Ernst Russ AG (ERAG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and a warm welcome to the first Deutsche Boerse Scale Summit. My name is [ Ingmar Gratenrade ], and I'm very pleased to welcome you on behalf of Deutsche Boerse. This new format brings together investors and high-growth scale issuers to enable a direct exchange on strategies, positioning and investment stories. Each presentation will last 20 minutes and will be followed by a 10-minute Q&A session. We warmly encourage you to actively participate in this discussion. With that, I'm pleased to welcome Joseph Schuchmann, Co-CEO and Chief Operating Officer of Ernst Russ AG, who will guide us through their presentation. And with no further ado, I'd like to hand over to you, Mr. Schuchmann.

Thank you. Good morning, everyone, and thank you for joining us here at the very first Scale Summit. A warm thank you goes to Deutsche Boerse and especially Jacqueline and team for organizing this event. My name is Joseph Schuchmann. I'm the Co-CEO and actually Chief Commercial Officer, not Operating Officer but that's fine, of Ernst Russ AG. So what I'd like to do today is take the next 20 minutes to introduce you to our company: who we are, what it is we do and how we structure our business. We are a lean tonnage provider with a clear preference for long-term charter contracts. And we -- this is not correct. And that gives us clear preference for long-term charter contracts and gives us revenue visibility. A significant share of what we'll earn in the next years ahead is already contracted today. Secondly, what have we been up to lately? Phase 1 of our transformation is almost completed. The modernization of our fleet is well underway, and our latest quarterly numbers really underscore that momentum. Thirdly, where are we headed? What do we see for the rest of the year and what is our long-term vision? After the presentation, as mentioned, I'm happy to take questions. So let's dive in into what we are at Ernst Russ. What do we actually do? Ernst Russ is a tonnage provider. In plain terms, that means we are a shipowner. We supply vessels to freight companies who charter them from us, rent them from us, and they use them to move their customers' goods from A to B. So we are a flexibility provider. We offer 2 kinds of flexibility. The first is operational flexibility, meaning our customers can scale their capacity up and down without owning the ships themselves. And the second is balance sheet flexibility because through long-term operating leases, they can grow without tying up their own capital. Our model, as you can see here, is deliberately clean. We concentrate on what we do best, which is investments, commercial management and ship financing. And we outsource all the rest: crewing, maintenance, insurance, the day-to-day operation of the vessels. All that goes to a small group of trusted partners, and we sort of operate them in quality assurance. The way the money flows in this construct is quite simple. Our customers, the freight companies, pay us a daily charter rate for the use of our ship. And they, in turn, earn a freight rate from their own customers. So if you want to take an example, if you ship a container with Hapag-Lloyd, you pay Hapag-Lloyd a freight rate for the transport of that container. And if we happen to have a ship with Hapag-Lloyd in charter, they pay us a daily charter rate for the use of that vessel. This is deliberate. So the charter rates are less volatile than the freight rate business, and that's why we think it's a good spot as well for the Deutsche Boerse to have exposure to the less volatile charter market. Turning to the fleet that we have today. This is as of our most recent reporting at the end of March. Back then, we had 26 ships on the water. The second one of the new multipurpose vessels joined in April, so shortly after this reporting. And we have a further 6 vessels incoming in our acquisition pipeline. It's been a busy 3 months. Last quarter, we completed the acquisition, as I said, of 2 multipurpose vessels. This is deliberate in terms of diversification. Both are on 7-year time charters. And since we've had one other multipurpose ship before, this is an expansion of that segment. And then a few months later -- a few weeks later, actually, we announced something that we are particularly excited about our entry into the chemical tanker segment with 4 intermediate tanker newbuildings. They're all secured on fixed charters of at least 5 years, and they will deliver end of this year, beginning of next year. This is actually quite a good milestone for us because the tanker segment is historically least correlated to the container segment where, as you can see, we have our major exposure as of today. So this was fully in line with the diversification strategy. We don't only buy. This is important to understand. We are active portfolio managers. It's at the core of what we do. So end of May, we announced the sale of one of our older container ships, the EF Emira, and that one disposal is really about 3 things in total. It brings down our container exposure a bit. As mentioned, we are quite heavily exposed to the container segment at the moment, and we are diversifying away from that. It renews our fleet. We are selling older tonnage and buying younger tonnage. So we try to actively manage the average age of our fleet. And it was a joint venture ship, and selling joint venture ships or buying out joint venture partners has been something that we've been actively managing the last 1.5 years because our joint venture fleet really is not at the core of what we do going forward because our structure with our new capital market strategy needs to be a lot simpler than it was before, but more on that later. This allowed us to raise our EBIT guidance as we did a few weeks ago. And taken together, these moves show that we are executing our growth strategy quite diligently. And we're actually doing this with a good deal of speed and more importantly, with discipline. So there's ships and prices that we sell at, and there are ships and prices where we buy at, and we are trying to do this in a very disciplined manner. Considering all of our ships together, we are looking at a market value of around $586 million and an average age of 17 years. And we are obviously looking, as I mentioned before, to bring that down a bit, actively manage the average age of the fleet. Our average charter rate sits at $19,500, and our utilization is quite strong at 99.8%. So the utilization is the amount of time that we spend earning the hire and not using it for maintenance or other, let's say, extracurricular activities that we are doing where we're not earning any hire. So 99.8%, obviously, quite strong. This is the predictability. So we have solid assets. They're fully employed and they're steadily generating cash, which is good for our shareholders. The markets we operate in, well, historically, as I said, mostly containers. This is a new slide that we've implemented from our diversification strategy. And what it shows is really interesting. As you know, the last 1.5 years were quite volatile in terms of geopolitics, in terms of fiscal policy, in terms of all kinds of things that influence international trade and shipping in general. And you see that the 4 sectors that we operate in have fared quite differently under these circumstances, which is exactly the point of our diversification strategy, so that we are not dependent on one single sector. As you can see, the lower bars, the chemical tanker and the MPP Index, have been faring flattish or even down a bit. This is exactly why we have now entered these sectors because the underbuilt sectors that possibly haven't been performing just as well as the container bulkers for the last 1.5 years, but we see real structural momentum there for the next 5 to 10 years. Shipping for the last 1.5 years has been very heavily influenced by geopolitics. The most important for us in terms of the financial impact it has is the closure of the Red Sea. This has various reasons that the Houthi rebels are shooting at ships. They mostly do that despite the Israeli and American forces. And the closure of the Red Sea has effectively led to most ships circumventing the Cape of Good Hope. And as you can see, 10 million TEU have been rerouted. This is very significant numbers. And if ships need longer to get to where they need to go, this reduces capacity quite a lot. And if you reduce capacity, the prices usually go up as the international trade actually keeps growing. Recently, of course, there was a peace agreement. This situation, as we see it, is quite fluid, and it's not at all yet determined that we will go back to full normal. Even if we do go back to full normal, a mess of this proportion usually needs quite a long time to figure out. So there will be congestion in the ports, there will be delays, there will be confusion, which is really the -- maybe the word for the last couple of years. People have not been really acting decisively and haven't been planning long term for their business because the world has become so volatile. And if you do not plan long term and don't go for the most efficient mode of transport, this lack of efficiency usually reduces capacity and the reduction of capacity is really where our prices go up. So what we've done since we took over 1.5 years ago, we've tried to implement a very clear capital markets story. That's why we are here today. And what our strategy is, is that we want a diversified portfolio. We want to increase the visibility of cash flows for our shareholders. And how we do that is we increase the backlog that we have contracted and we increase the length of the charter parties that we enter into. The Rome Express, as you see above, is our largest ship. We recently entered into a 7-year contract. Ronnie down there and her sister, Charlie. We also bought and now on a 7-year contract. And then these new 4 tankers will be on 5-year contracts, and we have 2 other newbuildings in the container space coming with 10-year contracts. So you see there is a clear path on what we're doing and the graphs here, I think, speak for themselves. Coming to the financial KPIs. First quarter was quite on point. We will report the full half-year figures on the 25th of August. So headline figures for the first quarter: EUR 37.8 million of revenue. We did have EUR 40 million a year ago, and we do have to see that in context where we sold a number of ships last year. And now we are actually on a per ship basis on a better footing because our average charter rate has actually gone up. Also, the 1-year comparison, as you see on the EBITDA and EBIT, needs some explanation. As we were selling these ships, we were taking one-off gains from vessel sales. And since then, we've been running on a smaller fleet, fewer trading days, so have actually been increasing our charter rate quite a bit. The underlying operating picture is quite strong in the first quarter. Daily charter rates rose again by about 16% and earnings per share now stand at EUR 0.33. What we are particularly proud of or what is really important to understand about our company is the debt-to-equity ratio. As you see on the bottom, it's quite healthy. We actually did a bit of releveraging last year on one of the deals we did because we do understand that having virtually no debt is maybe also not the most favorable way to go. But we will use this virtually debt-free portfolio that we have to fund new acquisitions. And as I said, we've already been doing that this year and last. This quarter has led us to increase our guidance on EBIT because, as I said, we've also been selling one ship, the EF Emira. The upward revision from EUR 34 million to EUR 44 million to now EUR 45 million to EUR 55 million. And this is for us, really, just a testament of that we are on the right path. We are actively managing the portfolio. We are releveraging a bit. We're doing new projects. So quite happy with that. When you look at what we are actually trying to do here, Ernst Russ historically has not really been very active on the stock exchange. We are trying to revitalize a company that is in a very healthy state. Phase 1 of this was started about 1.5 years ago. And this is a phase -- transformation phase that we are now slowly exiting. What have we done? We've sold a lot of older ships last year. We are continuing to sell older tonnage. We are actively managing the existing portfolio in terms of how many counterparts do we have, how strong are these counterparts, how long are the charter contracts. We are increasing our Investor Relations activities. We've increased the number of analysts that follow us. We are actively now engaging in formats like these. And this is really -- we are actually seeing quite a lot of benefit on that already. So these enhanced capital market activities have been generating some attendance, and we are actually quite proud of that because shipping in Germany is quite a niche segment. We have to reduce the complexity of our share. When we started, we had about 4 ships that Ernst Russ owned completely outright. And this has been increased quite a lot. When we have joint venture ships, we are really down to 3 parts of what we are able to do. Either there's a third party who is willing to buy the ship at a price that both joint venture partners feel is attractive, then we are selling the ship. We have done that last year. Sometimes the joint venture partner, let's say, has a brighter future in mind for the ship than we do, and then they can sell us -- buy us out. And sometimes we buy them out if we see that we have contract coverage to match our ambitions. All of these 3 things we've done. And really, what this has done is it has increased the earnings per share power that we have in the company because we want shareholders to actually know what exactly it is they're owning, and we want them to see that quite clearly in a simplified structure. Exiting this phase, we are now entering a phase called, or we call it disciplined growth. We've ordered some ships. We've done some new deals where we are further, as I said, reducing the number of old ships we have in the fleet. We're broadening our investor base. We have recently, or our largest shareholder has recently, placed some of its shares to reduce their shareholding from 75% to 72%. This, I think, is something that we are aiming to do a lot more of over the coming years, where we actually increase the trading in the share, increase the liquidity and increase the free float. This all will be capped off by a more international, more -- or a structure that is aimed at higher markets. The IFRS reporting is being implemented, and we are really focusing on coming from this very unlevered state of a company to go lever the company a bit, but stay disciplined in the shipping industry, which is really what it's all about. Our portfolio approach with various counterparts, various segments and various lengths of contracts will deliver very attractive risk-adjusted returns. We are aiming, and this is now our vision to become a leading, listed European shipping platform. We are aiming to do this from Germany, and we are actually aiming to capitalize on the niche that we are in, in Germany because in essence, our P&L structure is very, very simple. Our ships have a charter rate. And this -- the utilization they have is the number of days they are actually able to capitalize this charter rate. They have daily operating expenses, and that's the EBITDA. And if you just have a number of ships, you can multiply that with each ship and then you are right where you want to be as a shareholder. Just quickly, this is where you can meet us next. And I think now I'm 1 minute over time. So I'm happy to take some questions.

Great. Thank you very much for the presentation. [Operator Instructions] So we get to [ Mr. Samatora ]. What percentage of your fleet is already chartered for the next 12 months? And how sensitive is your EBIT to potential 10% to 20% decline in charter rates?

Thank you. Maybe I just go to -- no, actually, this slide. I need to close this. I can't see because the questions are in the way. Sorry. So as you see here, our guidance of the revenue is EUR 145 million to EUR 160 million. This is for the full year. Thereof, contracted is EUR 147 million. You could wonder why this gap is so wide. This is mostly due to the euro-U.S. dollar exchange rate. So basically, most of our contracts for this year have been already contracted and that revenue is basically locked in. So now it's about the utilization on how much of that locked-in contract value we can actually get into our books. In terms of this year, so in terms of the next year, this is really the development you should be focusing about because this is the average length of contract. So this is the optimized charter durations. The chart here is really the important bit. We are continuously expanding that. And a 10% to 20% drop in charter rates obviously has an impact, but it will have a staggered impact as the contracts are running out. If you go to our website, there is -- or our quarterly presentations, you will see the maximum dates of the fleet. So this is when the contracts are running out. So an impact of the charter rate market, let's say, will only come in as the ships come off charter. So this is why we are really increasing our long-term coverage to give investors more visibility so they can actually -- or they don't need to ask that question because they see for the coming years pretty much what's ahead. Hope that answers the question.

And we move on to a participant, Mr. Christian Bruns.

Can you hear me now?

Yes.