Hoegh Autoliner Asa

Good morning and a warm welcome to Hyk Autoliner's second quarter presentation. My name is My Linh Vu, Head of Investor Relations, and we have with me our CEO, Andreas Enger, and our CFO, Espen Stubberud. We will walk you through the last quarter update. As usual, you can send questions to our investor relations mailbox at ia.hyk.com and we will address these questions during our Q&A session at the end. So with that, I will hand it over to you, Andreas.

Thank you, My Linh. And welcome to this presentation. This has been an exceptional quarter in many ways. Exceptional in the sense that we've had the strongest customer demand growth I think I've ever seen, where we could have filled the multiple vessels, more vessels if we had them. It's been exceptional also then in the tightness of the capacity market with increased charter rates and it has been exceptional in disruptions both in terms of fuel costs and in terms of cargo displacement bound for the Middle East due to the conflict in Iran and the Strait of Hormuz. That in some way warrants a slightly deeper dive than usually into the underlying factors, but we will run you through the presentation and then, as My Linh said, respond to Q&A session afterwards. Starting with the quarter highlights, the market for Roro Services is exceptionally strong. Car exports out of Asia growing 31% year-on-year in the first half. China increased by 68% year-on-year, again creating an exceptional demand for capacity that is also fairly substantially underserved. That has tightened the capacity market. Charter rates climbing further. New build order books fully absorbed by the Chinese growth. We're coming into that in some more detail. It's also been Very much colored by the conflict in the Middle East. It's been for us a huge disruption with 16,000 cars bound for the Middle East displaced, but also successfully managed during the quarter. And while, as we said, the quarter is upset by this shock together with the fuel price, we do expect normal cash conversion and full round rate BAF compensation within the third quarter. So it is, as a summary, a market situation that is strong and is remaining strong. There has been some exceptional disruptions that we will dive into that has largely been dealt with and will soon be behind us. Starting with the Middle East conflict, we Oskar Orstadius As we speak, we have no vessels inside and no cargo displaced as a result of that, but we're going back to what happened and how we got to where we are now. On the financial side, the elevated fuel prices and I think the fairly well-known lag in our BAF revenues impacts the quarter and the cost related to rerouting and disrupted cargo. is fully compensated by customers, but it does create additional costs and receivables that takes slightly longer to collect due to the extraordinary nature of the costs. And that in some creates a working capital buildup that also unfortunately covers this quarter. Let's start with the effects of the Strait of Hormuz. As I said, we had more than 16,000 cars en route to the Middle East when the straits were closed. They ended up being unloaded in the Caribbean, in Mozambique, in India and in Sri Lanka. and a few back in Europe that created a huge disruption and substantial costs in terms of both storage and then finding solutions to bring these cars somewhere. and we worked closely with customers. We found good solutions. All of these units have found a home. All the costs are covered. But again, there is a slightly longer invoicing cycle, although going back most of these costs are now actually also paid and collected, but it created a longer cycle than building working capital. That was obviously compounded with the fuel price. And I think there are two effects that are important in that. We have an average fuel inventory on board of two months. And when the fuel price increases at the extent it does now, it basically substantially increases our fuel price. And it's also a structural delay in the compensation. The cost of that additional fuel cost is fully passed on to customers, but it is with a delay that then also is creating delays in revenues and building working capital. We do expect a full run rate BAF compensation within Q3, and our five-year average fuel cost recovery is 95%, so we are considering this to be temporary effects. And in a declining fuel prices, there is also a recovery or a sort of positive effect on that, although I don't think we're going to guide on oil prices in the current geopolitical situation. Those effects combined created then a working capital growth of 54 million in the quarter. As we said, net increase in receivables of 25, now mostly collected, and the fuel inventory obviously staying high with the oil prices, but as a one-off effect. but in some substantial effect on the quarter that obviously given our dividend policy being strictly linked to end of quarter cash has an impact on the quarterly dividend. So that brings us to the highlights, $122 million of EBITDA, $86 million of profit after tax, a growth rate of $94, and one new vessel, a feeder vessel delivered, continued high Equity Ratio, a result that if you factor in the delayed fuel cost and the costs of some vessel disruptions and not being able to serve the Middle East market fully is in our view a strong quarter. Unfortunately, with the working capital effects taking down dividends for this quarter. To go a little bit deeper into the market side, I think it's important to recognize, I think an unexpected, but an extremely strong growth in far east exports, primarily Chinese exports, with with a 73% growth in light vehicle exports, year-on-year a 41% in construction equipment. It's a little bit under communicated, but there's a strong development in that one as well. It's tightening capacity. It's also creating a larger system imbalance that also contributes to consuming rural capacity with the eastbound trades being largely flat with the westbound trades growing strongly. Chinese car exports is continuing to grow with high quality, well-priced products building market share across the world. and you know the 2026 growth alone consumes something like 100 car carriers in order to transport so it is a very very strong and and we believe uh you know well justified based on the the products and price points and uh and also sort of a a a given the given the growth across the world also a a a sustainable or a structural market change that that we expect to be here to stay With the lack of rural capacity, that has led to a strong increase in cars shipped in containers or other means of transportation. We estimate that to be about a million, one and a half million cars in the first half of 2026. My experience from this also to some extent happened after the pandemic and our experience is that these volumes will largely return to Roro when capacity becomes available so it also contributes to further tightening the capacity market but also represents a buffer if and when markets normalize. The To have a strong backlog, we are totally sold out for 2026. I think given what I've said, we probably would have some opportunity if we weren't, but that's where we are. We also have a strong backlog into 2027, but I think the situation in the market is now also changing dramatically. The kind of somewhat limited, but still the contract renewals as an upside opportunity rather than a risk, given that we see the market remaining tight into and through 2027. So our contract situation is strong. The renewing contract renewals represents an upside and so that the market outlook in our view remains quite strong and strongly colored by the lack of available rural capacity automation. Going a little bit into the capacity side as well, we are through the peak in new build deliveries. We are also heading towards a scrapping period where between now and 2020, A fairly substantial part of the older fleet will pass 30 years of age, which is the normal scrapping age for car carriers. And that is also clearly reflected, very saw, the 23-4 very, very high charter rates. falling sharply on expected normalized capacity balances through 2025 and is now again on a sharply increasing trajectory, which I think can Fairly well explained if we look back by this slide where we basically look at net fleet growth against Chinese export growth back all the way back to 2020, where you basically saw when market tightened in 2022-23, the growth grossly exceeded the new build deliveries or the fleet growth. In 2024-25, it somewhat reversed, where with the peak of the new build delivery, new capacity into the market slightly exceeded the Chinese export growth. and it's now been turned around again in 2026 with the increase in Chinese exports creating a gap that we currently estimate roughly 70 plus 74 ships. So it is kind of a fairly It's a close link between the evolution of Asian Chinese export growth and vessel deliveries that has during 2026 towards the end of 2025 into 2026 changed the dynamic of a loosening capacity balance into actually a sharply tightening which is where we are right now. And In that picture, we are obviously very, very pleased to have our first eight Aurora vessels in full operation. They are performing very well. They are also allowing us to deliver record carbon intensity. and since we are still running LNG which is helpful but this is mostly efficiency so it also actually impacts obviously our operating costs and the operating economics and we are also obviously looking forward to getting the first four dual fuel VLSFO ammonia vessels delivered you know from from next year, mid next year onwards. And we also in that sense, I think we are strongly committed. We did, I think, innovate the PCTC capacity market by basically introducing a new class of vessels being larger and with more fuel flexibility and efficiency. We now see how that works out where first the cash cost of our new build vessels are almost a tiny fraction of the current charter market in cost. It's also substantially lower than it would have been to build the cheaper smaller So we are rapidly building the most competitive class of vessels in the industry and we have now also acquired substantial operating experience and we are quite comfortable with how this plays out in terms of also long-term cost performance. That concludes my part of this presentation. I will then leave the word to Espen to go through the financial in some more detail.

Thank you, Andreas, and good morning. Our net rate is moving flat quarter on quarter and has been very stable over the last period. Topline is up 4% in the second quarter, quarter on quarter, driven by higher volumes, up 2.6% to 4 million CBM. And we think that is a strong result considering the meaningful disruption to our network in the quarter. RBTA in the second quarter came in at 122 million. That's slightly ahead of what we guided in the first quarter presentation. It's down 23 million quarter on quarter, and we had a net fuel impact of 22 million, which is explaining the drop in performance. Our fuel cost was up 21 million quarter on quarter, and we had a negative impact from BAF revenues of 1 million quarter on quarter, following changes to our cargo mix. We had a net profit before tax reduction of 16% or 16 million, mitigated by a gain from debt modification following a refinancing in June. Looking at our EBITDA bridge, as mentioned, we had 21 million extra in fuel costs. We also had, as Andreas already mentioned, additional operational expenses related to the Middle East routing, extra storage costs, extra discharge costs and canal costs, as well as some costs related to us putting our cargo on third-party vessels, which is increasing charter hire expenses. These costs have been invoiced to clients and is offset by additional revenues. We are continuing to using the short term capacity market and some of the increase in charter expenses is also reflecting the tightness of that market. Our balance sheet remains strong. Our net debt debited up to 1.3 times following a lower cash balance at the end of the quarter and an increase in right of use assets as we have taken delivery of one feeder vessel on a long lease and we also extended one feeder vessel for one year. The equity ratio remains stable. We end the quarter with 216 million in cash and we have liquidity reserves through our revolver of 197 million. As Andreas already talked to, our cash generation in the second quarter has been meaningfully impacted by increase in working capital with increased fuel inventory and also higher receivables. We expect working capital to be reversed in coming months. And we had an operating cash flow of 67 million in the second quarter. We had normal capex related to dry docks, vessel upgrades and also one new building installment for Aurora vessel number 9 of 16 million. And we had normal depth and lease payments of 35 million and as well as a 94 million dividend paid to shareholders. We have refinanced both our bank facilities over the last six months. We already announced that we extended our liquidity reserve, the 200 revolver we have. In the first quarter, we extended it by two years up to 2030. And in the second quarter, we also extended our main 640 bank facility. and we're quite pleased to have achieved an eight-year tenor, increasing then maturity by four years up to 2034 and also meaningful reduction in margin and more favorable covenants. As Andreas said, we have a cash-based quarterly dividend and that gives some volatility. In a very special quarter like the second quarter, we will be paying out 16 million, which is the excess cash above our targeted cash balance in August. And with that, Andreas, I'll hand it back to you for the outlook.

Thank you Espen. Yes, and with the outlook starting with the market, demand for ocean transportation is accelerated. supported primarily by strong growth in exports from China, both for vehicles and high and heavy equipment. And the capacity market is further tightening with 60% increase in July Charter Index prices, obviously also then creating a limit to our flexibility on the capacity side, but also reflecting a very strong market. Q3 remains impacted by high fuel prices and delayed BAF revenue, but cash conversion is expected back to normal in Q3. Normalized performance with full run rate BAF compensation is expected within the third quarter. and Q3 EBTA is expected then to be roughly in line with Q2. So that's our guidance. A very, very strong market. Still some of the kind of effects from the fuel and buffer counting wise coming into the quarter, less cash wise. But the underlying market suggests continued strong demand and continuing full utilization and also a strong environment for contract renewals. Thank you.

Andreas and Espen. And we can start our Q&A sessions. We have received a few questions from our online audience during the presentation. And the first set of questions is coming from analyst Sondre Snedrud from Nordea. First, on networking capital, we talked a little bit about that in a previous slide, and then we guide for normalization of cash conversion in Q3, within Q3. But how can we say again about how is our look for the underlying networking capital level and can we say a little bit more about expectation reversal and when we can expect that?

As we said, it's a very special quarter for us and the working capital build-up is significant. It's driven by two things. It's the fuel inventory following higher fuel prices, which will come down when fuel prices come down. The other part is the increase in receivables, and that is related to this rerouting of Middle East cargo. 16,000 units, big volumes, spread out on different locations. This volume is from our largest clients, some of our absolutely biggest customers. So we are not concerned, we will not get paid, but it takes longer to process for our biggest clients because this is non-contractual cargo moves with additional surcharges and so forth. So the increase in receivables at the end of the quarter is related to those Middle East cargo moves and wasn't paid at the end of the quarter, but it's largely paid today.

Thank you, Espen. The second question, surcharge lag. For this quarter, we highlight surcharge lags of five to six months. Isn't that somewhat longer than the previous commentary about one quarter? I think for these questions, I can just take it. It's consistent with our previous guidance of social acts of fine six months and it's a combination of the two main factors. It's the time-lapse nature of the bath where the price is based on the previous quarterly price and the prioritization effect. Do you want to add something more?

Basically what that means is that we load cargo and invoice and it takes a while before actually the work is fully done and the actual BAF revenues is prioritized over that period while it's invoiced separately.

Yes, and the next question is about capacity. HRK added two chapters for the quarter. How is the view on capacity needs going forward with regards to the contract backlog?

I think there are two answers to that. In terms of the contract backlog, we are largely covered. In terms of the market opportunities, we will clearly at all times be looking for additional capacity because we have good opportunities to put more capacity to work. But we will, given our... Thank you, Andreas. Contract renewals. Can we say a little bit about the sentiment and dynamics in contract renewals this year compared to last year? Can we say a little bit more about the written level and directions and the duration we are seeing? I think it's a fairly simple, maybe a bit complicated, but I think when you also looked at, if you go back to 2024 and 2025, you've had an environment where we expected The new bill delivers to catch up with the demand growth. And I think the kind of contracting market was probably more in a less for longer mindset. We're now in a situation where the capacity market is tightened. The availability of leased or chartered tonnage is both limited and very, very expensive. and a lot of our Asian customers simply have uncovered transportation needs, going into containers and chasing solutions. So the dynamic is fundamentally changed. and it's more back to sort of the earlier days. So it is changed and it's mainly driven by the fact that there is large uncovered transportation needs. There is more cargo going into containers. There is not sufficient rural capacity on offer and there is no easy way to get it through the charter market that changes dynamics quite substantially.

Thank you, Andreas. And the next question is about the spot exposure. Hög Autoliner has previously been successful with a somewhat higher spot exposure during time markets. So could this be a strategic play going forward, given the time market? Or will we continue to pivot toward a longer contract?

First, I think right now we would have wanted to have more spot capacity, yes. But I still think over the cycle that we have spent the last couple of years building strong relations with our existing large customers and also a number of growing customers. and we believe in our business that that is valuable. So we will continue that strategy. So I don't think we will seek to go back to a higher spot exposure. We are very pleased with our new build for creating capacity. We are, I mean, which I think is also indicating some of the tightness on the market. We have chosen to do 30-year class renewal on a couple of vessels, which is something that we generally do not like to do because of both the fuel efficiency and the cost of those vessels. So we are obviously actively chasing capacity. The good part is that with the exceptional performance of the Aurora class, we are still managing to provide market leading performance in terms of reducing our carbon footprint and efficiency. But the capacity game is basically Rather closer to where it was two or three years ago, while the last year and a half, I think it's been colored by the expectation of the market balance on capacity softening, which has sharply reversed during the first half of 2026, obviously changing the market dynamics substantially.

Thank you for the elaborately answer, Andreas. And the next question from analyst Oliver Dunvall, ABGSC. It's about operations. So with extreme export growth of Asia, are we seeing an increased port congestions in the West? Are the terminals able to handle all the volumes?

I mean, I would say generally yes, but I mean, I think there's more, I mean, and the port congestion issue, if you say, is more a question in the disruption in the Middle East is creating a huge appetite for alternative routes where you don't have the structure and you don't have, that one is... is challenging and remaining challenging. The challenge of actually serving the Middle East market is remaining. And obviously port congestion is increasing with the larger volumes, but I think it's mostly related to Middle East being a fairly substantial market, not being able to be served through the traditional developed port infrastructure is creating ongoing challenges.

Thank you, Andreas. Yes, and the next is a question from analyst Jørgen Leon, DNB Carnegie. We already answered in details about the stickiness of the higher networking capital and the TC high-end capacity market, so that's why we're not going to ask this question again. The next question is about the outlook of Q3 EBITDA in line with the current quarter. This saying is implying that the underlying numbers of the Q2 costs you guide for the Q1 report, mainly the 20 million Q and Q fuel costs and 10 million Q and Q Middle East disruption costs, is still extending into Q3. Can we elaborate about the in-line guiding of the Q3 EBITDA?

I think we in the first quarter regarded that we would have a 20 million impact from fuel and we had the 22 million net fuel impact so that was according to our guidance and line performance improved somewhat so we came in ahead of our guidance and we have been able to invoice all the additional costs related to this derouting to our clients and I think we also were very prompt to handle this disruption actually being able to grow volumes from the first to the second quarter. But I think we have been very clear that when you have a spike in oil prices, that takes five to six months. So it takes two quarters for us to come through the P&L fully. We have a 95% recovery over time, but it takes five to six months for us due to the length of our voyages and periodization of results. That's why we're saying that we have full BAF recovery within Q3.

And I think if you add to that, I mean, I think the guiding, which is, I mean, first, we're always careful of guiding exactly on working capital, because that's obviously difficult on a specific date. But what we are clearly saying is that, you know, by the end of third quarter, we're back to normal run rates, both in terms of EBITDA and Cash, and we're saying that cash conversion is improving faster. But the drag in Q3 is pretty much driven by the fact that we start the quarter in a still somewhat disrupted environment, and we end the quarter in what we basically call normal performance. and that obviously colors the average, the full number for the quarter.

Thank you, Andreas and Espen. For the next question, I guess we already briefly touched up on it, Andreas, during the answer for the capacity market question. But given the stronger market outlook, does this change our ambition for fit size in the future?

I mean, I think we will, given the strength of the market and actually also given the kind of aging of the current fleet, the global fleet and our fleet, you know, we are seeking capacity addition and capacity renewal opportunities. But we are very, very strongly committed to retaining an industry leading cash capacity cost because we believe The company and their shareholders best in long term. So we will have a very disciplined approach, but we're clearly, you know, we will hunt for capacity, but we will not, you know, commit ourselves to long term high charter costs.

Thank you, Andreas. Yes, and the next set of questions coming from Climate Mullings from Value Investors Edge. First, could we compare the cost basis of shipping cars by container versus using row-rows? And how much less efficiency using containers compared with using a traditional row-row vessels?

We have had that in a couple of, I think, some quarters ago, but what we have seen without sort of giving the exact numbers is that, you know, when... When rates for rural is excessive, for incremental cargo being substantially ahead of the kind of rate level that we report today in our system, and also when rural capacity is simply not available, you see volume drifting into containers. It happened after the pandemics in a fairly strong way. What we're seeing is that when at rate levels at or definitely lower than what we report today, these volumes and with availability or capacity, those are coming back. and it's partially a pure cost calculation. It's also a question that we had sort of discussions with. I did actually visit the port of Barcelona towards the end of last year that told the story of the additional land-based costs where during the pandemic, massive car imports came in containers. and there is simply no infrastructure to handle the unpacking and things around it. So it's partially the pure transportation cost, but also a sort of supply chain cost that makes At least on any large flows of cars, you know, most all of our customers strongly prefering rotor over container as long as the sort of pricing is not totally out of line. Then obviously if you have 10 cars going somewhere, then containers might be fine. But if you have 3,000 a month, it's simply quite cumbersome. And, you know, most of our large flows and most of our large customers are more in that territory.

Thank you, Andreas. Yes. And the next questions. With car manufacturing margins in China severely under pressure, to what extent do we expect continued export growth versus capacity regionalization? Are the export margins much higher than the domestic ones that could lead to the continued growth?

I mean, I don't think we have full transparency on that, but we have strong indications clearly that the export margins are substantially higher. And we had that discussion when tariffs were introduced, where the messages we got from And I think you also see, you know, the car exports, you know, growing in more markets. So it sort of get that sort of diversification out of it. You see also see high and heavy and equipment growing, creating sort of a broader, broader cargo mix. but I mean I think it would be exceptional if the Chinese growth should continue at the current pace. I think we do expect that some production will be shifted closer to market and some of those kinds of things but for us it seems like I mean looking at the Volume Aspirations, both of our automotive customers and the high and heavy customers, we believe the likelihood of continued growth is still high. So the situation is positive and product price point margins, as you said, is is supportive to that and that also comes in the sense that we are a bit surprised because you know the Middle East has been a high growth market also for Chinese cars and that has been choked by lack of transportation options and you've seen this kind of exceptional growth regardless of that so I think there is also still opportunities on on adding additional markets, whether that's Africa, other parts of Asia, South America, Middle East, and then broadening the product mix, probably offset by some localization of production to, for example, Europe, where volumes are high. And still the market share is still, I mean, it's growing rapidly. But it's still not so high that it's necessarily some limits to it. But we don't expect the first half growth rates to continue. And I don't think that would be almost even possible to serve from our point of view.

Thank you, Andreas. Yes, and the last question is about the fleet ambition. It's already addressed in full by Andreas earlier, so I'm going to just skip these questions. And I think that brings us to the end of the Q&A session today. And of course, if you have further questions, feel free to reach out to us via investor relation mailbox, and we will address that question to you later. Thank you very much for your attention today, and we look forward to seeing you next time.