Hoegh Autoliners ASA

OSE:HAUTO

Earnings Call Analysis

Strong Q3 performance and positive outlook for Hoegh Autoliners

Hoegh Autoliners reported a robust third quarter with EBITDA rising to $178 million, driven by increased freight rates offsetting a minor volume dip. Net profit before tax reached $196 million, bolstered by $52 million from vessel sales. The company maintains a strong balance sheet with $344 million in cash and net debt of $255 million. Looking ahead, Hoegh anticipates Q4 EBITDA in line with recent performance and aims to increase contract coverage to 80% by 2024, signaling stable growth. A dividend of $245 million is set for December, reflecting strong financial health and consistently high contract rates.

Strong Financial Performance

In the third quarter, the company reported a notable financial performance with a record net profit before tax of USD 196 million, driven primarily by operational gains and a significant contribution from recent vessel sales, amounting to USD 52 million. The EBITDA increased slightly from USD 174 million to USD 178 million, reflecting an effective strategy of contract renewals leading to improved revenue despite a minor reduction in cargo volumes.

Revenue Stability Amid Market Challenges

The revenue figures for the quarter stood at USD 349 million, showing resilience despite a 2.8% decrease in volumes from the prior quarter. This decline was offset by an increase in net rates, which rose from 83.2% to 86.7%. The company attributes this rate growth to the successful transition from legacy contracts to new contracts at higher rates, showcasing their ability to adapt in a fluctuating market landscape.

Solid Balance Sheet and Cash Position

The company maintains a strong balance sheet with a book equity of USD 1.3 billion, representing 64% of total assets. By the end of the third quarter, net debt was only USD 255 million, resulting in a low net interest-bearing debt to EBITDA ratio of 0.4. Their cash position is robust, totaling USD 344 million, bolstered by proceeds from vessel sales which contributed USD 119 million during the quarter. Notably, the firm plans to propose a substantial dividend of USD 245 million, reflecting its ongoing commitment to returning value to shareholders.

Market Outlook and Capacity Strategy

Looking ahead, the management anticipates that Q4 will see stable EBITDA performance in line with previous quarters, underpinned by an increasing portion of long-term contracts, projected to reach 80% by 2024. The geopolitical scenario remains complex, particularly due to disruptions affecting operations in the Red Sea, yet the company continues to execute its strategic initiatives effectively.

Expansion of Modern Fleet

The introduction of new, state-of-the-art vessels, exemplified by the Hoegh Aurora, is positioned to enhance operational efficiency and sustainability. These vessels, boasting LNG capabilities and significantly reduced carbon emissions, are expected to lower emissions per car transported by 58%. Moreover, the fleet renewal strategy is balanced with the sale of older vessels, ensuring a modernized fleet without overwhelming capacity increases.

Commitment to Sustainability

Sustainability is a key focus for the company as they transition to a more efficient, greener fleet. Ongoing upgrades to fuel efficiency during vessel dry docking are expected to further enhance carbon intensity improvements, aligning with broader industry trends towards decarbonization.

Contractual Developments and Future Prospects

The company is actively enhancing its contract portfolio with a current coverage rate of 75%, which they are optimistic will improve further. The average duration of new contracts secured is approximately 4.2 years, providing a stable revenue outlook. As a leading operator, they are making strides to gain a competitive edge by negotiating favorable terms and ensuring robust relationships with customers.

Conclusion

In summary, the company's strategic direction, bolstered by financial stability, modernization of its fleet, and a strong commitment to sustainability, sets a solid foundation for future growth. With expectations for steady performance in the near term and an unwavering focus on enhancing contract structures, the company is well-positioned to navigate the evolving market landscape while delivering consistent shareholder value.

Earnings Call Transcript 2024-Q3

[My Vu, executive]

Good morning, and welcome to Hoegh Autoliners Third Quarter Presentation. My name is My Linh Vu, Head of Investor Relations. And we have with me today our CEO, Andreas Enger; and our CFO, Per Oivind Rosmo, who will walk you through the last quarter business and financial updates. As usual, if you have any questions, we have a Q&A session at the end of the presentation and questions can be sent to our Investor Relation mail box at [e-mail].

So with that, I will leave the stage to you, Andreas.

[Andreas Enger, executive]

Thank you, My Linh. Welcome to this quarterly presentation. We're starting with the front page of a beautiful picture of Hoegh Aurora, the largest and most environmentally friendly car carrier in the world that we took delivery of in early August. And on this picture, just finishing its maiden voyage, successful maiden voyage to Europe and is in the process of loading cargo for Australia. A very important milestone for the company since our fleet renewal program has been one of the driving pieces of our strategy, actually also one of the triggers of the IPO back in 2021, and we're very pleased now to see the vessels coming with this one in Europe. And also, Hoegh Borealis, the second one is after the end of the quarter, left the yard in China and is loading in Asia as we speak.

The quarter, pleased to report another strong quarter EBITDA of $178 million. We had previously announced vessel sales, meaning that we have a net profit of $193 million. We have continued the growth in gross rates. And with our dividend policy of paying out free cash because we are fully financed and have -- for our newbuild program and have a strong -- very, very strong balance sheet. The dividend for the quarter will be $245 million. And as I said, we have taken delivery and put in operation the first of our Aurora class vessels successfully in the third quarter. And as I said, we have another one that is now in operation, and we have another 2 coming towards the end of the year. Equity ratio, 64%, reflecting what I said about a very, very strong balance sheet.

We're going through a traditional presentation, commenting a bit on the market, on capacity and sustainability before we go into the financials. Just before we start, and that's -- I mean, at this stage, just for the sake of good order, we've just released a notice of planned future organizational changes. And that is we are continuously working, developing the organization, building a strong succession plan and creating opportunities for our people. And one important element in that is that we have an operating model in Hoegh Autoliners, where we do all the critical tasks related to our business internally with our own staff and the largest office in the system is in Manila.

During the last several years, we have added substantial new activities to the Manila office includes activity -- we have traditionally had crewing. We had technical management of our vessels. We have the newbuilds. We've also -- and we had our entire financial -- or most of our financial office operating out of Manila. Recently, over the last few years, we've added IT. Our entire global IT is run from there. We've also built customer service. So, it's becoming the largest and most important office in our system and an operating model. And we've also decided that, that also the further development and optimization and getting the full effect out of that office is very important to us and requires some more executive attention also from corporate management.

And we have, therefore, I'm happy to -- we agreed with Per Oivind that he has been one of the key architects in creating the office and will from the beginning of next year spend more time on providing overall leadership in an Executive Chairman role for that office, which means that he will step out of the CFO role and will be replaced with Espen Stubberud in that role. It's -- this is not happening now. It's happening in a planned process at the end of the year, but it's a reportable issue. So, we want to make sure that we have shared that information.

Going into the market. We have fairly stable, but as you know, somewhat lower volumes driven by the Red Sea and also a fairly high activity on 5-year dry dockings of vessels and also obviously for the fact that we have sold some vessels, although they are being more than fully compensated by the additions of newbuilds that are happening this year. High and heavy breakbulk volume is stable. The net rate is continuing upwards, reflecting that we still -- we have a continued strong market and we have a very positive activity on renewing and actually also adding new contracts.

To the contracts, we have -- as we said, we've successfully signed a number of contracts adding up to 5 million cubic meters, still with an average rate on new contracts above the $100 million mark and a duration of 4.2 years, which is, I think, longer than we had usually. We still have some volume to renew before the end of 2024. There are good processes around that. And we basically, continue to have contracts that are strengthening our backlog and creating a more robust rate level. In Q3, the contract coverage was up to 75%, which is historically high, but we are continuing to build and are aiming for the 80% mark during 2024. And this is obviously a very important part of our priorities and economic model that we are now focusing on creating a robust platform with customers and happy to report that we're making great progress on that.

Also on the volume side, deep sea shipment of cars is increasing. It's still very much driven by Chinese exports, but a robust development for -- also in many other markets. With high and heavy, in many ways, the same development. There's been -- we've talked about before, a dip in 2024. We believe we're back on a growth track. And also in that segment, we see fairly stable volumes or slight declines, but it's a fairly stable level out of Japan and Korea, but -- and a strong growth out of China.

Capacity. We now entered into the kind of delivery phase for newbuilds through 2024. There has been a series of vessels delivered, including then one of ours, if you include only the third quarter, 2 if we include to date in the fourth quarter and 4 if we count to the end of the year. That is easing the charter market slightly, but still at a high level. And obviously, the deviation around Africa with the closure of the Red Sea is also continuing to create a strain on capacity.

On sustainability, I started off with talking about delivery of Hoegh Aurora. And these vessels with LNG and due to its size and lots of improvements in fuel efficiency in the design is actually from yard today delivering 58% lower carbon emissions per car transported than a typical or an average car carrier in the market today. And as we add those newbuilds and also as we continue technical upgrades to ensure optimized fuel efficiency on -- during dry docking of older vessels, we are on a trajectory to improve our carbon intensity substantially in the years to come.

That is the start, and I'll leave the details on the financials to Per Oivind.

[Per Oivind Rosmo, executive]

Okay. Thank you, Andreas. As usual, starting with a short recap of volumes and rates being the main driver for both the top line, but also the EBITDA and the cash flow. We had a small reduction in volumes, 2.8% down from 3.5 million CBM to 3.4 million CBM, mainly coming from, as Andreas mentioned, periodical maintenance of more vessels, but also, some repositioning mainly due to the issue in the Red Sea. It still creates a need for us to reposition vessels between continents and that absorbs, of course, capacity.

The net rate continued to increase, 83.2% to 86.7%, plus 4.2%. And the main driver now for the rate increase as it has been in the last quarter is actually renewal of contracts, leaving behind us old legacy contracts with low rates and replacing them with contracts with higher rates. That's the driver more than the spot rate, time being. And converting this to numbers, it has been very stable. The last quarters, we had revenues of $349 million. The lower volumes was offset by the higher rates, taking us from $341 million to $349 million if we compare with the last quarter. But as you see, over the last 5 quarters, this has been pretty stable. And the same goes for EBITDA. The EBITDA margin is between 50% and 52%, 51% the 2 last quarters. And we had a small increase in EBITDA from $174 million to $178 million. So, out of the $8 million that we increased the top line with, $4 million was converted into EBITDA.

Net profit before tax is a record high this quarter. It's $196 million. The main reason for that is that we, in addition to the result coming from the operation, have included the sales gain from the sale of Hoegh Kobe and Hoegh Chiba, and that is together USD 52 million on top of the normal operating profit. The bridge between first quarter and third quarter, it's basically driven by cargo revenues in -- from first quarter to second quarter, it was volume that increased. And now from third quarter -- from second quarter to third quarter, as I said, it was the rate increase that was the main driver for the uptick in EBITDA. Other expenses like bunker and other operating expenses, voyage expenses is pretty flat actually between the quarters.

The balance sheet, Andreas said it, it is -- we have a very strong balance sheet. We had net debt by the end of third quarter of USD 255 million only. Net interest-bearing debt EBITDA ratio, 0.4. The book value of the equity is USD 1.3 billion, 64% of the total balance sheet. And we built a substantial amount of cash during the quarter that is also reflected in the proposed dividend. In addition to a solid cash flow from operation, we also had the net proceeds from the sale of the vessels of the 2 vessels that I mentioned of USD 119 million. And both vessels were debt-free. So that cash is going directly into the cash balance here. There is no repayment of debt. In addition, we have unused drawing facilities of $208 million. So, the liquidity reserve by the end of third quarter was USD 551 million together.

Closer look at the cash development. We started with USD 195 million. We generated $190 million from the operation. EBITDA was $177 million. So, we had a positive development in working capital, reducing the working capital through the quarter. We spent $10 million on investing activity other than vessels, mainly dry docking and maintenance expenses. We sold the 2 vessels that I mentioned, Kobe and Chiba, $119 million net proceeds. And then we have taken delivery of Hoegh Aurora that was -- that was $70 million out of the $100 million, and then we also have purchased Hoegh Jeddah during the quarter. We have used $19 million on debt service, amortization, repayment and interest expenses. And we have taken $110 million in new debt, $70 million on Hoegh Aurora and $40 million on Hoegh Jeddah. And then we have other lease payments of USD 17 million. And then we paid USD 127 million in dividend and then a minor currency gain. So that is taking us from $195 million to $344 million.

Balance sheet, as we have said already, very strong. Our balance sheet is easy to understand. Most of the balance sheet is vessel and newbuilding, close to USD 1.5 billion. We still have some right-of-use assets, vessels, but it has been considerably reduced over the years as we have purchased most of the vessels that we previously had on leases, that is $72 million. And we have bunker and receivables of $141 million and cash of $344 million. That takes us to somewhat in about $2 billion in total assets. And the equity is $1.3 billion. The interest-bearing bank debt is now $513 million. We have some lease liabilities of $119 million and we have all the current liabilities of $86 million.

The book equity per share is calculated to USD 6.8 equivalent to NOK 74. If we replace book value with market value for the vessels, we end up with total assets of $2.5 billion, and that is -- represents a value per share of [ NOK 13.3 ] or net asset value of [ NOK 145 million -- NOK 145 per share ]. We have disclosed it and Andreas mentioned it initially here. We are proposing a dividend of USD 245 million. We expect to pay that in middle of December and it adds to the considerable dividend payments that we already have done so far this year.

Okay. Outlook for you, Andreas.

[Andreas Enger, executive]

Yes. And I think this is becoming a slide that is not changing so much between the quarters. And there are really sort of 3 points in this. And one is that the market remains strong. We are in a good track. We have started to add capacity with top-notch modern vessels. And we are having good progress, as I said, on contracts and contract renewals. The geopolitical situation, I don't think is changing much either. It's complicated, and it's obviously some effects of Suez being effectively closed for our type of operation, but it's not much change in those dynamics and we have adapted and responded to that, I think, operationally in a good way. And when it comes to expected Q4 there is a level of -- I think there is a high level of stability in this, meaning that we expect Q4 EBITDA to basically be in line with our recent run rate. And we are in the process of increasing our contract share, securing more cargo under longer contracts at strong rates.

So that ends our presentation. And thank you for listening in and we're opening for Q&A, My Linh.

[My Vu, executive]

Yes, we have received quite a few questions from our audience this morning. And the first question is about the general capacity planning. What is our plan with the older vessels where we have more and more delivery of the new Aurora class vessels?

[Andreas Enger, executive]

I mean, I think we have -- first, -- we have obviously used the opportunity to sell some vessels and we still have one vessel, Hoegh New York where we made an agreement and will deliver -- which we will deliver early next year. So, we have chosen to sell some older vessels at good prices to match the delivery schedule, meaning that we are adding capacity, but we're not adding massive capacity. And -- but I think the future capacity strategy, we will sort of work on as it goes along. Right now, we are quite tight. I mean we could easily have employed the vessels that we have divested. It's a bit of sort of balance sheet and fleet balancing. There are some vessels that are going to be -- also be retired in the years to come with age. but we're managing that carefully.

But I think the main thing about our capacity strategy now is that we have world-class newbuilds. We have a large sort of legacy fleet that is well performing and unencumbered with no debt. So, we have flexibility to basically continue and we could add extra charter vessels as that market gradually opens up. So, in a way, we are in a very comfortable situation where we are -- we have all the tools in our bag to, number one, go green with our customers, but also to balance our total capacity to our total requirements. And I think we will report on that as we make decisions going forward.

[My Vu, executive]

Yes. Thank you, Andreas. And the second question, since has been called by a few different analysts and audience is about the sentiment of the recent contract renewal. What are we are seeing? What can we say anything about the negotiation and the rate we are seeing for the recent contract renewal compared to earlier this year or last year?

[Andreas Enger, executive]

No, we don't really comment on rates on individual contracts, and that differs. But I think I will comment on the processes in the sense that -- I mean, to some extent, we have -- we're also getting some questions, but when do we announce contracts? And the dialogues with our customers are positive, going well. We are working hard to make sure that we get balanced terms and we are -- have sort of taken some time to make sure that we do improve the contract language and terms. And these are large organizations, so it naturally takes some time.

So, while we would like to sort of announce sooner, we have to have the entire process completed before we sign. But we're quite pleased with the processes, and I don't think we've experienced any setbacks or things regarding neither rates or terms nor contracts. So, it's quite a positive environment. It's -- I think we've seen our industry moving in a more industrial direction. I mean we are we are not sort of chartering out vessels on spot trades and stuff. We are creating trade systems that has multiple customers and that creates some stability. And we've reported the fact that we now have a contract coverage up to 75% is a substantial improvement to previous. And with what we're doing, that contract coverage is also moving upwards.

[My Vu, executive]

Thank you. And the next question also from a few different analysts is about the outlook. So, you wrote in our outlook that we expect Q4 to be in line with the last 9-month run rate. Can you say anything more about that?

[Andreas Enger, executive]

I mean I think we are expressing a level of stability in the outlook and that we have a robust platform for performing at the current level. I don't know, Per Oivind, if you would add any details to that.

[Per Oivind Rosmo, executive]

That's what we tried to say. It's quite stable. We don't expect a lot of changes in fourth quarter. And so, I think that's what we can say about it. It's...

[Andreas Enger, executive]

And you should add something. I mean, it's a -- we're operating a complicated system. There's lots of moving parts and we have the impression that many analysts think a couple of percent up or down is a big deal. And on that background, I think it's fair that we hedge our language a bit on the outlook.

[My Vu, executive]

Thank you. Yes, the next question is about our new vessels, Hoegh Aurora. How will the ship perform versus expectations? So, how -- when could we expect some cost impact when the vessel is fully integrated in our system?

[Andreas Enger, executive]

The vessel has performed fantastically. It's been what the people that have been in this much longer than me says that it's probably the best build #1 of a series we've had. So, we worked -- we had a very, very good cooperation with the yard and all our partners on that. So the performance is very good. It has completed the first main voyage. Cargo operations are fine. Its operation is good. It has the LNG capability that is important. So, we are very, very pleased with having it. And I also want to emphasize the fact that this, I guess, according to our original plan, it's almost half year early. So, it's also ahead of schedule. And that will gradually go into both our performance and our carbon emissions. But it's -- now it's one voyage on one vessel in the fleet. So that's coming gradually, I think, into the fleet over the next 12 to 18 months.

[My Vu, executive]

Thank you. Yes. And [indiscernible] to build up on the newbuilding program or newbuilding, it's not a secret that we see a large order book in the segment. And we also write in our outlook that with the deliveries of the new build to the other operator as well, we will take away gradually some of the pressures seen in our industry. How could we comment about -- what could we comment about the outlook with increasing delivery of the new vessels?

[Andreas Enger, executive]

I think that -- I mean, that is a big question. But I think we should start with the fact that we have had an aging fleet over more than a decade. So, we believe that there is a quite substantial renewal overhang. And I think also it's like we also see the quality of the new vessels. And we have all these discussions of decarbonization and new fuels and willingness to pay, but we are quite confident that when we're taking on vessels that are really able to reduce carbon emissions per unit transported by more than 50% actually with no additional cost, even with more efficiency, that is a good platform.

And the fact that with the 12 Aurora class vessels being substantially larger than the average, we are making a very substantial renewal. We have captured the opportunity to divest some older vessels at very attractive prices, paying actually a large -- covering a large part of the equity installments in the newbuild. So, we are confident that we're building a more robust -- both more robust fleet, a better performing fleet. We're building a stronger contract portfolio. And it's our clear ambition or impression that our customers want that stability in their supply chain. So, we are optimistic, but I don't think we're going to speculate on what's happening. But still at currently, what the newbuild deliveries are there, yes, they're easing some of the extreme pressure, but it's also filling in the gaps from a decade of underinvestment.

[My Vu, executive]

Thank you. Yes. The next question is about the fluctuation in rate from month to month. And this question, I can answer.

So, I think where we all previously guide before, I mean, or informed the market before, the fluctuation in the market is simply because as a result of different vessel positions in different months. And I would -- we will not try to treat it as any indication about the general macro market in general. And yes, we have received a few questions about the macroeconomics and the impact of tariff and the impact of the potentials of the upcoming U.S. elections. And what we can say is that any kind of tariff in general, not good for the business, but it is something we are closely monitoring and -- yes, and we will take actions accordingly.

Yes. So with that, I would like to conclude today's Q&A questions. Thank you very much for your attention and we look forward to see you next time. Thank you.