Hoegh Autoliner Asa

Good morning and welcome to Hoek Outliners' first quarter presentations. My name is Mai Linh Vu, Head of Investor Relations. And with me today, we have our CEO Andreas Enge and our CFO Per-Evin Rosmo, who will present to you the first quarter business and financial update. Online audience can send questions to our investor relations mailbox at ir.hoek.com and we will answer the question during the Q&A sessions at the end. So with that, I will hand over the stage to you, Andreas.

thank you my name and welcome to this presentation of our first quarter 2024. i'm pleased to be able to present another strong financial quarter in a situation where the shipping industry has you know experienced you know one of the potentially biggest operational crisis that sort of can happen to the industry, which is sort of closure of the Suez Canal effectively through the situation because of the situation in the Red Sea. That has created a need for a comprehensive sort of reshuffle and change in our trade structure, and it has also resulted in substantial loss of volumes. Despite that, we've been able to deliver another very strong quarter. Before we go into the financials and the quarter, I just want to recap what is the essence of our strategy. We have had three focus areas over the last couple of years, where one is to build resilience through the cycle, the other is to execute a comprehensive green fleet renewal, and the third is to provide attractive returns to shareholders. and in that sense you know this quarter actually represents an important milestone in the sense that we've done the refinancing that is in many ways the last building block of you know creating resilience with you know debt maturities pushed beyond 2030 and a very very robust capital structure We have fantastic progress on our green fleet renewal and not only progress in the sense that we will get the first two vessels delivered in August and September of this year, but it's also you know, fully financed, almost entirely financed with equity and fully financed with debt, meaning that we have a capital structure that removes the conflict between the fleet renewal need and the ability to pay dividends, which then basically leaves us with the third one in providing attractive returns with the dividend that was paid out in Q1. and our dividend capacity going forward we're delivering industry leading dividend yield and we do that without without sacrificing renewal or financial resilience in the company and that that is it's a we believe it's a fantastic achievement but it also creates a very very strong platform going forward recap a bit on the new building program we have 12 aurora class vessels on order it is almost 110 000 cus capacity it basically makes up 47 percent of our existing fleet capacity and we have made created the ability to get the last four of the 12 series delivered with ammonia propulsion from yard allowing us to go to zero carbon in in that period And we are getting the first vessel in August, the second in September and further two in the beginning of 2025. So it's very, very well on track. Fully financed at attractive terms, combination of bank and lease arrangements where we have full control of the vessels. And it will reduce emissions per transported vehicle by 58%, starting with just the scale and LNG, and 100% as we can get to green or blue ammonia. We believe this is very, very important in a situation where we believe the oldest and least carbon efficient vessels will become increasingly competitive in the years to come. And having this type of fleet quality is, in our view, essential to serve the premium OEMs in our industry. So that data is an important achievement and it is very well on track and you see pictures of the first vessels really taking shape at the yard on the side here. Being early with fleet renewal has also allowed us to optimize our fleet. We've sold total now of three 17, 18 year old vessels. And if you look at the price received, it's actually quite similar to the price per capacity unit as the new builds, meaning that we are getting an extremely good exchange rate. We are able to time delivery of the sales to the deliveries of our new builds and are such, in that sense, strengthening our fleet in both ends, and we are doing that with very strong cash proceeds, further increasing our both resilience and dividend capacity. Then to the quarter. $162 million of EBITDA, that is as expected with the situation in the Red Sea, down from the exceptional result of last quarter, but still a very, very strong quarter. Net profit of $115 million, further increases in rates, And it allows us to pay $109 million of dividends. And we have a very, very strong equity ratio at 62%, although a bit down after the large dividend payment in the quarter. moving on to a commercial side and i think one of the highlights in the volume side it's it's relatively stable in terms of of rates and high and heavy share it is as we've seen strongly and previously reported in our monthly updates strongly down in volume due to primarily the red sea uh situation but but also with a net rate at all-time high and gradually recovering volumes that uh perevin will will comment further on we believe we are we are so we still have a very very robust business system We are now in the middle of several important contract renewal processes. Our message there again is the same as previous quarters. We are continuing to strengthen our contract coverage at attractive rates and with increased duration. We still have an analyzed volume of more than 4 million CBM to renew. We are in the middle of some processes. Some processes are coming later in the year. And we will, as a customer, report those as they come along. But I think it's important to say that we are now in a stage where clearly, it's been for a while, it's the contract renewals or legacy contracts that drives our rate development. And while the spot market is still robust and allows us to effectively manage the network and balance capacity, it doesn't provide the kind of rate uplifts that we saw a year or more ago. So we are now in the process of increasing our contract coverage beyond 80%, which is an all-time high. We believe also it's kind of the limit in the sense that in order to be able to provide a quality service to important customers, we will have to have some flexibility also in our network in terms of managing volumes. And that is something that we are customer balancing by also having a share of uncommitted volumes that gives us that flexibility. The market. Outlook remains strong, has been a strong growth in Asian exports. It's a continued outlook of volume growth, continued sort of constraint in terms of capacity. So we see the market outlook continuing to be strong. We also see further growth in the high and heavy market. And as we've said many times, while high and heavy has become less important to safeguard profitability with increased rates on new cars, it is still important to optimize our trade system. So we retain our focus on the high and heavy segment. Capacity, it's also, I think, fairly unchanged. There is an order backlog slightly above 200 vessels. It is not changing a lot. Time charter rates are remain at a very high level. We are, as you've seen, given our new build program and given the upcoming new build programs, we rather monetize or leverage that market by taking opportunities to sell all the vessels and we're not in the current moment chartering vessels at these levels. Then there has been I think an unprecedented series of disruptions in this quarter. We obviously had the Red Sea coming in over Christmas that has created a major change in trade patterns. We've also had the Israeli-Iran conflict that has created some uncertainty about the Arabian Gulf and the Strait of Hormuz, which has fortunately not escalated. And we have the Baltimore Bridge, which is a tragedy to the local community. Baltimore is not a very active port for us and we've been able to secure good alternatives for the port calls, so it does not have any real operational impact for us. And again, saying that we've had key layings of vessel 3 and 4, we now have As we speak, we have two vessels on the water ready, being prepared for delivery in July or in August and September. And we have two more vessels being built in the dock. And we actually have another two vessels where construction of locks has started. So we have six vessels in construction at the yard right now and two for very near term delivery. On the sustainability side, we're starting to see effects of our increased use of biofuel. It is an important, I would call, bridge fuel for us. It's not scalable to the level that we can rely on it on a long term low carbon fuel, but it's very, very important to deliver near term low carbon solutions to our customers. So we are running a substantially increased volume of biofuel and we're doing it with full cost coverage from customers. We also have a docking series with a substantial upgrade plan for existing vessels for fuel efficiency, various upgrades on rudders, propellers in connection with the dockings. And we have as the only company in our segment secured for early delivery of ammonia engines for vessels being delivered in 2027. And one of the, I think, very positive things over the last three to six months is that all, I think, several leading ship owners, several important ports, clearly MAN, now also the International Energy Agency, is clearly pointing to the possibility to now really launch ammonia powered vessels and that ammonia powered vessels is likely to be the leading zero carbon alternative and the most cost effective zero carbon alternative. We are glad that the optionality we built in when we started a new build program seems to pay off in the sense that it allows us to take a real unique competitive position on zero carbon propulsion as early as 2027, which we believe will be important for our competitive position. That leaves, ends the kind of more sort of business and capacity and market update. And I'll leave it to Per Eivind to take us through the financials in some more detail.

Thank you. Thank you. Good morning. As Andrea said, the main impact on the volume in Q1 was the reduction in volume. We lost 650,000 CBM compared to Q4 2023. And the main reason was the situation in the Red Sea, especially in the beginning of the year. where we had to reroute vessels, we had to turn vessels around that was on the way into the Mediterranean or actually also was in the Red Sea area, and that created a lot of challenges to the network. 3.3 million CBM is a reduction of close to 17%, so it is actually a considerable reduction compared to the average that we had in 2023. To some extent that was mitigated by the higher net rate, but also a good and solid cost control during the quarter. We will see that from the numbers. Revenues reduced from 382 million USD in Q4 to 328 million in Q1. That's a reduction of 14% coming from the loss of the volume. We still produced a strong result, 162 million in EBITDA compared to 171 million in Q1 2023. And we were able to maintain the EBITDA margin of 50% even with this big volume loss. That gave us a net profit of 113 million compared to 124 million in Q1, 2023. The 195 million that we had in Q4, 2023 includes a sales gain of 36 million from Bangkok that was sold and delivered in December. So the number is not directly comparable. If we look at the bridge between Q4 2023 and this quarter, we see that we had 54 million in lost revenues. We had 3 million lower bunker expenses and we had 14 million other operating expenses. That gave us the EBITDA of 162 million. The balance sheet is still very strong. We have seen an increase in net interest bearing debt, of course, since we paid 360 million in dividend from the cash in Q1. But still, the net interest bearing debt EBITDA ratio is only 0.5. Book value of the equity somewhat reduced due to the dividend payment, but 62% of the balance sheet is equity. Close to 1.2 billion in equity. the cash balance we had 458 million we paid 360 in dividend we ended the quarter with 207 million we had a strong operational cash flow and in addition to the 207 we have a credit facility in the new loan arrangements of 200 million so our liquidity reserve by the end of first quarter was 407 million Looking at the cash flow development, we started with 458. We had cash from operation of 165 million. We used 19 million on investing activities. 10 million was yard instalment for one of the new buildings. And the other 9 million is... dry docking expenses and also some owners expenses related to the new buildings. We have some expenses related to the new buildings that we have in addition to the yard installments. Depth service, interest rates and amortization, 16 million in the quarter. And then we paid the 360 in dividend. And we also had the lease payment and other financial expenses of 21 million USD. That took us to 207. And as I said, in addition to that, 200 million in an undrawn facility. The balance sheet is, as before, simple and easy to understand. Most of the assets are vessels that we own, 1.3 billion. And then we still have a few vessels on lease, 169 million. And we had bunker inventory and freight receivables of 190 million USD by the end of the quarter, and then cash. 207 equity 1.2 billion and the interest bearing bank debt by the end of the quarter was 355 million usd only and then we have some lease liabilities related to the right of use assets of 190 million Current liabilities was 135 million and other non-current liabilities, mainly deferred taxes, was 38 million. That gave us a book equity of 67 NOK per share by the end of the quarter. If we adjust the book value of vessels and use market value of the vessels instead, We see to the right here that we have calculated the net asset value of the company to be 2.5 billion USD, and that equals to NOK 143 per share. As Andreas mentioned, one of the main events in the first quarter was the refinancing of the mortgage debt. We have two facilities in place now. We have the main loan facility of 720 million USD. We used that to refinance the 350 million USD that we had in legacy debt by the end of March. Main change here is that we have now only pledged six vessels for that debt, leaving 24 vessels completely without debt. And looking at the market value of those 24 vessels, it was 1.5 billion USD. by the end of first quarter. The 24 vessels that have no debt also of course have very low cash capacity cost. It's basically only running expenses and some admin expenses and dry docking expenses. So the cash break even cost for the 24 vessels without debt is around 10,000 USD per day. 90 million will be used to purchase Jacksonville and Jeddah, two vessels previously owned by Ocean Yield, and we have declared the purchase option. We will get Jacksonville this Friday, and Jeddah we will get in September. And then we have 280 million under that facility that is earmarked for four of the Aurora new builds. The facility runs into 2030, so it's a six-year tenor in this facility. and we have given that we have only pledged relatively new vessels the horizon class vessels are built in 2015 and 16 meaning that we have a a very attractive amortization schedule on on on the mortgage steps reducing quarterly amortizations considerably And we also were able to reduce the interest rates on the loan. So all in all, we have a very, very flexible and attractive financing now for our bank debts. In addition to that, we secured 200 million non-amortizing four-year credit facility. And this facility is undrawn as of today, and it will serve as an additional liquidity reserve, but also gives us the possibility to use it for future capital allocation if there is opportunities coming our way. And you see the lenders in this facility to the right here. They are all well-known international shipping banks, and we have had a long relationship to all these banks. As Andrea said, we will pay the free cash flow that we had in the quarter in dividend. That is 109 million and the dividend is expected to be paid out early May.

Yeah, that leaves us with the outlook, which I think we have mostly covered already. But one, the market remains tight, creating a good environment for our contract renewal processes. Our dispositions in the contract market is expected to bring our contract share up above 80%, which I think compares with the historical level of more 60 to 70. So we are clearly strengthening our market backlog and our portfolio in that process. That's one important point. The other one is clearly that the Red Sea disruption is consuming capacity. Longer voyages reduces the cargo capacity of our fleet. The total volume loss is approximately 800,000 to 900,000 on an annual basis. We are mitigating with a combination of surcharges and the way we manage our fleet and we expect, as you say, volumes now gradually to come back. It's also such that, you know, in addition to the Red Sea, we live in a, you know, more unstable geopolitical situation than previously. We've seen some tension building up in the Gulf of, the Arabian Gulf, straight over most that has not had major impact, but we're clearly following all aspects of the global geopolitical and macro situation closely. So that ends our presentation and I think it leaves us open for Q&A. Mylene, any questions?

Thank you Andreas. Yes, we have received a few questions from our online audience during the presentation. And the first question is related to more general macro pictures. So can you say something about the impact of the drop in electric car sales in Euro with the company, on the company?

I think no, in the sense that it doesn't have much impact.

But Trevin, do you want to elaborate? So far, we haven't really seen any impact. And to the extent that we transport less EV, we have been able to take all the cargo out of Asia. So our sailings from Asia to Europe is still And we see also that some of the EV exporters out of China are right now exporting more in order to get these cars into the market before the tariffs eventually come into play. It's also fair to say that EVs from China, China produced EVs to Europe, has not been a major part of our cargo historically. So far, no impact, and vessels are still full, also from Asia to Europe.

Thank you, Andreas and Per-Evin. The next question is related to the capacity. So the question is, you have previously indicated that we would like to keep the fleet size constant. Is this still the plan, or would you be willing to take advantage of the high price for the second-hand vessels market and sell a higher number of older vessels, leading to a slight reduction in fleet size?

I mean, first, you know, we have a new build program that actually makes up, you know, almost half of our current capacity. We are obviously also retiring some vessels reaching a normal retirement age, but implicitly in our fleet renewal program, we are increasing capacity. And we will constantly look at the right way to optimize our fleet in light of our network demand and the opportunities to realize strong values for all the vessels in order to improve our fleet. We have a strong belief that the fleet quality in 2027-28 where the market balance improves and the carbon consciousness of our customers improves and ETS charges and CII hits. The fleet quality in 2027-28 is extremely important for our long-term competitiveness and we are steering towards improving that and we're quite pleased that I think we have the most comprehensive and most credible program to deliver low-carbon services and deliver a market-leading fleet quality into that time period.

Thank you, Andreas. And the next question is related to the volumes. We already mentioned, we already quantified the volume impact from the RSE disruptions in our outlook. But could you just comment something about the volume in Q2 compared to the volume in Q1?

No. As I said, we had a big impact on the volume in the beginning of the year where we had to reschedule a lot of sailings and in a way recalibrate the network. That effect is gone. And as we see it now, all sailings are full. We have high utilization and the volume loss that we have compared to 2023 is around 200,000 CBM per quarter coming from the Red Sea effect. and around 100,000 USD, sorry, CBM, coming from the sale of Bangkok in December. But other than that, the conclusion is that we expect to see higher volumes going forward than what we had in the first quarter.

And I think we add to that that the two new builds we get in August and September has approximately the same capacity as the three vessels we've sold.

Yeah, they have 50% higher capacity than the vessels that we are selling, so we are also adding capacity by exchanging 6,000 CEU vessels with 9,000 CEU capacity vessels.

Thank you. Yes, we have a few questions coming in just now. The first two questions related to the volume we just commented on and the EU tariff. Basically, you already touched on in the first answer. And the next question is about the last four new buildings. Could we provide some comments about the incremental capex? Should we go with the options to go with ammonia engines for the last four vessels?

I don't know exactly whether we want it. It is work in progress, but we have received an award of 146 million NOC from Innova, which is expected to basically cover 40% of the incremental cost of the new builds. That's the sort of order of magnitude, but we also have, as I said, cost coverage for that through the Innova cash support.

Thank you. The next question is from Annelise Petterhagen, MBGSE. We mentioned about contract shares of up to 80% towards the end of this year. Is that excluding or including the new builds?

That is based on the capacity we have. As I just said, we are retiring. I mean, we are delivering older vessels. We're adding new ones. We will have roughly the same capacity, including the new builds. So I think it doesn't particularly matter.

Yes, so next question. Could you recommend anything about the competitions from the container lines?

I mean, I think in all fairness, we don't see much competition from the container lines. I mean, most of our dialogues related to containers is with OEMs currently shipping in containers, wanting to create plans to get back on Roro. So I don't think we see that. I mean, I think what we see structurally is that we don't see much. We've taken some volumes back from container in some markets, but running running large trade flows in containers is not really an option for the large OEMs. Containers is an option for new startups and smaller volumes. It's clearly an option for those who are not able to secure sufficient capacity on rural vessels, but most of our dialogues is really taking volume back. We have taken some volume back in China and outside China and we are having those dialogues.

I think we said it before and I think we can say it again. The volumes currently going in container vessels and bulk vessels, we consider that to be a cargo reserve for the rural industry. Those volumes, we expect those volumes to come back to rural when the capacity is there.

We don't have open space on our vessels due to container shipments.

Thank you. And the last question, I guess it's related to the news that has come out recently this morning, so I'm not sure it's a bit too early to commence, but can we say anything about the cash shipping markets that container lies, for example MSCs, before Graham as announced earlier this morning?

I don't think we can comment much on that. But I think GRAM is a tonnage provider that benefits from having a good backlog of time charters to operators. And it sounds like from the press releases that they don't plan to change the business models. So I don't think the ownership of that does much change. The whole new build program is creating a different operator environment. There are Chinese buildings, there are new players that are entering into the car carrier market and containers are among them. This is a competitive market, it will remain a competitive market and I don't see that as a major change.

Thank you, Andreas. Yes, and that was also the last question we received so far. And if you have further questions, please reach out to us to our investor relation mailbox at ir.hoek.com. We thank you for your attention and we look forward to seeing you next time. Thank you.