Hoegh Autoliners ASA

OSE:HAUTO

Earnings Call Transcript 2023-Q2

[My Linh Vu, executive]

Good morning, and welcome to Höegh Autoliners second quarter presentations. This quarter, it's our pleasure to present you a result on what a beautiful [indiscernible] right at the heart of the Arendal.

My name is My Linh Vu, Head of Finance, Treasury and IR. And I gladly introduced our CEO, Andreas Enger; and our CFO, Per Rosmo, who will be your main presenters today.

[Operator Instructions] So with that, I will hand over the stage to you, Andreas.

[Andreas Enger, executive]

Thank you, My Linh. It's really a pleasure to have our presentation this quarter in Arendal. We will, given that we've spent a big part of this week discussing and debating how to make the green transformation happen in shipping, we will also use the opportunity to elaborate a little more on our progress on that journey.

But starting with the highlights of the results and the numbers, we've had another record quarter, delivered an EBITDA of USD 181 million, transforming into a net profit of USD 133 million and producing then according to our dividend policy, a dividend for the quarter of USD 67 million.

This result is created or produced based on a good operation, continuing strong, slightly increasing rates and is further strengthening both our ability to pay dividends to shareholders and to strengthen our financial platform and now with an equity ratio up to 64%, which is a robust platform for our fleet transformation and for the future business of the company.

I'm going through a little bit on the market today with expanding a bit on our progress, on our contract structure. Going through the capacity update, expanding also a bit on sustainability, looking a little bit into the impact of our new vessels coming, with the first vessels being delivered now in less than a year before Per Øivind takes over the financial update in more detail and we allow room for Q&A.

Talking about the market. It's a continued strong market. All vessels are full, rates are slightly up and the cargo mix is strong. So all in all, it is a good -- is a good quarter on the core operational side.

I would like to elaborate a little bit on -- give some light on how our contract portfolio is developing. I think I have in several quarters, said that we have been working intensively through 2022 and into 2023 with firming up, solidifying our contract structure. That has been quite a substantial effort.

We have basically, I would say, been very clear that we want a revised contract format, where our commitment to provide services and transport cargo is mirrored in the customer commitment for the same. And that led in reality to the fact that in 2022, second half of 2022, we entered into very few contracts. We had lots of debates, but we chose to keep volume in the spot market or enter into short uncommitted contracts until we had been able to arrive at a contract format that we are comfortable with in the longer term.

And we haven't been able to provide much detail on that partly because it's been ongoing negotiations and also because we have confidentiality clauses in all our contracts that prevents us from giving specific commercial details on individual contracts. But I'm pleased to now be at a point where we have aggregated a sufficient portfolio of contracts that we can provide some aggregated numbers.

Just warning that we are not going to engage into discussions on details and breakdowns of these numbers. But the headline of that is that so far this year, we have signed mutually committed contracts with a total contract volume in -- total value in excess of USD 1 billion. And the average rate in these contracts is above USD 100 per cube substantially above our current rate. And the weighted duration of the contracts is 4.2 years. Meaning that we've now, I think, established some tangible success on an effort that has been a key priority of the company for the last year.

And I think it's also looking a little bit into our legacy structure, which is important because these are the contracts that we are going to renegotiate and renew over the next years and is sort of also then looking at giving some light into the future risk and prospects.

The volume of -- annualized volume of contracts up for renewal in 2024, which is actually contracts were then producing today is 5.4 million cubic meter. The average rate -- net rate on these contracts is below USD 50, and the average remaining duration is 11 months. So that is the rollover.

And in addition to that, we have and not in significant volume of sort of more than 2 million cubes of contracts expanded -- expiring beyond 2024. Those are actually also at an average rate of actually substantially below USD 50, which I think in the current climate and with the level we're entering into new contracts provides, in our view, relatively limited downside risk to the renewals.

So this is kind of the summary of both where we are in terms of the legacy portfolio that is a part of our -- obviously, part of our quarterly numbers and operating run rate. But more importantly, the profile of the year-to-date contracts, which is at the level and on terms and with the duration that we are quite satisfied with.

And we also continue to see a steady growth in deep sea vehicle shipments. Obviously, much debate around macro, but still we are experiencing the fact that lower replacement of vehicles for several years and a relatively still low sales figures compared to history suggests that we are still experiencing a robust sort of volume development on our shipments.

And same goes for high and heavy, although it's a bit flatter, but we have a particularly strong growth of -- there is a strong growth of high and heavy exports out of China. So again, also a strong picture on the high and heavy side, where I can repeat once again that we are positioning ourselves to be able to move substantial amounts of high and heavy cargo. Our newbuilds have very, very strong cargo flexibility. But the high and heavy new cars mix has become less important than it was a few years ago because we've got a more robust market on the vehicle side, but high and heavy remains and will remain an important part of our cargo base.

Capacity, not so much to say. Starting slowly delivery on a few new vessels, I think we are getting our first newbuild in July of next year. We are building at a very efficient, large, highly automated and capable yard with big strong capacity. We're actually slightly accelerating delivery schedule. And after the first delivery in late July, we will get the first 4 vessels delivered within half a year from that.

So we are very much looking forward to being able to introduce new capacity to the market in 2024. Obviously, there is a further backlog into 2025 and '26 that has been discussed thoroughly, I think, through this year.

And we have in the quarter, as you know, and as announced, declared another 4 options -- secured another 4 options on top of that, which is customary when you firm up. There's no sort of implicit message on decisioning on what we do with it, but we do have the option.

Total newbuild program is now up to 12 and again, with the first vessel delivered in July 2024, less than a year from now. Beyond that, we have a stable capacity situation around 37, 38 vessels. We own and control virtually all our vessels and have no near time -- no expiring leases before we start getting our newbuilds.

Then moving to sustainability and which clearly is an important topic here in Arendal, but it's also becoming an increasingly important topic in our dialogue with customers. We have the benefit, I would say, of being in an industry where most of our large global customers have quite clear and ambitious and committed plans to decarbonize their supply chain and a very important part of our dialogue with customers and part of the reason to work with Höegh Autoliners is that we have substantial capacity to deliver on near-term and longer-term decarbonization of the supply chain of our customers.

We are still in a level with tight market port congestions, lack of ability to actually slow down in order to reach commitments. Relatively flat, but slightly reducing CO2 emission in the quarter. We have used 3,600 metric tons of biofuel in the quarter, which is about the same as all of 2022. That is an important all time for the main current and short-term opportunity to provide carbon neutral transportation.

We are pleased that we are -- we have very strong believers in using 100% biofuel. It's a better controlled for us fuel in the engine room than blends. But more importantly, it means that to a large extent, we can get the carbon improvements from biofuel by replacing much more expensive MGO rather than using it to replace LSFOs and -- but we still get the carbon benefit of that. So we have a clear and ambitious the biofuel strategy, where we basically clean tanks and bunker and operate on 100% biofuel at parts of voyages to provide a better carbon performance.

And also now, I think this is a good time to start zooming in on what's really happening with the carbon performance of the car carrier fleet. The EU ETS is being introduced from 2024. We get clear feedback from customers that if you go a few years back, they didn't know and they didn't care about the carbon footprint of their vessels. They're equally clear that looking a year or 2 into the future, they will start to care.

So we have just put together on if you just model the CO2 emission per car using different types of car carriers, and we have done this on our own vessels. We also have broader analysis on the industry, but better to talk about ourselves. And what you see is that if you compare with C and D-rated vessels, which actually make up a large part of the global car carrier fleet, even our Horizon class vessels, which is among the most carbon efficient vessels on the water today, we have almost a 40% reduction relative to a C-rated vessel while the Aurora class from delivery, operating on LNG will have approximately 50% reduction of the carbon footprint.

So this is not only vessels that has a clear, defined path to 0 and where we are in specific discussions with both engine manufacturers, the build yards building the engines and fuel suppliers on possibly not guaranteed, but we're working for getting ammonia vessels in operation by 2027, if everything falls in place. But I think it's also important to say that from next year, we are able with the newbuilds being delivered to offer transportation services with carbon footprints that are substantially lower than the standard capacity available in the market.

And we believe that, that will be a more important topic over the next few years, and we are, again, quite pleased to both having done the first steps of repositioning our carbon footprint with the Horizon class a few years ago and then now adding an even stronger performance with the new Aurora class coming in a year from now.

And just to sort of put that, another one is that with CII ratings with the ETFs with more focuses, we have already a strong fleet, our existing fleet with a large proportion relative to the market of A and B-rated vessels. We have very few vessels below sea. We have a clear program in place in terms of technical upgrades and engine deratings and those kinds of things to manage the tail end. But more importantly, we are quite dramatically expanding the top end of our fleet through our newbuild program, both the short term and longer term going to 0.

So this is -- it has been an important priority for us, and will be an important topic with our customers in the market with regulators in the years to come. With that, I leave to Per Øivind to go through some more details what the quarter was in terms of numbers. Per Øivind?

[Per Oivind Rosmo, executive]

Thank you, Andreas, and good morning, everyone. It's very nice to be in this inspiring atmosphere presenting the best results for Höegh Autoliners ever. Before we dig into the numbers, it's -- we were trying to just take a look at the volume development and the net rate development.

That is the driver from our top line. And over the last 12 to 18 months, the top line has been the driver for the improvement in our results. In second quarter, we had 4.1 million CBM transported. It's slightly up from first quarter. It's actually an increase of 48,000 CBM. And the main reason for that is that we are utilizing the vessels better and better. We have full utilization, all sailings are full, and we can lift more cargo with existing capacity. We don't really have more capacity but we are able to utilize the capacity.

The net rate increased with USD 0.6 from USD 74.4 to USD 75 per CBM, and that is also a new record rate for Höegh Autoliners. Strong results. We see that freight revenues came in at USD 356 million. It's pretty much the same as it has been the last 3 quarters. It's USD 2 million more than in first quarter. And it's a combination of volume and rates that gives us USD 6 million but that was offset by somewhat lower surcharges, mainly buff. We reduced the buff with 4 million in second quarter compared to first quarter, and that is a consequence of the declining oil prices that we have seen through first half. That is, of course, offset by lower bunker prices.

The adjusted and reported EBITDA came in at USD 181 million. It's up from USD 171 million and out of that, it's USD 2 million coming from the increase in gross freights and USD 6 million coming from reduced voyage expenses. We also have a somewhat lower general and admin expenses in Q2. So small growth on the top line, but the declining expenses is explaining most of the increase from first quarter into second quarter.

Net profit before tax increased to USD 136 million, up from USD 124 million. And if you go back and compare it with second quarter last year, we see that we have increased the net profit from USD 64 million to USD 136 million.

Diving a little bit into why we are able to increase the EBITDA. And as you will see, cargo revenues account for most of the increase both during 2022, but also to some extent from first quarter into second quarter, NOK 2 million up, as I said. And then we have bunker expenses reduced with NOK 5 million, but that was, to some extent, offset by lower buff.

And then we have other operating expenses, minus NOK 3 million. We had a reduction in voyage expenses of NOK 7 million, but we had somewhat higher charter in expenses in the quarter. But cost reduction is our agenda, and we are able to make more efficient voyages. We have less port calls per voyage in this tight market. We also have some effects from the cargo mix. You have seen that our cargo mix has been -- we have reduced the high and heavy and breakbulk on account of cars and cars comes at lower handling costs than breakbulk. So that is also part of the explanation why we are able to reduce expenses.

So -- but again, going 1 year back, most of the increase is coming from increased rates. But on top of that, we are also able to control and reduce our expenses.

Net balance sheet. Very strong, very robust. We have reduced the net interest-bearing debt to USD 226 million. We are generating a solid cash flow from our operation and even with the dividend payments and CapEx installments for the new buildings, we are able to build cash and reduce the net debt.

We have taken on new debt in the quarter. We purchased 1 vessel and financed it with debt. The net debt-to-EBITDA ratio is down to 0.4. Book value, equity 64%, and our equity is now -- book equity is now USD 1.2 billion. Cash balance, as I mentioned, we are building cash. We had USD 253 million by the end of second quarter. We have increased it to USD 306 million by the end of second quarter. And on top of that, we have an unused RCF of USD 87 million. So we have a very strong cash position by the end of second quarter.

How did the cash balance develop? We started out with USD 253 million, and we generated USD 168 million from the operation. We used USD 10 million in CapEx, and that is mainly one installment for the second new building. We paid USD 20 million in amortization and interest for the mortgage debt. We purchased Höegh Trapper for USD 53 million. And as you see from the green bar here, we took USD 48 million in loan on that reserve. And then we paid USD 60 million to shareholders and we used USD 20 million on bareboat leases and time charter hires, and that took us to USD 306 million.

But you will see from this slide that our free cash flow is very good. We had USD 168 million from operation, and we basically used USD 40 million on financing and leases leaving us with USD 128 million for CapEx and dividends. Strong balance sheet, simple balance sheet. As we have said before, we don't have a complicated business.

We have vessels that we mainly own and we don't do very much else. So our balance sheet consists of vessels and newbuildings, USD 1.3 million. We have right-of-use assets, that is the IFRS value of the vessels that we have on bareboat leases and time charter, USD 138 million. As I said, we have a cash of USD 306 million, and then we have bunker and receivables of USD 154 million.

Equity, USD 1.2 billion, interest-bearing bank debt to gross, USD 370 million, and the lease liabilities related to the right-of-use assets is USD 161 million. And then we have current liabilities of USD 96 million and of the current nonliabilities of USD 44 million. This gives us a book equity per share of USD 6.3 or if we convert it with today's exchange rate, that is NOK 66 per share.

If we take the book value of the vessels and replace it with the market value of the vessels, we will see that we have a net asset value of USD 2.2 billion. That calculates to USD 11.5 per share or NOK 121 million -- or NOK 121, sorry.

But again, very strong balance sheet, high equity ratio. We have a solid cash balance, and we have a good ratio between current liabilities and current assets. Our working capital for all practical purposes consist of the bunker inventories that we have on border vessels.

Dividend, we are paying out again 50% of the adjusted net profit. We are adjusting for payable taxes. So the basis for dividend is USD 134 million, and that gives a dividend of USD 67 million. We have, on aggregate, paid out USD [ 206 ] million now in dividend over the last 12 months.

So dividend is part of our equity story here that we like to pay dividend when we have the capacity to pay dividends, and we are doing so. That ends the financial presentation. We are open for questions, but before we take the questions, Andreas will say a few words about the outlook.

[Andreas Enger, executive]

Thank you, Per Øivind. Yes, just very briefly on our outlook. We are still -- we're experiencing a strong market. I expect this to continue in -- during this year. We have a healthy rate development both obviously in the quarter, but also in the sense that we have fundamentally also improved our backlog at strong rates during the quarter.

We are in the middle of the third quarter now. So -- and a large part of the cargo for delivering the quarter is onboard our vessels. So we have a -- we do expect another strong quarter. And as we always say, obviously, the world is a strange place these days, and we are closely monitoring all aspects of the global macro situation and planning scenarios for things that make change.

But in our immediate outlook that is the part that we are commenting on. It looks still very, very strong. And again, just to close off, very happy to both have been able to deliver a record quarter, at the same time, as we have done fundamental progress on strengthening our longer-term contract backlog and also that we have a green fleet renewal program that is well on track and will give us substantial green capacity in -- starting in less than a year from now.

[My Linh Vu, executive]

We have received a few questions from our online audience. And the first question from our investor -- from our analytics, Jørgen Lian.

First question is about the voyage expense. There has been a very good development on the voyage expense over the last few quarters. And if so, can you elaborate a little bit about what has happened? And how do we see this develop going forward?

[Per Oivind Rosmo, executive]

I think what we can say is that when we have this very tight market, we are able to take more cargo in each part. We don't really have to go to that many parts that we did before to fill up the vessels. So we have, on average, reduced the number of port calls per voyage with 1.7 port calls over the last 3 years.

That, of course, reduces the expenses as we have to pay less for port use and tugboats and pilots and everything. So that is a direct saving. In addition to that, we have also seen increased utilization and that is also contributing to reducing the voyage expenses. And what we have seen over the last 12 months is that we also have seen a shift in our cargo mix. We used to have more high and heavy and breakbulk and that is cargo that comes with higher handling costs.

So when we replace that kind of cargo with big lots of cars in less ports, we also get the savings from that. So I would say that, that is the 3 main factors: reduced port costs, higher utilization and to some extent, the cargo mix. How this will develop forward? That is not a very easy question to answer, but we are focusing on these things in our company. We have always focused on costs and managing costs. So hopefully, we can maintain where we are at least and whether we can also achieve more. Well, that's -- we will try, but we cannot promise that.

[My Linh Vu, executive]

And we have received a few questions about Slide 7, when we talk about the contract renewals.

First question is that we mentioned that we have over USD 100 per CBM for the renewed contract. And while the less under USD 50 per CBM average per contract up for renewal in the next 12 months. And the first question is that are the volume here is really comparable in terms of trade mix and the cargo?

[Andreas Enger, executive]

Yes. I mean I think the contracts we have made actually goes in multiple trade lanes, Eastbound, Westbound, and it includes high and heavy and -- so we haven't done the full sort of breakdown. Instead, we're not going to get that full breakdown, but our new contracts reflect really most trade lanes, both Eastbound, Westbound and both vehicles and high and heavy. So we believe is fairly well reflecting in our operation.

[My Linh Vu, executive]

Yes. And also another analyst, Erik Hovi from Nordea and it is also about the same slide.

And the question is, as contracts so far are done above the USD 100 per CBM and 32% of USD 5.4 million CBM rolling off in 2024, has averaged rate below USD 50 per CBM. Could you say a little bit more about the 2024 earnings if risks over the next 12 months should come in around both over USD 50 per CBM?

[Andreas Enger, executive]

I think we are commenting on what we have done and we're guiding for the next quarter. And I think we're going to stop there, and we're going to continue stopping there. We're not going to comment on next year. But obviously, the fact that we are building long-term backlog on committed contracts and high rates is firming up our longer-term platform, but we're not going to add that up to a total yet.

[My Linh Vu, executive]

And I can see that we have a series of few questions about the commercial slides. And the next one from analyst, Frederik Ness from SEB.

Could we comment about the spot cargo rates development over the recent months?

[Andreas Enger, executive]

No. I mean spot cargo rates remains robust, but we are increasingly giving up spot opportunities to shift into longer-term contracts. But for us, that is at the level we are, that is sound and spot opportunities are there. They're at strong rates. But that's really not our main priority now, and we are increasingly selling out our available capacity to customers that are engaging in longer-term contracts.

[My Linh Vu, executive]

And also, the next question is how is the increasing order book impacting the contract negotiations? And are customers increasingly pushing for shorter contracts?

[Andreas Enger, executive]

No, I don't think that has been a particular issue at all. We have customers that, number one, have big problems and challenges, pain points in the logistics structure that they want our help to resolve. They have experienced the pain of not having a robust outbound logistics structure. They're talking about how to decarbonize over the next years. And actually, the new build backlog has not been an important topic in those conversations.

[My Linh Vu, executive]

And the next question is, what is the contract and spots strategy for the next 2 and 3 years? With contract rates averaging over USD 100 per CBM, is it a good time to increase contract coverage?

[Andreas Enger, executive]

Yes. We basically said -- I mean I think a little context here. We have said for more than a year that all our available capacity will be made available with priority to customers that are willing to engage in long-term committed contracts, that are truly committed in terms that it's balanced in terms of our commitment is balanced with their commitment. And that has been our clear strategy for a year. The big change is that last year, it took time -- it takes time to get large organizations to enter into contract forms they haven't had before with us. Obviously, it takes some conviction.

And so during 2022, that progress was quite slow, meaning that we chose to make our capacity available to a larger extent in the spot market. Now, we have good traction on that and clearly, we are shifting capacity to the contract market, and we will continue to do so. And our main strategy is to be a partner with the largest, strongest automotive and equipment manufactures in the world to basically create robust and increasingly decarbonized supply chains for them. And that's our business and I think the spot focus of last year was basically just a reflection that the customers have been a bit slow on actually approving more balanced contract frameworks.

[My Linh Vu, executive]

Yes. Thank you, Andreas. And I can see the next question coming in from analysts, [indiscernible] is also about the renewal. I think I already touched up on that, but -- okay. But when we say rate for a new contract above USD 100 per CBM, can we say a little bit about how much of the total volume is renewed at this level for 2024 and 2025?

[Andreas Enger, executive]

Not in detail. Basically, what we've said, we said annualize -- we said the annual volume that is renewed, and we said the average duration. And you can sort of -- you can do the math from that. We are not sort of going to translate it in. But it is a total volume in excess of USD 1 billion, which we mean [indiscernible] an indication that it is the market. It's not something that some exotic contract. It is a duration of 4.2 years in average, and you have the volumes. And you can sort of do the math.

[My Linh Vu, executive]

Yes. And I can see that as a last question that has coming in for now. And we say, if you have further questions, please send some e-mail to our Investor Relations mailbox at [e-mail], and we'll gladly come back and answer your questions. And with that, we would like to wrap up this presentation. Thank you for your attention. We look forward to seeing you next time.