Höegh Autoliners ASA ($HAUTO)

Good morning from sunny Oslo, and welcome to Hoegh Autoliners First 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, will walk you through the first quarter business and financial performance. As usual, we have the Q&A session at the end of the presentation. So for the audience, if you have any questions, please send the question to our Investor Relations mailbox at [email protected]. So with that, I leave it to you, Andreas.

Thank you, My Linh. And we are starting this presentation with a beautiful picture of Hoegh Rainbow, which we took delivery of in the beginning of January. So it had its first quarter in operation. It's the eighth in the series of our 12-ship newbuild program of vessels that are doing a great job in a tight market. Let's start with some of the very recent highlights. We've had an exciting week's at Hoegh Autoliners with a successful exit out of the Persian Gulf of Alliance Fairfax, which I think we commented earlier has been trapped inside the Persing Gulf. That happened with fantastic help and support from the U.S. Navy that mobilize substantial resources to ensure a safe transit for that vessel. We now have no vessels operating in the Persian Gulf and no remaining vessels that are bound for that area. There is sort of a continuous disruption, but contained operationally with repositioning and adaptation, which is, I think, one of the things we are quite good at in terms of fast response. The Persian Gulf service is suspended due to the conflict. We don't, at this point, see any near-term transit of vessels into the area. But we maintain regional coverage via a Suez-Red Sea service that then returns back to us as we're not going through either the Southern Red Sea due to the [indiscernible]. Capacity market is tightened following these delays and rerouting and there is also substantial onshore logistics constraints. So there is clearly a turbulent market in many ways. So also in terms of fuel and bunkering, I think one of the biggest effects of the Hormuz crisis is imbalances in the global energy market, sharp increase in fuel prices and also tighter availability. It has led to reduced network speed to save fuels, but also a very sort of proactive bunkering operation to make sure that we have sufficient fuel on our vessels at all time, which we're also successful in doing. The fuel price increases comes with a delay coming into. We are expecting recovery through fuel surcharges, but those comes with a significant time lag that is impacting our short-term guidance as we will see. Given the impact on fuel, actually, there has not been much impact of fuel pricing -- fuel price increases on this quarter because most of our fuel is used in the quarter is basically bunkered and expensed at an earlier price. But given the kind of large fluctuations we see right now, we've chosen to show these pictures -- number with the upper part here showing the bunker cost and BAF balance over the last 5 years. And that shows that there are periods, and we saw the last period during -- following the Russian invasion in Ukraine with substantial hike in energy cost and substantial effects also on our cost and on BAF. But we see that through this period and through all other periods, the BAF mechanism has worked and we have, over that period, had a fuel cost recovery of approximately 95%. But the bottom part of the chart here basically shows how the Hormuz conflict have created a new very, very substantial spike that will have big effects on our fuel costs into the second quarter and will also have then big corrective effects later in the year on the battery revisions that will come for the third and the fourth quarter. But then again, the highlight for the quarter. EBITDA of $145 million, flat quarter-on-quarter, reflecting obviously some added operational costs due to the turbulence in the Strait of Hormuz, but underlying and driven by continued strong cargo availability and continued attractive pricing and market conditions. USD 103 million profit after tax. Gross rates of $92.6 million, which is up 1% back to normal dividend payments, paying out $94 million of dividends for the quarter. We have taken delivery, as I just said initially, of 1 vessel, adding or making the account of newbuilds now in commercial operations to eight. And we have an equity ratio of 53%, slightly down due to the debt increase on the new delivery. Moving on to market and commercial. We are facing quite exceptional growth in Chinese light vehicle exports. And Far East exports in total rose 28% year-on-year, China at 57%. And if you look at EV and hybrid exports into Q1, you're talking -- you're seeing numbers of sort of 80% or close to 90% year-on-year. And what we see is that the energy uncertainty and the higher oil and gas prices is -- seems to be driving also the sales and the conversion to EVs and hybrids, clearly benefiting Chinese producers having, I think, in many ways, very strong products and price points in that market. The global light vehicle sales fell 5% year-on-year. Full year outlook is somewhat downgraded. But again, the Chinese success in the market is substantially elevating demand for shipping services. Reflect a little bit also in all the turbulence and with the growth of China, what our trade structure looks like. And I think we are pleased to see, and it's important to notice also in these times of disruption that we have a well-diversified operation. We've had fantastic growth in China, almost double the share, but it's still from 10% to 19%. So it's still sort of a balanced card on this. You can see on the other one is that we have a very strong presence in the Middle East as a discharge region, 17% of our cargo discharge, which obviously causes some disruption that we are addressing by first reallocation of capacity, but also from a dedicated service now from the U.S. into the Red Sea, where we can still -- we do not go through the Southern Red Sea because of the Houthi threat, but we can go into Suez and serve the Red Sea coast of Saudi Arabia, which we are doing to compensate for not being able to enter through the Strait of Hormuz. High & heavy, it's in many ways, the same story, not exactly with the same magnitude, but the shipments of construction equipment from Asia did grow 31% year-on-year in Q1, and it's driven by continued growth out of China with -- but still with other markets being fairly stable. There is an expectation of continued high and heavy sales growth in 2026 into 2027. But there are some uncertainties of the U.S. equipment demand in 2026 due to various tariffs and sort of some noise in that area. But the same story that you have a market growth primarily out of Asia and primarily driven by the success of Chinese exporters. We have a strong contract backlog. We are, in many ways, relative to our 80% contract coverage over booked for 2026. So we have a large part still of 2027 covered. We have added contracts, I think for about $160 million during the quarter. We have -- when it comes to the remaining renewals into -- towards 2027, 80% of that is to long-time relationship customers where we have 10-plus years of relationships. Rate agreements are typically noncommitted contracts with a fixed pricing towards freight forwarders and used vehicle shippers. And the spot volume, just -- it's only now 6% of the volume, in that volume, there is an 80% high and heavy share. So the spot market is in reality in the current market, almost entirely for tight project cargo, high and heavy equipment. There is very little automotive components in that part of the cargo mix. That leaves us to first capacity, sustainability and later into finance. And I'll leave it to Espen.

Yes. Thank you, Andreas. Turning to capacity and the capacity market continues to be tight and tighter than we had anticipated a year or two ago. During 2024 and 2025 and so far this year, 141 car carriers have been delivered. These have been absorbed and the market remains tight. In fact, pricing have been increasing so far this year. We continue to use the short-term capacity market. We had 4 ships on charter in the first quarter. That was down 1 vessel quarter-on-quarter. And if you would want to charter a ship over the next few months, that's -- it's pricey, but it's also very few ships available, only 2, 3 ships available up to the summer. Turning to sustainability. We are very pleased to have been able to drive down carbon intensity over the past few years, obviously, on the back of now having 8 Aurora Class vessels in operations since January, but also having invested heavily in existing fleet and also divested 5 vessels, which were weak fuel performers. Quarter-on-quarter, we're up marginally. That's related to heavy weather delays and idling early in the year and also some idling related to the Middle East conflict. Turning to the financial update. The year started very, very strongly. Our commercial team complained about lack of capacity already early in January. That's not normal. I think it's the first time we heard about. Normally, the first few weeks in January is a slow period following downscaling and closure of plants around New Years. But this year has been very strong from the very beginning. We have about the same number of operating days in the first quarter as we had in the fourth quarter. We still had anticipated somewhat higher volume in the first quarter on the back of very strong demand and extremely high utilization. However, volume came down a little following the Middle East conflict, where we canceled 3 voyages to the region in March. Net rate moving flat quarter-on-quarter. So top line moving very flat. Costs also moving flat. So we come in with an EBITDA, as Andreas said, of $145 million, moving flat quarter-on-quarter. And also, as mentioned by Andreas, we didn't have any fuel impact from the increasing pricing in the first quarter. In fact, fuel costs came down $2 quarter-on-quarter, following a 5% lower fuel prices. We had some extra costs related to discharge of unplanned cargo. That was cargo already in route to the Middle East that was discharged. And we had charter costs increased $2 million quarter-on-quarter on the back of the increased pricing that we just talked about. Net profit before tax, seemingly, we are dropping 35% year-over-year. So just as a reminder, we sold one vessel in the first quarter of 2025. So adjusting for this net profit before tax year-over-year is down 11%. Our balance sheet remains strong, some modest changes to net debt to EBITDA and equity ratio following the delivery of the 8 Aurora vessels. And we are ending the first quarter with close to $500 million in cash and liquidity reserves, cash somewhat higher than we've seen in the previous quarters, but flat quarter-on-quarter following the change in dividend calculation method that we announced in the second half last year. So it's another strong quarter with cash generation. We had $144 million from operating activities. We had net CapEx of $16 million. That's mostly dry docks and investments in the existing fleet. We had normal payments to bank and lease, and we paid out $99 million in dividends in the quarter. So again, we are paying out cash in excess of $200 million, paying out $94 million in May, which marks the 16th consecutive quarterly dividends, and we paid $1.7 billion now over the last 4 years. Then we're coming to the outlook.

Yes. And I think it's fair to say that there is a level of turbulence uncertainty in the world on many dimensions, including tariff fees and conflicts that is creating uncertainty. But in that environment, we see demand for ocean transportation remaining firm, supported by steady demand from Asia and China. And I mean, in particular, we see quite substantial demand for additional capacity, and it's definitely not in the current market, any downward pressure on rates. And when it comes to the next quarter, so I think the Q2 will be very much colored by the spike in fuel prices, which will impact fully and still with no BAF effects before into the third quarter. That effect is expected to be around $20 million and the disruption impact of Middle East service is expected to around $10 million. My small comment on that one is that we are quite. While this is obviously an unfortunate effect, and we would love to get back to the Persian Gulf as quickly as possible, we are also quite satisfied that we have an area where we have 17% of our cargo discharge, very important and attractive market for us, and we're able to manage that disruption with clearly some but not enormous impact to the system, which I think is because we have a fantastic team and capability to deal with disruptions and reallocate capacity and work the system in a way that minimizes that effect. And as we said back to that, we have a well-diversified geographical structure that allows us to manage also quite substantial crisis. The Q2 EBITDA adjusted for the above effects is expected to be slightly at the same level or slightly below the first quarter. So that is the outlook. That is substantial, but temporary fuel effects and some -- and we'll -- I don't think we're going to guide on how temporary or how long-lasting the disruptions in the Strait of Hormuz is, but it's quite clear that in the current environment, we are extremely pleased that we have got one vessel out with U.S. Navy support, which is now fully back in commercial service, adding to our available capacity. But we see no scenario where we'll send new vessels in there in the very near future, but we are obviously still hoping for a resolution that will allow us to resume traffic into the area. That's the end of our presentation. Thank you very much for listening. And I think we're now going on to Q&A, My Linh?

Thank you, Andreas and Espen. And yes, we have received a few questions from our online audience. And the first question is regarding market and the rate. So first question is RoRo as part of shipping business is what we call. Can you say anything about where we are in the cycle? And can you comment anything about how the net rate is looking towards the second half of the year?

I think starting with that, we have a practice of guiding for the following quarter. We are not going to divert from that, and it's definitely not the time where that, I think, would be appropriate. And that's not so much because of the market, it is because of all the sort of conflicts and tariffs and things and other things that are impacting this industry in different ways. But when it comes to the cycle, I think, we are in -- where there is a cycle where we are in a period in this industry that is very, very strongly influenced by a remarkable growth of Chinese exports across our cargo categories. It's obviously most prominent in automotive. It's very prominent in EVs, hybrids that seems to be gaining traction with -- also with the energy uncertainty, but also supported by equipment high and heavy. So we are seeing -- we are in the part of the cycle where there is an export growth that is clearly absorbing or to some extent, with disruptions more than absorbing the new build deliveries. And so I think we're more -- I think the driver of the market now is more on the position on Chinese export growth. From where we see demand seems to be there. The products are there, the price points are there. We're quite impressed with how -- also the Chinese car exporters have lost or unable to deliver to one of their important growth markets in the Middle East. And we basically, from what we can see, they're still able to redirect production to other areas, maintaining or even accelerating the export growth. So that position is very robust. And that also creates a tight market. It puts upward pressure on trucking capacity. And it clearly supports the current rate levels very well. And how and when that will change in the longer term, I don't think we want to speculate.

Thank you very much for the detailed answer, Andreas. And yes, we received also a few questions, but this is the same topic that we will try to considerate questions. The next set of question is about the capacity market. We mentioned a bit earlier that we are looking at roughly one vessel delivery per week for this year and that the market is still high. Can you say anything about that we're still having newbuildings coming in the next years? So can you say anything about the rig overcapacity in the market? Is there anything we can comment on? What is the current supply/demand balance?

I think that -- I don't know if you have anything to add, Espen, but I think that answer will be quite repetitive of the one I just gave in the sense that as long as Chinese exports grow at the pace it does, the market will remain tight. And I don't think -- but it is very dependent on that growth rate.

You didn't say that the order book has been big, and I think it's been a concern for many. And at the peak, it was -- the order book to fleet ratio was 42%. Now it's down to 20% and that capacity has been absorbed. And so I think we also see now actually that a couple of new orders have been placed for '29 and '30. It's also reflecting this very, very strong market and capacity pricing actually going up.

And maybe add to that, if there is one thing that's happening that for every year, this capacity has been well absorbed by growth, the legacy fleet has become 1 year older, and it was old to start with. So I mean, I think we're also seeing that the longer this journey works and the longer the capacity is actually absorbed, the closer we are to capacity attrition through scrapping for vessels that reach their end of life. So I think every year of maintained tight capacity is further improving the cycle by actually adding a year to the legacy and getting -- bringing more vessels closer to natural scrapping. So I think it's a very positive dynamic while I think it's also difficult to make clear guidance on exactly how it's going to play out because it's many moving parts, and it's a sum of all those variables.

Yes. And the next question is about fuel price and how we hedge the fuel cost exposure. We mentioned earlier about the cost pressure from higher fuel price starting from Q2. And we also talked explicitly about the BAF mechanism. So maybe -- but maybe we can just remind -- we get the question from the audience just now. So maybe you can just remind the audience a little bit how we handle costs, higher bunker costs in this segment with our BAF mechanism?

Yes. I think the BAF that we're referring to, it's a contractual fuel surcharge, and it's very established in our industry. We've had it for a very long period of time. So it's a contractual fuel surcharge, is updated quarterly based on actual fuel pricing. So -- but it comes with a lag, as we said, the quarterly lag, and it takes actually -- for us, it takes 5 to 6 months before it's fully reflected in the P&L because of the [indiscernible] of the voyages. But it's a very, very strong recovery, as Andreas already talked to. So this quarter is a one-off. We will get these increased fuel prices back in surcharges in the following quarters, and we have a 95% recovery over time. So this is very well established, and it's been basically a very strong recovery for a very long period of time.

Thank you Espen, Yes. The next question from [indiscernible], DNB Carnegie. We guide about the impact of fuel and service in the Middle East. And for the latter, the volume impacts were around $10 million expected in Q2. Is there a run rate quarterly impact or just more specific for the quarter?

I think we -- this -- I think we are talking about the next quarter. And I think as Andreas said, the Middle East is a very important discharge region for us. It's a backhaul. So the rates to the Middle East is lower than on the front haul. And we are very happy that we can continue to serve the region via the Red Sea with a dedicated service from the U.S. So we are serving our clients. We already have 2 ships into the Red Sea that has discharged in 3 ports in the Red Sea. And we're also serving clients from Europe to the Middle East with what we call space chargers. So we put that cargo on [indiscernible] capacity. So we are serving this region through the Red Sea, and we'll continue to do so. So -- but for the second quarter, the impact is around $10 million.

Yes, I'm just trying to wait a little bit a few seconds for the new questions to come in. Yes. The next question from [indiscernible], have we seen or do we expect to see any effect of the disruptions from the Middle East conflict on contract renewals?

I mean, no, I don't think so in the sense that what we're seeing is the contract renewals, I commented on that, that we are engaged in is going as planned and continued as planned. And demand for additional volume from customers in Asia is strong. So I think the environment, given the tightness and given the export growth out -- particularly out of Asia, that is -- there is a strong dynamic around contracts and contract renewals there. And I don't think it has any particular impact on the Middle East either, I think. But obviously, we have customers there that are eager to get back. I mean both finding alternative routes like the Red Sea and -- but clearly, preferably coming back into an order service to the Persian Gulf, which, again, is an important market for us and it's an important market for many of our customers.

Thank you, Andreas. We talk a little bit about our contract backlog for the coming years. And can we say it's a question from audience for the webcast. Can you say anything about the risk level in the recent contract renewal for this year and next year?

I mean we are [indiscernible] new contract level, I think, but that's obviously individual and it's -- do you want to add?

No, I think -- no, not really. I think it's a very strong market and it's the back of China. And again, 57% growth quarter -- year-over-year in the first quarter is just unprecedented. So I think that's such a strong growth that we actually see capacity pricing going up, and that's just reflective of where the market is.

For the next question is about the topic that we talked a lot about in the Q3 last year. We have any current base case regarding U.S. fees? Do we have any updates about that?

No, I don't think we have any updates on that. It has been suspended. There are debates around it. We are actively engaged in the process. We have met with USTR. We have had key meetings, and it's an ongoing process. But I think I also said back in Q3 and elsewhere on the similar kind of questions is, I will -- we are not going to guide on future policy decisions from the U.S. Administration. And this is a future policy decision from the U.S. Administration.

Thank you so much, Andreas. I think that's the last question we received for now. Thank you so much for your attention and for your engagement. And of course, if you have more questions, feel free to send an e-mail to our Investor Relations. Thank you for your attention, and I look forward to seeing you next time.