Hoegh Autoliners ASA

OSE:HAUTO

Earnings Call Transcript 2022-Q4

[My Linh Vu, executive]

Good morning, and welcome to Hoegh Autoliners fourth quarter presentation. My name is My Linh Vu, Finance Manager and IR responsible at Hoegh Autoliners. With me today, we have our CEO, Andreas Enger; and our CFO, Per Oivind Rosmo, who will walk you through the last quarter, business updates and financial results. If you have any questions please send an email to our Investor Relations mailbox [e-mail].

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

[Andreas Enger, executive]

Thank you, My Linh. It's a great pleasure to be here to present the best quarterly results on record for Hoegh Autoliners. Start with some highlights. We are delivering an EBITDA of USD 156 million for the quarter. That is a 36% increase from a strong third quarter. Net profit, USD 118 million. The performance is driven by a continued success in repricing contracts and exploiting a strong spot market. And as a result of the quarter, we are stepping up our dividend payout ratio from 30% to 40%, delivering based on the adjusted net profit, a dividend for the quarter of USD 44 million to be paid in February.

In addition, we have continued our effort to optimize our capacity cost, buying, using purchase options to buy long-term chartered vessels, 2 options declared this quarter. We also raised financing of USD 130 million for -- at very attractive terms to finance those purchase options in a way that reduces our capacity cost.

I will take you through some of the details on market capacity and sustainability before I leave Per Oivind to take the financial update for the quarter. On the market side, as I said, volumes are flat, reflecting that we are running really flat out on capacity. And our performance improvement is, as I said, initially driven by a continuously successful ability to reprice contracts and capture strong spot opportunities. And I think that is also particularly strong in the context that in the quarter, we've also reduced our high and heavy share. That's partially because we are selecting attractive new car cargo, but it's also that we are still moving substantial volumes on legacy contracts that are below the current market level.

And as I said, Q4 has been another successful quarter of contract renewals, and we will expect that to continue into this year. We are at a situation where car shipments is at an historically low level, first because of the pandemic and then because of various supply chain issues. And based on our records, we are coming into a period where we see improvements, increases in car shipments, particularly driven by a very strong trend. And I would say really that exports of cars from China to Europe, in particular, has really had an inflection point this year and is showing remarkable strength. So that's -- so the underlying trend on the market, in our view, is still positive, primarily driven by the fact that we're starting from a very low base.

High and heavy market is also strong. I think when we reflect on our high and heavy share going down, I think it's also important to reflect that high and heavy is a very broad segment. And while we are maintaining and serving the strategic end of that segment working as before and prioritizing our strong long-term clients in the area and the strong players in the industry, high and heavy and breakbulk also includes a broad mix of much more opportunistic cargo that we have, as I said, at times chosen to deselect. We've had a strong year on mining equipment, and we have a good sort of outlook on high and heavy cargo availability.

And that market perspective, then has to be matched up against the capacity situation. And we have an historically tight market. We have very limited new capacity coming into the market before late 2024. And we have seen extraordinarily high charter rates at the level where we have decided not to increase capacity through the charter market even if the market volumes are available. And I think also, it's important when we look at the capacity situation, it's very much focused on the new build backlog, but there is also -- during 2022, you've seen a significant tightening of the IMO regulations in terms of carbon efficiency of vessels.

You've seen a step-up in particularly the EUs focus on carbon taxes and as important as the new build backlog, which we are following very closely, is also the quality of the bottom 1/3 of the global fleet and how they are getting increasingly challenged both by IMO regulations, carbon taxes and customer preferences. So we would say, for our part, we are quite pleased that we have a significant green newbuild program and that we're going into 2025, 2026 with vessels that will have a substantially better environmental and carbon performance than the fleet average.

We have, during the last years, optimized our network to -- around the fleet we have driven by the fact that we are -- have decided not to cover the capacity gap until newbuilds coming in 2024 with long-term expensive charters. We do have a few charters, but all -- we have a total of 3 charter vessels that are all now contracted into the newbuild delivery window. So we have a stable and very controlled capacity situation that is not exposed to the spot charter market.

Sustainability is -- has rapidly become a very important factor in our industry, driven by the fact that we serve some of the most ambitious companies on decarbonization and some of the companies of the world that has a clear brand profile of sustainability and decarbonization. And as a company, we are committed to deliver on supporting our customers on that journey. We would say, unfortunately, which I think is for the industry with port congestions and capacity shortages and then still lack of newbuilds, the carbon, the AR ratio is sort of slightly increasing for the fourth quarter. It's driven primarily by bad seasonal weather and higher speed.

But I think it's important to say that we have a very clear plan in place with newbuilds and with modifications and initiatives on the existing fleet to take down carbon emissions substantially. And we have already taken down our unit carbon emission by 38% from 2008 to 2022. And as I said, we are -- we have substantial quantified ambitions to take that significantly further by 2030.

Then I'll leave it to Per Oivind for the financials of the quarter.

[Per Oivind Rosmo, executive]

Yes. Thank you, Andreas. I am very happy to be here today to present the best result ever for Hoegh Autoliners. As Andreas said, we had a record quarter, and we are also -- when we summarize this, we are -- we have the best year ever in the history of this company. Before I go into the detailed numbers, just a short recap of the main drivers for our profitability and that is the volumes and the net rates.

Looking at the volumes, we see that we have a small increase, 1.2% from third quarter. When we round this off, it is 4.1 million CBM each of the quarters. That comes on the back of reduced capacity. We actually had a 4.3% lower capacity in Q4 because we sold 2 vessels during Q3, meaning that we are actually able to utilize the fleet better. We have more cargo on board on every sailing, and we are also able to do more efficient voyages given the high volumes that we have. So same volume with lower capacity is the main takeaway from this one. As Andreas said, we are able to transfer the strong market that we have, the tight capacity situation into a situation with considerably increase in the net rates.

The net rate increased with 9.3% from third quarter to USD 68.3 per CBM. And looking at the year as a total, we see that we have been able to increase the rate from USD 55.6 to USD 68.3, representing 22.8%. This comes both from renewal of contracts as they expire, but we are also in a situation where we have capacity available to benefit from the very strong markets. So that is the backdrop for the financial numbers.

Revenues increased with USD 27 million from third quarter into fourth quarter, USD 24 million is coming from the increase in the net rates and approximately USD 3 million is coming from increase in surcharges mainly BAF. The EBITDA, as we said, increased from USD 115 million to USD 156 million, representing an increase of USD 41 million from Q3. We see that we have also a record high margin. The EBITDA margin has increased to 44%. This is also then translated into a very high net profit. We see that we have a net profit here of USD 120 million in the fourth quarter. That is up from USD 95 million in third quarter. The increase from -- or actually, if you compare it with 2021, Q4, you see that we had USD 146 million, but that was because we had the reversal of impairments of USD 109 million.

So comparing on apple-by-apple basis, you see that we have an increase from USD 38 million to USD 120 million comparing to fourth quarter last year. If we look at how this is divided between income and expenses, we see that we had an EBITDA of USD 79 million in Q4 2021. That took us to USD 115 million by the -- in Q3. And the drivers there was the increase in revenues, but we had a hit from higher bunker prices, USD 34 million, but we were able to reduce our operating expenses by USD 12 million in that period. From third quarter to fourth quarter, again, cargo revenues, as I said, USD 27 million, USD 24 million coming from the increase in the rates, USD 3 million coming from surcharges. And we also had a positive effect in bunker.

Bunker expenses was reduced with USD 16 million from third quarter to fourth quarter. And other operating expenses, mainly voyage expenses, more or less the same as in third quarter, and that took us to USD 156 million for the quarter. The balance sheet has strengthened considerably during the year. We see that our net interest-bearing debt is reduced from USD 491 million by the end of Q4 2021 down to USD 379 million. Looking at the net interest-bearing debt-to-EBITDA ratio, it is now down to 0.8x. The book value of the equity is by the end of the quarter, close to USD 1.1 billion, representing 61% of the total assets.

Cash balance, we are generating a lot of cash, and we can see that -- if we go back to second quarter, the end of second quarter, we had USD 61 million in cash. That has now increased to USD 184 million. And on top of that, we have an undrawn revolving credit facility of USD 94 million. So our liquidity reserve by the end of the year was USD 277 million. Looking at the cash development during the quarter. We started with USD 130 million, and then we generated USD 146 million from the operation. We used USD 7 million in investing CapEx during the quarter, USD 7 million, that is mainly dry-docking of vessels. And then we repaid USD 10 million of the mortgage debt and had interest and commitment fees of USD 4 million.

We purchased Hoegh St. Petersburg late December for USD 30 million. We paid cash, and we didn't take any loan on that vessel at that point in time. We also paid USD 20 million in dividend, and we had other cash spending from financing activities, USD 23 million. That is mainly payment of lease and time charter hires. And then we had some currency gain/losses. We had a loss of USD 2 million, and that is because of the strengthening of the USD . So that took us to USD 184 million, plus the USD 94 million, USD 277 million by the end of the quarter.

The balance sheet is, as we see it, very strong. We have vessel and newbuilding of USD 1.151 billion. We have right-of-use assets of USD 274 million. That is the leases and the time charters that we have. And then we had cash of USD 184 million. Bunker and receivables was USD 143 million by the end of the quarter. Equity close to USD 1.1 billion, lease liabilities, USD 299 million, and we had interest-bearing bank debt of only USD 265 million. Current liabilities and other noncurrent liabilities, USD 87 million and USD 39 million, respectively. So the equity share was 61%, it represents USD 5.6 per share or NOK57 if we compare it to NOK. We also calculate the value adjusted equity by replacing book value of vessels with market value of vessels. And we see that we had a net asset value of close to USD 2 billion by the end of the quarter, representing USD 10.4 or NOK107 per share.

Dividend, we have -- as Andreas said, we have increased the dividend payout considerably. We increased it from USD 20 million to USD 44 million, representing an increase of 120%. And we calculate the dividend as 40% of net profit adjusted for extraordinary items. And that is according to our dividend policy. Converting this into numbers per share, it represents USD 0.231 per share or NOK2.369 per share for the fourth quarter. That dividend will be paid on February '23.

That concludes the financial presentation. All the details are in the quarterly report. We will also publish on our website a fact sheet with more details after the presentation. So with that, I'll leave it back to Andreas to say something about the outlook.

[Andreas Enger, executive]

Thank you. And I think we do that relatively short and sweet. We expect a continued strong market, driven by limited capacity growth and positive demand development from a very low level. We see continued positive rate development. We have already published our first monthly report for the year, and we see strong fundamentals supporting both contract repricing and spot rates. The year 2023 has started well, as I referred to with our first monthly update. We are obviously closely monitoring the global macro situation and continuously working on having scenarios for any impact that might come, but we are seeing a good start of the year.

And I want to add to that, that we are extremely satisfied with -- going into 2022, we had a focus on finding the right balance between building financial resilience and investing in fleet renewal and serving our shareholders. And if you look at where we are, we have a debt-to-EBITDA ratio under 1x. We have a market-leading fleet renewal program where actually most of the equity is already paid in, and we have committed financing, that gives us future capacity costs substantially below what you can achieve by picking up some of the charters of the tonnage provider owned and newbuilds that are coming onstream.

And we have then decided for the quarter that this bounce now comfortably allows us to step up the dividend payout ratio from 30% to 40% and still keeping the focus on financial resilience and financial capacity to execute a market-leading fleet renewal program.

Then we'll leave it for questions. My Linh?

[My Linh Vu, executive]

Yes. We have received a few questions from our audience. And the first question is from analyst, Erik Hovi from Nordea. And the first question is about the potential leakage of cargo to the container market. And this is also the question coming from Petter Haugen as well. Do you want to -- if you can say a little bit more about the leakage breakbulk cargo to the container market and if we want to quantify it.

[Andreas Enger, executive]

First, I don't think we will or can quantify it. I think what we see, we do not see any kind of mass sort of change to the container market. There is a little bit on the margin on what we would call both strategically and income-wise marginal cargo. We see a few things. I was in Australia last week and see not in containers, but some of the breakbulk, the complicated breakbulk things that sometimes went on RoRo is going on both carriers. That's normal. You see some sort of creative solutions when we talk to customers, that's almost entirely driven by lack of RoRo capacity as opposed to a cost optimization kind of thing and most of the solutions that are in reality, quite costly, but is providing additional capacity.

But there is a balance there. And obviously, there are smaller items. There are some things that fits in container that will move. But in terms of our core cargo segment and what's driving our business, we don't really see that. And we'd rather see people that are transporting on alternative means that we'd like to get RoRo capacity to cover their needs.

[Per Oivind Rosmo, executive]

I would add to that, that this is on the margin. We saw cargo coming from containers to our vessels when the container rates peaked a couple of years ago. And now we see some of that cargo moving back to containers, but this is on the margin, and it doesn't really impact our cargo portfolio to a meaningful extent.

[Andreas Enger, executive]

And I'd also say that in a situation where we're not able to satisfy transportation requests from our customers, we obviously have to expect that they seek other means of transportation.

[My Linh Vu, executive]

Yes. And the second question is about the difference of premium in rates for light vehicles versus high and heavy. Is the closings, we actively shift to light vehicle volumes?

[Per Oivind Rosmo, executive]

I think in general, we can see that at least for our business, that gap is closing, has been closing over the last year. It's still high, heavy to some extent, are still better paid, but it's a mixed picture because the rate structure in this industry is very fragmented. And today, we are clearly in a situation where we see that the cars are in some markets better paid than what you can call the liner part of the high, heavy. So -- but that is a very -- it's not a straight answer to that question because the rate structure is fragmented. But yes, in some cases, we see that, that gap is clearly closing.

[My Linh Vu, executive]

And the next question is rather dividend outlook. And the question is the declared dividends for the fourth quarter is highest so far. And what can you expect similar going forward?

[Andreas Enger, executive]

Yes. I think we can say to that, that when we have stepped up from 30% to 40%, we've obviously done that on the basis of a belief that, that is sustainable, and we will continue to monitor that balance, but we are quite confident in the dividend outlook.

[My Linh Vu, executive]

And the next set of questions is from analyst Petter Haugen from ABG Sundal Collier. And the first question is about the outlook section. And the question is, you're right that for the first quarter of 2023 has started well, and we expect another strong quarter. Can you clarify a little bit more on that? Do you see an increase in EBITDA?

[Andreas Enger, executive]

No, I don't think we want to clarify more on that. We have published our -- we have a focus on transparency. So we have our monthly reports coming out. We have published the first one of the rates into January and commented on that. We will publish for February and March as time comes. But we basically said that the quarter has started well, and we're also saying that we're seeing a positive sort of direct development on the other side. And then I think we stop here. We don't want to speculate in numbers.

[My Linh Vu, executive]

And the next question is about the net rate in contracts renewal. Can you share some light on the relative change in net rate in the contracts you renew in Q4 and this year in Q1. Can you say something about it?

[Per Oivind Rosmo, executive]

I think what we can say in general is that when we renew contracts now, we do it at what I would call sustainable rates. And the rates we get is higher than what we have seen historically. So -- and that is also when you look at our rate development through the year, you see that we have a big increase. And a portion of that is contracts renewed at higher rates than what we had when we left the contract. So contracts are, in general, renewed at better rates than what we had.

[My Linh Vu, executive]

And I can see that we have quite a few questions about outlook today. And the next question is from analyst, Fredrik Dybwad from Fearnley Securities. However, second half of 2023 looking from your perspective, do you see a reduced ordering pace from light vehicles and high and heavy customers?

[Andreas Enger, executive]

I think we said that we expect a strong market driven from a low level, and I don't think it makes sense to speculate about the second half.

[Per Oivind Rosmo, executive]

Our observation is that it will be a tight capacity situation through the year. And the year has started with a good cargo inflow to us, and we don't really see that changing.

[My Linh Vu, executive]

And the next question is from Frederik Ness, analyst from SEB. And it's about capacity. You can see that there's a few vessels was above 15 years and how is the CII and EEXI impacting these vessels. And do we expect to lower extra sailing speed on these vessels?

[Andreas Enger, executive]

I think -- I mean, our view is that we have the most environmentally friendly vessels on order. Half of our current capacity has A&B CII rating. So we're quite comfortable with that. Out of the remaining, I think we only have 1 -- and we have a clear program on dealing with individual vessels. So I think our view is that we're starting off with marketing-leading ARR performance and a very strong existing vessel portfolio in terms of CII ratings. And we obviously are -- have one of the more active renewal programs among operators, which is driving that -- further improving that substantially, as I would rather pivot to what I'm saying. I'm very pleased that we are planning to enter 2026 with probably the best and most carbon-efficient fleet in the industry, and I think that is an important part of the EU.

[My Linh Vu, executive]

And the follow-up question is that what do we expect for the global fleet overall? Or do we expect increased scrapping or slow steaming going forward?

[Andreas Enger, executive]

I don't think we don't want to speculate on that. What I think we had -- already have said is that we see the CII regulations coming, the IMO regulations tightening, we see increased appetite for carbon taxes in the EU. We wish that -- think that is a good and positive development and is needed to -- for our industry to play a role in the energy transition and in the fight against global warming. So we appreciate that. And we expect that, that will be increasingly challenging for the bottom tier of the global fleet. And we are quite pleased that we have fewer vessels in that category than many other operators.

[My Linh Vu, executive]

Yes. And the next question is from Frederik is also about Hoegh's transport containers and leakage. And I guess you can find the answer from previous answers. And the next one is about volume export of China. So we have seen data showing falling port call at Shanghai in November, December and particularly January. We also see lower turnaround times. Do you share this development or is both loadings of China and turnaround, which we could use proxy for volumes still strong.

[Andreas Enger, executive]

We have a strong business out of China. And so I think we have -- as I said, out of Asia, our problem is our available capacity, not the access to cargo. And obviously, we balance that capacity between customers that we want to serve. So that's an entirely customer strategic customer-driven selection from our side.

[My Linh Vu, executive]

The next question is from analyst Erin Konsgold Clarksons. How much of your fleet is tied up in extraordinary port congestions. Can you share a little bit about the driver behind it? And do you expect it to end? When do you expect it to end?

[Andreas Enger, executive]

I mean it is improving slightly. I don't want to go into numbers. It is -- we have, I think, our congestion or delay problem is now fairly concentrated to Australia. I was in Australia last week talking to CEOs of ports, maritime authorities and terminals, and we are working intensively. We have a very close sort of focus on our business and are working with the relevant stakeholders to find solutions. But the sort of biosecurity constraints, creating capacity constraints in terminals and causing delays in Australia. It's quite a serious problem that has -- where are we incurring substantial costs although reflected in the number, they still reflecting the positive numbers.

So that is a challenge, and we're working very closely with it to find both better short-term and long-term solutions on it. But it is -- it has been sort of varying around the world with COVID. We've had issues in Europe that is becoming softer. There has been issues in Shanghai that has been coming better. And I think if you should point out something now, it's Australia, and we're very close to it and working with it because freeing up capacity is obviously a very important priority for us in this market.

[My Linh Vu, executive]

Thank you for sharing this, Andreas. And the next question is from our investor, Pete Hermensted. And I think it's about the contract renewal volumes. So the question is, are you rolling 17% capacity during 2023. What I understand it's volume capacity, it is a lower share than in shore? Or do you mean -- that mean you renegotiated a large share of contracts during Q4 2022 already -- something.

[Per Oivind Rosmo, executive]

Yes, we entered into some contracts in second half of 2022 that are running now. And yes, that is what we did.

[My Linh Vu, executive]

Yes. And that is the last questions we received from our online audience. And if you have more questions, please send us an e-mail to [e-mail], and we will answer you as soon as we can. With that, I would like to thank you for watching our webcast, and we look forward to see you again next time.