Hafnia Limited

Welcome to Hafnia's third quarter 2021 financial results presentation. We will begin shortly. You will be brought through the presentation by Hafnia CEO, Michael Skopf, CFO, Perry Van Echtelt, EVP Commercial, Ian Christopherson, and EVP Head of Investor Relations, Thomas Anderson. They will be pleased to address any questions after the presentation. Should you have any questions, you can submit them via the chat function or use the raise hand function to be unmuted to ask your question verbally. Questions will be answered at the end of the presentation. You will receive further instructions as required. Certain statements in this conference call may constitute forward-looking statements based upon management's current expectations and include known and unknown risks, uncertainties, and other factors. many of which Hapnea is unable to predict or control, that may cause Hapnea's actual results, performance, or plans to differ materially from any future results, performance, or plans expressed or implied by such forward-looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell or a solicitation of an offer to purchase or sell any securities. With that, I am now pleased to turn the call over to Hafnia CEO, Michael Scov.

Thank you for this. My name is Michael Scov, and I'm the CEO of Hafnia. So let me welcome you to our third quarter 2021 conference call. Along with me today, I have our CFO, Peritha Nechtelt, EVP Commercial, Jens Christophersen, and EVP Head of Investor Relations, Thomas Anderson. The four of us will present the third quarter 2021 financials for Hafnir. Today's presentation agenda consists of three key areas. We will begin with an overview of Hafnir and key highlights of the quarter, followed by commercial updates on the product tanker market, and finally ending off with our ESG overview. Before we move on, I would like to take this opportunity to express my deep gratitude to all Huffington employees, both at sea and ashore, and stress our employees' health and well-being so we can continue to serve our customers. Let's move to slide number two. You should all be aware of the mandatory disclaimer that I would urge you to read. Moving into slide number four. Let me begin by introducing Hafnia. Hafnia is a fully integrated shipping platform with 100% aligned interest across all segments without any fee leakage. We have corded in Singapore with offices in three other key shipping hubs, namely Houston, Copenhagen, and Mumbai. We are listed on Oslo Stock Exchange under the ticker code Hafni. That's how the third quarter ended 2021. We owned and have charted in a diversified portfolio of 98 vessels across four product segments and commercially managed an additional 99 vessels, bringing us to 197 vessels under commercial management. This is a fully integrated shipping platform. There are six key areas to our operations. Apart from being a ship owner, We have a global commercial platform with chartering teams in Asia, Europe and the United States, which secures optionality and flexibility for our customers. We also have our own in-house technical management and bunker team. Our technical management team ensures that the highest safety and environmental standards are maintained on board. Our bunkering business is buying bunkers for more than 450 vessels for our pool platform and third-party owners. Deep revenue from our various operational segments has been strong and consistent. Based on this success, we will continue to develop our adjacent businesses. Lastly, we also have a strong focus on ESG. Besides reducing our emissions to A and C, We also strive to meet our social obligations for sustainable development. We take all of these responsibilities seriously and do our utmost to realize both social and environmental benefits. I would also like to take this opportunity to highlight six key factors why Hafner is one of the leading tanker companies. Firstly, Hafner is the largest operator of product and chemical tankers in the world. This on parallel scale will make the company more robust and sustainable, enabling improved earnings capability through the shipping cycle. Next would be our continuous focus to have the lowest operating and funding costs. Our operating cash flow rate even was $12,917 per day for the quarter. Our industry-leading financing costs, solid balance sheet, and low DNA expenses are also key contributors to our competitiveness. Following that is our solid business model with diversified revenue streams. Earnings from our various operating segments have been strong and consistent. We plan to expand these businesses further by adding more vessels to existing pools and focusing on new segments. We also have a strong relationship with our stakeholders, such as fans and industry partners, which gives us access to industry-leading debt financing, including the cost of debt and breadth of capital sources. At Hafnir, we have a clear ESG profile. As a leading shipping company, Hafnir's goal is to provide safe, sustainable, and efficient hydrocarbon transportation solutions. thereby contributing to the shipping industry's efforts to reduce environmental impact. Lastly will be the positive outlook post-COVID-19 rebound. With a recent increase in demand for refined products, leading to a sharp drawdown of inventories, we believe that the product market will recover in the near future. Moving to slide number five. The product center market was mostly subdued during the third quarter. Elevated crude oil prices attributed to OPEX Plus decision to limit the increase in oil production rate resulted in large slowdowns of both crude oil globally. This adversely impacted product center transportation demand in the third quarter. Let me now bring you through some key financial metrics for Hafnir's third quarter. For the quarter we achieved time-shared equivalent income of $88.7 million and an EBITDA of $29.7 million. Following a difficult quarter for the product market, we recorded a net loss of $20.7 million for the quarter. We will pay no dividends for the third quarter. While this is not satisfactory, we strive to continue controlling what we can. Over the years, we constantly benchmark ourselves against our peers to evaluate our commercial performance. When we look at these benchmarks, AFNI stands at the absolute top in all of our segments. The spirit of excellence results from the quality of our daily commercial decision making and constantly improving our understanding of the market conditions. The grass further reinforced this. For the third quarter 2021, we benchmarked some key metrics against our peers, and we can see that Hafni stands out from the rest in all segments. Moving on to slide number six. Let me now bring you through a key event that we concluded earlier this month. Hafni has entered into an agreement to acquire chemical tankers including the fleet of 32 vessels through an issuance of new half-year shares. The number of shares to be issued and performer ownership has been determined through an NAV for NAV framework based on respective balance sheets and the predefined vessel value methodology performed by a mutually agreed panel of five reputable shipbrokers. As a result, AFNA will issue new shares to CTI shareholders representing approximately 21.5% of the outstanding shares in the combined entity. Post-transaction, Hafni will own 133 vessels with more than 230 vessels under commercial management. The combined entity will continue to operate as Hafni Limited and trade on the Oslo Stock Exchange with the typical code Hafni. commitment to growing its platform to maximize shareholder value. We can achieve improved earnings capability through the shipping cycle by complementing the existing commercial utilities in the energy and MR segments, whilst enabling enhanced trading flexibility through the ability to carry clean petroleum products and chemicals, limiting balance time by optimizing triangulation and offering material cost synergies. There are many other attractive synergies to be achieved from this transaction. With this improved operational scale, we can expect overall cost savings and improved access to capital. We can expect synergies in improving vessel utilization and TC earnings with COA-based chemicals trading with periodic cross-trading in clean petroleum products on the commercial front. We can also expect synergies that have been existing to improve their TCEs, in particular during the low market cycle. With this increased scale of over 230 vessels for our pools, we can further expand our pool business into new segments to operate the vessels. This will help us to add additional pillars to our already successful pool business. We also expect to expand our bumpering business further for the chemical market participants once that has been established. With that, I will hand it over to Kerry to take us through the financials.

Thanks, Michael. The third quarter continued to face pressure on rates due to weakened oil demand in Asia and a hurricane season in the U.S. This, combined with lower rates, resulted in a net loss of $20.7 million for the quarter and and $47.6 million for the first nine months. Despite this, the outlook for the fourth quarter onwards remains positive. Vaccination rollouts have been progressing swiftly in most economies, and this has resulted in the easing of movement restrictions in many countries, as we are already seeing borders opening up in several countries. We have already seen an improvement in demand for jet fuel, and this is anticipated to continue. Seasonally, the fourth quarter also tends to experience higher demand for oil and oil transportation. Income from the management of third-party vessels and buying bunker on behalf of third-party clients was $4.5 million for the quarter, totaling $15.5 million for the first nine months of the year, but more on pool earnings later. We saw a return on equity of negative 7.3% for the quarter and a return on invested capital of negative 1.6%. The balance sheet, though, remains strong with an equity ratio of 45.2% and a cash position at the end of the quarter of $75 million. Moving on to the next slide. For the quarter, we saw TCE of an average of $10,643 per day, totaling $88.7 million for the quarter. This can be further divided into the key sectors that we operate in. The TCE was based on 8,337 earning days, making $22,816 per day on the LR2 vessels, $9,828 per day on the LR1 vessels, and $9,955 per day in the MR segment, and ultimately $9,275 per day in the Handy segment. Then OPEX, which includes our vessel running costs and technical management fees, was $51.4 million this quarter, which results in an average of $6,813 per day across the fleet. The OPEX was based on 7,550 calendar days with $631 per day on the LR2 vessels, $727 per day on the LR1 vessels, $6,268 per day on the non-pool Panamax vessels, and then $6,814 per day in the MR segment, and finally $6,647 per day in the Handy segment. G&A per day for the quarter was $698 per day. We project our full-year OPEX per day across the fleet to be $6,792, and G&A per day to be $824. Then moving on to the next slide. Hapnia operates vessels in four pools, which range from the largest product tankers to small specialized chemical tankers of under 20,000 deadweight tons. Our highly specialized chartering and commercial teams are responsible for developing, marketing, and negotiating all contracts for vessels that the pools operate. The diagram on the left shows key features of our pool economics. Firstly, Hafnia receives pool management commission in the form of a fixed fee and a percentage of all net pool income. Working capital upon entering the pool also ranges across the different sectors from $750,000 for the LR pool to $250,000 on the specialized pool. Pool earnings distribution occurs twice a month. The pools follow a basic pool point distribution based on two core performance variables, fuel and time. As you can see, the number of commercially managed vessels in our four pools have been steadily increasing over the past years. And I want to highlight that Hagnia has recently reached a noteworthy milestone in our pools. In the past week, we enrolled vessel number 200 into the pool fleet, and this represents a tenfold growth from the day of the establishment of Hagnia back in 2010. With this success, we will continue to invest in our commercial platform to increase the service level and build skill in the pools through adding external vessels with the right pool partners. Jens, why don't you take the next few pages?

Thank you for that, Perry. If we can move on to slide 11. These next few pages shows a global oil outlook and our expectations for the product tanker market. The product tanker market remained under pressure during the third quarter, mainly due to virulent COVID Delta variant impacting domestic demand negatively, most profoundly in the Far Eastern region. Hurricane season in the U.S. closed refining capacity for prolonged periods during the quarter, hampering refining capacity and transport demand, with further inventory draws covered by demand as a consequence. However, since then, the energy crisis revolving around coal and natural gas supply has led to soaring gas and crude oil prices. This surge in gas prices may add some strength to oil demand through gas-to-oil substitution in the power sector, and can further boost oil demand by 0.5 million barrels per day through the winter months. Global oil production is also increasing. Despite OPEC+, disregarding pleas from major consumers to ramp up beyond monthly allocated 400,000 barrels per day to cool prices, the U.S. is now poised to provide the largest increase in supply of any individual country as they recover from the hurricane. We move on to slide 12. Global oil demand is also on track to increase in the coming months and is expected to reach pre-pandemic demand in 2022. With vaccination rates progressing well in most economies, we have already seen many countries reopening their borders. It has always been the slowest to recover, but this will support the demand for jet fuel as we see countries such as Australia, Thailand and Singapore finally lifting international travel restrictions. Apart from air travel, people are also driving more. Mobility indices for driving have shown strong recovery from the pandemic, and this helps to lend support for motor gasoline demand. The U.S. has seen very strong gasoline demand in September and October, while consumption in China and India is 10% above 2019 levels. Furthermore, seasonally Q4 tends to see higher demand for oil and oil transportation, due mainly to higher energy consumption from increased heating requirements in the northern hemisphere. Overall, we can expect global oil demand to grow 3.4 million barrels per day to 99.7 million barrels per day in 2022, reaching pre-pandemic levels by Q3, Q4 2022. If we move on to the next slide. Storage levels are also a significant driver for the overall tanker market. OECD total industry stocks have declined for the fourth consecutive month in September, now at levels below the most recent five year range. Total industry stocks now stand at 2,763 million barrels, the lowest since first quarter of 2015. Product inventories also continue to be drawn down due to supply tightness, with the majority of the decline coming from middle distillates in Europe. Floating refined product inventories have decreased from 108 million barrels in May 2020 to around 27 million barrels in November 2021. However, we expect a recovery in inventories as refineries return after the scheduled maintenance and Hurricane Ida outages which will lead to higher refinery runs and seaborne exports. Cargo volumes for clean petroleum products have also steadily recovered from the effect of the pandemic, reaching 74.3 million metric tons in September 2021 from 65.5 million metric tons in September 2020. Likewise, ton miles of clean petroleum products have already surpassed pre-pandemic levels, reaching 255.6 billion ton miles in September 21. In short, we see demand exceeding supply already now, and even the slightest seasonal demand will kick off the market. Moving on to the next slide. Moving on, the refining sector is recovering with global refining throughout expected to ramp up and reach a new post-pandemic high of 80 million barrels per day in December. As product inventories are declining quickly with an increase in demand for refined products, this bodes well to both refinery margins and utilization, and we can expect higher refinery runs. You can see that utilization has also significantly increased compared to a year ago. Closures and reduction of old and inefficient refineries around the world remain evident, despite improving refining margins. At the same time, there are also many refining capacity additions and expansions, and the majority of this will come from China and the Middle East. This combination of refinery additions and closures will have a positive impact on the product anger demand. We expect refining activities to cluster in regional hops and increase seaborne volumes of refined products and thereby turn mild. Next slide. The outlook remains positive when we look at the global product tanker fleet as we expect an increased demand for refined oil products and slow vessel supply growth. The growth of the Prototanker fleet is only expected to be at 1.8% in 2021 compared to 3.2% in 2020. Furthermore, the Prototanker order book stands at only 6% of the existing fleet in November 2021, one of the lowest ever levels. With increased emissions and efficiency targets, it will continue to put pressure on older vessels, accelerating the turnover of the global fleet and slowing vessel supply. The world fleet is gradually becoming older and therefore less efficient as older ships tend to have more waiting time and shorter voyages than modern vessels. With these various interlacing factors, the outlook remains positive and we can expect product tanker fleet utilization to increase. So, Michael, over to you for the next couple of slides.

Thank you for this. We're now on slide number 17. And how can we be committed to adapting to the constantly changing conditions while delivering energy to sustain the world? To accomplish this, we have established clear and effective environmental management plans to ensure we fully comply with all international and local regulations while seeking to minimize our overall environmental impact. To illustrate this, in 2020, across Hafnia's own fleet, our carbon intensity, as measured by the annual efficiency ratio, was 5.6% below the IMO's current target. We have set a goal to reach IMO's 2030 target of a 40% reduction in the carbon intensity of the entire fleet two years in advance, i.e., by 2028. To remove emissions to the air, we employ additional initiatives such as hot cleaning in addition to standard vessel optimizations. Furthermore, we're working with data from vessel-based sensors via smart chip from Alpha Ori to reduce fuel consumption. We also have an ongoing fuel trial for new and innovative alternate fuels. We have also partnered with Titinex Solutions, which is a world-leading sustainability-focused impact tech company to bolster the digital collection, management, and reporting of our ESG data. The objective of this is to create an ESG reporting framework tailored to the nuances of the shipping industry. We strive to continue improving our ESG initiatives through small but impactful measures to deliver cargoes with the lowest possible footprint. Moving on to slide number 18. Hasnet is also fully focused on upholding the highest corporate governance standards, professionalism, and business integrity across all activities. In Hasnet, we have a highly reputable board of directors responsible for the company's overall management, supported by a seasoned audit committee, remuneration committee and nomination committee. Also safeguarding a best-in-class governance structure. Moving to slide number 19. Looking ahead, the future remains volatile and uncertain, but we believe we are well equipped to face it. With borders around the world easing, and the seasonal increase in oil demand. We expect the global economy to improve going into 2022, leading support to oil demand and the product tanker market. We also believe that our chemical exposure with CTI would be beneficial going forward. We will be able to unlock arbitrage earnings through the cycle by switching between chemical and product cargoes. Post-earnings over a sustained period for product tankers outperform clinical tankers. In that case, the latter may switch into the product's trade, much like the company's LR2 tankers may switch between crude and product trades. This helps to protect our downside risks with upside potential. Shipping is the backbone of the global economy and is facing increasing pressure to decarbonize its operations. Huffington will continue to strive and expand our sustainability capabilities by seeking out potential innovations and collaborations. Lastly, we believe that the product and chemical tanker markets will have significant consolidation and growth potential, as there is a large fragmentation of ownership in both markets. Top 20 owners of the product and chemical tankers control less than 30% of the global fleet. We will continue to invest in scaling our business while maintaining cost discipline. With that, I'd like to open up the call for questions.

We will begin our Q&A session now. Should you wish to ask questions, you can submit them via the chat function or use the raise hand function to be unmuted to ask your question verbally.

I see a question from Frederick Ness in the chat. Maybe, Thomas, you can take it. It refers to, first of all, it's two parts, actually. One is on preparing for EEXI and CEI and what our thoughts are on installing efficiency improvement devices. And firstly, to get some more color on cost and commercial synergies for the transaction. Maybe I'll kick off on that one and then maybe, Thomas, you can answer on the ESG benefits of the transaction itself. We see the financial benefits of these transactions from a few angles. First of all, commercial by the combination of the access to clients, triangulation, and having a more diversified access to cargoes. On the commercial side, which would improve TCE, which we estimate to be around $500 a day across the CTI fleet. Furthermore, there's... to insourcing and doing the commercial management ourselves rather than having them in outside pools. In terms of the cost and the pool fees that we save on a net basis, we expect another $500 there. So that is for that fleet, $1,000 a day. And then overall, because the CTI company will be part of the large scale of Hafenia itself, we expect overall our G&A to drop with another $100 per day. Of course, it will take some time for these synergies to utilize in full, but that will be on the commercial side, TCE cost saving $1,000 a day, which is close to $10 million a year. And then obviously on that fleet, also the $100 a day on G&A. Once fully utilized, we would see close to $15 million of synergies on that fleet. Then maybe, Thomas, if you can give some color on the effect on ESG metrics of the transaction itself.

Yes, thank you, Barry. And thank you, Frederik, for the question. We do see usually improved, you could say, environmental ratios for the combined fleet compared to Hafnir standalone simply because the CGI fleet is on average newer than the Hafnir fleet. And I think you're also asking us on thoughts on installing efficiency improvement devices going forward. um that is of course something we're looking into and seeing how much each kind of thing can can improve our environmental footprint of course in theory it looks like you can save two percent here three percent there and five percent there but in total it tends not to add up like that so we are working on on finding the optimal way to to to install you would say improvement devices as you call it um yeah i think that was it

Okay, thanks, Thomas.

I see a question on cash outflows for investments in the third quarter from Christos Aristidou. Yes, as you say in your question, this is indeed mainly related on the CAPEX side, on the investment in Andromeda that we concluded in the early Q3. And the other part, pool financing that we have arranged on behalf of our pool partners. So there's quite a bit of working capital being consumed in the different pools. What we have done is we have obtained an unsecured financing, which is then on land onto pool partners.

Then we have one more question on the speed reduction from 2023. I think maybe Jens can take that one.

Yeah. Hi Fredrik, this is a great question. I think many people are considering what does it mean. Across our fleet we expect that we may have about 18 of about 120 ohm chips. they may need to reduce speeds to comply in 2023, or we expect the reduction to be minimal. And if that's the case in our fleet, we expect that it'll be pretty much the similar case across the world fleet. Of course, one of the consequences of reducing the engine capacity or limiting the engine output is that a number of ships will be unable to speed up. So in a market that potentially goes higher and where speed will be of essence, this would be a disadvantage to the ships that have to de-break their engines. I hope that answers your question.

Thanks for that comment, yes.

Any further questions following this presentation?

It looks like we have a question from someone on the phone with plus 44780584077. So you can unmute yourself and ask your question.

Okay, if that is not getting through, maybe any other questions, either directly unmute the phone and post the question or post through the chat box, which is very easy for us to see actually. And if no further questions, I would like to thank everyone for joining this presentation on the third quarter financials of Hafnia. This presentation will be uploaded to our website. And, of course, if there are any other questions that you may have, you can always reach out to us for further discussion. Thank you very much.