Höegh Autoliners ASA (HAUTO) Earnings Call Transcript & Summary

[Presentation] Good morning, and welcome to Hoegh Autoliners Second Quarter Presentation. My name is My Linh Vu, Head of Investor Relations. And with me today, we have our CEO, Andreas Enger; and our CFO, Espen Stubberud, who will present you with the last quarter business and financial update. As usual, we will have our Q&A session at the end of the presentation, and you can ask questions by sending an e-mail to our Investor Relations mailbox at [email protected]. And so without further ado, I will leave the stage to you, Andreas.

Thank you, My Linh, and welcome to our second quarter presentation. We are pleased to present yet another strong quarter and yet another high, good strong dividend payment and also another vessel sale that was just concluded. And our quarter has an EBITDA of $166 million, which is up 7% on the previous quarter. Net income of $124 million. That's down, but adjusted for the gain on the sale of Hoegh New York, which was completed in the first quarter. Also, net income is up. We have a flat growth rate. We are -- have declared a dividend of $137 million. We have taken delivery of 2 more Aurora class vessels, Hoegh Sunrise and Hoegh Moonlight. And we have a continued strong equity ratio of 54%. Strong numbers across the board this quarter as well. And I'm going to go through a little bit on the market. And we have, this quarter, I think, seen a larger variation of estimates from analysts. And it seems like our monthly report is not fully delivering the picture. We believe that has something to do with fully understanding our capacity and market strategy, and we're going to go a little deeper into that to make sure that we get that fully communicated with the benefits, but also some of the associated costs. We have, for the last -- all the time since or even before the IPO, had very, very strong focus on managing the cycle. It started with launching the newbuild program that actually triggered the IPO to basically serve the need for fleet renewal and also future-proof our fleet with fuel flexibility. We went on and captured the opportunity of doing a very forceful repricing of cargo and improved contractual terms when the market became tight out of the pandemic. We have built a duration and extended our contract backlog to secure earnings through the cycle. We're going out of this cycle with a historically strong contract backlog that has further improved during the quarter. We are -- and I think that is the important point. We've been -- decided to actively divest noncore vessels during the peak to basically capture that value and also benefit from early deliveries of newbuilds. And we've also decided to go overweight cargo versus our carrying capacity in order to use this opportunity to create a strong backlog. And as an implication of that, we've also taken on short-term capacity to balance out our system and in order to preserve the quality of our service to customers. And in this quarter, that has added some costs because we are basically selling vessels that are fully depreciated, and we are chartering in at short-term charter rates, TC rates that have come substantially down, but it's still higher than the capacity cost in our own vessels. And during this quarter and as a part of that, we have also had a fantastic growth in volume out of Asia, 47% since the second quarter of 2024, while the volumes out of the Atlantic is largely flat. We have made a conscious decision to serve that market and capture those cargo backlog opportunities in Asia, which, over the cycle, is normally the most attractive market in our business. And as such, we are also accepting a larger imbalance, meaning that with more cargo coming out of Asia than out of Atlantic, it's basically more ballast voyages that have some impact on the capacity side. Looking at the charter market. We believe, in many ways, that the second quarter has, in many ways, for us, at least, confirmed our strategy. We expected the charter market to come down. It came from a level that was almost twice or was twice our -- the TC income in our system, and we haven't chartered any vessels during that period. We managed -- we did shrink. We did manage around our own capacity to maximize value. The market -- the charter market is normally the first to respond on the normalization of the capacity balance has come down substantially. We basically expect that market to go further down. And the second quarter has been the first quarter in this cycle where we can actually charter vessels and turn them around and cover the cost in our network. But it also means that some of our marginal capacity, for the time being, is basically serving substantially lower margin. That will, in our prediction, improve when we get first delivery of further newbuilds that comes in with a substantially larger small, lower cash capacity cost than the -- also the current charter market, but also as the charter market will be hit first by further newbuild deliveries. So this is a -- for us, a very conscious decision on -- and some choices on what we believe is the right way for us as a company to play the market in order to maximize value to shareholders, but also to create a more robust backlog into a different market, but it comes with some costs during a transition period until we get to newbuilds and until the time charter market fully responds to a new capacity situation. And just also to reiterate the capacity strategy, we have sold 4 vessels previously. And I commented before, those vessels are sold at the price per capacity that is fairly similar to what we actually pay for newbuild, much larger, much more efficient vessel with dual fuel capabilities and more than 50% lower carbon emissions, also substantially lower fuel emissions. We have, therefore, decided to continue that run. And we have -- we just had just decided sale of agreed the sale of Hoegh Beijing going to be delivered in September at a price of $43 million. That's a midsized vessel. And that is a further step on that capacity management. If we summarize that, we have now sold a total of 5 vessels, aggregated capacity, a little less than 30,000 CEU, proceeds of almost $290 million. They have an average age of almost 18 years. We have, at the same time, acquired -- that's lease and purchase options on leases, a large number of vessels being substantially younger with an average age of 12 years with almost 60,000 CEU and a cost of $315 million, which we believe is a very good exchange. And if you look at Hoegh Beijing, in particular, we acquired that vessel in -- at -- in 2022 at $22 million, almost 5-year younger at the time, and we're selling it now at $43 million. And obviously, after having had a very good ride of revenue generation and profit generation with that vessel during that journey. So in a way, so just to summarize, this is a core part of our strategy, managing capacity. It -- we believe it has given a substantial improvement of our fleet quality, also adding -- we now have taken delivery of 6 newbuilds. It's a dramatic modernization. We have freed up lots of capital, and it has allowed us to continue to pay extraordinary strong dividends. And in that context, I think we should also reiterate that we have a dividend policy of paying out free cash flow that has included and will continue to include paying out net proceeds from asset sales. That strategy is based on the fact that we are fully invested for the cycle with newbuilds. We have established a very strong balance sheet. We have a very competitive capacity costs going into the next stage of the cycle. And we believe it is prudent to basically return surplus cash to shareholders in this stage of the cycle. So just to sort of clarify that whole thing. And again, that strategy comes with higher dividends. It also comes with some added costs until, as I said, we either get more further newbuilds, we get 2 more newbuilds delivered at the end of the year with cash capacity costs substantially below the current TC rates. And as I said, we do expect the TC rates to come down as more newbuilds are delivered in the months and years to come. Another [ share ] was, I think, at our last quarter, we were at the time of maximum uncertainty in terms of tariffs and port fees. In our previous presentation, we basically said that this was unclear, and it was hard to make any firm decisions based on a fairly transparent and unknown process. That process have settled in many ways. Tariffs have been negotiated down. And for most of our products, most of our trades is now down to 15%, substantially lower than what was announced at the time of our previous presentation. Port fees has also come down to a level. And so that is -- that has, in many ways, stabilized the market. It has created a situation where we believe the disruption of sort of near-term trade flows is going to be small or to some extent, almost nonexistent. But I also think it is naive to believe that higher tariffs and higher fees, higher cost of transportation will not impact the market longer term. But right now, we are in a situation where things have stabilized. And we have a strong current performance. We have a strong outlook, and the system seems to be working well. We will look closely at it. There are probably going to be changes, probably going to be deals done, but that's one item that I don't think we can -- are particularly well positioned to guide on. It is a much more uncertain environment. We are working carefully on adapting our business at any time. But as we speak, the biggest change of our biggest imbalances and biggest challenges to our system is that the fact that the growth in volumes out of Asia is not fully matched with return trades out of the Atlantic create some more imbalances in the system that we have decided to absorb in order to be able to continue to grow our contract backlog. USTR, again, started with some very dramatic, very dramatic proposal, particularly for car carriers being harder hit than any other segments. There's been lots of discussions, lobbying. We have support from authorities, international industry organizations, customers and others. And the fees has come substantially down, but it's still a substantial feat that we believe is not in the best interest of our American customers and the American consumers, but we will find a way to deal with it. We are working closely with customers on ways to mitigate and reduce the impact for us on those charges. And then reiterating the contract backlog. We have further increased our contract share during this quarter. We have added additional contracts. And we have, again, a very strong backlog for the remainder of this year and also into next year. And the average duration in our current backlog is 3.3 years. That's a bit on our business and capacity and where we are in the cycle and how we respond. Talking about sustainability, we also see big changes. The whole range of initiatives we have on reducing our carbon footprint has led to substantial improvements this year. It is a combination of a very focused program on upgrading, improving performance on our older vessels. It is about actually letting go of some of the weaker fuel performers. It's about using biofuel. But I think also very importantly, it is about having taken delivery of 6 of the most fuel- and carbon- and also cargo-efficient vessels in the industry with the Aurora class, which has been a big contributor. So we are now seeing after some fairly stable periods, the needle is starting to move on our carbon intensity, which is -- we are very pleased with. And again, 2 more of those vessels delivered. We had a fantastic naming ceremony with customers in Japan for Hoegh Sunrise in May. We took delivery of Hoegh Moonlight in June. And there, we will have -- that vessel has been on a fully loaded voyage from Asia to Europe. And we will have a naming ceremony again with customers in Gothenburg in a couple of weeks. So we are very pleased with the program. It's ahead of schedule. We have 2 more vessels coming towards the end of the year. And we are then starting diving into the dual fuel ammonia capabilities from 2027 onwards on the last 4 vessels. We are also working on the entire value chain. And during the quarter, our new shipping, we have introduced the intention to support the Nordic Circle on a concept to upcycle vessels rather than melting them down. It is something that the aspiration is that it is going to give economics comparable to scrapping. It is a 97% reduction of the emissions compared to normal steel production. And we are working, as I said, closely with Nordic Circle to get together the conditions to be able to take the first vessel through that new and innovative recycling process during next year. So that's an interesting thing also dealing with the end-of-life issues on vessels as there will be more vessels and there will be more scrapping and there will be higher demand on scrapping yards in the time to come when newbuilds come and the legacy fleet grows older. That was my introduction, and then I'll leave it to Espen to take us through the financial updates and financials for the quarter. Espen?

Thank you, Andreas. Turning then to the financials. And our volumes in the second quarter came in at $3.9 million. That's the highest quarterly volumes we've had since we stopped sailing through the Red Sea at the end of 2023. As Andreas already mentioned, we've had strong growth from Asia over the last year. We had a bit weaker volumes from the Atlantic in the trades loading back to Asia in the first quarter, and we're pleased to see also volumes in return trades rebounding nicely in the second quarter. As we've communicated earlier, we took on some new contracts at the end of last year that started in January, and we saw our rates coming down as a consequence in the first quarter. We are pleased to see that rates are stabilizing and marginally up quarter-on-quarter in the second quarter. Our second quarter EBITDA came in at $166 million, that's up 7% on the back of the increased volume. Our EBITDA margin is slightly down to 45%. And there are 2 main reasons. One is the imbalance mentioned by Andreas. We have somewhat more imbalance in our network causing slightly lower efficiency and some more ballast. And the second reason is that the relative cost of the added short-term capacity is higher for parts of the volume growth. Net profit before tax came in at $124 million. That's also up 6% quarter-on-quarter, adjusting for the net gain of Hoegh New York in the first quarter. Looking at the EBITDA bridge. As mentioned, we had lower rates affecting the first quarter performance. And going into the second quarter, we have an increase in the top line of $38 million. And the increased activity comes with higher costs related to fuel voyage and the charter expenses, and we end at $166 million. I think just emphasizing, as Andreas also covered in the beginning, but the short-term capacity that we've taken on, it's creating value for the long-term agreements that we have taken on. And all the short-term capacity that we have taken on can be redelivered before Christmas and serve as a bridge capacity up to 2 more newbuilds that will be delivered at the year-end. We have a robust balance sheet. We saw net interest-bearing debt increase up $167 million in the quarter as we took delivery of 2 newbuilds in the second quarter and also paid installments on 2 subsequent vessels. Book equity reduced -- equity ratio reduced to 54%, but still very solid. We ended the quarter with $204 million in cash and also have undrawn facilities of $219 million. So that's another strong quarter for us in terms of cash generation. We had $153 million from operating activities. Seemingly, we have an increase in working capital. This is not correct. It's related to the fact that we don't have any short-term liabilities for withholding tax at the end of the quarter. All the first quarter dividends was paid in the second quarter. We also had $16 million related to dry docks and other CapEx. We had $26 million net proceeds from the 2 newbuilds delivered in the second quarter when then we had normal payments for debt and leases and paid out $158 million in dividends, ending then at $204 million. So we have -- we are pleased with the start to the year. We are -- I'm particularly happy with the growth we see now into the second quarter, and we're happy to declare a payment of $137 million to be paid in September. We now paid NOK 84 for over the past 3 years. I'm going give it back to Andreas for the outlook.

Yes. And I think there are 2 things to mention on the outlook. One is that we are still in an environment where tariffs and port fees is key. It's coming to a much more manageable territory, but it's still not good for the business over time. And we are looking carefully, although we don't see much short-term effects, tariffs and additional fees, could result in lower volumes transported, and we're watching that very carefully. U.S. port fees will be introduced as of 14th of October. The gross annual cost for us could -- would be about $30 million. But we are working both on our capacity planning and management of trades and with customers to mitigate that impact without exactly knowing the outcome of that. And we expect the Q3 EBITDA -- actually, I think we've said this in line with the first half, not the second quarter, but we are continuing -- we basically believe in a continued strong performance driven by a continued good market and our very attractive contract backlog. But there will be, due to our capacity management strategy that I previously said, some additional charter costs in order to serve that volume and to deal with the imbalances that we basically will try to wash away as we can get more attractive charters and more importantly, very efficient newbuilds that are continuing to come on stream. So that ends our presentation. So then I guess we're open for questions, My Linh.

We received a few questions from our online audience. And the first question is from an online audience. What would be the prospect for dividend given that now market is entering a new cycle?

And the prospects for dividends is, I think we have carefully assessed -- we did a thorough analysis, resilience analysis, actually in the first quarter when market uncertainty, I think, was at a very, very high level. And at that point, we confirmed, reconfirmed our dividend policy of paying out the free cash flow. And we have, once again, during our discussion now, I think I said it initially, are reconfirming that our dividend policy is to pay out 100% of free cash flow. And it will include proceeds from sales of vessels. And we do then expect the sale of Hoegh Beijing to complete during the third quarter. So that is no change to our dividend policy. It's basically reconfirmed and will continue.

And the second question from analysts, [indiscernible] from [indiscernible]. Volume growth in Q2 came stronger than anticipated. What are the key drivers? And how do you see the trajectory for volumes in the second half of 2025? I guess for the first part of the question, I just echo what Espen already mentioned. We have seen good support of cargo ex Asia, and then we see a nice rebound cargo ex Atlantic as well. And it's really reflecting our strategy to go long in cargo. And for the second part, for cargo trajectory for the second half of 2025, do you want to comment?

I mean I think we've said that. I mean, we have taken on additional contracts. We have -- we are going long cargo. So we expect cargo availability to be strong. We expect the original imbalances to continue. And we are basically working on converting our backlog and capturing additional opportunities in what we can continue to see as a strong market.

Thank you, Andreas. I think that's all the questions we have for now. And everything is loud and clear from the presentations. But thank you for watching. And of course, if you have more questions, feel free to reach out to us and just send an e-mail to our Investor Relations mailbox at [email protected]. So thank you, and we look forward to seeing you next time.