Himalaya Shipping Ltd. Common Shares

Welcome to Himalaya Shipping Q3 investor presentation. For the first part of this call, all participants are in a listen-only mode. Afterwards, there'll be a question and answer session. To ask a question during the Q&A, please press five star on your telephone keypad. This call is being recorded. I'll now turn the call over to CEO, Herman Biller, and CCO, Lars Christian Svendsen. Please begin.

Thank you, operator. I'm here together with my colleague, Chief Commercial Officer, Lars Christian Svendsen, and I'm Herman Billung, contracted CEO of Himalaya Shipping. And we will take you through first some highlights, then a financial update, a company update, and then Lars Christian will take you through the market and how we see present situation and the future. I kindly ask you first to pay attention to our disclaimer and then to the highlights. In the third quarter of 2024, all delivered vessel generated total operating revenue.

Welcome to Himalaya Shipping Q3 investor presentation. For the first part of this call, all participants are in a listen-only mode. Afterwards, there'll be a question and answer session. To ask a question during the Q&A, please press five star on your telephone keypad. This call is being recorded. I'll now turn the call over to CEO Herman Biller and CCO Lars Christian Svendsen. Please begin.

Thank you, operator. I'm here together with my colleague, Chief Commercial Officer, Lars Christian Svensson, and I'm Herman Billung, contracted CEO of Himalaya Shipping. And we will take you through first some highlights, then a financial update, a company update, and then Lars Christian will take you through the market and how we see present situation and the future. I kindly ask you first to pay attention to our disclaimer and then to the highlights. In the third quarter of 2024, all delivered vessels generated total operating revenues of $39.2 million, an average time charter equivalent of approximately $36,800 per day. net income of 10.7 million and adjusted EBITDA of 31 million dollars for the quarter ended September 30th, 2024. Conversion of indexing charters on Montblanc and Montneblina to fixed charges from 1st of July 2024 to the 31st of July, 2024, and on Mont Blanc and Mont Noblia and Mont Hua from September 1, 2024, through September the same year. During the quarter, we made an acquisition of 40% of the issue shares of 2020 Bölkers Management AS to fully align the management functions with Himalaya Shipping for NOK 3.2 million. Payment of cash distributions for May, June, July and August 2024 of $0.04, $0.05, $0.06 and $0.07 per common share, respectively. Some subsequent events. We converted Mont Blanc back to index-linked charter rates from October 1, 2024. and we declared a cash distribution for September and October 2024 of 10 cents and 4 cents per common share, respectively. We have executed an addendum to the Drew Revolving Credit Facility up to $10 million, extending the timeframe to drawdown from the facility to December 31st, 2025, and the latest repayment date to December 31, 2026. Then I turn to the financial update. We had an increase in operating revenues of $8 million during the quarter, due to full quarter operation of all 12 vessels. Average time charter equivalent gross of approximately 36,800 per day in Q3 2024 versus 34,600 per day in second quarter 2024. This against the cash break even time charter equivalent estimated to be approximately $24,600 per day. We had an increase in vessel operating expenses of $0.9 million in the third quarter due to additional three vessels delivered during the second quarter. Average vessel operating expenses of approximately $5,900 per day per vessel in Q3 2024 versus $6,000 per day in the previous quarter. G&A expenses remained consistent in the third quarter 2024 from the previous quarter at 1.3 million US dollar. We had an increase in interest expenses by 2.3 million in the third quarter of 2024 due to a higher average loan principal outstanding following the sale and leaseback financing of the three vessels that were delivered during the second quarter of 2024. Increase in operating profit by $6.2 million in the third quarter. Net income of $10.7 million in third quarter 2024 versus $6.9 million in the previous quarter. Adjusted EBITDA of 31 million in the third quarter, an increase of 7 million over the second quarter same year. Then just a few comments related to the balance sheet. Net cash generated by operating activities in the third quarter of 16.5 million. Net cash used in investing activities in the third quarter was 0.1 million, primarily relating to the acquisition of the aforementioned 40% equity in 2020 Berkish Management AS for 0.3 million, offset by cash rebates on new buildings of 0.2 million. Net cash used in financing activities in the third quarter was 16.8 million, consisting of payment of cash distributions paid of 9.7 million, loan repayments of 6.4 million, and payment of deferred loan costs of 0.8 million. Minimum cash balance required under the sale and lease back arrangements of 7.6 million, shown as part of cash and cash equivalents as of September 30, 2024. Vessel and equipment decreased primarily due to the quarterly depreciation of 7.3 million during the quarter. Equity method investment relates to the acquisition of the 40% equity in 2020 bulkish management, AS, for 0.3 million. Decrease in short-term and long-term debt was mainly due to loan repayments of 6.4 million, offset by deferred finance cost amortization of 0.7 million. $10 million available to drawdown under the revolving credit facility with Drew Holding Limited. Then just take through some key financials year-to-date. Operating revenues of $94 million on all delivered vessels Average time charter equivalent earning of approximately 34,300 per day gross. As I said, this is on aggregate for the nine first months of 2024. Vessel operating expenses of 17.1 million. Average vessel operating expenses of approximately 6,000 per day per vessel. GNA expenses of 4 million. including 0.4 million in share-based compensation, 1.3 million in management fees, 0.7 million of DNO insurance, 0.6 million of employee-related costs and director's fees, and 0.5 million in legal, audit, and accounting fees. Interest expenses of $33.4 million on the sale and leaseback financing net of interest capitalized. Operating profit of $52.6 million and a net income of $20 million, resulting in an adjusted EBITDA of $71.8 million. Then, a few examples. Words about the company, how we stand at the moment, a company update. The entire fleet, apart from one vessel, is fixed on index. A premium of 42.25 on average compared to the Baltic Cape Index, which we believe is the highest premium in the industry, plus the scrubber fit. So in other words, we have 11 vessel on index link starters with strong counterparts and one vessel fixed. Mount Norefjell, which was the first vessel delivered to us at $30,000 per day gross, including scrubber benefit. The next slide is showing growth and the involvement of EBITDA since the third quarter of 2023. And to the right, the dividends paid so far in 2024. We firmly believe that we ordered at the right time. and we finance long-term at a fixed price. With the current valuation, we believe today to order a similar vessel, you would have to pay in the region of $95 million against our original order price at $71.6 million, which gives us a theoretical loan-to-value of 64%. And to derive at our cash break even, we mentioned the long-term financing, where we have a fixed bearable day rate at around 16.5 per day. At the scrubber financing, at the estimated OPEX and the estimated SG&A, we derive at the cash break even of about $24,500 per day. which when we kind of subtract the estimated scrubber benefit when sailing and the earning premium, there is at the Cape size index cash breakeven rate at $16,300 per day. We have a solid dividend capacity. This slide shows free cash flow per share based on various Cape size indexes. And I think Lars Christian will come back to where our market view, but there is indeed the potential for some really nice dividends going forward. I think what describes and the most important thing for Himalaya apart from the very simple business model is is the buzzword is really capital discipline. We have an attractive cash break even, full alignment between shareholders and management. The sponsors own one third of the equity. We do not have any reinvestment plans and we have the youngest fleet in the industry. Cash flow from operations target to be distributed in monthly dividends. And we have already announced nine monthly dividends and with 10 cents for the month of September. And I just mentioned that we will be able to pay four cents for the month of October. So then I leave the word to my dear colleague, Lars Christian, who will take you through some market updates.

Thank you, Herman. We are soon closing out on a solid 2024, which has averaged $24,000 per day on the Baltic Index. That's up over 70% year over year. Taking history into account from 1990, we are entering into strong seasonality, as you also can see from the right-hand graph. We will, in this presentation, illustrate why we believe, even though we had a solid 24, the next few years will hold more potential. Cape sizes have seen a large increase in tonne miles over the last years. So far in 2024, the Cape Sizer Newcastle Max market has enjoyed a tonne mile increase of 5.4%. This has largely been driven by increased iron ore volumes from Brazil and more bauxite from Guinea to China. But there are more to come. The Simandou iron ore mine commission in Guinea will commence their export of iron ore next year. During a 36-month ramp-up, they are on schedule to export 120 million tonnes of iron ore to the market. In addition, Vale will increase their mining capacity in Brazil, providing an increase of 50 million tonnes. This means a total of 170 million fresh tonnes anticipated to enter the market in the next few years. If we make the assumption that these volumes will be carried on Newcastle Maxes, these two factors alone will absorb an entire equivalent of 150% of the current order book. And while we're on the subject of the order book, the supply of new ships in the Newcastle Max and Cape size space is very limited. We currently have a 25-year low order book, and as you can see from the right-hand graph, our segment has by far the lowest order book to fleeced ratio. A large dry bulk carrier is a relatively low margin product for the shipyards, which also means that the yards favour building container ships, tankers and gas carriers. In addition, the previous mentioned segments had favourable market condition prior to the Cape size in Newcastle Max market, which occupied the various shipyards with capacity to build ships of this size, prior to the large dry bulk market ascent. Not only are we looking at a low order book, but we also have an ageing fleet in need of replacement. 14% of the current fleet was built before 2009 and 50% of the current fleet was built between 2009 and 2015. That means 60% of the fleet will be over 20 years in 2033. However, as we addressed earlier, With the majority of the yard capacity being full for these types of vessels until 2028, it will be close to impossible to build meaningful fleet capacity to reduce the average age of the fleet, not to mention staying within the increasingly strict environmental and regulatory framework in place to reduce emissions and to comply with health and safety. To round off this presentation, it's also worth mentioning that an ageing fleet would need maintenance, in this case dry dock. Every fifth year, a vessel needs to go into dry dock to be maintained and thus renew the trading certificates required to be in service. 23% of the total cape size in Newcastle Max fleet will be required to dry dock in 2025. That is a 52% increase year over year. Historical dry dock data for the entire Cape Sizer Newcastle MAX fleet from 2015 until 2024 shows that a five-year dry dock takes 13 days on average, a 10-year dry dock takes 16 days on average, and a 15-year-old dry dock takes 19 days on average. Applying these numbers to the entire fleet, we anticipate a total between 2% to 3% capacity will be taken out of the market over the next two, three years. In conclusion, there are more demand and tonne mile coming. We have a 25-year low order book, an ageing fleet in need of replacement, which seems unlikely due to the scarce yard capacity, and 23% of the total fleet to be affected by dry dock in the coming year alone. Considering these factors, we see solid upside potential from today's levels as we soon enter 2025. Thank you very much, and I will now hand the word back to the operator.

Thank you. We'll now start the Q&A session. If you wish to ask a question, please press five star on your telephone keypad. To redraw your question, you may do so by pressing five star again. There'll be a brief pause while questions are being registered. And the first question will be from the line of Fulmergedale from Clarksons. Please go ahead. Your line will now be unmuted.

Thank you. Hi, guys. I guess first on the market, Herman, your crystal ball has a reputation of clarity. At least that's my experience over the past 15 years. So I'm just curious. What does it show you for, particularly Q1, right? So when I look at the FFA market, it's a few weeks ago, CAPE was at 17K. Today, just below 15. What's your view in the near term here?

I mean, Q1, as we all know, historically, is the weak season. What happened this year is kind of the contrary, rather. We believe that... I mean, there's always a lot of uncertainty related to Q1, but... Personally, this is my view. I think what the present FFA market is indicating is, I would say, on the weak side. I see upside. But usually we kind of don't, even though we have our crystal balls, we... wouldn't give you exact numbers, but personally, I am of the opinion that there is upside from where the present FFA market, what the present FFA market is indicating for the first quarter. And also what Lars Kristian mentioned is that it's been in a way a bit kind of flattish 2024, but Q1 surprised on the upside. We we have indications that December could be quite interesting from Brazil on the R&R side. And if that is kind of moving into Q1, it could be an interesting first quarter. And usually also in the first quarter, that's when you typically get most of the deliveries. But where the order book is at the moment, that doesn't really drag the market down. So that's what we believe at the moment.

That's good. And hopefully we'll get some positive macro news tomorrow from China, right? Or maybe... That helps as well, fiscal stimulus, that is. One thing, when I look at my email box, people are asking about this investment into the management company. All the questions are basically, is this a first step in a wider M&A, basically? Anything you could say about that? What's your thinking here?

You say between the two companies?

2020, yes.

No, that's not really on the agenda. This is just to align the management functions. And given that we have obviously that the size of the Himalaya fleet has grown considerably, quite a bit, and it's just to have an alignment in the management functions. But the capital structure and cash break-evens, et cetera, are, as you know, quite different. So we have no plans to merge the two. So this is just related to the management company.

Okay, that's good and clear. Thank you.

Thanks, Raoul. The next question will be from the line of Jesper from Arctic Securities. Please go ahead. Your line will now be unmuted.

Hello, guys. This is Christopher, not Jesper. Can you shed some light on recent development in the Cape size index? So how much of... The drop we have seen in recent weeks is due to normal seasonality. Are you seeing a lot of attacks due to EGA still not exporting bauxite out of Guinea?

Thank you, Christopher. I think the drop that we've seen over the... period now the last three weeks is a mixture of several things. I think the Chinese stimulus disappointment was the kicker of it. The Cape sizes did very well before any talks of stimulus, but the expectations were high, which impacted the sentiment negatively. At the same time of this, we had the large funds selling FFAs in volumes, which led to a sort of a tail wagging the dog scenario where the FFAs dictated the physical short term freight. But now it seems that this balance has been restored and we see the physical leading the charge over the FFAs again. We also noticed that we had less coal on Cape Sices due to the Panamaxes being quite desperate for business. So it's no surprise that the smaller sizes are trading lower due to the lack of the solid sort of structural trades. But we note with interest that they have been responsible for quite a few CAPE splits in the month of October. Regarding your questions on EGA, we still see that... Last week, Guinea had the highest exports they had since 2020 in a particular week. So EGA accountable for 14 million tons of the total. It's a small percentage in what seems to be quite a hefty operation continuing out of West Africa at the moment.

Okay, perfect. And on the docking side, as you mentioned, it's quite interesting. potential effects into 2025. What do you assume there on docking days in your calculation and do you see the need for the 15-year-old vessels to do a lot of efficiency upgrades in order to comply with regulations and how might that impact days in dock?

A 15-year dock usually is quite substantial. On average, I mentioned it has about 16 days. Obviously, it's quite individual as to which ship who needs steel reinforcements, etc. But with a 52% increase year over year in dry dock, I also think we're going to see delays in dry dock ports. It's a massive program. And remember, I assume the most clever owners out there have been booking... dry docks in Q1 due to the historical lower market there. But I think it's going to be quite a congestion in the yards as well for this particular dry dock scenario. And what we do like about this as well is now we're starting to have visibility. We talked about the order book before. We have the Vale mine upgrades plus the Simandu. And with this, we're actually going to have a negative fleet growth until 2028, which bases the visibility we have today. So we're looking with interest into next year and the next years. And I think this dry dock impact will have a larger effect than most people have calculated for.

Okay. Thanks a lot. Crossing fingers.

Thank you, Christopher. Thank you. As a reminder, if you wish to ask a question, please press five star on your telephone keypad. We'll now have the next question. Please state your name and company. Your line will now be unmuted.

Hi, it's Poe Fratch from AGP or Alliance Global Partners. Good afternoon. Can you go to your market outlook based on recent developments, meaning the U.S. election? Can you just address potentially, you know, what could happen if the U.S. gets more aggressive on tariffs versus China? And then secondly, if there is a mediation, or for lack of a better word, a tempering of the Ukraine-Russian situation, how do you think the market will react?

Hey there. Thank you for the question. Based on the US election, it's obviously difficult to interpret how that's going to look going forward. But in terms of Himalaya, most of our trades is not really linked to the US. Our big routes is bauxite out of Guinea. It's iron ore from Brazil and coal routes also from Indonesia, Australia, etc. But needless to say, we think it's going to be some noise between US and China here. But I would say it's highly likely that both parties would like a good deal here. Maybe something like Japan and US back in the day where it was more please sell cars to the Americans as long as you produce them here. But if anything, this might also be that the Chinese will put a little bit more larger impact into the stimulus package.

And then could you address Russia, Ukraine? And, you know, I know that you've You feel like there's limited exposure from a CAPE standpoint, but if you could potentially, could there be a knock-on effect just of grain flows changing?

Yeah, no, I think if the war ended tomorrow and that being with all the sanctions related to it, it would be a very much welcome addition, especially for the Ultramaxes and Panamaxes if the war ended. It's very difficult to assess how much of the supply that's been damaged over the last three, four years. But if that could be a good flow again, it will definitely impact the Panamaxes, Ultramaxes to a larger degree, which has a tendency to lift the Cape size market as well.

Okay. And then if you could just discuss the, you know, the aging of the fleet and, you know, you talked about it in the context of, you know, higher dry dock costs, longer dry docks. Can you just potentially talk about when you might start to see some scrapping as the age of the fleet, you know, gets, as you mentioned, you know, over 50% was built, you know, close to 20 years ago. If you get to the 2028, 29, what's your view on, or what's your working assumption on scrapping at this point in time?

Yeah, based on the estimations that we've done in the dry docking and the added volumes, etc., where we come up with a negative leaf growth going forward, we have not taken scrapping into consideration at all in those numbers. On average, a cape-sized vessel has a lifespan of about 23 years, which obviously, if the market continues to go up, it's likely that the scrapping ratio will increase. But at the same time, with the regulations now coming into the environment, slow steaming, etc., and the big charters of the world preferring younger tonnage, I think the older tonnage passing 20 years will struggle to find competitive trades in the long run to extend their lives. And don't forget that if you do a 20-year-old dry dock, it's highly likely that that's going to cost you between $4 and $6 million, depending on how hard you've been trading that vessel over time.

Great. Thank you for taking my questions.

Thank you very much. Thank you. The next question will be from the line of Clement Molens from Value Investors Edge. Please go ahead. Your line will now be unmuted.

Good afternoon. Thank you for taking my questions. I wanted to start by asking about the assumptions behind slide 16. Do your calculations assume the volumes will all head towards Asia slash China? And secondly, do you expect to see some charter interest to cover some of those volumes under long-term commitments?

Thank you for your question. Most of these volumes today are moving towards China. I would estimate it to be plus 90%. With the new Simandou mine, which is a joint venture between the Chinese government, Rio Tinto, and the government of Guinea, the Chinese has already put in a lot of investment into this mine. So we also assume that it's likely that these volumes will continue to flow to the east most of it.

That's helpful. Thank you. And this one is more on the modeling side. You've been clear since creating the company that you intend to distribute all access-free cash flow, and you've already started to do that. Should we assume you're comfortable having cash and cash equivalents of around 21 to 22 million plus the revolver going forward?

That is on the high side. I think we are focusing on having, obviously, on the covenants, you should focus on the eight CCBFL ships, where it's required that we have 1.5 million ships. in cash at any given time, which then adds up to around 12 million. And then to be on the safe side, we will add some cash on top of that. So say maybe 20 million is a fair kind of estimate of where we'd like to be. Which, yeah, if this was answering your question.

Yeah, it does. Sounds good. That's all for me. Thank you for taking my questions.

Thank you.

Thank you. As we have no further questions in the queue, I'll hand it back to the speakers.

Thank you very much. We have some questions on screen here as well. The first one is, can you provide some insights regarding the current cast position, liquidity reserves going forward? Is the 3.6 million per avic ship and 1.5 million per ship plus liquidity reserves for the CCFBL ships your preferred cast position?

And I guess that I answered to the previous question. to the previous question we had. Hopefully that answers that. And then the next question, can you provide some insights on the long-term profitability outlook for LNG as a bunker fuel? That is a tough one to answer. To answer, I mean, we know that there is a lot of new LNG entering the market, at least from 2026 from Qatar. So long term, we believe that there will be, say, more normal price of LNG coming back to, say, pre-Ukraine situation. But when that is going to happen, it's a very hard call to make.

And then we have one last question on screen here. Further on Q1, do you agree to the thesis that bauxite volumes from Guinea being strong in Q1 implies that seasonality should even out more for cape size rates in years to come? And I agree with that thesis. I think with Guinea being... high season in Q1 for exports of bauxite, where traditionally the iron ore from Brazil has had a low due to maintenance of the ports, et cetera, in Brazil. I think the Guinean volumes now, which are currently one third of the iron ore volumes from Brazil, will contribute massively into the Q1. We also see that a round trip for a Cape size, if you take her from China to Brazil back to China, is about 90 days. If you go to Guinea to do bauxite because of the loading operation, it takes longer. So a round trip is about 110, 120 days. So not only do you get the ton for ton impact in Q1 from Guinea, but you also get the ton mile effect on top of this. So with that, thank you very much for dialing in.

Thank you so much. And have a nice day. evening and hopefully next quarter we meet we have some good news to share with you regarding the market development. So thank you very much.