Hoegh Autoliners ASA

OSE:HAUTO

Earnings Call Analysis

Company Posts Stable Revenue and Strong Profit

The company reported a robust quarter with stable revenues of $355 million and achieved an EBITDA of $185 million, leading to a net profit of $142 million, a slight increase attributed to higher rates and reduced expenses. The firm's equity ratio strengthened to 67%, underscoring a solid balance sheet reflected by an increase in cash reserves from $306 million to $332 million. The company maintains a healthy long-term contract portfolio with 3.1 million cubic meters at above $100 rates and 5.4 million cubic meters below $50, highlighting growth potential. An ongoing commitment to shareholder value saw dividend payments set at $70 million for the next payment. The outlook remains optimistic with continued strong market presence and forthcoming fleet expansions aimed to enhance capacity and environmental efficiency.

Management Presentation and Financial Summary

During Höegh Autoliners' third-quarter presentation, the CEO Andreas Enger and CFO Per Rosmo, alongside Head of Investor Relations, My Linh Vu, recapped a quarter of remarkable financial achievements. A significant highlight was the reached EBITDA of $185 million and a net profit of $142 million, driven by a record gross rate of $90 per cubic meter. Enger pointed out the importance of operational focus and financial discipline in achieving these results. The earnings allowed for a 50% dividend policy to be observed, with $70 million to be distributed in November and a strengthened equity ratio at 67%.

Market Conditions and Business Operations

The CEO described market stability powered by capacity, with all trades operating at full capacity despite a slight reduction in volume due to port congestions and extended voyage times. Important to note, there's a positive outlook given the 3.1 million cubic meter of long-term agreements secured, spread over an average of 4.4 years, at a rate above $100 per cubic meter. Moreover, Enger stressed that 5.4 million cubic meter of contracts below $50 per cubic meter will soon be up for renewal, a significant opportunity for the company considering the strong market sentiment.

Performance Indicators and Outlook

CFO Per Rosmo highlighted the stable revenue, with a slight drop in volume due to port congestions affecting third-quarter results. Despite the drop, revenue remained stable at around $355 million, and an increase in net rate from $75 to $78.5 per cubic meter bolstered a net profit increase to $143 million. Operating expenses saw reductions, contributing positively to the bottom line. Höegh's balance sheet reflects robust financial health, with an increase in cash position to $332 million and a very low net mortgage debt, solidifying an impressive equity ratio of 67%.

Strategic Priorities and Shareholder Focus

Enger articulated their strategy with three main objectives: resilience through competitive cash capacity cost, a strong balance sheet, and robust customer contract portfolios. There is a committed focus on renewing the fleet, evident from investments in 12 new vessels prepared for the upcoming energy transition, establishing financial leverage that's even more competitive than pre-pandemic levels. Expectations remain high with strong dividend payouts and assessing implications for dividend policy will be a point of examination in the fourth quarter. They uphold capital discipline with no intent to divert from their core focus on serving shareholders effectively.

Dividend Policy and Shareholder Returns

Höegh's commitment to shareholder returns remains steadfast, with the company increasing its dividend payment to $70 million, up from $67 million the previous quarter. This demonstrates the company's strategy of maximizing the dividend payment as part of its policy to return 30-50% of net profits to shareholders. Subsequent quarter performances have consistently been at the upper limit, showcasing the management's intent to reward shareholders amid strong financial and operational performance.

Earnings Call Transcript 2023-Q3

[My Linh Vu, executive]

Good morning, and a warm welcome to Höegh Autoliners third-quarter presentation. My name is My Linh Vu, Head of Investor Relations. And let me introduce our presenters today. Our CEO, Andreas Enger, who will start the presentation with a business update from the last quarter, followed by our CFO, Per Rosmo, who will give you a deep dive into the financials. As usual, we will have the Q&A session at the end of our presentation. And our viewers are encouraged to ask questions by using the line under the video or by sending an e-mail to our Investor Relations mailbox at [indiscernible]. So with that, I will hand over the stake to you, Andreas.

[Andreas Enger, executive]

Thank you, My Linh. And it's a great pleasure to dive directly into the key figures. And I think all the numbers on these slides represents a record for us produced by a team that has been extremely focused on all aspects of operations from the vessel operations into the trade management and the way we work with customers and our financial discipline. So the quarter has given us an EBITDA of $185 million translating into a net profit of $142 million produced by a record gross rate of 19 more than $90 per cube. According to dividend policy, 50% of the base net profit is $70 million being paid in November. And our equity ratio has strengthened further up to 67%, leaving us with a strong cash position, strong earnings momentum, and a very, very strong balance sheet.Talking about what gets us there a little bit about the market. The market is in a stable and driven by capacity. We are running flat out in all our trades. We've seen a slight volume reduction in the quarter, driven by port congestions and longer voyages. But all of that being compensated by a favourable development, both on the cargo mix and on the net rate. We have continued momentum for contract renewals, although I think it's also fair to say that the big contract rent starts into 2024. The momentum on the contracting and dialogue with customers remains. We have now 3.1 million cube of long-term agreements, duration of 4.4 years, average rate above $100, and that's the kind of environment we're working in. But I think the important driver of further strengthening our contract portfolio lies in the fact that we actually have a 5.4 million cube of contracts with a net rate below $50 per cube with our remaining duration of 9.5 months. Meaning that we are going into a very important period of contract renewals, and our feeling is that the sentiment is strong for that.There is a steady growth in shipments of new vehicles. We talked a lot about the driver of the increased exports of China. I'm going a little bit back to that when we're talking about capacity balances. But we do see a solid development and also remind ourselves that these are not kind of historically fantastic high numbers, but it is recovery from a prolonged low deliveries of cars driven by first semiconductors and then pandemics and all other things. But the market on the car side remains strong. Same with high & heavy. There are some differences in terms of segments and others, but still, we have good access to high and heavy cargo. And as we mentioned a couple of times that we took down as the markets on new vehicles started to strengthen. We took down some of the low-value parts of our high & heavy business, but the high-value branded equipment producers has been and remains a strong market for us. Talking about capacity. We're always talking about the fleet and the fleet growth. I think what we are seeing now is that clearly, there is a fairly large backlog of new vessels. But I think it's important to emphasize that these are coming gradually over several years. We've had some discussions and questions on previous presentations on what is the impact of shippers moving to containers, and we've done our own sort of deep dive on that in China. And our view is that in the current market, about 1/3 of the seaborne deep-sea exports from China is carried by containers, and just our analysis of the product and also our conversations with some of the OEMs that do use containers.We strongly believe that it's an inferior product, and that is something that will return largely to rural at the point when we actually offer capacity at sustainable rates in the current market. Some of those shippers will either be offered no capacity at all or they will be offered very, very high spot rates, simply because the capacity situation out of China and Asia is filled up. So from that perspective, we believe that, and if we go a little bit deeper into and what you see is that there has been almost a 50% increase in seaborne exports from China after the lockdown in the middle of 2022. And what we see is that because of the lack of capacity, a large proportion of that has in effect gone to container. But as I said, we are quite confident that those volumes will return and reflect, together with the increased focus on decarbonization, reflects a stabilizing force in at least the early stage of the newbuild deliveries.Time charter rates remains high. That market from what we can see remains firm. So again, the capacity market remains tight and strong. No changes really to the fleet. We're running stable. We're obviously looking very much forward to our newbuilds, but results for the last, I guess, several quarters is basically created by efforts to maximize the value from an existing fleet and also created by increasingly offering what we had of available spot volumes to long-term contracts. I think our new build program remains increasingly exciting or becomes increasingly exciting for us. We're now seeing the first vessel being built at the yard. Engine is about to be moved from Korea. We are getting the first vessel in July of next year. We will receive a total of eight new vessels by the summer of 2026. We believe that is well timed to be able to offer our customers a strong product, both in terms of capacity and in terms of the fact that even initially on L&G, these vessels will have half the carbon footprint per unit produced from an average car carrier. And it obviously in addition, have a clear path to zero that is attractive to the OEMs that actually have that kind of objective and wants to start working on what that path looks like. And we are, with those 8 vessels and with further for that we are still seeking to get in -- it's ordered in 2027.We are making further progress on getting those delivered as dual-fuel ammonia. But that said, that's obviously a longer development depending on -- that is both safe and the right thing to do. But our impression is that both the fuel producers, the engine providers and all in that chain is actually making significant progress. So our newbuild program, starting with deliveries already mid-next year and rapidly renewing our fleet to become the newest and most environmentally friendly fleet in our segment is something that we believe will help us both in contract negotiations and in maintaining our momentum in the years to come.Sustainability update. I think the big thing on sustainability is that we have substantially stepped up our use of biofuel. We're using 100% biofuel, meaning that we're able to provide carbon-neutral transport for certain shipping legs or for cargo for certain customers. And that is in demand and is quite important. I think it's fair to say, just listening to the DNV Energy outlook recently that also claiming that the energy transition in our segment has really not yet started. We're still running on conventional fuel. We're still running with a tight capacity balance, but I think what we are doing is that we are rain ourselves to be able to play that forcefully in the years to come. And we have a slight reduction in our CII this quarter, but the big reductions obviously require partially new assets and also modifications to existing. And just while we're working on new builds, we're also working on improving the quality of our existing vessels, having four vessels with upgrades for fuel efficiency being made and 10 vessels on order linked to the dry dock schedules of the vessels. So it's a massive preparation to be able to deliver the carbon efficiency that the leading customers will demand. With that, I leave it to Per to go through numbers in some more details. Per?

[Per Oivind Rosmo, executive]

Yes. Good morning, everyone. Starting with this one showing volume developments and rate developments over the last quarters. And you see that for the last five quarters, we have had a relatively stable volume. We saw a cargo drop in third quarter as we have mentioned also in our trading update. This is due to delays in port and port congestion. The volume reduction is around 150,000 CBM. It peaked, the delay and congestion peaked in August. It improved somewhat in September, and we see the easing also in October. So it remains to be seen, but volumes as long as we have a stable fleet, is hovering around $4 million CBM per quarter. All vessels are full in all trades, and they are highly utilized. The rate development has been good we saw another increase in the net rate in third quarter. It increased from $75 per CBM to $78.5 per CBM. That is an increase of 4.7%.Top line is the driver for the bottom line as long as the fleet is stable and the expenses are more or less constant with the stable fleets. As we saw, our freight revenues came in at $355 million. It is more or less the same as we have had for the last four quarters, very stable around $355 million. Adjusted EBITDA this quarter. Adjusted EBITDA is the same as the reported EBITDA, $185 million, up from $181 million, meaning that the volume reduction was offset by the increase in rates and to some extent, also reduction in expenses. That gave us a net profit of $143 million, and the increase in net profit is somewhat higher than the increase in EBITDA because we also saw some reduction in financial net financial expenses, higher interest income, and also lower interest expenses in this quarter. As we said, reduced expenses is the main driver. Top line is the same, more or less, as in last quarter, and we see that cargo revenues was minus 1%, and then we had a reduction in bunker expenses of $5 million.We also had a reduction in charter hire expenses. We did no short-term charters this quarter. We had a few space charters, but compared to second quarter, where we had one vessel chartered, and no vessel chartered in this quarter, only operating our own fleets and doing some space charter on top of that. A slight increase in voyage expenses, but comparing with the second quarter, it's a very similar quarter to what we had in second quarter. Balance sheet is becoming extremely strong. We had a net interest-bearing debt by the end of the quarter of $175 million. Out of that, $150 million is leasing and time charter liabilities. The net mortgage debt is only $25 million. If you take the cash and the mortgage debt, the net mortgage debt is $25 million only. And you see the ratio, the net interest-bearing debt-to-EBITDA ratio is down to 0.3%. Equity continued to increase. It increased to $1.3 billion, meaning that we have an equity ratio now of 67%. And I will show you some more details on the cash development, but the cash during the quarter increased from $306 million to $332 million on the back of a very strong cash flow this quarter. You see it here.We started the quarter with $306 million. We had cash from operating activities, $301 million, meaning that we actually reduced our working capital with more than $16 million this quarter. Cash from investing activities, $69 million, out of which $65 million is installments, first installments to the yard for Aurora vessel #9 to 12. We paid 15% of the contract price when we entered the contract in July. That was $65 million out of the $69 million, and the difference is, for all practical purposes, dry dockings. We used $20 million in debt service repayment of $13 million of the mortgage debt, and interests of $7 million on the mortgage debt. And then as we have said, we paid $67 million in dividends for the second quarter, and we have lease payments and others, $17 million. Out of the $17 million, $15 million is lease and time charter. We have 3 vessels on bareboat charter, and we also had 3 vessels on time charter, and that goes in that category. And then we had a small currency gain loss of $1 million. So that took us to $332 million. We have an unused revolving credit facility of $84 million. Again, very strong balance sheet. Very strong and very simple balance sheet to put it that way.Vessel and new buildings, $1.3 billion, and then we have the right-of-use assets, the lease time-chartered vessels, $126 million. We have bunker and freight receivables of $134 million, and we have cash of $332 million. The equity, $1.3 billion. Then we have the interest-bearing bank debt of $358 million. We have the lease liabilities related to the right of use assets of $149 million. And we have current liabilities related to our trading of $93 million. And then noncurrent liabilities, $42 million, same as last quarter, and that is mainly deferred tax. The book equity per share was calculated to $6.7 converting that to NOK 74 per share. Adjusting the balance sheet, you're seeing market value of the vessels instead of book value give us the net asset value of the company, and we have calculated that to be $3.4 billion by the end of third quarter, and that converts to $12.4 per share or NOK 138. So that is the main numbers. All the details are in the reports and the fact sheets that are available on our web pages. So with that, I think, yes, there is one more. We have dividends. And as we have said, we will pay $70 million. It will be paid early November, and it is an increase from last quarter where we paid $67. And you see here how the dividend have developed over the last quarters. And we have a dividend policy of paying 30% to 50%. We are maximizing that paying 50% of the net profit every quarter now. With that, I'll leave it to Andreas to say something about outlook.

[Andreas Enger, executive]

Good. Thank you. Then I'm going to get a brief. We don't do much long-term guiding. But I think we just want to summarize by emphasizing that we've considered, based on our current performance and get based on our dialogue with customer contracts that we are still in a strong market. We have, obviously, from the numbers, very healthy rate development. Q4, we're well into it. It started well, and we expect another strong quarter. Obviously, we are living in a turbulent world, and we are closely monitoring the macro picture, but that does not really change our overall view on where we are. I have been in the previous couple of quarters, repeatedly being asked the question about with the current performance and the strong cash generation, what do you intend to do with the cash? And to pre-empt that question coming once again, I think we have had a clear strategy of basically balancing three objectives. We have wanted to create a resilient company, and we have defined that by having the combination of low very competitive cash capacity cost, having a strong balance sheet to support it and having a strong relationships and the contract portfolios with our customers. It's the first priority.Second, we've had a strong priority on renewing our fleet, preparing for the energy transition that we think is going to be an important competitive driver in the years to come. And I think it's also fair to say that with early deliveries already from next year with 12 vessels on order, we have made our investments for this round. And I think it's also one of the things is important also to notify that we have paid most of the equity on all of those 12 vessels. We have about $80 million of payments and all the vessels are then on very competitive financing producing that competitive capacity cost and actually a much lower capacity cost than what we had pre-pandemic with a much weaker fleet. So, we're comfortable with that picture, and we've said that at the third element of our objective is to basically serve our shareholders. And as we have established the balance sheet and the capacity cost we desire, as we have made our investments for the fleet renewal, we will clearly now during the fourth quarter, look at what the implications is for our dividend policy. We have, as we said, we gradually stepped up the dividend. We went on the listed in 2021 with the objective of 30% to 50% dividends. We started at 30%. For the last three quarters, we've been at 50%, and we will assess the way forward based on those 3 priorities that is going to drive our decisions. And I also want to emphasize on that, that we are strongly emphasizing capital discipline. We are proud to be a lean and very focused company, and we have no plans on diverting from that track and are investing in things outside our core business. So with that, I'll leave it to the questions.

[My Linh Vu, executive]

Yes. Thank you, Andreas, and Per, and also thank you to our online audience for your engagement. We have received quite a few questions today. So the first question from our analyst Fukal McDonald from Clackson. And the questions is about capacity utilization. The question is, how would you describe the current average utilization percentage for vessels considering both hedge haul and back haul routes? Are there any opportunities for further optimizing utilizations such as via speed adjustment or alleviating congestions?

[Per Oivind Rosmo, executive]

Investors are for all practical purposes, 100% utilized in all directions. Of course, if congestion and port utilization is off, that will free up capacity to transport more. I think we also saw it from the graph here, that we had a drop in third quarter. And if that situation is off, we have capacity to take more volume. But for all practical purposes, we don't really have a capacity available now to transport more than what we have seen on the average on the previous quarters, around $4 million to $4.1 million is our maximum. There might be way cargo available that we can take, but we don't really have capacity now to take more cargo unless we get more vessels. And we are not there that we will charter in vessels to do that. We have our new building programs. We will get the first vessel in July next year and another one in November next year, and then 2 more in March 2024. So that will increase our ability to take more cargo. But where we are now, we are maximizing the fleets.

[My Linh Vu, executive]

Yes, and the next question is about the contract renewal from our analyst, Erik Hovi, Nordea. The first question is for the 5.5 million CBM for renewal the next 9 and 5 months, 9.5 months, what's our duration? Was that book on? And is that likely that the duration for these volumes also increase? Can we comment a little bit about that?

[Andreas Enger, executive]

I mean we said the remaining duration of those contracts was -- is 9.5 months, right? So they're expiring now starting from, throughout 2024 mostly. The duration of those contracts when entered into, I guess, was mostly in the 3- to 5-year range, including some options having we've commented before that we feel that we've had in the past a fairly unbalanced contracts where many of them has been sort of 3 plus 2 years, but we're now into the final stage of where customers have been able to renew it or prolong at long rates. Our philosophy is that we will go into this to see much more mutually balanced contracts. We will see as long as the durations we can get. And we believe it is a favourable market for that, both because there is still a number of customers having needs to fill for capacity in 2024 and 2025 and the results of a number of customers that see the benefit of having longer relationships in order to be managing their own decarbonization targets. So we are quite optimistic about that process that has started for many contracts and will run through 2024.

[My Linh Vu, executive]

And also a follow-up question on that also from Erik Hovi. It seems that the legacy contract volumes has been quite similar to what we were showed during Q2. So could you comment a little bit more about that?

[Andreas Enger, executive]

Yes. I mean I think it's fair to say that there hasn't been much contract expiries and renewals in the quarter. During this year, we've also had a substantial -- we talked about this before that we took a clear position that we would not want to enter into unbalanced or short contracts in 2022, meaning that we drove up our spot share. During 2023, we basically told our customers that volume is available to people that will commit long and we had great success with that in the first half of the year, and we are rolling into renewal. But there hasn't been any significant contract expiries and renewals in the third quarter.

[My Linh Vu, executive]

And also our new volumes. The next question is, what is the usually time for booking new volumes rolling off basically? [indiscernible].

[Andreas Enger, executive]

I think that varies a lot. Some of these processes start very early, and there are long discussions over long times because this is a core part of our customers' sort of logistics network so they need planning horizons. We have obviously seen that some of them have been pretty short in the sense that customers are not fund suitable solutions so that there's been some last minute needs to change approaches. But we prefer to have structural dialogues with our customers over several months in order to basically create good solutions that are mutually beneficial.

[My Linh Vu, executive]

And the next question about the mix between spot and contract. Can we comment about the current spot and contract mix?

[Per Oivind Rosmo, executive]

Yes. We can comment on that, and it has not really changed. We have said before that we have around 70:30 ratio between contract and spot. And we also see that we are very close to that in third quarter.

[My Linh Vu, executive]

The next question from analyst Pierre Christiansen, Nordea and it's about financing. Considering the recent deals in bond market for shipping peers, is there something other liners consider in financing? Considering the bond market?

[Per Oivind Rosmo, executive]

No. As of now, we are fully financed. We have financed the whole new building program. We have a good financing of our legacy fleet. So where we are right now, we are not looking into the bond market. We are following it, and we think there is an opening for us there if we like to go there. But where we are now, we are not considering issuing bonds.

[My Linh Vu, executive]

The next question is from analyst Christopher Hollan, from Optic Securities, and it's about rate. Do we expect to achieve premium rates for the new buildings, given their attractiveness to the perspective of the OEM? And if so, can you comment something about the rate?

[Andreas Enger, executive]

No, I don't think we will speculate because that depends a lot on how they're used and what kind of fuels they're using and whatever. But I think what we can say is that our investment calculations and investment cases for newbuilds basically includes that these vessels will be more attractive and they will most likely run full. They will be larger and have better economics, but it's not really based on premium rates unless we deliver a premium product with low a carbon ferrocarbon fuels that obviously will be reflected in the rates.

[My Linh Vu, executive]

The next question from our analysts, Erik Havas, Pareto Securities, and it's also about the contract renewal. Can we elaborate a little bit about how the contracts are now structured in terms of minimum volume? And about the rate environment, are we able to formally lock in the volumes to commitments?

[Andreas Enger, executive]

I think so. But I think also we have to. I mean, I think we said before that these contracts now, we have substantially changed the contract structure. We've substantially changed the level of commitments, but it's all individual negotiations that are based on circumstances in the individual trades. And it has several different components to it. I think the big difference is that the first is -- I mean, there are 2 things that we have. We have real commitments expressed in different ways and firmed up in different ways from customers for the volumes. And I think equally important, we have basically work to not be having large commitments to take up volume, giving away free options to take volume that is not committed by the customers. So it's both about getting, and it's a combination of exclusivity and liquidated damages for the different volumes. It's different in trades where we have parts of our customers' volume where you know the guarantee can be relevant and where we have the entire volume in the trade flow where there is some more need flexibility. So those things are individual by contract and there is not one structure and particularly also in the situation where we were firming up, putting lots of effort into firming up those contract structures. There will be differences based on simply different circumstances with customers and contracts.

[My Linh Vu, executive]

The next question from analyst Fredrik in SEB. The first question is about volume commitment, and I guess it's already been covered by your last answer. The second question is about the rate on the new contracts. Are rates on the new contracts flat or fixed rate? Or is there a step profile in the new contracts?

[Andreas Enger, executive]

I think it's generally fixed, but there are also variations there depending on the specific circumstances. But most of the contracts are fixed. There are some provisions in there. There are some inflation cover in there. There is some, obviously, for surcharges and carbon taxes and fuels, but generally, they're reasonably flat.

[My Linh Vu, executive]

And the next question is about the dividend payments. Are we free to increase dividend payments above the 50% of EPS? Or does this require the credit approvals? Is it something we're considering?

[Andreas Enger, executive]

I mean, basically, we are absolutely free, both in terms of dividend capacity and agreements, to pay whatever we want in dividends within the law.

[Per Oivind Rosmo, executive]

Yes. We have no restrictions in our loan agreements when it comes to dividends.

[My Linh Vu, executive]

Thank you. And yes, and that was the last question we received for now. And of course, if you have further questions, please send an e-mail to our Investor Relations mailbox at itho.com, and we will get back to that. We thank you for your attention, and we look forward to seeing you again for next quarter. Thank you.