Hafnia Limited

Welcome to Hafnir's first quarter 2023 financial results presentation. We will begin shortly. You will be brought through the presentation by Hafnir Chief Executive Officer Michael Skov, Chief Financial Officer Perry van Echtelt, Head of Commercial Jens Christoffersen, and Head of Investor Relations Thomas Anderson. They will be pleased to address any questions after the presentation. should you have any questions you could 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 Hafnir is unable to predict or control, that may cause Hafnir'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'm pleased to turn the call over to Hafnir Chief Executive Officer Michael Skov.

Thank you. My name is Michael Skov and I am the CEO of Hafnir. Let me welcome and thank all of you for attending Hafnir's first quarter 2023 conference call. Joining me today are Peri van Echtelt, our Chief Financial Officer, Jens Christoffersen, Head of Commercial, and Thomas Andersen, Head of Investor Relations. The four of us will present Hafnir's first quarter 2023 financials. During today's presentation, we will cover four main areas. We will start by providing an overview and key highlights of Hafnir, followed by the financials for the first quarter. We will then proceed to share commercial updates and provide an outlook on the product anchor market and finally conclude the presentation with key corporate updates. Let's move to slide number two. You should all be aware and take a note of the mandatory disclaimer. Moving on to slide number three. So let me begin by giving an overview of Hafnia. Slide four. Hafnia is one of the world's leading tanker owners and operators within the product and chemical tanker market. With a strong global presence across seven offices worldwide, Hafnia operates as a fully integrated shipping platform. This entails having our main dedicated in-house technical management and chartering teams situated in Asia, Europe, the Middle East, and the USA. We have a robust business model. Whilst Hafnir is a shipowner in its own right, our value proposition extends beyond that. Our shipping platform consists of diversified revenue streams, such as our pool management and bunker procurement services. At the end of the first quarter, Hafnir owns and has chartered in a diversified portfolio of 124 vessels and commercially operates a fleet of over 200 vessels. Our bunkering team are now also buying bunkers for more than 1,000 vessels for our pool platform and third-party owners. Our own vessels have an average broker valuation of $4.1 billion. giving Hafnia a net asset value of around $3.4 billion. This represents a net asset value per share of $6.8 or 71 NOC, representing significant upside in Hafnia's share. Since our listing in 2019, Hafnia has significantly enhanced its value proposition. With our expertise and active management strategy, we have navigated through the volatile global environment cautiously and delivered robust results. The foundations for the products and the market also remain strong, driven by a resurgent China and inefficiencies arising from the altering trading patterns. With limited fleet growth and rising global oil demand, I'm confident that the high rates environment will continue in an otherwise volatile world. Slide number five. Moving on, I'm proud to announce that Hafni has delivered another quarter of solid earnings. For the first quarter 2023, we achieved a net profit of $256.6 million. This is Hafnia's best first quarter results so far and brings our total EBITDA in the last 12 months to above $1.2 billion and net profit just shy of a billion dollars. Despite a high interest rate environment, we have continued optimizing our balance sheet to further reduce our leverage. our net loan-to-value ratio at the end of the quarter was 31.4%. With that, I'm pleased to announce a dividend of $0.3144 per share or 3.3 NOC for the quarter. This represents a 60% dividend payout ratio of $154 million. This quarter demonstrates another strong shareholder return and brings Hafnia's total dividends in the last four quarters to $546.2 million, representing a total payout ratio of 55.3%. These strong results and consistent shareholder returns underscore the resilience of our business model and the effectiveness of our active management strategy. I look forward to the next quarter where we once again will build on this momentum and produce robust results and shareholder value. Perry, why don't you take us through our financials?

Thanks, Michael, and good day, everyone. If we move to the financial summary, we can say that on the back of an already very strong 2022, the spot market had a very promising start in the first quarter of 2023. Average spot rates in the first quarter decreased marginally compared to the fourth quarter of 2022, but mainly due to the weakness early in January. However, we're already seeing significant increases in the volumes of refined products in transit and believe market conditions will remain firm. As a result, we're pleased to announce that Hafnia has displayed another strong result for this quarter. The first quarter generated a TCE income of $377.2 million, more than doubling the levels we generated in the first quarter of last year. EBITDA was just shy of $300 million for the quarter, resulting in a quarterly net profit of $256.6 million. Also, our fee-focused businesses have benefited from this increased rate environment, generating $11.1 million from our commercial pool and bunkering business. These strong results saw an annualized return on equity of 49.9% for the quarter. Also, our balance sheet remains very strong, with a cash balance of $268.3 million and a total liquidity exceeding $500 million. By the end of the quarter, 62.6% of our debt was hedged at a weighted average rate for the quarter of 1.36%. And we will maintain a cautious approach in navigating the higher interest rate environment to mitigate any interest rate risks going forward. We'll be able to lower our break-even levels and maximize shareholder value. With increasing asset prices and a higher earnings environment, cash flow from operations has been utilized to optimize in our capital structure. We constantly work on refinancing part of our balance sheet to reduce our funding costs and cash flow break-even levels so that we build both market resilience and enjoy significant operating leverage in these high markets. As a result, we have decreased our outstanding interest-bearing debt and combined with further improving asset values, our net loan-to-value further improved to 31.4% as compared to the end of last quarter where it was 37.4%. Then moving on to the operating data on the next page. For the first quarter, our TCE was based on 10,389 earning days, giving us an average TCE per day of $36,312 per day. For OPEX, which includes our vessel running costs and technical management fees, it was based on 9,470 calendar days in the quarter, resulting in an average of $7,468 per day per vessel. This increase in OPEX was due to timing difference in budgeted supply for stores and spares in the fleet, as well as handover-related costs for vessels that we divested in the quarter. All-in G&A expense per day for the quarter was $998 per day, and operating cash flow breakeven for the first quarter was approximately $515,800 per day. As mentioned in previous calls, we're very much focused on bringing down our cash flow breakeven. But due to the higher leverage from the acquisitions we did last year, inflation and higher interest rates had increased these break-even levels to where we are today. Despite our industry high dividend distribution, we expect our cash flow break-even to be in the mid-13s by the end of this year through a combination of refinancing and further debt reduction. We're also constantly benchmarking our performance against our peers and we remain operating the business at the most competitive levels. despite the very strong markets continue to focus on our cost levels. Then moving on to earnings coverage on the next page. Rates have been very strong over the past four quarters, but high volatility remains. However, with expected growth in oil demand and longer trading routes, we expect rates to remain firm for the year. As of the 15th of May 2023, we had 65% of the total earning days in Q2 23 recovered at an average of $34,378 per day. For the rest of the year, Q2 to Q4 of 23, 31% of the total earnings recovered at an average of $31,330 per day. And if we look at the various scenarios that we currently present, the strong financials or fundamentals in the product anchor market, the outlook for 23 remains strong and Huffington is well positioned to take advantage of this continued elevated freight market with a high spot market exposure. On this page, we present a comparison of three different scenarios regarding the company's potential full year earnings. These scenarios include, in first place, the consensus forecast provided by the equity analysts. Secondly, the extrapolation of the Q2 covered rate for the entire year. And on the right side, the third scenario based on year-to-date numbers projected for the entire financial year. And as you can see in all three scenarios, the indications point towards another exceptionally strong year for Hafnia. Jens, why don't you take the next few pages?

Thank you, Perry. The next few pages provide commercial updates and our expectations to the product tanker market looking forward. Since the February 5th embargo on Russian products, we have experienced significant increases in oil product volumes in transit. This is mainly due to the redirection of Russian exports to unsanctioned regions and growth in Europe's middle distillate imports. When we look at cargo volumes and ton miles, the clean market has experienced strong recovery over the past years. There's also a more than proportionate increase in CBP ton miles versus CBP cargo volumes, mainly due to inefficiencies in the market, such as longer voyages with Russian products and increased import time. With the continued redirection of cargo volumes, we can expect this market inefficiency to persist, leading to further ton mile gains on the horizon also as Europe needs to resupply its oil stocks. Slide 13. According to the IEA, global oil demand will climb by 2.2 million barrels per day to 102 million barrels per day for 2023, with around 103 million barrels per day in the fourth quarter. This is mainly accounted by a research in China, which will account for 90% of the growth as their domestic demand is returning to pre-pandemic levels, resulting in a decrease in export volumes. Despite that, announced extra cuts by OPEC Plus in early April will cause short-term volume headwinds and apply pressure on rates. However, the OPEC Plus shortfall in supply will likely be mitigated by increases from non-OPEC Plus led by the US and Brazil. Export volumes from Russia remain on a steady upward trajectory, but volumes to Europe have come to a halt, with Turkey, West North Africa, Middle East, South America, and the Far East accounting for most of the redirected Russian flows. Slide 14. There's also a growing fleet trading Russian oil products. We estimate a more than double increase in MI equivalents of tonnage engaging in Russian CPP trade. Looking at the key destination regions, Russian exports flows to Turkey, West North Africa account for 38% of the ton mile gain. The balance of absorbed tonnage supply stems from exports to the Middle East, Far East and South America. Slide 15. Storage levels are also a significant driver for the overall tanker market. According to the IEA, OECD oil product stocks have plunged by 51.5 million barrels month-on-month in March, as refinery intake declined by 0.4 million barrels a day. However, oil and water, including floating storage for products, rose by 39.8 million barrels Mill distillates accounted for half of the increase as Russian products were traveling longer distances to customers in Africa, South America and the Middle East instead of Europe, representing significant ton-mile increases. Inventories for clean products in the West remain below the last five-year average, while levels in the East remain on par. Currently, Europe continues to draw on its inventories, and we expect an uptick in transportation demand once Europe starts to increase oil inventories. With the start-up of significant volume in new refinery capacity in the Middle East, we can expect clean trade volumes to increase to replenish the drop in oil stocks west of Suez. Historically, rates have been very strong when inventories are being built. This will support the clean product tanker segment due to long haul voyages, whereas it will have limited impact on the crude market due to the proximity with crude sources. Slide 16. Moving on to the refinery sector. The global refinery landscape is evolving with capacity going offline and online throughout the world. In 2023, global refinery expansions of approximately 4 million barrels a day is expected, mostly located in the Middle East and in China. In the Middle East, two mega-refineries, Saudi Aramco's GSAN and KBC's Alsawa Refinery in Kuwait, have been increasing production in the past months. Further expansion in refining capacity and ramp-up of throughput at recent startups is expected in Kuwait, Saudi Arabia, Oman, Bahrain, Iraq, and focuses on the production of middle distillates. This would support the clean product tanker segment due to increased export volumes and long-haul transport and demand from the Western Hemisphere to replenish its inventories. Looking at the supply side, we remain bullish on the tanker market. Despite ordering activity picking up in the LR2 and MR segments, the product anger order book remains low at around 8% of the total fleet, with most of these deliveries scheduled for second half of 2025 onwards. We also do not expect to see a sharp increase in ordering of product angers due to the increase in new build prices and high financing environment. Furthermore, when we look at yards in China, Japan, South Korea, and Vietnam, they are already operating near full capacity, dominated largely by containers, bulkers, and gas carriers. Looking at deliveries in 2023 and 2024 in terms of CGT, they have already exceeded levels seen in 2021 and 2022, and it leaves minimal capacity available in 2025. Furthermore, with an increasing aging fleet profile, we can expect demolitions of potter tankers to continue. Considering potential scrapping of older potter tankers, we estimate this represents only a net addition of 27 MR equivalents by the end of 2026, paving the way for higher utilization of existing vessels. Slide 18. So to sum it up, we believe that earnings will remain strong for the balance of 2023 and for the years ahead. Global oil demand is expected to reach a record high in 2023, driven mostly by China. Refinery capacity dislocations, shifts towards longer haul transportation will continue. And finally, but not least, limited tonnage growth will result in a tight market for the future. And Michael, over to you for the next few slides.

Thank you for that. Moving into slide number 20. I would now like to talk about some key corporate updates in Hafnir. Firstly, earlier in April, Hafnir, along with Microsoft, Wilhelmsen, IMC Ventures, and DMV, has announced the launch of a new digital venture study entitled Studio 3050. This is in line with our sustainability strategy, where the studio aims to solve both near and long-term goals in the maritime industry. The studio will work with founders of early-stage startups who have an ambition to solve complex challenges around emission reduction, building a circular economy, solving social issues, and the broader supply chain inefficiencies facing the maritime industry. We anticipate that this studio will serve as a valuable launching pad for aspiring entrepreneurs, offering them a strong foundation to develop scalable business models. With our expertise and the support of our diverse partners, we provide guidance and assistance, enabling these entrepreneurs to succeed in their endeavors. Moving on, I would like to provide an update on Hafnir's fleet activities during the first quarter. As part of our fleet renewal strategy, we registered five older LR-1 vessels with four of them already delivered in the first quarter. Consequently, this led to a reduction of approximately 250 earning days in the quarter, and an increase in OPEX per day due to associated costs related to the handover of the divested vessels. Furthermore, Hafnir has recently agreed to acquire two additional MR-IMO2 vessels scheduled for delivery in the second quarter. I'm delighted to also announce the arrival of Hafnir Langdok, the first of four LR2-LNG dual-fuel new builds ordered under our VISTA joint venture. This significant milestone propels Hafnir further along the path of decarbonization as these vessels are equipped with high pressure LNG engines capable of operating on dual fuel, substantially reducing greenhouse gas emissions. Our low fleet average age of 7.7 years is the result of our constant fleet renewal strategy allowing us to maintain a fleet of young and modern vessels, which will enable for better utilization and improved earnings. 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. So we're going to take the questions that have been in the raise hand function first. So we have one from Frode Mukedal. I'm going to unmute you. Go ahead, please.

Thank you. Hi, guys. Can you hear me?

Yes.

Perfect. Yeah, there's been some commentary around the growing new billion recently. As you mentioned, around 8% of the existing fleet, which is, I guess, still low, but, you know, up from the recent low. But at the same time, you have this aging fleet and apparently a huge pool of older vessels trading Russia. So the question really is, how do you think about that, let's say, longer term cycle in terms of supply demand dynamics going forward? Can you talk about that?

Thanks for that. A good question is Michael here. Yeah, so I think you're pointing to one of the key elements of the reasons why we are positive on the market going forward, because you are absolutely right that as an industry overall, we have underinvested. in new ships in general. And I think all of this came from the fact that people thought we were going to have a transition and lower oil demand much sooner than what we've actually seen. So as a consequence, we think that we're now in a situation where existing ships will have to last longer. And when we look at the current New Britain order book, as far as we can see, even if we started filling up in 26, 27, it's not going to be enough to replace an aging fleet. And although we have already ourselves had implemented a strategy for extending the lifetime of our current assets, it's also clear that it's not something you can just do at the very end of the life of a ship. So what you're going to see is that not all ships that are getting to 15, 16, 17 years old will be able to trade until they are above 20 because if they have not been maintained since early of their life, it's going to be impossible to start getting them back into that particular standard. So I think overall that we're looking into a long period of time where we're going to be on the supply of ships. Even as we're seeing orders come in here and there at high levels, it's not going to be enough in our view to cover the demand for ships in the foreseeable future.

Perfect.

And with that backdrop, I guess, how do you view investments into ships? I mean, given that backdrop, I would think that vessels values should appreciate going forward. And secondly, I guess, given the huge discount to the NAV, you know, you could buy your own ship, so to speak, with a big discount. So how do you view capital allocation at this point?

So we viewed from the point of view that we have already done a lot of investments in assets back in 2021, very early 2022. So as far as we're concerned, we kind of we in a way fulfilled our acquisition strategy in those years. So what you're going to see us do going forward is, as we've done already in this quarter, is to divest some of the older ships when we feel that value appreciation is so significant that it makes sense to sell them rather than trying to keep them for a number of years. And then secondly, if we're going to acquire ships, it's going to be only if there is a specific value proposition. So you're not going to see us going out and just buy random ships here and there unless there is a specific strategic rationale, i.e. being a price or a specific feature of a ship that we feel fits in and maybe even have a longer lifetime cycle than what we're currently looking at. So that's also why again when you look at our dividend policy that we're basically focusing on net LTV and we'll continue with that dividend policy and therefore paying out 60% of our net profit in dividend and that will increase as net LTV comes down.

Thank you for that. But is there room for buybacks in that program?

There is. And it's a real discussion we're having on every quarter with the board, whether it should we go for share buyback or dividends. And so it's nothing is stationary in that context. So, yes, the answer is that there is technically room, but it's something we decide quarter by quarter. And this quarter here, we decided that we will continue with our current dividend policy.

Okay, thank you.

Do we have any more raised hands? Otherwise, I will move to the Q&A chat function. Okay, great.

So we have a question from Gary Dixon, who says, I know you can't reveal too much about the acquired MRs, but can you say the year of build?

Do you worry you are paying high prices for secondhand ships at the top of the market?

All right. Hi, Gary.

This is Jens. The ships we have bought are IMO2 chemical MRs with nitrogen plants and performance coatings built in 2017. One of the ships has already been delivered to us, and the second one is due for delivery soon. In terms of why are we buying expensive steels at the peak of the market, we think you should see it in the context of us selling older steel and putting a bit of that revenue back into newer steel. That's a good fit with the segments that we're currently employed in. We're quite content with the IMO tool fleet that we are currently trading now.

I hope that answers your question.

okay so we don't seem to have any more questions with the raise hand function nor with the q a chat a few more seconds unless anyone else has anything more

Okay, so we've come to the end of today's presentation.

Thank you for attending Hafnia's first quarter 2023 financial results presentation. More information on Hafnia is available online at www.hafniabw.com. Goodbye, everyone.