product to market. So they are paying almost whatever it takes, being in a box or being on a ship, as long as they get product to market. So it's not as easy. And it's not dynamic, it's not that you can sit an arbitrage and look at, now it's a bit cheaper to put it in a box.

Because it's not cheaper when you take into account the entire cost from the cleaning up the car, the logistics is disrupted because you're getting the box into the wrong port. When you take the entire cost, car carriers is still the preferred solution by all the OEMs.

[August Klemp, analyst]

Sounds good. And then a question here that we've seen a few of the Oslo-listed companies dual list in the U.S. recently. Most recently yesterday, with OKEANIS. You have also started trading on an exchange in New York, but is there any appetite to potentially uplist here going forward as you can perhaps achieve a better pricing on the dividend?

[Georg Whist, executive]

I think that's why we went for the OTCQX solution. And we've had one virtual conference with them so far. We're also going to New York in 2 weeks and having an Investor Day there. So to us, it's all about doing the heavy lifting. We need to do the marketing, whether you're on OTCQX or you're listed. I think our hypothesis on what working on right now is that we have a ticker in the U.S. We'll do the heavy lifting, we'll do the marketing, and then I think people will appreciate that and start pricing our stock a bit more aggressively on the dividend yield.

If it turns out some -- further down the line that it's even better to list, well, we always look at optimizing and make sure we get the best pricing. But right now, we're only sort of 4, 5 months into our OTCQX listing, so it's a bit early to start looking even at more advanced solutions.

[August Klemp, analyst]

Okay. [Operator Instructions] We have a few more here. I think maybe for Gunnar, this one. Costs came down during the quarter and was below estimates, is there a particular reason for this? And should we expect that this level is maintained more or less going forward?

[Gunnar Koloen, executive]

So cost last quarter, second quarter, we reported some nonrecurring expenses. So basically, we have not had these nonrecurring expenses, that's why it's come down to the level where we're expecting it to be. And the [ $6,000 ] for the smaller ships and [ $7,000 ] OpEx for the bigger midsize and Panamax, which we have communicated previously is what we are expecting for the rest of the year. And then next year, I think we will see OpEx in line with general inflation, I think.

[August Klemp, analyst]

Sounds good. And one on your debt facilities. Now that you've fixed out all of the Panamaxes and, obviously, as you have a very nice backlog, is there any appetite to kind of refinance the current facilities or change them in any way?

[Gunnar Koloen, executive]

Yes. So we are -- we have 2 of the Panamaxes, the Adventure and the Viking Bravery, we have on a lease. So we will be looking at refinancing or we are working on refinancing these 2 vessels now, I mean with a solid backlog, we're expecting to obtain very competitive financing on those 2 ships.

[August Klemp, analyst]

Okay. Sounds good. Then as far as I can see, there are no further questions there. So unless there's any latecomers that have a question, you have to type quickly. Otherwise, I will give the word back to you guys for some -- okay, here we had one actually. Apart from the repair downtime, is the Caribia able to operate normally?

[Georg Whist, executive]

Yes. She is working -- she is operating at the moment, and we are -- so that's why there's been quite a long time between when the incident happened and when we are repairing end of this year, it's because we are preparing all the bits and pieces. So it will be an efficient quick dry dock. But the vessel is pretty functional at the moment and it's carrying cargo in the Caribbean.

[August Klemp, analyst]

Okay. Sounds good. And then a follow-up was just, will insurance cover the repair cost?

[Georg Whist, executive]

Yes.

[August Klemp, analyst]

All right. Nice and easy. Then I think -- okay. Here's one with the smiley face. So I guess you can take it as you like as our last question. But what do you see as a fair yield price for your stock?

[Georg Whist, executive]

Of course, we have opinions about our own company and how it should be priced. But I mean with the now extremely visible and predictable cash flow, I think the current -- as we said, the analysts have it at 18%. To me, that sounds rich. It should. But I think we should expect as well, as we are just keep on delivering and sending dividend check, I would expect that to come down towards 10% to 12%. And then you can -- each one of you, and together with the analysts, can calculate what that means to share price. I will not be guiding on share price.

[August Klemp, analyst]

Sounds good. Then there are no further questions, and I think we draw the line there. So please, if you have some final remarks, Georg.

[Georg Whist, executive]

Yes. So thanks, everyone, for listening. And we are super excited. As I said, we are here in Zeebrugge at the NYK terminal. We're going to go out and experience these facilities. And thanks, everyone, for listening. We appreciate all existing shareholders and welcome all new shareholders. And we'll stick to our promise, we'll keep sending those checks every quarter. So we'll speak to all of you quite soon, I hope.