Hoegh Autoliners ASA

OSE:HAUTO

Earnings Call Analysis

Company's Recent Performance and Outlook

The company will pay quarterly dividends based on net free cash flow, which may fluctuate due to capital expenditures, particularly with $50 million remaining mainly due this year. Drawing on loans for two vessels in Q3 will improve cash flow. Capacity reduction supports rate increases, with costs expected to be covered by cargo surcharges, but overall impact needs observation. New contracts have increased customer volume commitments. Contract renewal efforts continue with $4.6 million this year and roughly $2 million pending, mostly in 2025. The expected annual volume reduction, if vessels reroute due to Red Sea disruptions, is between 800,000 and 1 million CBM. Newbuild financing is 77% credit, with a 23% equity portion, leaving $50 million outstanding.

Strong Performance with Record Profits Despite Operational Challenges

Hoegh Autoliners concluded the fourth quarter with remarkable financial results, marking a period of stability and growth. The company transported 75,000 Cubic Meter (CBM) more cargo in Q4 than in Q3, with stable volumes through 2023 reflecting capacity optimization. A noticeable revenue increase to $382 million from $355 million in Q3, arising from both higher volumes and increased net rates by 6.3%, boosted the top-line growth. Their net profit soared to a new high of $195 million, partly bolstered by a $36 million sale gain from the vessel Hoegh Bangkok. These developments ensured that the Adjusted EBITDA rose to $199 million, continuing an uptrend since their IPO over two years ago.

Fortified Balance Sheet with Significant Cash Reserves

Hoegh Autoliners' balance sheet remains robust, with a healthy 69% equity ratio and a book equity of $1.4 billion. The company possesses a strong cash position, sitting on $458 million in dry cash by quarter-end, alongside $81 million in accessible undrawn credit facilities. Their mindful cash management resulted in an enhanced cash flow, with net gains from both operating activities and investment activities, including proceeds from asset sales and mindful CapEx towards newbuilds. This financial prudence facilitates an opportune net interest-bearing debt of only $52 million, presenting a nearly debt-free profile with a balance sheet sum of $3.1 billion.

Proactive Approaches Amidst Suez Canal Disruption

Despite encountering substantial operational difficulties following the discontinuation of transits through the Suez Canal in December, the company has applied agility in operations to mitigate the impact. The immediate effect saw a cutback in volume down to $1.1 million in January. However, management is actively introducing surcharges for rerouting and optimizing fleet deployment. Executives conveyed optimism about the sustained strong market backlog and rate reinforcing the general market health despite these disruptions.

Ambitious Fleet Modernization and Resilient Dividend Policy

Hoegh Autoliners' vision encapsulates fleet modernization with carbon-efficient vessels, a sturdy balance sheet to counter future market variations, and rewarding shareholders. Notably, the company's future-facing ambition is highlighted by its commitment to renew its fleet, expected to become the industry's most modern by 2027, coupled with attractive financing. This ambition feeds into their revised dividend policy, now aiming to distribute roughly 100% of the net free cash flow quarterly after accounting for CapEx, debt amortization, and taxes, reflecting an assertive shareholder returns policy.

Earnings Call Transcript 2023-Q4

[Camilla Knappskog, executive]

Good morning, and welcome to Hoegh Autoliners Fourth Quarter Presentation. I'm Camilla Knappskog, Head of Communications. And I'm here with our CEO, Andreas Enger and our CFO, Per Rosmo. Shortly Andreas will present the business update followed by Per Oivind, who will take us through the financial aspects.If you have any questions during the presentation, please reach out to [e-mail], and we will address the questions after the presentation. Thank you.

[Andreas Enger, executive]

Thank you and welcome. I'm coming in with a little bit of cold. So I hope the adrenaline of the content will keep my voice going for 15, 20 minutes. This quarter is quite a milestone for Hoegh Autoliners. We had a lot of important milestones, and we have had a good sort of run for a long time. But going into January this year, first, I've been able to walk the car decks and the engine room of our first newbuild to be delivered this summer. We have taken stock and concluded that we are now fully invested on probably the most ambitious renewal program in the industry, having fully financed newbuilds being about 1/3 of our fleet in number and quite a bit more in terms of capacity with future fuel ready, very efficient vessels. And we have concluded that our effort to create a robust and resilient balance sheet has now to come to the point where we are able to increase dividend payments to shareholders. And all of this is kind of the demonstration of what I think is a successful strategy executed over the last 3 years. Obviously, we were helped a lot by a very strong market.Looking at the headlines. Our EBITDA for the quarter is USD 199 million, definitely a record. And also below the EBITDA line with other items that Per Oivind will come into later, the net profit is $197 million, also a record number, driven by rates with a gross rate now at past $95 per cube. We sold one vessel, and we have an equity ratio approaching 70%, very strong balance sheet. And that has then allowed us to rethink our dividend policy and rethink what is a sustainable balance sheet, leading to a payout of $360 million after Q4, which is basically the dividends for the quarter and addition, the correction of the cash down to what we consider is a prudent and resilient cash balance for the company.In terms of the market, continued development with -- I think we said for a long time that we are running full, meaning that volume development has not been very significant in the quarter and the high/heavy, breakbulk likewise. So it's the rates that is driving our results and it's in line with what we said earlier that we have closed a number of contracts at more attractive levels, and we are also renewing legacy contracts moving from low to high levels. And that's also an effect that is still ongoing.We have signed several long-term contracts. We do announce according to our policy. They're now at an annual volume of 3.4 million CBM. The average rate remains above $100 per cube. And the average duration is now, on that contract portfolio is 4.3 years. And correspondingly, on the other side, we still have 4.6 million [ cube ] of what we call legacy contracts at an average rate of less than $50 per cube. And in this environment and with the demand in the market, we are also in the process of increasing our contract coverage and have adjusted our target that has normally been in 70% and up to 80% for 2024. So it's a robust contracting situation that is continuing.And I think some of the important milestones in the automotive export market for 2023 is that China has now passed Japan to be the largest vehicle exporter in the world. And the increase in volumes is continuing this catch-up from the very low volumes we have seen during both -- during the pandemics and semiconductors in the past. High and heavy as well is globally strong, a bit slower, but expecting to continue -- strong, a bit slower, but expecting to continue. So that cargo segment is -- so that cargo segment is also contributing positively.Capacity situation, not so much changed. There is a substantial newbuild activity, total of 192 vessels, starting to come in the second quarter of 2024. In reality, we get our first vessel in July going into operations in August. And time charter rates remain record high. Not relevant for us because we are not active in that market, neither chartering in or out. But it's obviously an indicator of the market and capacity situation in the industry.Again, our fleet size is stable. The big thing is that we have taken advantage of market and sold 1 and delivered 1 sort of which I call mid-age, 17-year-old vessel at quite high sales price this quarter. But we are running a stable fleet of mostly wholly-owned vessels, and that will continue until second half of 2024 when we start getting our Aurora newbuilds.Again, the newbuild contract process is going well. The yard is on track. And these are pictures -- we showed pictures earlier of the engine and the tanks and other things arrived. This is actually a picture of the first vessel to be delivered in July now on the water. And I was just down a little more than a week ago looking at it. And the building is going well and also the next several vessels are ahead of original plans. So -- and quality and progress is as expected. So we're very, very happy with the yard and the process on the newbuild side.Sustainability, we are continuing to expand our use of biofuel. We are continuing to offer all our customers the ability to use low-carbon carbon-neutral fuels through biofuel. We will, over the next year or 2 then or actually towards 2027, expand that substantially by adding LNG -- bio-LNG and eventually ammonia into the fuel mix that we're offering to our customers. And in sum, I think we are -- we clearly stand out as both a leader in introducing 100% biofuel as an option to customers and a leader in offering new zero carbon fuels into the future plants and -- which is well received by customers and leading us into a host of very interesting discussions on how to help customers decarbonize their supply chain.That is the sort of highlights on the marketing capacity side, and I'll leave it to Per Oivind to go through the financials in some more details.

[Per Oivind Rosmo, executive]

Thank you, Andreas. Starting just with a short recap of volumes. As you have seen from this slide, we had very stable volumes through 2023. The volume was for all practical purposes kept by our capacity. A small increase in Q4 compared to Q3. We transported 75,000 CBM more in Q4 than in Q3. The net rate and also the gross rate continued to increase. We achieved a net rate of $83.4. That was an increase of 6.3% compared to Q3. The top line, as we have talked about before, is the main driver for the increase in the EBITDA and the net profit.Looking at the revenues, they increased from $355 million in Q3 to $382 million. That is an increase of $27 million. $7 million is coming from the increase in volumes and $20 million is coming from the increase in the net rates. The adjusted EBITDA increased to $199 million, up from $185 million. And we see from the graph that we have had an increase in EBITDA every quarter since Q4 2022. We actually have had an increase in EBITDA every quarter since we did the IPO a little bit more than 2 years ago.The net profit is $195 million. That's also a new record, up from $143 million. Out of the $195 million, $36 million is related to a sales gain from the vessel we sold, Hoegh Bangkok. So the underlying net profit adjusted for that sales gain is $159 million.Looking at what was the driver from the increase from $185 million to $199 million, as I said, $27 million is coming from increased revenues, $7 million from volumes, $20 million from rates. Then we had bunker price increases of $10 million in the quarter. Out of the $10 million, $3 million was offset by increased [ buff ]. As we have talked about before, there is a lag in buff compensation when oil price increase, and we saw an increase in bunker prices during fourth quarter. And then we also have somewhat higher other operating expenses, that is mainly voyage expenses coming from the additional volumes that took us to the $199 million in EBITDA.The balance sheet is, as Andreas also touched upon, extremely strong. We have a net interest-bearing debt of only $52 million by the end of the quarter. The mortgage debt is $360 million by the end of the quarter. And you see to the right here that the cash balance was $458 million. The reason why we have a positive net interest-bearing debt is that we also have some leases included in the debt according to IFRS accounting principles. And the leases also include vessels on time charter. We have 3 vessels on time charter by the end of Q4, and we have 3 vessels on bareboat charter. We have exercised an option to purchase one of the vessels that we have on bareboat charter that will be delivered to us in April 2024.Net interest-bearing debt to EBITDA ratio is close to 0, as you see, 0.8. Book value of the equity has increased every quarter and is now at 69%. We have a book equity of USD 1.4 billion. And the cash balance increased considerably through the quarter. We had $458 million by the end of the quarter in cash, and the cash is actually cash in bank. We are not investing in papers or anything. We keep the dry cash on bank accounts. In addition to that, we had $81 million in undrawn revolving credit facilities by the end of the quarter.Looking at the cash development through the quarter, we started with $332 million. And then we have cash from operating activities of $203 million. We had a positive development in the working capital through the quarter, reducing the working capital. And then we have net $28 million from investing activities. That is the sales proceeds from Hoegh Bangkok. But we also paid equity installments for the newbuilds through the quarter. So the net was a positive cash flow from investment of $28 million.We used $20 million for debt amortization and interest payments, and we paid USD 70 million in dividend to the shareholders in November. We also used $16 million on lease and time charter payments. And then we have a currency gain of $2 million. So that took us from $332 million to $458 million. And as I said, on top of that, we have $81 million in unused credit facilities.Looking at the balance sheet, it's -- as I have said before, we have a balance sheet that -- our asset is for all practical purposes, vessel and the equity installments that we have done under the new buildings. That is [ $1.3 million ]. And then we have the right of use assets, the value of the lease and bareboat chartered vessels, $142 million. We had bunker and receivables of $135 million, and we had the cash balance of $458 million. Equity, $1.4 billion and the interest-bearing bank debt, $346 million. I said $360 million earlier. The reason why we have $346 million here is that we recognized a mortgage debt with debt modification. That is also an IFRS technical thing, but the outstanding debt towards the banks is around $360 million. And then we had the current liabilities, mainly trade-related vendor debt of $164 million. We had other noncurrent liabilities, mainly pension -- sorry, deferred tax of $40 million, and that took us to a balance sheet USD 3.1 billion. That is approximately NOK 75 per share. If we adjust the vessel values with the broker values instead of using book values, we calculated the value adjusted equity to be NOK 142 per share by the end of the fourth quarter.As Andreas touched upon, we are building resilience and we have also updated the dividend policy. We now have a solid contract backlog. Expect that between 70% and 80% of the cargo that we will transport in 2024 will be under contract and the average rate for the contract cargo is now very close to the average age -- the rate that we have for all cargo actually. It has increased considerably, and we are now seeing the full effect of the contracts that we entered into during 2023.We have attractive financing in place. We have financed all the 12 new buildings at very attractive terms and we are also in the process. We have signed commitment letters from our lending group of refinancing of the legacy debt and the purchases of the leased vessels that we plan to purchase this year.CapEx is reduced. We have done most of the installments for the newbuilds. We have, as of today, $50 million left in equity installments for the newbuildings. Cash breakeven rate is at historically low level. We have reduced the cash capacity cost considerably over the last 4 to 5 years. And we are also cost conscious when it comes to other expenses. So the difference between the rate and the -- the rate difference is in a way wider than it ever has been.We have -- we will pay $360 million in dividend. But we will continue to keep prudent and solid liquidity reserve in the balance sheet. So the new dividend policy, it is stated here. Our intention going forward now is to pay out in dividend around 100% of the cash that we generate through the quarter after CapEx, after debt amortization and after taxes. So for all practical purchases, the net free cash flow will be distributed as dividend.And Andreas mentioned it, we are increasing the dividend to USD 360 million. That is paying out the cash that we have accumulated through 2023 and also to some extent, the cash flow that we will have during first quarter this year. But as I said, we will continue to keep prudent cash balance also going forward.

[Andreas Enger, executive]

Thank you, Per Oivind. Again, we are ending an historically strong quarter. I think it's also fair to say that we are in a situation where there is -- there are some complications regarding the outlook, which, in our view, is not related to the market. We see a continued, as Per Oivind said, a strong backlog. We see healthy rates. We are quite optimistic about the outcomes of the renewal processes that we are engaged in and consider the general market to be strong and rates firm.That being said, it's clear that discontinuing transits through the Suez Canal and the Red Sea late December is creating substantial operational challenges for us and I think the industry as a whole. I think we have actually by now also released the January trading update. And I think that is maybe the immediate effect of that where our volume is down in January to $1.1 million. I think that is a compound effect both of the longer voyages and disruption, but also that in the immediate -- immediately following the changes, it's hard to really manage the network effectively. So we have a volume loss in Q1, might improve some, but it will remain -- volumes will remain constrained as long as the Suez situation continues.We are having a good process and are in the process of implementing surcharges for the rerouting. It's clear that if this situation sustains, it will consume substantial capacity in the market and some -- in that sense, be supportive to the remaining volume. It's also important to note that we are actually getting substantial additional capacity into our fleet in the third quarter. But as long as the Red Sea situation prevails, there will be some loss of capacity from longer voyages. It will be partly compensated by surcharges, but it will consume capacity from us and the entire industry.But I think it is important for us to sort of reiterate what I said in the beginning that we've had objectives over the last several years or since we IPO-ed. It's really threefold. We wanted to renew our fleet with modern, cost-effective and carbon-efficient vessels, we wanted to establish a resilient balance sheet to be able to meet future cycles and we wanted to serve shareholders well. And it's quite clear then where we are now. We are -- we have -- with our investment program, we have a fully funded investment program that will give us the most modern, the most carbon-efficient and the most cost-efficient fleet in our industry in 2027. We have a resilient balance sheet with long durations, very attractive financing, very attractive terms. And we see a market -- we have then the financial situation, allowing us to pay out all cash generated -- net cash generated to shareholders. And we have a market view that obviously -- that it gives good prospects for that payout going forward, although I have to say that $360 million in the quarter is quite extraordinary.But -- thank you for listening and Camilla, do we have any questions?

[Camilla Knappskog, executive]

Yes. We do. The first question is from Erik Hovi, Nordea. Can you walk us a bit through how the dividend will pan out into the ongoing delivery schedule as you will have a lot of in and outflows on CapEx and debt inflows that could impact the levels?

[Per Oivind Rosmo, executive]

[ Andreas ], the dividend policy is in a way stated very clear. We will pay quarterly the net free cash flow. So if we have CapEx in the quarter that will reduce the dividend that quarter. And so the dividend will be somewhat -- it can be somewhat volatile depending on when we pay the CapEx. The remaining CapEx is only $50 million. Most of it is coming this year. And we will draw on the loans for the first 2 vessels in third quarter that will improve the cash flow in third quarter. But we can expect that the dividend will be somewhat volatile, depending on when we pay newbuilding installments, but that is basically the only disturbing factor here. Other than that, it will be the operational cash flow, less the normal debt amortization.

[Andreas Enger, executive]

And the total effect for that in 2024 is roughly $50 million.

[Per Oivind Rosmo, executive]

Yes. It's $50 million remaining in CapEx.

[Camilla Knappskog, executive]

Okay. Is it fair to say that the new policy is at least double your previous policy?

[Per Oivind Rosmo, executive]

Say it again.

[Camilla Knappskog, executive]

Is it fair to say that the new policy is at least double your previous policy?

[Per Oivind Rosmo, executive]

In monetary, it's depending on what you compare with. But if you compare with the $214 million that we paid in 2023, I think you can -- if the income continues at the current levels, you can roughly say that you will double the dividend.

[Camilla Knappskog, executive]

Okay. Next question is from a private investor [ Kwara from Bergin ]. How will uncertain situation in the Red Sea and the Suez Canal affect costs, rates, assignments and earnings in 2024 if the situation continues as it is indefinitely?

[Andreas Enger, executive]

I mean -- I think that is an invitation to speculate, I don't think we will go into. But what I think we have said is that -- I mean, clearly, taking out capacity will be supportive to rates, although it will take some time before that kicks in. It will -- we will have additional costs that we expect to be largely covered by surcharges on cargo. We will have lots of capacity and volume through longer voyages that will be a negative. And exactly how that adds up, I think, is -- we'll have to wait and see.

[Camilla Knappskog, executive]

Okay. Next question is from [ Jack Stuef ]. He is a shareholder. Do new contracts have minimum volume commitments?

[Andreas Enger, executive]

Generally, yes. But I have to say, as we are substantially firming up the terms on the contracts, particularly on the large contracts and large trade flows, those terms are specialized for each contract. So it's not a general answer, but we have substantially more volume commitments from customers in the new contracts than we had in our previous contract portfolio. That's fair.

[Camilla Knappskog, executive]

Next question is from Kristoffer Haugland, Arctic Securities. Can we expect full mitigation by increased bunker costs in Q2 already?

[Per Oivind Rosmo, executive]

Yes. As long as oil prices stay more or less stable, we can expect a recovery coming back in Q1.

[Camilla Knappskog, executive]

Very good. Are you looking to divest any more of your older vessels as there is clearly appetite for those given the grand divestment?

[Andreas Enger, executive]

We are continuously looking at our fleet composition in light of the newbuilds. And clearly, the accelerated delivery of our newbuilds provides some more optionality. But that's the assessments we are doing continuously and will do continuously through this year and we will report on it when we decide.

[Camilla Knappskog, executive]

Okay. Next question is from Fredrik Dybwad. Congratulations on a successful quarter. Having been busy in renewing your contract portfolio, how much renewal is left until all legacy contracts are renewed on current rates?

[Per Oivind Rosmo, executive]

I think we had it on the slide. We are about to renew $4.6 million through this year. And after just roughly $2 million that we have, we will still have to renew in -- most of that in 2025.

[Camilla Knappskog, executive]

Okay.

[Andreas Enger, executive]

Which means a little more than 1/3 of our capacity?

[Per Oivind Rosmo, executive]

Yes.

[Camilla Knappskog, executive]

And how long is the average duration of your contract portfolio today on a fleet-wide basis?

[Andreas Enger, executive]

We said -- I mean I think we said -- I mean -- I think the good thing, we haven't...

[Per Oivind Rosmo, executive]

The new contracts have an average duration of 4.3. We still have -- we have contracts that are expiring now in 2024. So of course, if you look at all contracts and the duration, it's shorter. But of course, we expect to renew that contract during 2024 for at least 3 to 5 years. So I think going forward, the average duration time of the contract portfolio will be between 3 and 5 years.

[Andreas Enger, executive]

Yes. But I think it's important for that one is our best-paying contracts have an average duration of more than 4 years, and our lowest-paying contracts have an average duration of less than 1 year. I think that is the important [indiscernible].

[Per Oivind Rosmo, executive]

Yes, yes, that is the main message.

[Camilla Knappskog, executive]

Okay. Next question is from Eirik Haavaldsen in for Pareto. [ Ref to ] surcharges on the Red Sea situation, how have they been met by your clients? Are they accepting this without any issue? Are you able to charge these on all contracts?

[Andreas Enger, executive]

I think the answer to that is that I think it's met with a general understanding. And we are in the process of implementing it in the large share of our contracts. But I think it's also reasonable to expect that there will be questions and discussions. So they are obviously in close dialogue with customers. But I think the short answer to that is that we are implementing surcharges and that the customers recognize the additional costs and those discussions are constructive.

[Camilla Knappskog, executive]

Okay. Last question is from [ Freedrish Costish ]. If all vessels, which used the Suez Canal before the Red Sea crisis will continue to sail around the Cape of Good Hope for the entire year of 2024, by how much or how many percent would total volumes be reduced?

[Per Oivind Rosmo, executive]

We have done some rough calculations. It absorbs approximately 2 vessels per month or per year, and the average vessel will carry around between 400,000 CBM and 450,000 CBM. So the volume effect of going around is between 800,000 CBM and 1 million CBM on an annualized basis.

[Camilla Knappskog, executive]

Okay. Last question. Will the new buildings be financed at 100% LTV? Or if not, how big will the equity portion of the newbuild...

[Per Oivind Rosmo, executive]

The equity portion of the newbuilds is -- they are financed with credit of approximately 77%, meaning that the equity portion is 23%. And as we have touched upon before, we have paid most of that, and we have $50 million left.

[Camilla Knappskog, executive]

Okay. Very good. Okay. This was the last question we had for now. If you have any additional questions, please reach out to [e-mail] and we will reply later. Thank you for joining us today, and we hope to see you when we're back for the next quarter presentation in May. Thank you.