Gram Car Carriers ASA

OSE:GCC

Earnings Call Analysis

Gram Car Carriers Optimistic Amid Growing Demand

Despite a global shortage of car carrier capacity, Gram Car Carriers (GCC) is navigating a tight market with a firm footing in operational performance, benefiting from China's significant increase in car exports and robust demand for high-end heavy cargo. With the current export rate at over 5 million vehicles, China’s electric vehicle (EV) share stands at 30%. GCC is capitalizing on its modern fleet amidst this shortage, having achieved the sale of the Viking Constanza at a price equivalent to a newbuild, exemplifying sound risk management and favorable shareholder outcomes. The company is actively pursuing opportunities for fleet renewal with a focus on operational excellence and cash flow stability while preparing for environmental regulation changes. Future growth is targeted to be neutral or accretive to earnings per share, with the company committed to delivering attractive quarterly dividends based on strong earnings and cash generation.

Gram Car Carriers Delivers Record Earnings and Robust Dividends in Q4

Gram Car Carriers (GCC), the world's third-largest car carrier tonnage provider, has delivered outstanding Q4 results with record earnings, thanks to solid operations and higher day rate charter contracts. The company celebrated strong car shipping market conditions and created additional value through strategic vessel transactions. Shareholders were rewarded with a substantial dividend of $0.979 per share, marking the eighth consecutive quarter of dividend increases and reflecting a 52% growth from the previous quarter. This performance indicates an 18% annualized dividend yield based on Q4 distributions, boosted by a gain from the sale of the Viking Constanza vessel.

Sustained End-User Demand and Strong Financial Performance

GCC experienced nearly pre-COVID level demand for cars, driving revenue up to $56.4 million in Q4. The EBITDA also rose to $41.6 million, with Panamax timecharter earnings being a significant contributor. Net profit stood at $37.8 million, leading to 75% of this profit returned to shareholders. The company's revenue backlog of $851 million, with an average contract duration of 3.4 years, showcases good earnings visibility and financial stability.

Forward-Looking Strategies Amid Market Positive Outlook

GCC expects the vessel shortage to persist, supporting strong charter rates in the foreseeable future. The company plans to announce new contracts on two vessels coming open in 2025 as it continues to strategically engage with customers to generate investor value. Ensuring earnings protection, GCC confirmed that its timecharter parties include standard BIMCO clauses to manage risks in areas like the Red Sea.

Decisions on Fleet Expansion and Renewal Geared Toward Growth

The future of GCC's four newbuilds will be determined closer to their Q4 2025 delivery, with decisions to be aligned with chartering visibility and cash flow. A recent vessel sale was executed based on favorable market pricing, which suggests no immediate plans for further sales. The management emphasizes a conservative growth strategy that's EPS accretive or neutral, suggesting a prudent approach to fleet renewal and expansion.

Projected Strong Market Fundamentals and Company Adaptation

GCC benefits from robust car export activities from Asia, with Chinese exports alone up by 49% in 2023 compared to pre-COVID levels. This is expected to drive high demand for car carriers as automakers prioritize more lucrative export models. With an aging global fleet and environmental regulations pushing for more efficient vessels, Gram Car Carriers finds itself in an advantageous position to meet these new challenges, ultimately adding to the company's investment appeal.

Earnings Call Transcript 2023-Q4

[Georg Whist, executive]

Good morning, and welcome to today's presentation of Gram Car Carriers results for Q4 and the full year 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, from Singapore. To summarize, we are pleased to deliver a strong quarter and a full year with record earnings. This is driven by solid operations and execution of charter contracts at higher day rates. Car shipping market remains strong, and we are creating additional value through vessel transactions. In sum, this translate into our eighth consecutive quarter with increased dividend in line with our strategy.Gram Car Carriers, we're the world's third largest car carrier tonnage provider with a clear commitment to providing attractive shareholder distributions. The Board has approved a Q4 dividend of $0.979 per share. Increased daily timecharter earnings for distribution and Panamax vessels and vessel sales gain is driving record net profit in Q4.Near record fixed revenue backlog of $851 million provides long-term earnings visibility. We work actively to optimize capital structure and refinance 2 vessels in Q4 at lower interest costs. We continue to create additional value through asset transactions. Market outlook is positive with continued demand for long contract durations at high charter rates.We will distribute $28.37 million for the Q4 equal to 75% of net profit. $0.979 per share is a 52% increase from $0.645 in Q3. Good operational performance and contracts with higher day rates and gain from sale of Viking Constanza. We distribute our capital in a tax-efficient manner by way of repayment of [ paid ] in capital.We have delivered on this significant increase in 2023 through dividends versus 2022 and distributing $79.2 million in total since IPO, including this quarter's dividend. Annualized Q4 distributions implies an 18% dividend yield, which includes Q4 gain from vessel sale. Dividends are a function of the earnings locked in through our contract backlog and transaction gains. The analyst consensus indicate a 16% dividend yield at current share price for 2024 and 2025.End-user demand for cars remained strong, and we were 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 over the next couple of years, and charter rates have stabilized at record high levels.Our Q4 revenue was $56.4 million, up from $54.9 million in Q3. EBITDA was $41.6 million, up from $40.5 million in Q3. This mainly reflects increased Panamax timecharter earnings with the Viking Bravery's first full quarter on this new contract.Net profit was $37.8 million, including a $30 million gain. This equates to $1.31 per share in earnings. We returned 75% of net profit to our shareholders. We signed no new contracts in Q4, so the change in backlog reflects revenue generated in the quarter. The fixed revenue backlog provides good earnings visibility with an average contract duration of 3.4 years. Increase in timecharter breakeven reflects a general inflation on operating expenses.We continue to create value through asset transaction and fleet optimization. We just agreed to sell Viking Amber, a 4,200 capacity mid-size vessel built 2010 for USD 64.6 million. As I've said before, there are prices where we sell, and there's prices where we buy. This is an attractive sales price in a very strong market, reflecting that the vessel soon comes off its current contract. The transaction is set to yield a gain of $36.5 million to be booked in Q2 this year and will support dividends. As always, we are focused on optimizing shareholder return.Gram Car Carriers are a strong industry name with 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 together with our Singapore office, we manage a modern fleet of car carriers.We're listed on Oslo Bors main market since mid-December 2022, and the GCG shares commenced trading on the OTCQX best market in New York in June 2023 under the ticker GCCRF. The car industry is one of the world's largest industries, and we are an integral part of their logistics chain. We charge our vessels with the operators who, in turn, sits on volume contracts with the manufacturers.Take a few examples. GLOVIS operated 90 vessels service. They own about 1/3 themselves, and they're chartering 2/3 of their tonnage needs at any time. NYK, MOL, K Line operate each about 100 vessels. They own themselves about 2/3 of that, and they're chartering about 1/3 from tonnage providers. Wallenius Wilhelmsen on the other hand, they own 90% and only chartering about 10%.Gram Car Carriers, we are preferred partner to deliver a consistently high-quality service, which means all 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-siz vessels, serving North South trade-lanes and intra-continent; and we have the Panamax vessels serving East West trade-lanes, crossing the canal for major oceans. We have an own fleet of 18 vessels after delivery of the distribution at Viking Princess to a new owner in January. We operate in commercial management 4 new buildings for global auto carriers.With that, I will now hand over to Gunnar for the financial section.

[Gunnar Koloen, executive]

Thank you, Georg. The average TC rate for the fleet was $32,300 in fourth quarter, which is up around $1,000 compared with third quarter. This is explained by higher TC rates for the distribution on Panamax vessels with the Viking Bravery under the new 5-year charter for the whole quarter. In Q1 2024, we expect a further increase in the Panamax average rate as the Viking Queen is delivered under this new charter later this month.Operating expenses are developing in line with expectations. There's a slight increase in cash breakeven rate, reflecting general inflation on vessel OpEx, as expected and previously communicated. Utilization for the quarter was 99%. In our Q3 presentation, we communicated that Hoegh Caribia would be due to dock [ for ] repairs and have periodic survey in the fourth quarter. The vessel only dropped in late December, somewhere later than we first anticipated and communicated in our Q3 presentation.As per end of 2023, we are reporting a revenue backlog of $851 million. We did not enter into any new contracts during fourth quarter. The Viking Queen charter was reported at the very end of Q3. We are sold out for 2024, and the only open capacity is in 2025 and is limited to Viking Passero and Mediterranean Sea, which come open towards the middle of the year. Average contract duration for the Panamax vessels with a higher earnings is at 4.5 years.Visibility on revenues is very good, which I will get back to on the next slide. Since listing in 2022 -- beginning of 2022, we've signed charter contracts for more than $1 billion. And the chart to the right there shows the revenue backlog as at the end of 2023 and how it is split on a year of expected recognition. And this demonstrates the good visibility we have on revenue and earnings.Yes, I'll go to the financials. Revenue and earnings reflect continued strong operations. EBITDA was up 3% and net profit up 52%, reflecting the gain from the sale of the Viking Constanza, which we delivered to the buyer during the fourth quarter. The Board has approved to pay 75% of net profit as dividend, which is in line with our stated dividend policy. And the dividend includes 75% payout of the gain from the sale of the vessel. Dividend will be paid out of share premium.Operating cash flows was at $48 million during the quarter, which is up from $45 million in previous quarter. We're building a solid balance sheet with a book equity at 46% and $59 million in cash at year-end. The total liquidity reserve stands at $100 million, and net debt is now at $240 million. And at the end of the quarter, the net interest-bearing debt-to-EBITDA ratio is at 1.7. Once this leverage ratio reduced below 1.5, our -- the margin on our main credit facility will reduce to 2.25%.We continue to optimize our capital structure and cost base to maximize profit and shareholder returns. Lower cost of debt supports our long-term cash flow visibility and dividend capacity. In Q4, we refinanced the Viking Bravery and Mediterranean Sea at the competitive terms. And we just recently initiated the refinancing of the lease debt on the Viking Adventure by exercising the repurchase option. And we put back the vessel with liquidity reserve. And we're now working on competitive financing for the vessel, more in line with what we have recently obtained for the Viking Bravery.And with that, I'll hand it over to Georg to give an update on the market. Thank you.

[Georg Whist, executive]

Thank you, Gunnar. There are a very limited number of vessels open for fixing in 2024. It reflects the type market with most car cases booked now on long-term charters. Volume growth is expected in 2024 and 2025 despite economic uncertainty, lower growth expectations, weaker consumer confidence in the U.S. and Europe and the conflict in Ukraine and Gaza. New car sales are expected to be back at pre-COVID levels this year. The auto manufacturers continue to prioritize their export models where they make better margins. U.S. inventories of import brands remain at low levels. China's export continued to grow at a record high and heavy volumes, gives a tight market for car carriers. In sum, we're looking at a prolonged firm market.The main driver of 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 but helped by Japan and South Korea, driving increased ton-mile demand, and Asia vehicle producers grew their export by 49% in 2023 versus pre-COVID of [ 20.50 ]%. They are taking market share on outperforming European seaborne export driving up the average sailing distances.The increase from 2019 to 2023 of 4.7 million cars exported from Asia to the world market, translate into about 110 Panamax vessel demand. More than 50% of 2023 exports from Asia headed to North America and Europe. This is driving up ton-mile demand and explains the tight market we're experiencing.Looking more closely at China, China has rapidly established itself as the second largest and soon the largest car exporter in the world. The current export run rate indicates more than 5 million last year, up from 3.2 million vehicles shipped in 2022.[ EV ] share over the last 12 months is 30%. China is expanding its position as a global EV powerhouse. This will further drive 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, investing in production in China.They're all benefiting from an established battery electric value chain in China with modern production facilities, modern port infrastructure, a well-established auto parts supply chain, including EV batteries. And of course, they have a large skilled and cost-effective workforce.The 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 for car carriers. There's a clear shortage of car shipping capacity. When we were matching the ARS data, tracking all car carriers departing Asian ports with custom data for export of new and used cars plus high and heavy cargo, the deficit was [ 2.9 million ] until November 2023.To get these cars to market, the manufacturer must utilize inefficient transport methods such as containers, dry cargo vessels with [ rags ] and even multipurpose vessels. Such [ 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 will require an additional 94 car carriers on an annualized basis.The supply side remains favorable despite the order book increasing and above historic average levels. This is a response to the strong market fundamentals. These fundamentals are set to continue to support a long-term strong market.Net fleet growth has been negative since 2014. Only 11 newbuildings were 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 reduce fleet efficiency due to environmental regulation requirements.Gram Car Carriers, we are a unique pure-play investment opportunity. We are experiencing attractive market fundamentals, and we have captured a strong market through fixtures and value-adding vessel transactions. We have good visibility on growing earnings and cash generation, and we're committed to delivering attractive dividends to our shareholders on a quarterly basis.With that, I thank you for listening, and we're now turning over to the Q&A session.

[August Klemp, analyst]

Thank you for the presentation, Georg and Gunnar. My name is August, I work here in Pareto in Equity Research, and I will be moderating this Q&A. So just a reminder to everybody at home, if you have any questions, feel free to post them in the chat function on the website. So we have received quite a few questions. I guess we can start with this one.When do you expect to announce new contracts on the 2 vessels coming open in 2025? And what rate levels compared to the current rates would you expect to get on these?

[Georg Whist, executive]

As we have 2 ships coming up in mid-'25, so normally, we expect to conclude those 3 to 6 months before expiry. Of course, should there be an opportunity earlier at the price we like, then, of course, we are always there to engage with our customers and create value for investors. Rate levels, [ it's ] difficult to predict the future. But as I've just explained to everyone, the market looks very tight for the next couple of years. So it's difficult to have any other opinion that similar levels should be there, market permitting or the world not falling into parts.

[August Klemp, analyst]

And then there's a lot of focus on the Red Sea situation now, obviously. There's a question here. Could you please confirm that all timecharter parties are covered with owner-friendly war risk clauses so that the restrictions on Red Sea passage does not affect GCC's earnings/backlog?

[Georg Whist, executive]

Yes. I mean we have in all our charter parties clauses that regulates the war-like situations in the Red Sea. They are the standard BIMCO clauses. You call them owner friendly, I will call them balanced [ since ] war. It's something that we have to avoid at any cost. So yes, they are all [indiscernible].

[August Klemp, analyst]

Then there is one here regarding the newbuilds. When will the decision be made as to what will happen to the 4 newbuilds?

[Georg Whist, executive]

Yes. We've been discussing this on this forum a few times before. So to remind everyone, the 4 newbuilding starts coming from Q4 2025. And we will have a decision and a discussion with those owners when we are closer to delivery and when we have visibility on chartering and cash flow. So in 1 year's time, maybe -- around 1 year's time, will be my best estimate.

[August Klemp, analyst]

And then one -- and maybe you would like to maybe add a bit to the sale you announced this week, a little bit about the thinking there, maybe what could have been the alternative if you were to charter the vessel, and also if you're planning to sell any more of your ships?

[Georg Whist, executive]

No, we're not planning to sell any more of our ships. We weren't even planning necessarily to sell this ship. But when we are out and this ship becomes open in the market, there are -- we have discussions on chartering, and we have discussions on sales price. And when they are out of sync, then there are prices we sell that, as we have said before, and there is a price we buy it as well. So we are very active in the market, looking for opportunities. And this one was quite easy decision for us actually because the price we obtained, if you do the math on what's available in charter market now and what you then have to earn until the ship is 25 or even 30 years, is extremely elevated. And so from a risk-reward, we thought this was a fantastic deal.Another example is, if we were to go out today and order the exact same spec of this ship, we will probably have to pay $65 million. So we're really getting the same price for a 14-year old ship as you would have to pay for a newbuilding. So for us, that is good risk management. And for you, the shareholders, it's a good risk-reward. And again, it's prices where we sell.

[August Klemp, analyst]

Then there's a question, could you provide some commentary on your approach to fleet renewal going forward? Is there any appetite to order new builds or acquire modern tonnage?

[Georg Whist, executive]

Yes. We -- as I said, we are quite active, both looking at the newbuildings or modern ships. Obviously, Gram Car Carriers is all about vessels on the water, cash flow stability, dividend yield to our shareholders. So with that in mind -- and this is exactly why we have global auto on the side, that is a different investment, different risk capital, different drivers. But of course, we're looking to bring it together and have that negotiation with those owners and see if we can agree on the price, which is at least neutral or accretive on an earnings per share basis. And that's the sort of mentality we always use. We are not going to take away any money from shareholders to do growth. Growth has to be neutral or accretive.

[August Klemp, analyst]

Then there's a question here. What do you think about the demand for your vessels when current contracts end considering stricter environmental regulations coming up and a lot of newer and alternative fuel vessels entering the fleet?

[Georg Whist, executive]

Yes, as I think we've demonstrated in today's presentation, is that there is not enough ships. We are firm believers that the world has to decarbonize and we are working on various projects to decarbonize our fleet. We have a specific decarbonization plans for all our ships. The world cannot decarbonize within the current order book. You have to do a retrofit. You have to work on existing fleet, which actually is the greenest way to transform. So we are constantly working on that.And we see very clearly that when we are out sailing -- when the ships are sailing long distances, we operate to what is called a CI rating A. It's the number of port calls, it's the speed and other adjustments which makes the carbon higher. So with optimization of sailing schedules with various kits on the ships. Also biofuel is, to a large extent -- we're seeing more and more of carbon capture, retrofit of new fuels. I mean all of this has to come together to decarbonize the world. And I think our fleet is well positioned for that and to drive the next curve as well.

[August Klemp, analyst]

Just a reminder, if you have any questions, you can type them into the chat here. There's a few more. Let's start with this one. You see strong deliveries in '25 to '27. Can this affect prices starting from '25?

[Georg Whist, executive]

Well, the deliveries are -- '27 is not all as much, but '25 and '26, it's 60 ships per year. So that is quite lumpy. But as I've shown on the presentation today, we are already a very high number of cargo, which should be on car carriers, is now transported on container ships. And it's not on container ships because it's cheaper or because of anything else. It's just on container ships because there isn't any capacity on the car carriers. So if there were 50 more car carriers in the world today, they will be utilized and there will be slightly [ lesser ] container ships. Containers, bulkers, it's not an efficient or even wanted way to transport brand-new cars by the auto manufacturers.

[August Klemp, analyst]

And then one you kind of touched upon, so I'll leave it up to you if you want to elaborate, but how is the business influenced by the Red Sea?

[Georg Whist, executive]

Yes. So our business -- we are a timecharter operator. So I mean, we get paid on a daily basis. So directly, we don't feel any difference. We get paid the same amount whether we go around Cape of Good Hope or through the Red Sea. And so directly for us, there is no difference. Generally, in the market, if you believe that this will last for, let's say, 1 year, then on our calculation, that will tie up between 5% and 6% of the world fleet, which again, in the already extremely tight market, just [ making ] it even tighter. So well, if this terrible situation last, maybe it will be even better rates when we renew in '25. But personally, I do hope that this war and situation in the Middle East will end sooner. But yes, that's the consequence of what's going on.

[August Klemp, analyst]

Then there's a question here. Can you tell us which banks you work with for ship financing?

[Georg Whist, executive]

Yes. I think we've been fairly open with that in all our materials. So we have a large syndicate of -- or not large, we have a syndicate of banks with predominantly Scandinavian banks and a few German banks, which have been with us for -- yes, for -- some of them more than 10 years and for a long, long time. We also work with Asian banks, and we have recently announced that we have repaid our Chinese leases. So we have won debt-free ships which we are now working on, the Viking Adventure, and we'll be announcing quite soon a refinancing of that vessel. So it's a combination of Northern European banks and Asian banks.

[August Klemp, analyst]

Then there was a question, do you have an estimate of how much of current deep sea car trade that is not transported on car carrier vessels?

[Georg Whist, executive]

Yes. I think it's on one of the slides, right? I think we did the [ AI ] -- mapping of the AIS data where you look at how much cargo is leaving the -- or last year was leaving Asia, and then you map all the export data. And then there is a big gap. And that gap transponds to 94 vessels last year. So it's a big, big number, which are now moving on other means of transport, meaning, dry cargo, container ships, multipurpose, et cetera.

[August Klemp, analyst]

Then as far as I can see, that was the last question, but I have one as well. So if you have any final ones at home there, please type them in now. Kind of just thinking a little bit ahead, you have the 2 vessels coming open in the middle of 2025. You have potentially some talks on the new builds starting also maybe next year. But until then, what's kind of the strategy? What are you thinking about for the next couple of quarters?

[Georg Whist, executive]

Also for the strategy, of course, we will keep on doing what we've been doing so far. So it will be more the focus on the balance sheet, optimizing debt structures, making -- saving money there. Of course, with all these great contracts, it's extremely important as we deliver to our customers. So we are working on operational excellence. So all that is happening. And of course, we don't see it on our [ hands ]. So we are calculating and looking at all kinds of transactions all the time, but they do need to meet our hurdle, which is it has to be neutral or accretive to shareholders. Otherwise, we will not do those transactions.So in a high market, that is always tough because, when people sit on gold, they feel its gold and they don't want to sell it for less. So it's very difficult to agree on pricing in the current market, but we will be persistent and stubborn and stick to our plan and deliver on our promise to our customers. So 75% of net profit every quarter. And now with this very fixed backlog, you can calculate extremely precisely what your checks will be the next couple of years.

[August Klemp, analyst]

Okay. I think that's a nice way to end it. So thank you very much to Georg, Gunnar, and yes, we'll leave it at that. Thank you.

[Georg Whist, executive]

Thank you all for listening.