Höegh Autoliners ASA (HAUTO) Q3 FY2025 Earnings Call Transcript & Summary

[Presentation] Good morning, and welcome to Höegh Autoliners Third Quarter Presentation. My name is My Linh Vu, Head of Investor Relations. And with me today, we have CEO, Andreas Enger; and our CFO, Espen Stubberud, who will walk you through the last quarter performance. We have a Q&A session at the end of the presentation, and you can ask questions by sending e-mail to our Investor Relations mailbox at [email protected]. So with that, I will leave the stage to you, Andreas.

Thank you. Opening this presentation with a photo of beautiful Höegh Moonlight at the quay in Gothenburg, where we had a naming ceremony while loading cargo together with valued customers in Gothenburg. This quarter, we are once again presenting a strong result. We have a good -- have good underlying earnings and profitability driven by our strong contract backlog and an operation as previously noted, we have some more imbalances than others, but fundamentally, we're running full vessels out of Asia and are basically serving customers to the full and executing our backlog. I will open this presentation to basically respond to an issue of a slight change in the payment schedule for dividends that may require some explanation. And I want to do that by starting with reiterating how we operate as a company. We have focused a lot on creating value through the cycle by building backlog, focusing on a cargo strategy being overweight cargo. We have basically operated in the market now there is persisting market imbalances with strong growth in Asia, not so much opportunities elsewhere in the world. Charter market is starting to provide opportunities for short-term capacity, which we are using at the cost to develop our -- and be able to maintain a strong backlog. And we are now faced with, I think, a totally new level of geopolitical uncertainty coming from things like U.S. port fees and taxes and whatever. And while we are fully committed to remain -- keep our dividend policy of distributing excess cash flow, we have found that the unusual geopolitical situation is requiring a slight modification. And it's really triggered by the fact that the implementation of the tripling of the USTR fees that came a couple of weeks ago has resulted in the biggest change in our short-term cash forecast as long as I've ever been to the company. And that period includes the shutdown during the pandemic where we lost a large part of our cargo share. And adapting to a world where governments choose to introduce or increase cash payable taxes with it in reality, 2-day notice is really putting an extra requirement for securing the cash balance that has made us conclude it is prudent to do a small change. And without going into too much details, but the U.S. port fees, and we don't know exactly what's happening with them and the tripling and the retaliation from China is creating a situation where we suddenly get an additional cost of $60 million to $70 million per year effective immediately. And that is totally unprecedented, and we can have all kinds of ideas and theories of what will happen. But in our financial and liquidity management, I think we'll have to work on a worst-case scenario and basically say that we have to be prepared for these kinds of shocks in a situation where our business is drawn into a geopolitical space where we don't think we belong, but we are still pulled in. But I think I also want to emphasize that this is not reflecting a fundamental change in our business operations. I mean coming to that sort of when we have the guiding for the next quarter, but it is to make our -- make sure that we are resilient to type of shocks that we haven't seen before, not because we have any expectations that there will be further shocks, but we think it's prudent to be capable or make sure that we can handle it comfortably. And -- so what we're doing is that we are reiterating, reconfirming our dividend policy of paying out excess cash. We are adjusting the calculation method that basically results in a one-off and nonrecurbable impact to the Q3 distribution. And the way we do it is simply that instead of paying the dividends based on the running sort of outlook of cash, we are changing it to actually do it on the cash balance we are reporting at the end of the quarter -- in this case, the end of Q3. And that creates, in many ways, one quarter gap in the dividend payments. Just to remind, we have a track record of paying out dividends. We paid out NOK 1.5 billion in cash dividends since our IPO. That is more than 3x the equity value of the company at the IPO. So it's quite substantial. And again, we are committed and we have reviewed our financial resilience requirements. We have concluded that the current strategy, the current cash balance is sufficient and that we intend to continue to pay all excess cash in dividends. But we have changed the liquidity policy from a forward-looking one to ensuring that we actually have that cash balance at any time in order to be robust against those types of shocks. And that then leaves us to the headline figures, $155 million of EBITDA, slightly down. Espen will come into more detail, mostly a result of combination of the imbalances in the system and charter costs to keep up the volume. We have 2 further newbuilds at the end of the year, and we have -- so we are -- but we do -- due to our vessel sales, have a capacity gap to fill that is creating some charter costs in the near term. $132 million profit after tax, $92.3 million in gross rate. And then what we talked about, the $30 million dividend, which is then not related to this quarter's free cash, but produced out of this onetime change in the timing of payouts. We have taken delivery of one purchased previously bareboat chartered vessel, Höegh Copenhagen. It's the last one, I think now we have exercised all the purchase options, and we have a strong equity ratio of 54%. If you take into -- going into the market, I think one very important thing is that shipments from Asia continue to grow and expand despite U.S. tariffs and despite the kind of environment, I said, increased geopolitical risks. So we have a very, very strong activity. It's mostly driven out of China. And as we see it, Chinese growth and Chinese exports of vehicles and equipment is basically continuing to grow. And that is a trend that has been driving this industry for a while, continues to drive it. And Chinese share of exports from Asia or actually even the world is strengthening. High and heavy market is also after some flat years going into a good growth pattern. But again, we have a stronger market out of Asia than we have out of the U.S. and Europe. But the market is generally strong and supportive. We have, as we said, a strong contract backlog being fully booked in 2026. And we have a number of -- and we are continuing to add contracts, although I think both capacity and the market cycle, the big contract renewals for the next couple of years is -- or next year is behind us. But we have signed a long-term significant contract during September with substantial value and a 15-year duration actually. We have a contract share that is now up at 81% and a duration of the backlog of approximately 3 years. We do have rate agreements mostly 1 year fixed pricing, but noncommitted, that is a product that is mostly towards freight forwarders and secondhand vehicles. But -- and we do have sort of long-standing relationships also in that area that basically creates stability. And also reiterating that when it comes to what we call spot, it's not the kind of same cargo in the spot contract. New vehicles OEM business is almost entirely on contract and 60% of the spot volume is high heavy and break bulk, which is cargo that has a different -- has more variability in volumes and trades. Espen, should you take over on the capacity side?

Yes. On the capacity side, there is still a significant order book in the industry. Net fleet growth is up 12% in 2025 and another 8% is expected in 2026. As we've talked to a few times, we have expected the charter market to normalize in terms of pricing, and we are using that market to a larger extent than we have in the past with 5 actually short-term charters in the third quarter. We see pricing is stabilizing around $40,000 to $45,000 for a large ship at the moment.

If I take in a short word on sustainability, we showed you Höegh Moonlight. We have 6 of our newbuilds now in operation. We have had an intense docking schedule, which is sort of somewhat variable, but we had a large amount of dockings of all the vessels in the 5-year cycle in 2025. We do have a committed program to use every dry docking to upgrade existing vessels for better fuel economy and efficiency. We have then taken development of delivery now in total of 6 vessels in operation of, I think, the most -- both carbon and fuel and cargo-efficient vessels on the water. And that is now also materializing in a clear downward trend on our carbon intensity. We're also continuing to use 100% biofuel and have 100% biofuel available as a product to our customers. And we have 3000 tonnes bunkered in the quarter. So we have a continued effort on decarbonization, both in improvement of our existing fleet in taking delivery on modern efficient fleets and obviously, also in our path to zero, looking at future fuel options. And that drives us into a carbon intensity -- clear carbon intensity road map. Just reiterating from 2008 to 2024, we have improved our carbon intensity more than 40%. And we do have a clear path to 0 where half of that -- the remaining voyage is on improvements to sort of non-zero carbon fuel-related improvements. The last half of this in our plans will basically have to be covered by clean ammonia and e-fuels, and we believe we are with that on track to be able to deliver zero-carbon transportation by 2040. With kind of the uncertainties creating by the delay of the IMO framework and others, I think it's also prudent to reiterate that in all our decarbonization efforts, we are ensuring dual fuel, multi-fuel capabilities. And we are 100% committed to be able to offer our customers zero carbon transportation by 2040. We are also committed to offering the option to billing customers on zero carbon transportation before 2030, but we are not underwriting the decarbonization cost of our customers. So it has to be aligned with regulations and the customer demand. And we have the ability to deliver, but we will obviously run our vessels in a matter that is economic and profitable in whatever regulatory market that exists. Then back to financials.

Yes. Turning to the financials. The [ fourth quarter ] volume came in at 4 million CBM. That's up 4% from the second quarter, but up 17% year-over-year. And we are particularly pleased with our volume development out of Asia. The first 3 quarters this year is up 48% last year, so very strong volumes. The volume we loaded out of Asia in the third quarter is the highest volume we loaded since we IPO-ed back in 2021. We talked to it a couple of times that we took on some -- a couple of large contracts at the end of last year at somewhat lower rates to add to our contract backlog. That lowered the rates that came into 2025. But we've seen very stable rates in '25 with a net rate drop of 2% from second quarter to the third quarter, mainly related to changes to cargo and trade mix. Revenues are moving flat on higher volume, quarter-on-quarter. EBITDA is down about 6% from $166 million to $155 million as our operating margin is being reduced. And as Andreas already mentioned, we talked to the increased imbalance this year, basically reduced network efficiency. We also see somewhat lower utilization of our fleet in the third quarter. That's not so unusual, particularly in August when production is closing down, so which is reducing the efficiency somewhat in the third quarter and we're also using some more charter costs as we talked to. Net profit before tax came in at $132 million in the third quarter. That includes the $20 million book gain of selling Höegh Beijing. Turning to the EBITDA bridge. In the first -- from the first to the second quarter, we added revenues of $38 million. And with that revenue followed the increased voyage costs and charter costs, but we increased EBITDA to $166 million in the second quarter. We also added volume from the second to the third quarter of $15 million in revenue. However, that was fully offset by increased voyage costs and charter costs. And with the rate net rate dropping about 2%, we come in at $155 million for the third quarter. Our balance sheet is robust with healthy ratios. We have seen net interest-bearing debt being increased over the last few quarters as our newbuilds have been delivered. No newbuilds delivered in the third quarter, so moving flat quarter-on-quarter. And as Andreas said, we're looking forward to ship -- sorry, #7, newbuild #7 being delivered now in a few weeks in December and newbuild #8 to be delivered in January, which will reduce our capacity cost going forward. Cash balance and undrawn liquidity from our revolver is moving basically flat over the last few quarters. So it's another strong quarter with strong cash generation with somewhat improved working capital, we have $173 million in cash from operating activities. We have $27 million in dry docks and CapEx, which includes $10 million newbuild installment on vessel #7 -- we have $42 million in proceeds from selling Höegh Beijing in the quarter, and we've drawn $46 million in debt, that's the $10 million for the newbuild installment, and it's $36 million for the purchase of Höegh Copenhagen. That was -- the purchase option was exercised in the first quarter, but the delivery took place in August. Then we had normal mortgage repayment and interest of $31 million, and we paid leases of $43 million, which includes the purchase of Höegh Copenhagen. And we paid dividend of $137 million, ending then the third quarter with cash of $230 million. That only leaves us with the outlook. And I think we need to have -- we need to put in the cautionary note that tariffs may, over time, lower volumes transported. I think it's fair to say that, that has so far not really happened in the sense that the Asian market has continued to grow and remains strong. But clearly, it is a friction and we'll have to look carefully at that over time. The changes to the U.S. port fees that was announced on the 10th of October with implementation from the 14th of October was, as I mentioned in the beginning, quite a substantial shock adding cost of $60 million to $70 million. And we are working diligently to mitigate the impact. We have close dialogues with all affected customers. We are basically have strong beliefs that we will both be able to get unlikely full, but substantial compensation of the U.S. port fees from customers. We will also change our trade pattern in the U.S. to optimize versus the port fees. So we are continuously working on mitigating. But given the kind of erratic, kind of decision-making in this field, it's basically hard for us to provide much guiding beyond the fact that we are clearly working to optimize around it. We are working with customers to recover the cost. And we have, as we said, chosen to have a slightly more conservative cash retention policy by changing not the amounts over time, but the timing of paying dividends to make sure that we are resilient against these types of shocks. When it comes to the Q4 performance, we expect the operational performance to be slightly below the Q3 EBITDA level and that the USTR fees are expected to be around $20 million for the quarter. And on the last one, I would also say that we don't -- we are intending through our mitigating actions to do everything we can to avoid that number being multiplied by 4 for next year. But given that it was introduced at a surprise on a 4-day notice, we obviously had cargo on the water and vessels on the way into the U.S. that strongly significantly reduces our mitigation options during the fourth quarter, but we are working on adjusting and seeking recovery to reduce the impact going into 2026. So that concludes our presentation. We have open for questions. And My Linh, is there anything to answer.

Yes, there are a few questions for the Q&A session. And the first set of question coming from analyst Jorgen Lian, DNB Carnegie. The first one on the dividend policy. With the quarter end cash balance, would simulate around $200 million based on the declared dividend in this quarter be a constant or a function of certain assumptions?

Basically, we have said again that we will distribute excess cash. And with that, that is -- and I think you can -- and we have said we're going to be on the reporting quarter. So I think using that number as an anchor point is useful. And we have reconfirmed in the Board, both that we consider that cash level to be -- give us sufficient resilient, and we have reconfirmed our commitment to pay out excess cash in dividends. But I think we should also remind that we do have, obviously, and the Board has the responsibility to make a complete assessment of the total situation at any quarter, and that will obviously be the basis. But in the current environment, and we have reconfirmed our dividend policy, and we are -- but we are using the last reported quarter as a reference for [indiscernible] surplus.

Thank you, Andreas, for the clarifications. And the next set of question is about port fees. I think we already briefly touched upon that during the outlook sessions. But we mentioned the guided impact for U.S. port fees of around $60 million to $70 million for yearly -- annual impact for HAUTO. And how does this relate to the last quarter guide of around USD 30 million for full year impact, given that now the modified port fee is now 3.3x higher. Espen, you want to.

Yes. Now we guided on $30 million earlier, and then the increase in fees now is 3.3x. So when we're saying $60 million to $70 million, this is based on us optimizing our voyages into the U.S., and that's basically about minimizing number of voyages into the U.S. and looking at how we can do that from various angles. We have deep sea vessels going into the U.S., and we try to consolidate as much cargo to the U.S. as possible on those vessels. We also have activity in the Caribbean with smaller feeder vessels that are calling on the U.S. that we will look differently upon and reroute. And of course, we also need to avoid any marginal calls to the U.S. that we have done in the past. So the $60 million to $70 million is more of a -- is an estimate on the cost for the company after we have optimized the voyages into the U.S.

And it seems we also guide $20 million impact for Q4 out of the $60 million, $70 million for gross impact for the full year. So I guess for Q4, I guess, also takes into consideration the shorter lead time between the modification...

Yes, yes. Basically, we have no time to optimize. So the impact will be lower going into next year is what you're saying, yes.

Yes. And the next question is asked by a few analysts as well. Another clarification on the Q4 guidance. Is it correct to assume that the underlying operational result is slightly below Q3 and that the additional $20 million port fee will be added on top of that?

Yes. What we're saying is that the performance is continuing strong, third quarter is strong, and we're seeing also good volumes into the fourth quarter. I can repeat what we said earlier, we basically have more cargo than we can carry very strong growth in Asia. So the underlying performance is strong also into the fourth quarter, but slightly below the third. And then on top of that, all of a sudden, we've had this extra $20 million that is reducing the performance in the fourth quarter.

Thank you Espen. The next question is about capacity management. Höegh Autoliners is chartering in more capacity. So what is the future consideration requirement we have for additional vessels -- additional vessels at this point?

I think first, we just said we have 2 vessels coming in, in the next couple of months, which are welcome additions to the fleet. And these are large vessels, 9,100 CEU. They're much more effective. And with our attractive both cost and financing on those vessels, they will come in on -- at a capacity cost for us that is substantially lower than the charter market. So we welcome that. But beyond that, I think it's fair to say that our -- looking at the charter rates that Espen showed without speculating too much, we were selling vessels to leverage and utilize a tight charter market. And high asset valuation, that asset valuation is coming down, and I think that is probably reducing our -- the likelihood of future vessel sales. But we are in a fleet renewal -- we have a fleet renewal strategy, and we have a decarbonization strategy. So this is something we will always look at, but they will be done based on specific opportunities rather than any kind of predecided thing. But when it comes to investments in new capacity, our program is fixed. We are getting those 2 vessels now. And then there is a gap until mid-2027, where we will then from mid-2027 into 2028, get the last 4 of the Aurora class vessels then coming at as dual fuel ammonia vessels that will have the option of running zero carbon fuels. It will also have the possibility to run entirely on traditional fuels if the sort of worst thing should happen with the IMO process. I think I also want to reiterate, it's our belief that even without -- with delays in the IMO process, we believe a system will come in place. And in the absence of an IMO system, I think it's also likely that the EU's scheme will continue. It's likely that other regions will copy that and have similar, so carbon taxes in our scenario will come in the years to come. We would have preferred to get them in a level playing field in a uniformed IMO structure. We still hope that, that will get in place. But even if it is further delayed, it doesn't mean that there will not be taxes and fees and costs of emitting carbon in our trade system. So we believe that, that trajectory is still in place. But for CapEx, we don't have any additional vessel CapEx plans that are not already announced and financed and handled.

Thank you so much, Andreas. And I guess part of your answer already answered the question from one of our audience regarding the plan -- if we have any plan to sell further vessels next year. So the next question is back into the topic of U.S. port fees, and this is asked by several analysts and other investors that follow webcast as well. So how do we plan to handle the U.S. port fee or possible future -- similar future tax with our customer? And how much do you expect to recover or pass on these costs to customers?

I don't think we can answer that specifically. But clearly, we are introducing those fees in full for our sort of liner business, and we are in dialogues, and we will get substantial compensation for our existing customers. But I think it's also quite clear that this is now a cost that we expect to be embedded in all future contracting in and out of the U.S. And our expectation is that these fees will gravitate to basically become an additional cost for American consumers and American exporters. So -- but there will be a transition period where we will get some compensation, but not full compensation for those fees.

Thank you, Andreas. I see this question coming in just now. The next question is about the Suez Canal and the opening of Red Sea. When do we expect -- when do we expect the reopening of Red Sea? And how will that affect our operations and earnings?

I mean I think it is -- I don't think it makes sense for us, I mean, to speculate about opening. It's, again, a geopolitical issue. It's a disturbance that we believe will have to come to an end. But -- and clearly, a reopening will allow us a more efficient trade system. It will also add capacity into our system. But I think we are -- with our sales of vessels with the newbuilds with the current short-term charters, we are fairly well placed in terms of also optimizing that situation, and it gives us more carrying capacity. So in that sense, I think that is an optimization that we are fully prepared for. We have, I think, created some things in our -- a solid structure in order to deal with it, and we will deal with it when it comes. But I don't think we will try to speculate or provide any guiding on the timing. It doesn't seem to be imminent. But when you look half year out, a lot of things can happen. And if you look a couple of years out, we are assuming that the Red Sea will eventually open. But more than that, I think we will refrain from providing -- I mean, there will be not any valid insight into our speculations and that timing because that's driven by totally external factors.

Thank you for detailed answers, Andreas. I think that's the last question we have for now, and we can give around 15 to 30 seconds more to see if we have more questions coming in. I guess that's the last question we have for now. And of course, if you have further questions, feel free to reach out to us at Investor Relations mailbox at [email protected]. Thank you for watching, and we look forward to seeing you next quarter.