Himalaya Shipping - Earnings Call - Q4 2024

Transcript

Speaker 0

At this time, I would like to welcome everyone to this Himalaya Shipping Q4 2024 investor presentation. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be in a listen-only mode throughout the presentation, and afterwards, there will be a question-and-answer session. I would now like to hand it over to the speakers. Please begin.

Speaker 1

Thank you, Operator, and a very warm welcome to Himalaya Shipping Q4 2024 investor presentation. My name is Herman Billung. I will take you through some highlights and some financial and company specifics before I leave the floor to Lars-Christian Svensen, COO. And I ask you just to pay attention to the safe harbor and then to the highlights. Before I start, I mean, there is no secret that the dry bulk market has been facing some headwinds lately, but I would like to stress that our constructive market outlook remains. And Lars-Christian will take you through that a bit later on. Q4, all the 12 vessels delivered generated total operating revenues of $29.6 million and average time charter equivalent earnings of approximately $27,800 per day gross. Net income of $1 million and adjusted EBITDA of $21.3 million for the quarter ended December 31st, 2024.

We did a cash declaration distribution for September, October, and November 2024 of $0.10, $0.04, and $0.01 per common share, respectively. Subsequent events, we declared a cash distribution of $0.005 per common share for each of December 2024 and January 2025, and we entered into a new time charter agreement for Mount Norefjell for 14 to 38 months. The vessel will earn an index-linked rate reflecting a premium to the Baltic 5TC index that is higher than the average premium on our current charters. Then, through some financials, operating revenue of $29.6 million in Q4, which was a decrease of $9.6 million in comparison to the prior quarter. The decrease mainly due to the decrease in BCI rates in the fourth quarter. Average TCE gross of approximately 27,800 per day in Q4 versus 36,800 in the previous quarter.

The cash break-even estimated to be approximately $24,600 per day. Total operating expenses of $15.6 million in Q4 remained materially consistent with the prior quarter. Interest expenses of $13.2 million, a decrease of $0.1 million in comparison to the prior quarter. The decrease is a result of a decrease in loan principal outstanding due to quarterly loan repayments. Net income of $1 million in Q4, a decrease of $9.7 million in comparison to the prior quarter. The adjusted EBITDA of $21.3 million in Q4, a decrease of $9.7 million in comparison to the prior quarter. Balance sheet summary. Net cash generated by operating activities in the fourth quarter was $10.5 million. Net cash used in financing activities in Q4 was $12.6 million, consisting of loan repayments of $6.5 million and cash distributions paid of $6.1 million.

Minimum cash balance required under the sale and leaseback arrangements of $12.3 million presented as part of cash and cash equivalents as of December 31st. Decrease in vessel and equipment primarily due to depreciation of $7.3 million recognized during the fourth quarter. And a decrease in short-term and long-term debt of $5.1 million, primarily due to loan repayments of $6.5 million, offset by deferred finance cost amortization of $0.7 million. And we have $8 million available to draw down under the RCF with Drew Holdings Limited following the $2 million drawdown in 2025. The next slides show the key financials year to date for 2024. And I just want to stress that these are unaudited numbers. Then, to a company update. The entire fleet following the fixture of Mount Norefjell on index-linked means that the entire fleet now is earning index with a premium.

We firmly believe that our premiums are superior to any of our peers. The average premium to the BCI is 42.7% as we speak. The next slides to the left just shows that we really are giving our shareholders a full payout. The left shows dividend per share in percentage of earnings per share. For the full year, that was 102%. To the right shows that Himalaya Shipping earns an average premium versus the index of 47%. Average premium compared to our peers at 25%. The next slide shows two things. One, that we ordered at the right time to the left with a share price of $4.77, which was the case a few days ago. The enterprise value per vessel is $1,063, while the present broker quote gives a net asset value of $9 per share.

To the right illustrates the financing we have in place for our vessels compared to a new building price of $1,095 with a regular bank financing. The dividend capacity is very solid. This slide shows illustrative free cash flow per share based on Capesize index rates ranging from, say, 16,300, where we are at breakeven up to a theoretical, or not theoretical, which very well could happen, a market at $55,000, where we have a free cash flow per share of $5.3 per year. Capital discipline is the buzzword. We have a cash break-even of $16,000 per day on Capesize index equivalent versus BCI average of $22,000 per day over the last four years. We have full alignment between shareholders and management board and sponsors on one third of the equity. We have no reinvestment plans.

We have the youngest fleet in the industry and means limited capital needs. Cash flow from operation targets to be distributed in monthly dividends. And we are proud that we have so far paid 12 consecutive monthly dividends and $0.15 for Q4 2024. Then I leave the floor to my dear colleague, Lars-Christian, who will take you through the market update.

Speaker 2

Thank you, Herman. The 2024 overall ton-mile was satisfactory with a year-on-year increase of 3.1% for Capes and Newcastlemax. However, as you can see from the left graph, after three strong quarters, the historically strong Q4 contracted unexpectedly. Even though the iron ore and bauxite volumes performed well with record exports from Brazil and Guinea, respectively, you can see from the right graph that coal demand on the Capes and Newcastlemaxes was heavily reduced. Due to a weak grain season from East Coast South America and US Gulf, the Panamax segment, the main carrier of grains and soybeans, went looking for alternative business and became more competitive than Capes and Newcastlemax on the coal routes.

We note with excitement that the grain trade looks to have picked up for the Panamaxes as we're halfway through Q1, which should indicate that more coal will return to the larger sizes yet again. So far, we've seen an overall slow start to the season. There are, however, positives. The bauxite exports from Guinea are up 10% year over year, and the Brazilian iron ore exports are up 3.5% compared to the same time last year. Together with a seasonal low tonnage balance, we expect the Capesize and Newcastlemax market to increase from current levels. Many of you are aware that bauxite is used in alumina production, which is an important component in the automobile industry.

Guinea holds one of the largest bauxite deposits in the world, and with limited sources to fully utilize the economies of scale, the milk route from Guinea to China on large-sized dry bulk is set to continue. This is already confirmed so far this year by a continued export increase. As you can see from the two left graphs, Chinese bauxite imports are increasing consistently. The appetite is large, and port inventories for the commodity are in steady decline, although the imports are continuously on the rise. As an interesting side comment, for the first time in history, there are currently more bauxite transported on Capesize and Newcastlemaxes than on coal. Simandou is a household name for most of you at this stage.

Iron ore from the Simandou mine in Guinea will come on stream in the second half of 2025, and the latest update now indicates a 24-month ramp-up period versus the 36-month ramp-up previously communicated. This will provide the market with an additional 120 million tons of iron ore per annum from 2027. With the additional valor capacity increased by 2026, we're looking at a total of 170 million tons of new iron ore volumes from the Atlantic, which mostly will be exported to China, i.e., great for ton miles. The dry bulk market has historically done well, where economies are growing. This thesis is likely to be maintained going forward as well, but it's also worth looking at the import dependency in large economies, especially China. Since 2015, China has increased their import volumes of iron ore by 6%.

This coincides well with data showing lower iron ore content in Chinese domestic iron ore and an increased domestic production cost. This means that iron ore prices above $100 per ton, plus import costs, are still preferable to the Chinese compared to domestic production. The same can be said for the coal imports. Since 2015, the coal imports have increased with 8%. In addition, China has commissioned new coal-fired power plants, which equates to 30% of existing capacity. This shows that China is serious when it comes to coal consumption in the future as well. We would like to remind you again of the very compelling Cape and Newcastle Max supply story. The order book remains at 25-year low at only 7.2% of the current Cape size and Newcastle Max fleets.

As you can see from the graph on the right side, Capesize and Newcastlemax has the lowest order book compared to fleet size among all the shipping sectors. Not only do we have a small order book, but the fleet is aging at a rapid pace. 50% of the current fleet was built between 2009 and 2015, and by 2033, 60% of the fleet will be over 20 years old. We remind you that many reputable charterers will not use vessels that are older than 15 years today. With shipyard capacity down 50% from the peak in 2008, it will become increasingly more difficult to build any meaningful vessel capacity to reduce the increasing average age of the fleet. Our last slide for today is relating to vessel dry docks.

With an aging fleet, also comes a large increase of dry docks due to mandatory special surveys required on merchant vessels every fifth year. The vessel delivered in 2010 accounts for 10% of the total Capesize fleet and will have to go in for 15-year special survey in 2025. In addition, you will have the 5- and 10-year special surveys as well, which means that almost 25% of the total Capesize and Newcastlemax fleet will have to look for a dry dock slot during 2025. We remind you that with the youngest Newcastlemax fleet in the world, Himalaya Shipping will not have to engage in any dry dock discussions until 2028. And with that, thank you very much, and I'll pass the word back to the operator.

Speaker 1

Thank you. If you do wish to ask a question, you will need to press a five-star on your telephone. To withdraw your question, press five-star again. There'll be a brief pause while questions are being registered. Our first question comes from Frode Mørkedal from Clarksons Securities. Please go ahead, Frode, I'll be unmuted.

Nice. I wanted to ask you about your near-term market views, essentially. So the FFA market has been a big rally and quite steep contango, right? So April contracts above 18,000, rest of the year around 22,000. First off, maybe any comments you have on the near-term outlook? And secondly, are you willing to lock in part of that curve right now? So what's your thoughts?

Speaker 2

Hi, Frode, it's Lars-Christian here. Near-term, I would say this week has been very positive. It's good to see that the cyclone in Australia seems to have shifted and the port operations are resuming over there. So we see more increased volumes out of Australia this week, which is very much welcomed after the last two weeks of slow markets. In addition, we do see quite a lot of activity now on Brazil and the bauxite out of West Africa, which has been pumping steadily all year. So the near-term looks quite solid, I would say. And obviously, we are very much aware of the contango on the FFA curves as well. So it offers good value going forward.

I think if you converted calendar quarter two, three, four today, we could probably convert our fleet into $30,000 plus per day for the rest of the year, which is compelling numbers. So we will obviously have an ongoing process here where we find the right level to be. But at the moment, it looks like the physical market might aid this a little bit further.

Okay. So it sounds like you're probably willing to wait then, just follow the stock market up from current levels. So it makes sense, I guess. The second question I had is on the supply side, a very interesting slide on page 22 on the off-hire. So clearly, a very supportive event that the ships are off-hire because of dry docking, right? But what about slow steaming? Do you have any view on that? Could you see, I guess, older ships not being compliant with the carbon intensity might cease further slow steaming? Any view on that one?

Yeah. So far this year, I would say the fleet overall is slow steaming quite a bit already. So I wouldn't see it as likely that the total fleet will slow down even further from this stage. If anything, in tandem with the rising market, I would expect to see a little bit of an upturn. Obviously, coming into the end of the year and into next year, it will be more and more owners will have to relate to these slow steaming requirements to make sure that you tick all the boxes within the environmental regulation. But at the moment, I think the fleet is operating at a slow pace, and if anything, it will turn back up in the near term.

Okay. Fair enough. Good caller. Thank you.

Thank you.

Speaker 1

Next in line, we have Petter Haugen from ABG. Yolana, I'll be unmuted.

Good afternoon, guys. A quick question first on dividends here. So right now, with the index at sort of 6,000, it's not that much to pay out, is it? So if you could comment on how we should model your dividends now going in the next months, and also just remind us if there are any other elements to think about other than the minimum cash requirement from the sale lease back agreements.

Hi, Petter. No, on the dividends, we will strive to continue to pay monthly dividends. And as you correctly say, March is not the—or February so far is not a fantastic month, but we will still try our utmost to continue to pay dividends. And as Lars-Christian mentioned, the way we are in contango, but if the market materializes in line with the FFA market, obviously, there will be more room for dividends going forward. Your next question was if there is anything else you should pay attention to, then the minimum cash, not really. It's the same that it's $1.5 million for eight of the vessels, which kind of is our kind of ballpark figure you should use. Nothing else really to pay attention to.

Okay, thank you. And if we could follow up with a market-related question. In terms of those volumes now expected from West Africa and the Simandou project, have you seen any activity as of yet in terms of attempts from the cargo owners in that project to source tonnage on longer term?

Speaker 2

We do see the second-hand Capesize and Newcastlemax market being very, very hectic nowadays. There's been numerous transactions, especially made by Chinese buyers, and there's no secret that they are heavily invested in this particular project, so we believe that a lot of these vessels that are being purchased now is a tonnage security for the volumes that are coming on stream later this year.

Speaker 1

It is very encouraging to see.

Thank you for asking that question.

Speaker 2

Sorry.

No, please.

Speaker 1

No, I mean, it's obviously very encouraging to see how asset values are holding up in spite of, say, a fairly soft end of the last year and the two first months of this year. But it looks like modern big vessels are in demand. So asset values are really holding up in spite of a softer freight environment.

That was actually my last question here, Herman, but I guess you then answered that. And I interpret you guys to think about the future demand as the main sort of reason why these asset prices are keeping at, I would say, higher levels than we would have thought if you knew that we would have that Q4, Q1 weakness that we had. Yeah.

Yeah, no, I agree. And it's also interesting to see, I don't have the number in front of me, but the percentage of transactions done by Chinese over the last few months on modern ore Capesizes in general has been picking up considerably, which is interesting. And at the same time, who we are really behind Simandou, I mean, that's also quite encouraging. So the combination of the two looks, it's a support kind of the story, the way I see it.

Okay, thank you. That was all from me.

Thank you. As a reminder, press five-star to ask a question. There will be a brief pause while new questions are being registered. As no one else has lined up for questions, I'll now hand it back to the speakers for any closing remarks. Oh.

Thank you so much for taking the time. We, as we started the presentation, our constructive market view remains intact, and particularly backed on the supply story that Lars-Christian was pointing at. Thank you very much to all of you, and have a nice end of the quarter.