Hoegh Autoliners ASA

OSE:HAUTO

Earnings Call Transcript 2024-Q1

[My Vu, executive]

Good morning, and welcome to Hoegh Autoliners' First Quarter Presentation. My name is My Linh Vu, Head of Investor Relations. And with me today, we have our CEO, Andreas Enger; and our CFO, Per Øivind Rosmo, who will present to you the first quarter business and financial update.

Online audience can send questions to our Investor Relations mailbox at [e-mail], and we will answer the question during the Q&A session at the end. So with that, I will hand over this back to you, Andreas.

[Andreas Enger, executive]

Thank you, My Linh, and welcome to today's presentation of our first quarter 2024. I'm pleased to be able to present another strong financial quarter in a situation where the shipping industry has experienced one of the potentially biggest operational crisis that sort of can happen to the industry, which is sort of closure of the Suez canal effectively through the situation because of the situation in the Red Sea.

That has created a need for a comprehensive sort of reshuffle and change in our trade structure -- despite -- and it has also resulted in a substantial loss of volumes. Despite that, we've been able to deliver another very strong quarter.

Before we go into the financials and the quarter, I just want to recap what is the essence of our strategy. We have had 3 focus areas over the last couple of years where one is to build resilience through the cycle. The other is to execute a comprehensive green fleet renewal and the third is to provide attractive returns to shareholders.

And in that sense, this quarter actually represents an important milestone in the sense that we've done the refinancing that is, in many ways, the last building block of creating resilience with debt maturities pushed beyond 2030 and a very, very robust capital structure.

We have fantastic progress on our green fleet renewal and not only progress in the sense that we will get the first 2 vessels delivered in August and September of this year. But it's also fully financed -- almost entirely financed with equity and fully financed with debt, meaning that we have a capital structure that removes the conflict between the fleet renewal need and the ability to pay dividends, which then basically leaves us with the third one in providing attractive returns with the dividend that was paid out in Q1 and our dividend capacity going forward.

We're delivering industry-leading dividend yield, and we do that without sacrificing renewal or financial resilience in the company. And that is -- it's -- we believe it's a fantastic achievement, but it also creates a very, very strong platform going forward.

Recap a bit on the newbuilding program. We have 12 Aurora Class vessels on order. It is almost 110,000 CEUs capacity. It basically makes up 47% of our existing fleet capacity. And we have made -- created the ability to get the last 4 of the 12 series delivered with ammonia propulsion from yard, allowing us to go to zero carbon in that period.

And we are getting the first vessel in August, the second in September and further 2 in the beginning of 2025. So it's very, very well on track, fully financed at attractive terms, combination of bank and lease arrangements where we have full control of the vessels, and it will reduce emissions per transported vehicle by 58% starting with just the scale and LNG and 100% as we can get to green or blue ammonia.

And we believe this is very, very important in a situation where we believe the oldest and less least carbon efficient vessels will become increasingly competitive in the years to come. And having this type of fleet quality is, in our view, essential to serve the premium OEMs in our industry.

So that is an important achievement, and it is very well on track, and you see pictures of the first vessels really taking shape at the yard on the side here. Being early with fleet renewal has also allowed us to optimize our fleet. We've sold a total now of 3 17-, 18-year-old vessels. And if you look at the price received, it's actually quite similar to the price per capacity unit as the newbuilds, meaning that we are getting an extremely good exchange rate, we are able to time delivery of the sales -- to the deliveries of our newbuilds and are such in that sense, strengthening our fleet in both ends.

And we are doing that with very strong cash proceeds further increasing our both resilience and dividend capacity. Then to the quarter, $162 million of EBITDA that is as expected with the situation in the Red Sea, down from the exceptional result of last quarter, but still a very, very strong quarter.

Net profit of $115 million further increases in rates, and it allows us to pay $109 million of dividends, and we have a very, very strong equity ratio at 62%, although a bit down after the large dividend payment in the quarter.

Moving on to commercial side. I think one of the highlights in the volume side, it's relatively stable in terms of rates and High & Heavy share. It is, as we've seen strongly and previously reported in our monthly updates strongly down in volume due to primarily the Red Sea situation, but also with a net rate at all-time high.

And gradually recovering volumes that Per Øivind will comment further on. We believe we are -- we still have a very, very robust business system. We are now in the middle of several important contract renewal processes. Our message there again is the same as previous quarters. We are continuing to strengthen our contract coverage at attractive rates and with increased duration.

We still have a volume -- an annualized volume of more than 4 million CBM to renew. We are in the middle of some processes. Some processes are coming later in the year, and we will, as a customer report those as they come along. But I think it's important to say that we are now in a stage where clearly, it's been for a while.

It's the contract renewals of legacy contracts that drives our rate development. And while -- the spot market is still robust and allows us to effectively manage the network and balance capacity, it doesn't provide the kind of rate uplift that we saw a year or more ago.

So we are now in the process of increasing our contract coverage beyond 80%, which is -- I think it's an all-time high. And we believe also it's kind of the limit in the sense that in order to be able to provide a quality service to important customers, we will have to have some flexibility also in our network in terms of managing volumes, and that is something that we are customer balancing by also having a share of uncommitted volumes that gives us that flexibility.

The market outlook remains strong, has been strong growth in Asian exports. It's a continued outlook of volume growth, continued sort of constraint in terms of capacity. So we see the market outlook continuing to be strong. And we also see further growth in the High & Heavy market.

And as we've said many times, while High & Heavy has become less important to safeguard profitability with increased rates on new cars. It is still important to optimize our trade system. So we retain our focus on the High & Heavy segment.

Capacity. It's also, I think, fairly unchanged. There is an order backlog, slightly above 200 vessels. It is not changing a lot. Time charter rates are -- remain at a very high level. We are, as you've seen, given our newbuild program -- given the upcoming newbuild programs, we'd rather monetize or leverage that market by taking opportunities to sell older vessels then to -- and we're not -- that is in the current moment chartering vessels at these levels.

Then there has been, I think, an unprecedented series of disruptions in this quarter. We obviously had the Red Sea coming in over Christmas that has created a major change in trade patterns. We've also had the Israel-Iran conflicted has created some uncertainty about the Arabian Gulf and Strait of Hormuz, which has fortunately not escalated. And we have the Baltimore Bridge, which is a tragedy to the local community.

It's -- Baltimore is not a very active port for us, and we've been able to secure good alternatives for the port calls, so it does not have any real operational impact for us. And again, saying that we've had keel layings of vessel 3 and 4, we now have -- as we speak, we have 2 vessels on the water, ready for being prepared for delivery in July -- in August and September.

And we have 2 more vessels being built in the dock. And we actually have another 2 vessels where construction of blocks has started. So we have 6 vessels in construction right now and 2 for very near-term delivery. On the sustainability side, we are starting to see effects of our increased use of biofuel. It is an important, I would call bridge fuel for us. It's not scalable to the level that we can rely on it on a long-term low-carbon fuel, but it's very, very important to deliver near-term low-carbon solutions to our customers.

So we are running a substantial increased volume on biofuel, and we're doing it with full cost coverage from customers. We also have a docking series with a substantial upgrade plan for existing vessels for fuel efficiency. Various upgrades on [indiscernible] propellers in connection with the dockings.

And we have, as the only company in our segment secured 4 early delivery of ammonia engines -- 4 vessels being delivered in 2027. And one of the, I think, very positive things over the last 3 to 6 months is that all, I think several leading shipowners, several important ports. Clearly, MAN, now also the International Energy Agency is clearly pointing to the possibility to now really launch ammonia-powered vessels and that ammonia-powered vessels will likely to be the leading zero-carbon alternative and the most cost-effective zero-carbon alternatives.

So we are glad that the optionality we built in when we started our newbuild program seems to pay off in the sense that it allows us to take a real position, really unique competitive position on zero-carbon propulsion as early as 2027, which is -- which we believe will be important for our competitive position.

That leaves -- ends the kind of more sort of business and capacity and market update, and I'll leave it to Per Øivind to take us through the financials in some more detail. Thank you.

[Per Oivind Rosmo, executive]

Thank you, and good morning. As Andreas said, the main impact on the volume in Q1 was the reduction in volume. We lost 650,000 CBM compared to Q4 2023, and the main reason was the situation in the Red Sea, especially in the beginning of the year, where we had to reroute vessels.

We had to turn vessels around that was on the way into the Mediterranean or actually also was in the Red Sea area, and that created a lot of challenges to the network. 3.3 million CBM is a reduction of close to 17%. So it is actually a considerable reduction compared to the average that we had in 2023.

To some extent, that was mitigated by the higher net rate, but also a good and solid cost control during the quarter. We will see that from the numbers. Revenues reduced from USD 382 million in Q4 to USD 328 million in Q1. That's a reduction of 14% coming from the loss of the volume.

We still produced a strong result $162 million in EBITDA compared to $171 million in Q1 2023. And we were able to maintain the EBITDA margin of 50% even with this big volume loss that gave us a net profit of $113 million compared to $124 million in Q1 2023. The $195 million that we had in Q4 2023 includes a sales gain of $36 million from Hoegh Bangkok that was sold and delivered in December. So the number is not directly comparable.

If you look at the bridge between Q4 2023 and this quarter, we see that we had $54 million in lost revenues. We had $3 million lower bunker expenses, and we had $14 million other operating expenses. That gave us the EBITDA of $162 million.

The balance sheet is still very strong. We have seen an increase in net interest-bearing debt, of course, since we paid $360 million in dividend from the cash in Q1. And -- but still, the net interest-bearing debt-to-EBITDA ratio is only 0.5%.

Book value of the equity somewhat reduced due to the dividend payment, but 62% of the balance sheet is equity, close to $1.2 billion in equity. The cash balance, we had $458 million. We paid $360 million dividend. We ended the quarter with $207 million. We had a strong operational cash flow. And in addition to the $207 million, we have a credit facility in the new loan arrangements of $200 million. So our liquidity reserve by the end of first quarter was $407 million.

Looking at the cash flow development, we started with $458 million. We had cash from operation of $165 million. We used $19 million on investing activities, $10 million was a yard installment for one of the newbuildings and the other $9 million is dry docking expenses and also some owners' expenses related to the newbuildings.

We have some expenses related to the newbuildings that we have in addition to the yard installments. Debt service, interest rates and amortization, 16 million in the quarter. And then we paid the $360 million in dividends. And we also had a lease payment and other financial expenses of USD 21 million.

That took us to $207 million. And as I said, in addition to that, $200 million in an undrawn facility. The balance sheet is as before, simple and easy to understand. Most of the assets are vessels that we own, $1.3 billion. And then we still have a few vessels on lease, $169 million. And we had bunker inventory and freight receivables of USD 190 million by the end of the quarter and then cash, $207 million. Equity, $1.2 billion. Interest-bearing bank debt by the end of the quarter was USD 355 million only. Then we have some lease liabilities related to the right-of-use assets of $190 million.

Current liabilities was $135 million and other noncurrent liabilities, mainly deferred taxes was $38 million. That gave us a book equity of NOK 67 per share by the end of the quarter. If we adjust the book value of vessels and use market value of the vessels, instead, we see to the right here that we have calculated the net asset value of the company to be USD 2.5 billion, and that equals to NOK 143 per share.

As Andreas has mentioned, one of the main events in first quarter was the refinancing of the mortgage debt. We have 2 facilities in place now. We have the main loan facility of USD 720 million. We used that to refinance the USD 350 million that we had in legacy debt by the end of March. The main change here is that we have now only pledged 6 vessels for that debt, leaving 24 vessels completely without debt.

And looking at the market value of those 24 vessels, it was USD 1.5 billion by the end of first quarter. The 24 vessels that have no debt also, of course, have very low cash capacity cost. It's basically only running expenses and some admin expenses and dry docking expenses. So the cash breakeven costs for the 24 vessels without debt is around USD 10,000 per day. $90 million will be used to purchase Jacksonville and Jeddah, the 2 vessels previously owned by Ocean Yield, and we have declared the purchase option, we will get to Jacksonville this Friday.

And Jeddah, we will get in September. And then we have $280 million under that facility that is earmarked for 4 of the Aurora newbuilds. The facility runs into 2030. So it's a 6-year tenure in this facility. And we have -- given that we have only pledged relatively new vessels, the Horizon class vessels are built in 2015 and '16, meaning that we have a very attractive amortization schedule on the mortgage debt, reducing quarterly amortizations considerably.

And we also were able to reduce the interest rate on the loan. So all in all, we have a very, very flexible and attractive financing now for our bank debt. In addition to that, we secured a $200 million non-amortizing 4-year credit facility. And this facility is undrawn as of today, and it will serve as an additional liquidity reserve, but also gives us the possibility to use it for future capital allocation if there is opportunities coming our way.

And you see the lenders in this facility to the right here. They are all well-known international shipping banks, and we have had a long relationship to all these banks. As Andreas said, we will pay the free cash flow that we had in the quarter in dividend that is $109 million and the dividend is expected to be paid out early May.

[Andreas Enger, executive]

Yes. That leaves us with the outlook, which I think we have mostly covered already. But one, the market remains tight, creating a good environment for our contract renewal processes. Our dispositions in the contract market will -- is expected to bring our contract share up above 80%, which is, I think, compares with the historical level of or more 60% to 70%. So we are clearly strengthening our market backlog and our portfolio in that process. That's one important point.

The other one is clearly that the Red Sea disruption is consuming capacity. Longer voyages reduces the cargo capacity of our fleet. The total volume loss is approximately 800,000 to 900,000 on an annual basis. We are mitigating with a combination of surcharges and the way we manage our fleet, and we expect, as you say, volumes now gradually to come back.

It's also such that in addition to the Red Sea, we live in a more unstable geopolitical situation than previously. We've seen some tension building up in the Gulf of -- the Arabian Gulf, Strait of Hormuz that has not had a major impact, but we're clearly following all aspects of the global geopolitical and macro situation closely.

So that ends our presentation, and I think it leaves us open for Q&A. My Linh, any questions?

[My Vu, executive]

Thank you, Andreas. Yes, we have to see a few questions from our online audience during the presentation. And the first question is related to more general macro pictures. So can you say something about the impact of the drop in electric car sales in Europe with the company -- on the company?

[Andreas Enger, executive]

I think, no, in the sense that it doesn't have much impact, but [indiscernible]

[Per Oivind Rosmo, executive]

So far, we haven't really seen any impact. And to the extent that we transport less EV. We have been able to take all the cargo out of Asia. So our sailings from Asia to Europe is still full. So -- and we see also that some of the EV exporters out of China are right now exporting more in order to get these cars into the market before the tariffs eventually come into place.

So we have -- and it's also fair to say that EVs from China, China produced EVs to Europe has not been a major part of our cargo historically. So far, no impact and vessels are still also from Asia to Europe.

[My Vu, executive]

Yes. Thank you, Andreas and Per Øivind. The next question is related to the capacity. So the question is, you have previously indicated that we would like to keep the fleet size constant. Is this still with the plan? Or would you be willing to take advantage of the high price for secondhand vessels market and so higher number of older vessels are leading to a slight reduction in fleet size?

[Andreas Enger, executive]

I mean, first, we have a newbuild program that said that actually makes up almost half of our current capacity. We are obviously also retiring some vessels reaching normal retirement age. But implicitly in our fleet renewal program, we are increasing capacity. And we will constantly look at the right way to optimize our fleet in light of our network demand and the opportunities to sort of realize strong values for older vessels in order to improve our fleet.

We have a strong belief that the fleet quality in 2027, '28 where the market balance improves and the carbon consciousness of our customers improves and ETS charges and CII hits. The fleet quality in 2027, '28 is extremely important for our long-term competitiveness, and we are steering towards improving that. And we're quite pleased that I think we have the most comprehensive and most credible program to deliver low-carbon services and deliver a market-leading fleet quality into that time period.

[My Vu, executive]

Thank you, Andreas. And the next question is related to the volumes. We already mentioned -- we already quantify the volume impact from the Red Sea disruptions in our outlook. But curios comment something about the volume in Q2 compared to the volume in Q1?

[Per Oivind Rosmo, executive]

Now what we -- as I said, we had a big impact on the volume in the beginning of the year, where we had to reschedule a lot of sailings. And in a way we calibrate the network that effect is gone.

And as we see it now, we will -- all sailings are full. We have high utilization and the volume loss that we have compared to 2023 is around 200,000 CBM per quarter coming from the Red Sea effect, and around 100,000 CBM coming from the sale of Hoegh Bangkok in December. So -- but other than that, we -- the conclusion is that we expect to see higher volumes going forward than what we had in the first quarter.

[Andreas Enger, executive]

And I think we add to that, the 2 newbuilds we get in August and September has approximately the same capacity as the 3 vessels we have sold.

[Per Oivind Rosmo, executive]

Yes, they have 50% higher capacity than the vessels that we are selling. So we are also adding capacity by exchanging 6,000 CEU vessels with 9,000 CEU capacity vessels.

[My Vu, executive]

Yes, we have a few questions coming in just now. The first 2 questions relate to the volume, we just commented on. And the EU tariff basically you already touched on in the first answer. And the next question is about the last 4 newbuildings. Could we provide some comments about the incremental CapEx should we go with the options to go with ammonia engines for the last 4 vessels?

[Andreas Enger, executive]

I don't know exactly where we want. It is work in progress. But we have received an award of NOK 146 million from Enova, which is expected to basically cover 40% of the incremental cost of the newbuilds. So we -- that's sort of order of magnitude, but we also have, as I said, cost coverage for that through the Enova cash support.

[My Vu, executive]

The next question is from analyst [indiscernible]. We mentioned our contract shares of up to 80% towards the end of this year. Is that excluding or including the newbuilds?

[Andreas Enger, executive]

That is based on the capacity we have. As I just said, we are retiring. I mean we are delivering older vessels, we're adding new ones. We will have roughly the same capacity, including the newbuilds. So I think that's -- it doesn't particularly matter.

[My Vu, executive]

Yes. So next question. Could you comment anything about the competitions from the container lines? when you come to...

[Andreas Enger, executive]

I mean, I think in all fairness, we don't see much competition from the container lines. We -- I mean, most of our dialogues related to containers is with OEMs currently shipping in containers, wanting to create plans to get back on RoRo. So it is -- so I don't think we see that -- and I mean, I think what we see structurally is that we don't see much -- we've taken some volumes back from container in some markets, but running large trade flows in containers is not really an option for the large OEMs.

Containers is an option for new start-ups and smaller volumes. It's clearly an option for those who are not able to secure sufficient capacity on Aurora vessels. But our -- most of our dialogues is really taking volume back. We have taken some volume back in China and outside China, and we are having those dialogues.

[Per Oivind Rosmo, executive]

Yes, I think we said it before, and I think we can say it again that the volumes currently going in container vessels and both vessels, we consider that to be a cargo reserve for the RoRo industry. Those volumes, we expect those volumes to come back to RoRo when the capacity is there.

[Andreas Enger, executive]

We don't have open space on our vessels due to container equipments.

[My Vu, executive]

And the last question, I guess, is related to the news that's come out recently this morning. So I'm not sure it's really too early to comment. But can we say anything about the car shipping markets? That container lines, for example, MSCs, Gram has announced early this morning.

[Andreas Enger, executive]

I don't think we can comment much on that. But I think Gram is a tonnage provider that benefits from having a good backlog of time charters to operators, and it sounds like from the press releases that they don't plan to change the business models. So I don't think the ownership of that has much change. But it is -- the whole newbuild program is creating a different operator environment. There are Chinese building new players that are entering into the car carrier market and containers are among them. This is a competitive market. It will remain a competitive market, and I don't see that as a major change.

[My Vu, executive]

Thank you, Andreas. Yes. And that will also the last question we received so far. And if you have further questions, please reach out to us to our Investor Relations mailbox at [e-mail]. We thank you for your attention, and we look forward to seeing you next time. Thank you.