Hoegh Autoliner Asa

Good morning from Arendelle and welcome to Herc Autoliner's second quarter presentations. My name is Mai Linh Vu, Head of Investor Relations. And with me today, we have our CEO, Andreas Engge, and our CFO, Per Bin Rosmo. We will walk you through the last quarter business and financial update. If you have any questions, feel free to send an email to our Investor Relations mailbox at ir.herc.com and we can read out the questions at the end of the presentation. And with that, I will leave the stage to you, Andreas.

Thank you. Yes, welcome to today's presentation. And we're starting with this beautiful picture of Hög Aurora, the world's largest and most environmentally friendly car carrier. We had a great naming ceremony last week at the yard in China, and the vessel has since then bunkered LNG and is loading cargo in Japan and is going to make a fantastic voyage back to Europe. So that's a big milestone for our company. It's something we've worked for the last three or four years and we're impressed with the results and very, very pleased that the program we laid out in 2021 in connection with our IPO has been executed flawlessly and the vessel is now in operation well ahead of original schedule. To the quarter, another good quarter for Höök Outliners. We have an EBITDA of 174 million US dollars and we happen to have a net profit also of 174 million due to some extraordinary items that Previn will come back into. And, you know, a gross rate of $96, you know, illustrating that the market is still at, you know, it's a very attractive level and coming back to, you know, our contracting activity is also reflecting that. In line with our dividend policy, we have declared a quarterly dividend of $127 million that will be paid during August. And we have taken delivery of one purchased previously bearable chartered vessel, Hög Jacksonville, which is a modern, efficient vessel, part of our core fleet. equity ratio up 3% to 65%. And again, Per-Evin will explain to you, you know, a very strong and continuously strengthened balance sheet. We're going through the standard items. I'm going to talk about market lid touch on capacity and sustainability and Previn will take us through the financials before we have an outlook and Q&A. And one of the characteristics I think of this first half for her goat liners is that with the Red Sea situation and things, we have a constraint on volume. In addition, we have, as you know, also sold a few of our older vessels and the first one was delivered at the end of last year and it's obviously impacting our capacity. But given the pricing of this vessel and the accelerated delivery on our new builds, we believe that's on balance a prudent portfolio management move. High and heavy and break bulk roughly constant said the net rate is with the positive underlying trend now mostly driven by contract renewals and new contracts. And coming to new contracts, we have now signed what we call sort of new contracts with 4.6 billion cubic meters, weighted average of 4.3 years, very attractive rate levels. And we still have, I mean, we are in advanced processes with several contracts, and we still have legacy contracts an annual volume of 3.8 up for renewal most of it during 2024 and we are continuing to increase our contract coverage and i want to make one comment on this and that is you know we had quite an attractive result out of chasing opportunity in the spot market during the last 12 to 18 months. I think during this first half, we have a very, very clear strategy of where we're willing to give up short term profits from potential opportunistic spot trades and rather allocate volume into long-term contracts, and that also includes new contracts, new counterparties, in order to further increase the resilience of our contract backlog and improve our customer and cargo portfolio. And we have good progress in that work, and I think we are continuously strengthening our contract portfolio. In the market, still steady growth, still driven by China. And China is further firming up its position as the leading vehicle exporter. And it's also driving the market growth to a large extent. But it's also interesting to see that it's not it's not actually eating into the volumes from South Korea and Japan. So it creates an overall very strong volume position out of Asia. High and heavy has been, you know, in terms of the global market volumes, slightly down this year due to, you know, I think inflationary and sort of effects on CapEx. It's projected to regain its growth. It is an important market segment. We are introducing vessels with additional high and heavy capacity and more cargo flexibility. So it's obviously an important market and we believe there is good outlook also for high and heavy. On the capacity side, I think, you know, we're seeing now that, you know, new builds are deliveries and new builds have started. They're not at the level that in our view is fundamentally changing the capacity situation. But, you know, we are obviously very pleased with the first vessel that we have, Aurora-class vessel now in operation, and the next one that we will get in a little more than a month, and then further two that are in advance. I mean, one of them is actually a float at the yard, but will be delivered right at the beginning of 2025. So we are in the situation where we are getting new capacity into the system that both has allowed us to to dispose of older vessels and is giving us capacity in a situation where the capacity market is still very tight. Sustainability, that is obviously an important part of our strategy. And with the new builds and working into new fuels, we are, I think, at the verge of making real progress. But in this half year, we're still with our existing fleet is still biofuel and fuel efficiency measures that matters. And we respond to that by continuously increasing our use of biofuel for customers. And we have good demand and are continuously increasing the use of biofuel. we have a preference for the 100 biofuel that is is totally clean easy to explain we're also for this quarter for the first time also bunkered some some blends which obviously also gives gives some effect but also on the technical side we have we have a very clear program on technical updates for fuel efficiency, which includes propellers, bulbs, additional technical technical upgrades. And and we have installed substantial fuel efficiency upgrades on six vessels during Q2. And we have a further nine on order. So in addition to taking delivery on world class, extremely efficient, zero carbon ready vessels, we are obviously also working to improve fuel efficiency on our legacy vessels, and there's good progress on that. That is my part of it, and Per-Eyvind will take you through the financials in some more detail.

Thank you, Andreas. Good morning, everyone here in Arndal and on the webcast. As Andreas mentioned, we had recovery in volumes in second quarter compared to first quarter. That was expected. We had a lot of disturbances in the scheduling and routing of vessels early in the year. coming from the sudden situation where we had to reroute vessels through Cape. To some extent that has been migrated and we ended the quarter with 3.5 million CBM. Net rates compared to first quarter, more or less the same. We saw a small reduction from 83.6 per CBM to 83.2 per CBM. And as we all know here, the top line is the driver for our EBITDA and profit. So it is important for us to follow these numbers. Second quarter results, we saw on the back of higher volumes, the freight revenues increased from 328 million to 341 million. That translated into an increase in the EBITDA from 162 to 174 million. It's somewhat lower than what we had the previous quarters, but it's basically all coming from the reduction in volume. The rate has to a large extent migrated the reduction that we have had in volume. We are reporting a net profit before tax of 135 million. That is an increase from 130 million that we had in the first quarter, and it's more or less exactly the same net profit that we had in the second quarter last year. And bear in mind, again, that we have considerably less volume this quarter than second quarter last year. It's actually a reduction of 600,000 CBM from second quarter last year. It is the volume that is in a way limiting the upside here, comparing with the 199 million that we had in Q4. That was all time record high for the company. You see here that the cargo revenue was reduced with 54 million into the first quarter, and then we see a small uplift in the cargo revenues from first quarter to second quarter. Bunker expenses, positive development, plus 3 million, comparing to QFAR, and other operating expenses, looking at the the first half has actually been reduced with 12 million part of that is of course that we transport less volume that gives less handling cost and to some extent also less port costs so this basically follows from the reduction in the volumes The balance sheet is still extremely strong and healthy. It's solid resilience now in the company. We have been focused on building resilience, and that is still intact. Net interest bearing debt, 354 million USD only, including lease liabilities. And we have a net interest bearing debt EBITDA ratio of 0.4. Book value of equity, again, well below 60%, 65%. It increased somewhat from first quarter, but it is more or less the same as we had in second quarter last year, 64 million. And we have been paying out substantial amounts in dividend over the last 12 months. The cash balance, we are targeting a cash balance by the end of the quarter of plus minus 200 million. We ended the quarter with 195 million. And in addition to that, we have 204 million in drawn revolving credit facility. So also cash wise, we are well off also by the end of this quarter. The development in cash, comparing to end of first quarter, we had 207 million. We generated 169 million from the operation. And we had capex of 65 million. A majority of that is yard installments related to the new buildings. That accounts for approximately 50 million out of the 65. We had a debt service of 18 million installments and interests, and we paid 109 million to the shareholders during the quarter. And we took new debt of 70 million. That was 50 million related to the purchase of one of the least vessels that we had from Ocean Yield. Hug Jacksonville and we also took 20 million related to two of the new buildings. That is actually pre-delivery financing given by the lease provider for two of the vessels. And we had lease payments and others of 15 million, and we purchased Herg Jacksonville for 43 million. So that took us from 207 million to 195. And as I said, on top of that, liquidity reserve of 204 million in the form of untouched revolving credit facilities. Balance sheet, strong, as I said, equity ratio of 65%. It's a simple balance sheet, as we have mentioned before. We have vessels and new buildings, 1.4 billion. We still have some vessels on leases that accounts for 119 million right of use assets. We are in the process of buying another one of the leased vessels. Høgd Jedda will be purchased in October. And bunker and receivables, 182 million. And as I said, cash, 195 million. Equity 1.2 and interest bearing bank debt is 414 million by the end of the quarter. And then we have leased liabilities of 136 and current liabilities of 120. So equity 1.2. If we take market value of the vessels instead of using book value, we calculate the net asset value or the value adjusted equity. And as you see here, that's what's calculated to 2.6 billion by the end of the quarter. That equals US dollar 13.5 or NOK 145. per share compared to a book book value per share of 17 dividend 127 million has been declared and it will be paid out on or about August 28. And as you also see from this graph, the new dividend policy of distributing all free cash flow has increased the dividend considerably compared to the same period last year. A very strong quarter in a market that is somewhat more volatile than what we have seen. It is disruptions. We are exposed for waiting. We have the Red Sea situation, but we are running. all vessels full of cargo and we are to say it that way, we are sold out and we don't really expect that to change in the short term future. Andreas will say a few words about Outlook.

Thank you, Brevin. And again, that is, I mean, I don't think this is changing very much from quarter to quarter. It's the same things that we've said. You know, supply remains tight and we don't really see the new build delivery. They feel basically a shortage in the market and it's not impacting the capacity situation as we see it the time being, and we do not really expect the market to change significantly during the rest of 2024. We are continuing to be concerned and monitoring macro events. It's a complex geopolitical situation. But we are not really seeing that impacting cargo flows and our business now or in the immediate future. Obviously, the Red Sea situation is covered and that is consuming some capacity and is adding some costs and complexity. But that's, I think, now well handled and is part of our normal operation, really. And for Q3, we expect that to be another strong quarter started well and, you know, in the sense sending up results broadly in line with Q2. But I think it's important to underpin given that we are reporting monthly, you know, volume and and rate data that and in the current situation, both because, you know, we are now chasing longer duration contracts and relationships rather than focusing on maximizing capturing short term opportunities and vessel positioning and cargo mix that in our portfolio that you should expect volatility from month to month on those reports. And I think it's important to see a trend to actually have some kind of a moving average because individual months says as much about our cargo mix and our positioning for the month as it does about the market development. But again, a strong outlook, strong market and we really are in a situation that we basically say on the top line on the financial side is relatively stable for the time being and as I said we are continuing to improve our contract portfolio in continuing to build backlog. And we're obviously continuing to, you know, renew our fleet and are also now have now made this maybe not a surprise to those who are following us, but but have made the decision that we will take delivery on ammonia powered fuel vessels in 2027. So we're making good progress on in financials, good progress on cargo, and we are also making good progress on our sustainability agenda. So that's all for us. Then I think we'll leave it to the audience to ask questions.

Yes, we have received a few questions from our audience in the meantime. And I guess the first question is actually about the outlook from analyst Jørgen Leon, DNB. So about the guiding for Q3 in live Q2. And given the uplift for the contract rates, does that imply any slide in the spot rates? I get you already mentioned that there's actually is the cargo mix and the positions that can explain the volatility in the rates from month to month, but I guess do you want to say anything more?

I think we said in many ways that the spot market probably peaked last year, but I think the volatility and the things as you see it is also that if you look at our cargo mix, we still have legacy cargo. And I think what you also see is that there is a fundamental picture in there that because of the overall capacity situation, westbound cargo is paying better than eastbound cargo, which means that the fleet positioning actually has impact on a monthly basis. And if you look into the last 18 months, there's been basically a continuous upward trend on rate levels. And I think we've said several times now that we're not really chasing higher rates now, we're chasing longer duration. And I think that has that has an impact. And we're also, you know, eager to enter into firm contracts, which we are in in, you know, what we call the the return trades is bound, you know, even if even if that might be at some point diluted to our rates. So it's a it's a it's a complicated picture, but we are Our view on the outlook is that the rate picture is now fairly stable and that we are entering contracts on terms that reflects the current market rate and that those contracts have duration that increases the resilience of our cargo portfolio. So we are quite pleased, but it's also clear that we are in a much more, call it, stable market environment than we have if you compare to a year back where there was a strong upward pressure on rates. And it's more the sort of rollover of contracts that drives development.

And the next question also from Jørgen and another investor and a few other investors actually, a little bit deeper about the contract renewal and the rates. So we mentioned that the average rates for the renewal contracts are on average around $100 per CBM. Should they have any more expectation about the further development of the monthly rates that we published on the monthly trading updates? I guess Andreas already mentioned that we have seen an upward trending development of the rates over the last 18 months, but if there's anything else we should... You want to comment about that?

We have said that we will expect some more volatility from month to month, but I guess broadly we are working to develop our contract portfolio to extend the duration and the robustness. of the current rate level and balancing our system to create a good platform for attractive earnings and an efficient trade system for the years to come. That's really where our focus is for the time being.

Yeah, I think I can just add that we are increasing the contract portfolio share of the total volume that we lift. And that has coincided with an increase in the average net rate over the last 12 months. And we are still in a situation that when we renew contracts or enter into new contracts or replace legacy contracts with new contracts, we are still getting, I would say, considerably higher rates than what we leave behind us. So that dynamic is still there. But of course, as we also increased the contract share, we reduce to some extent our exposure to the spot market. So that dynamic is not straightforward. And when you mentioned $100 on average, that is the situation, what we have done historically, that that is not necessarily how it will be going forward. We are not renewing all contracts above $100 per CBM.

But I also want to emphasize the fact that you've seen we have a steady, we have a regular uptick in our contract share, right? And that means that we are not only renewing, rolling over contracts from low rate to high rates. We are also, to a large extent, taking our spot market exposure and transforming into contracts. And those two obviously have different dynamics, while the rollover of contracts, legacy contracts at low rates is definitely increasing the rate, but the spot to contract does not have the same effects. And we also have a large share of that in our portfolio now in terms of contracts. And we are very, very satisfied with that because that is, in our view, fundamentally improving our backlog quality. But it doesn't transform into immediate rate upticks.

Thank you, Andres and Pevin. As our next questions, on contract renewals, we say annualized volume of 3.8 million CBM. So just to be clear, is this translate to roughly 1.9 million offer renewal in the second half of 2024? So for this question, I can just answer. What we means is that we have a legacy annualized volume of 3.8 million CBM offer renewal towards the end of 2024. The next questions. The contract share is up to 75% from 70%. But at the same time, we mentioned that we lost around 5% of capacity due to Red Sea disruptions. So in the case that the Red Sea is opening again, should we expect another increase of around 5% in the sport business? Or how would that translate into our sport contract cargo mix in the case that Red Sea is opening again?

If the situation changes suddenly and that you can start going there from tomorrow, you could expect that that will have some impact on the ratio between contract and spot cargo. But I still think that we will still be above 70% on contract cargo. We have a pressure. It is more cargo out there than we can accommodate for. And to some extent, we are also pushing cargo in front of us. So I don't think the ratio will change that much if we get that additional capacity available overnight. It will be more or less the same ratio as we have seen lately.

Thank you, Pei-Wen. And the next question is from a private investor. It's about vessel sales and expected dividends. Is it still the plan to sell Chiba in Q3? And Kobe with Kobe has been already delivered in July. So what should we expect about the dividends before Q3?

I mean, first, SGB has been sold, right? It's a firm contract deposit paid and we are delivering it this month. So that will happen. And I think we have said we have a dividend policy. I don't think we will guide much more specific on that, but we are not intending to accumulate cash. And I think that answers most of it. And we're coming back with the exact timing of that.

Thank you, Andreas. The next question is from analyst Erik Hove in Nordea. The first question is about the contract renewal negotiations. So looking at your progress towards the 80% long-term contract coverage, Are there any changes in the sentiment from counterparties and overall negotiations when it comes to rates, durations and market?

I would say broadly no, in the sense that I'm of the view from what we're seeing from customers that our shipping segment has become more industrial. I mean, the customers have seen the pain of instability in their logistics system. So we are working with customers and our feeling is number one, that the market level is firm when it comes to rates. And the other is that actually customers acceptance, even appetite for longer duration is improving. And that goes particularly for the larger customers and the larger flows where, you know, it's also a need from the customers to have stability in the setup for their large volume flows. So we believe both rate-wise and duration-wise, for us, we see the market situation and our customer dialogues as quite supportive to what we're doing.

Yeah, nothing to add. Customers seems to be focusing on transport security and are willing to enter into long term contracts to secure the transport capacity for the years to come.

Thank you. And the next question is that we have communicated that 80% contract is the target we are looking for. So are we also looking to increase this target to over 80% if there's appetite or?

I mean, I think we are saying first, we have said that as a target, I think we believe that some flexibility in the system is also important for the product quality. So I don't think we believe that running 100, because there are changes, variation in customer needs, there are disruptions in the system. So we believe we are delivering a stronger product to our customers by not being 100% committed. Because being 100% committed basically means that any disruption in the world means that you're not able to deliver on your commitment.

Yeah, and adding to that, we also have some very profitable cargo that we don't have under longer contracts, but that we have with freight forwarders and others. And that is cargo that we most likely like to keep. So to increase the contract ratio to 100%, giving up that cargo is most likely something we will not do.

Thank you. Yes, and the next set of questions is from analyst Petter Huygen, ABGSE. And the first question is a deep dive, further deep dive into the outlook. So we wrote that expected Q3 to be another strong quarter with results more or less in line with Q2. We see it's difficult to square with the highest rate on record from July trading update. so can we expect the net rate to decline in august and september so i guess what we have already communicated is that we expect some volatility in the net race given the positions and the cargo mix but we are not going to comment more specifically about the net race until we come up with the trading updates The next question is, could you guide anything about the amount of contract space that come up for renewal in the next two years, 2025 or 2026?

I mean, that's smaller volumes given that we have, and if you look at the ration and the volume we have, I think we're entering into, I mean, we still have what we call legacy contracts going into 2025, but it's not a huge volume.

it isn't a huge volume but but there is there is volume that we can renew also in in 2025 that could uh and and will contribute positive to the rate if if if the market stays more or less as it is now yeah and but i also think in the fact that you know obviously we are trying to balance this out and we have have divested some vessels but uh you know we have uh

It's great to see we have six vessels under construction at the yard. Four of them, including the one delivered in advanced stage and which looks like a vessel. Three of them actually are floating. So we are getting new capacity and we have some flexibility given that we did place some early orders and have a stream of new builds coming over the next year, which is giving us some flexibility. For that, we have also been seeking to commit capacity to customers that we believe have a prospect for an increase in cargo volumes and those types of things. So we are obviously working on using the position we have, using the market as it is, to try to optimize our cargo backlog relative to our capacity situation, which actually includes some growth in capacity over the next year.

uh and the next questions um what is the current share of capacity trading spot or share of total capacity are we planning to trade sport in 2025 and 2026. like so i guess this year we mentioned that i mean we said the 20 but i think also also we have i think as previan alluded to

i mean the notion spot and contract is not is not an entirely clear distinction because we have we have as you say we have liner cargo parts of the things that that are in our world technically spots but are recurring cargo but so so when we're talking spot contract is more about commitment on the contract what we call contracts we are basically seeking a much and getting a much higher degree of mutual commitment where we are formally financially committing space to customers, and they are formally and financially committing cargo to us. So I think that distinction is, I mean, most of our cargo comes out of some kind of relationship. and and a lot of what we call spot cargo has some uh you know a written agreement behind it so for us this is mostly a pricing thing and it's a pricing thing and a commitment thing we can reprice that cargo

on an ongoing basis and we don't really have the commitment to take it but but we are working with customers and freight forwarders and other that we have been working with for many many years so spot cargo is not cargo that we have to fight for every day it is regular cargo but we are not committed and we can reprice more frequently and that is cargo we like to have actually thank you

And the next question from an audience is about the utilization on our backwards trade. So could you comment about the utilizations on our vessels on the eastbound routes?

Yeah, utilization on our vessel is always high. It's a lot of expenses involved taking a vessel around the globe. So we always have high utilization. So the simple answer to that is that vessels are always full. But in some cases, if we have an unbalanced situation when it comes to tonnage, we might choose to ballast vessel from Atlantic to Asia. And to some extent, We do that, but we don't have a systematic model where we balance. This is decisions that we take from basically month to month, but we are utilization wise, we are always full.

So you're saying eastbound vessels are either going full or empty and most of them are going full. That's kind of the situation. Yeah.

Thank you. And yes, this is the last question we receive from our audience. Thank you very much for the engagement. And if you have more questions, feel free to send a question to our investor relation mailbox at aya.hoek.com. Thank you very much for your attentions and we see you next time.