HOEGF (HOEGF) Q2 2026 Earnings Report, Transcript and Summary

Good morning, and a warm welcome to Hoegh Autoliners Second Quarter presentation. My name is My Linh Vu, Head of Investor Relations. And we have with me our CEO, Andreas Enger; and our CFO, Espen Stubberud who will walk you through the last quarter update. As usual, you can send questions to our Investor Relations mailbox at ir@hoegh.com, and we'll address these questions during our Q&A session at the end. So with that, I will hand it over to you, Andreas.

Thank you, My Linh. And welcome to this presentation. This has been an exceptional quarter in many ways, exceptional in the sense that we've had the strongest customer demand growth, I think I've ever seen where we could have filled the multiple vessels that -- more vessels if we had them. It's been exceptional also then in the tightness of the capacity markets with increased charter rates. And it has been exceptional in disruptions, both in terms of fuel costs and in terms of cargo displacement bound for the Middle East due to the conflict in Iran and the Strait of Hormuz. That in some way, warrants a slightly deeper dive than usually into the underlying factors, but we will run you through the presentation. And then as My Linh said, respond to a Q&A session afterwards. Starting with the quarter highlights. The market for RoRo services is exceptionally strong. Car exports out of Asia growing 31% year-on-year in the first half. China increased by 68% year-on-year, again, creating an exceptional demand for capacity that is also fairly substantially underserved. That has tightened the capacity market. Charter rates climbing further, new build order books fully absorbed by the Chinese growth. We're coming into that in some more detail. It's also been very much colored by the conflict in the Middle East. It's been, for us, a huge disruption with 16,000 cars bound for the Middle East displaced, but also successfully managed during the quarter. And while as we said, the quarter is upset by this shock together with the fuel price. We do expect normal cash conversion and full run rate BAF compensation within the third quarter. So it is for -- as a summary, a market situation that is strong and is remaining strong. There has been some exceptional disruptions that we will dive into that has largely been dealt with and will soon be behind us. Starting with the Middle East conflict. We have a strong position serving the Middle East market. We have regular voyages into the Middle East. And obviously, the disruption with the outset of the war or the military escalation is substantial. Right now, as we speak, we have no vessels inside and no cargo displaced as a result of that. But we're going back to what happened and how we got to where we are now. On the financial side, the elevated fuel prices, and I think the fairly well-known lag in our BAF revenues impacts the quarter and the cost related to rerouting and disrupted cargo is fully compensated by customers, but it does create additional cost and receivables that takes slightly longer to collect due to the extraordinary nature of the costs. And that in some creates a working capital buildup that also unfortunately covers this quarter. Let's start with the effects of the Strait of Hormuz. As I said, we have more than 16,000 cars under the Middle East when the Strait were closed. They ended up in being unloaded in the Caribbean, in Mozambique, in India and in Sri Lanka. And if you -- back in Europe that created a huge disruption and substantial costs in terms of both storage and then finding solutions to bring these cars somewhere. And we worked closely with customers. We found good solutions. All of these units have found an home. All the costs are covered. But again, there is a slightly longer invoicing cycle, although going back most of these costs are now actually also paid and collected, but it created a longer cycle than building working capital. That was obviously compounded with the fuel price. And I think there are 2 effects that are important in that. We have an average fuel inventory on board of 2 months. And when the fuel price increases at expenses as now, it basically substantially increases our fuel inventory, and it's also a structural delay in the compensation. The cost of that -- the additional fuel cost is fully passed on to customers, but it is with a delay that then also is creating delays in revenues and building working capital. We do expect the full run rate BAF compensation within Q3, and our 5-year average fuel cost recovery is 95%. So we are considering this to be temporary effects. And in a declining fuel prices, there is also a recovery or a sort of a positive effect on that, although I don't think we're going to guide on oil prices in the current geopolitical situation. Those effects combined created then a working capital growth of USD 54 million in the quarter, as we said, net increase in receivables of USD 25 million, now mostly collected and the fuel inventory obviously staying high with the oil prices, but as a one-off effect. But in some substantial effects on the quarter, that obviously, given our dividend policy being strictly linked to end of quarter cash has an impact on the quarterly dividend. So that brings us to the highlights, USD 122 million of EBITDA, USD 86 million of profit after tax, growth rate of USD 94 and one new vessel, a feeder vessel delivered continued high equity ratio. It resulted, if you factor in the delayed fuel costs and the costs of some vessel disruptions and not being able to serve the Middle East market fully is, in our view, a strong quarter. Unfortunately, with the working capital effects taking down dividends for this quarter. To go a little bit deeper into the market side, I think it's important to recognize, I think, an unexpected, but an extremely strong growth in far east exports, primarily Chinese exports with a 73% growth in light vehicle exports year-on-year, a 41% in construction equipment, a little bit under communicated, but there's a strong development in that one as well. It's tightening capacity. It's also creating a larger system imbalance that also contributes to consuming RoRo capacity with the eastbound trades being largely flat with the westbound trades growing strongly. Chinese car exports is continuing to grow with successes, high-quality, well-priced products, building market share across the world. And the 2026 growth alone consumes something like 100 car carriers in order to transport. So it is a -- it is very, very strong, and we believe well justified based on the products and price points and also sort of, given the growth across the world, also a sustainable or a structural market change that we expect to be here to stay. With the lack of RoRo capacity that has led to a strong increase in cars shipped in containers or other means of transportation we estimate that to be about 1 million, 1.5 million cars in the first half of 2026. Our experience from this also, to some extent, happened after the pandemic. And our experience is that these volumes will largely return to RoRo when capacity becomes available. So it also creates a -- contributes to further tightening the capacity market, but also represents a buffer if and when markets normalize. This remain a -- to have a strong backlog, we are totally sold out for 2026. I think given what I've said, we probably would have some opportunity if we weren't. But that's where we are. We also have a strong backlog into 2027. But I think the situation in the market is now also changing the kind of somewhat limited, but still the contract renewals has an upside opportunity rather than a risk given that we see the market remaining tight into and through 2027. So our contract situation is strong. The sort of renewable -- renewing -- contract renewals represents an upside. And so that the market outlook in our view, remains quite strong and strongly colored by the lack of available RoRo capacity out of Asia. Going a little bit into the capacity side as well. We are through the peak in newbuilds deliveries. We are also heading towards a scrapping period where between now and 2030, a fairly substantial part of the older fleet will pass 30 years of age, which is the normal scrapping age for car carriers. And that is also clearly reflected where we saw in '23 -- '24 very, very high charter rates falling sharply unexpected normalized capacity balances through 2025, and is now again on a sharply increasing trajectory, which I think can fairly well explained, if we look back by this slide where we basically looked at net fleet growth against Chinese export growth back all the way back until 2020, where we basically saw when market tightened in 2022, '23, the growth grossly exceeded the newbuilds deliveries or the fleet growth. In 2024, '25, it's somewhat reversed where with the peak of the newbuilds delivery, new capacity into the market slightly exceeded the Chinese export growth, and it's now been turned around again in 2026 with the increase in Chinese exports creating a gap that we currently estimate roughly 70-plus -- 74 ships. So it is -- it is kind of a fairly -- it's a close linked between the evolution of Asian, Chinese export growth and vessel deliveries that has during 2026 -- towards the end of 2025 into 2026, changed the dynamic of a loosening capacity balance into actually a sharply tightening, which is where we are right now. And in that picture, we are obviously very, very pleased to have our first 8 RoRo vessels in full operation. They are performing very well. And they are also allowing us to deliver record carbon intensity. And since we are still -- I mean we are running LNG, which is helpful, but it is mostly efficiency. So it also actually impacts obviously our operating costs and the operating economics. And we are also, obviously, looking forward to getting the first 4 dual fuel VLSFO ammonia vessels delivered from next year, mid next year onwards. And we also, in that sense, I think we'll -- we are strongly committed. We did I think, innovate the PCTC capacity market by basically introducing a new class of vessels being larger and with more fuel flexibility and efficiency. We will now see how that works out, where our -- first, our -- the cash cost of our newbuild vessels are almost a tiny fraction of the current charter market in cost, it's also substantially lower than it would have been to build the cheaper, smaller 7,000 or 7,500 vessels. So we are rapidly building the most competitive class of vessels in the industry. And we have now also required substantial operating experience, and we are quite comfortable with, with how this plays out in terms of also long-term cost position. That concludes my part of this presentation, I will then leave the word to Espen to go through the financials in some more detail.

Thank you, Andreas, and good morning. Our net rate is moving flat quarter-on-quarter and has been very stable over the last period. Top line is up 4% in the second quarter, quarter-on-quarter, driven by higher volumes, up 2.6% to 4 million CBM. And we think that is a strong result considering the meaningful disruption to our network in the quarter. Our EBITDA in the second quarter came in at USD 122 million. That's slightly ahead of what we guided in the first quarter presentation. We had -- it's down USD 23 million quarter-on-quarter, and we had a net fuel impact of USD 22 million, which is explaining the drop in performance. Our fuel cost was up USD 21 million quarter-on-quarter, and we had a negative impact from BAF revenues of USD 1 million quarter-on-quarter, following changes to our cargo mix. We had the net profit before tax reduction of 16% or USD 16 million, mitigated by a gain from debt modification following a refinancing in June. Looking at our EBITDA bridge. As mentioned, we had USD 21 million extra in fuel costs. We also had, as Andreas already mentioned, additional operational expenses related to the Middle East routing, extra storage costs, extra discharge costs and canal costs as well as some costs related to us putting our cargo on third-party vessels, which is increasing charter hire expenses. These costs have been invoiced to clients and is offset by additional revenues. We are continuing to using the short-term capacity market and some of the increase in charter expenses is also reflecting the tightness of that market. Our balance sheet remains strong. Our net debt to EBITDA up to 1.3x following a lower cash balance at the end of the quarter, and an increase in right-of-use assets as we have taken delivery of one feeder vessel on a long lease, and we also extended one feeder vessel for one year. Extra ratio remained stable. We ended the quarter with USD 216 million in cash, and we have liquidity reserves through our revolver of USD 197 million. As Andreas already talked to, our cash generation in the second quarter has been meaningfully impacted by increase in working capital with increased fuel inventory and also higher receivables. We expect working capital to be reversed in coming months, and we had the operating cash flow of USD 67 million in the second quarter. We had a normal CapEx related to dry docks vessel upgrades and also one newbuilding installment for Aurora vessel #9 of USD 16 million and we have normal debt and lease payments of USD 35 million and as well as a USD 94 million dividend paid to shareholders. We have refinanced both our bank facilities over the last 6 months. We already announced that we extended our liquidity reserve. The USD 200 million revolver we have in the first quarter, we extended it by 2 years up to 2030. And in the second quarter, we also extended our main USD 640 million bank facility. And we're quite pleased to have achieved an 8-year tenure increasing the maturity by 4 years up to 2034, and also meaningful reduction in margin and more favorable covenants. As Andreas said, we have a cash-based quarterly dividend, and that gives some volatility in a very special quarter like the second quarter, we will be paying out USD 16 million, which is the excess cash above our targeted cash balance in August. And with that, Andreas, I hand it back to you for the outlook.

Thank you, Espen. Yes. And with the outlook, starting with the markets, demand for ocean transportation is accelerating, supported primarily by strong growth in exports from China, both for vehicles and high and heavy equipment. And the capacity market is further tightening with 60% increase in July charter index prices, obviously, also then creating a limits to our flexibility on the capacity side, but also reflecting a very strong market. Q3 remains impacted by high fuel prices and delayed BAF revenue, but cash conversion is expected back to normal in Q3. Normalized performance with full run rate BAF compensation is expected within the third quarter. And Q3 EBITDA is expected then to be roughly in line with Q2. So that's our guidance, a very, very strong market, still some of the kind of effects from the fuel and BAF accounting-wise coming into the quarter less cash-wise. But the underlying market suggests continued strong demand and continuing full utilization and also a strong environment for contract renewals. Thank you.

Andreas and Espen, we can start our Q&A session. We have received a few questions from our online audience during the presentation. And the first set of questions is coming from analyst, Sondre Snersrud from Nordea. First, on net working capital. We talked a little bit about that in a previous slide, and then we guide for a normalization of cash conversion in Q3 -- within Q3. But how -- can we say again about how is the outlook for the underlying net working capital level? And can we say a little bit more about expectation reversal and when we can expect that?

So I mean, as we said, it's a very special quarter for us and the working capital buildup is significant. It's driven by 2 things: it's the fuel inventory following higher fuel prices, which will come down when fuel price come down. The other part is the increase in receivables, and that is related to this rerouting of Middle East cargo. 16,000 units, big volumes spread out on different locations. This volume is from our largest clients, some of our absolutely biggest customers. So we're not concerned. We will not [ get paid ], but it takes longer to process for our biggest clients because this is noncontractual cargo moves with additional surcharges and so forth. So the increase in receivables at the end of the quarter is related to those Middle East cargo moves and wasn't paid at the end of the quarter, but it's largely paid today.

Thank you Espen. The second question, surcharge lag. For this quarter, we highlight a surcharge lag of 5 to 6 months, even just somewhat longer than the previously commentary about one quarter. I think for these questions, I can just take it. We're consistent with our previously guidance of a surcharge lag for 5, 6 months. And it's a combination of the 2 main factors, is the time [ lag ] nature of the back where the price, [indiscernible] customer is they on the previous quarterly price and the privatizations effect. You want to add something more?

I mean, that, basically, what that means is that we load cargo and invoice and it takes a while and before actually the cargo is -- the work is fully done and the actual BAF revenues is prioritized over that period while it's invoiced separately.

And the next question is about capacity. I heard at 2 charters for the quarter, how is the view on capacity needs going forward with regards to the contract backlog?

I think there are 2 answers to that. In terms of the contract backlog, we are largely covered in terms of the market opportunities, we will clearly at all times, be looking for additional capacity because we have good opportunities to put more capacity to work, but we will, given our very, very attractive cost of newbuilds. We will be very careful going into long commitments at pricing that is substantially above newbuild parity, which it is today.

Thank you, Andreas. Contract renewals, can we say a little bit about the sentiment and dynamics in contract renewals this year compared to last year? Can we say a little bit more about the [indiscernible] directions and the duration we are seeing?

Yes. I mean I think it's a very fairly simple, maybe a bit complicated as well. But I think when you also looked at -- if you go back to 2024 and '25, you've had an environment where we expected the newbuild deliveries to catch up with the demand growth. And I think the kind of contracting market was probably more in a less for longer mindset. We're now in a situation where the capacity market has tightened. The availability of lease to charter tonnage is both limited and very, very expensive. And a lot of our Asian customers simply have uncovered transportation needs going into containers and chasing solutions. So the dynamic is fundamentally changed and it's more back to sort of the earlier days, so it is changed, and it's mainly driven by the fact that there is large uncovered transportation needs, there is more cargo going into containers. There is not sufficient RoRo capacity on offer, and there is no easy way to get it through the charter market. That changes dynamics quite substantially.

Thank you, Andreas. And the next question is about the spot exposure. Hoegh Autoliners has previously been successful with higher -- somewhat higher spot exposure during time markets. So could this be a strategic play going forward given the tight market? Or we continue to pivot towards a longer contract?

I mean, first, I think I mean, right now, would we have wanted to have more spot capacity? Yes. But I still think over the cycle that our -- we have spent the last couple of years building strong relations with our existing large customers and also a number of growing customers. And we believe in our business that, that is valuable. So we will continue that strategy. So I don't think we will seek to go back to higher spot exposure. We would -- we are very pleased with our newbuild effort, creating capacity. We are, I mean, which I think is also indicating some of the tightness in the market. We have chosen to do a 30-year class renewal on a couple of vessels, which is something that we generally do not like to do because of both the fuel efficiency and the cost of those vessels. So we are obviously actively chasing capacity. Good part is that with a exceptional performance of the [ Euro ] class, we are still managing to provide market-leading performance in terms of reducing our carbon footprint and efficiency. But the capacity game is become -- is basically rather closer to where it was 2 or 3 years ago. And while the last 1.5 years, I think there has been -- it's been colored by the expectation of the market balance on capacity softening, which has sharply reversed during the first half of 2026 obviously changing the market dynamics substantially.

Thank you for the elaborated answer, Andreas. And the next question from analyst, Oliver Dunvold, ABG SC. It's about operations. So with extreme export growth out Asia, are we're seeing an increased port congestions in the West? Are other terminals are able to handle all the volumes.

I mean I say generally, yes. But I mean, I think there's more -- and the port congestion issue, if you say, is more a question and the disruption in the Middle East is creating a huge appetite for alternative routes where you don't have the structure and you don't have -- that one is challenging and remaining challenge. I mean the challenge of actually serving the Middle East market, is remaining. And obviously, port congestion is increasing with larger volumes. But I think it's mostly related to Middle East being a fairly substantial market, not being able to be served through the traditional developed port infrastructure is creating ongoing challenges.

Thank you, Andreas. Yes. And the next sets of question from Analyst Jorgen Lian, DNB Carnegie. We already answered in details about the stickiness of the higher net working capital and the TCI and capacity market. So that's why we're not going to ask this question again. The next question is about the outlook of Q3 EBITDA in line with the current quarter, in saying is implying that there's an underlying numbers of the Q2 cost you guide for the Q1 report, mainly the USD 20 million Q-on-Q fuel cost and the USD 10 million Q-on-Q Middle East disruption costs is still extending into Q3? Can we elaborate about the in line guiding the Q3 EBITDA?

I think we -- in the first quarter, we guided that we would have a USD 20 million impact from fuel, and we had a USD 22 million net fuel impact. So that was according to our guidance. Underlying performance improved somewhat. So we came in ahead of our guidance, and we have been able to invoice all the additional costs related to this routing to our clients. And I think we also were very prompt to handle this disruption, actually being able to grow volumes from the first to the second quarter. And I think -- but I think we have been very clear that when you have a spike in oil prices, that takes 5 to 6 months. So it takes 2 quarters for us to come through the P&L fully. We have a 95% recovery over time, but it takes 5 to 6 months for us due to the length of our voyages and prioritization of results. That's why we're saying that we will have full recovery within Q3.

And I think if you add to that, I mean, I think the guiding, which is -- I mean, first, we're always careful of guiding exactly on working capital because that's obviously difficult on a specific date. But what we are clearly saying is that by the end of third quarter, we're back to normal run rate, both in terms of EBITDA and cash, and we're saying that cash conversion is coming improving faster. But the drag in Q3 is pretty much driven by the fact that we start the quarter in a still somewhat disrupted environment, and we end the quarter in what we basically call normal performance. And that obviously covers the average, the full number for the quarter.

Thank you Andreas and Espen. For the next question, I guess, we've already [indiscernible] touch up on it, Andreas, during the answer for the capacity market question. But given the stronger market outlook, that restrain our ambition for fleet size in the future?

I mean I think we will -- given the strength of the markets and actually also given the kind of aging of the current fleet, the global fleet and our fleet, we are seeking capacity addition and capacity renewal opportunities. But we are very, very strongly committed to retaining an industry-leading cash capacity cost because we believe the company and our shareholders best in the long term. So we will have a very disciplined approach. But we're clearly -- we will hunt for capacity, but we will not commit ourselves to long-term high charter costs.

Thank you, Andreas. Yes. And the next set of questions coming from Climent Molins from Value Investor's Edge. First, could we compare the cost basis of shipping cars by container versus using RoRos, and how much less efficiency using containers compared to reducing a traditional RoRo vessels?

We have had that in a couple of, I think, some quarters ago. But what we have seen without sort of giving the exact numbers is that when rates for RoRo is excessive being substantially for margin -- for incremental cargo being substantially ahead of the kind of rate level that we report today in our system. And actually also when RoRo capacity is simply not available, you see volume drifting into containers. It happened after the pandemic in a fairly strong way. What we're seeing is that when -- at rate levels and at or definitely lower than what we report today, these volumes and with availability of our capacity, those are coming back. And it's partially a pure cost calculation. It's also a question that we had sort of discussions with -- I did actually visit the port of Barcelona towards the end of last year that told the story of the additional land-based costs where during the pandemic, massive car imports came in containers and there's simply no infrastructure to handle the packing and things around it. So it's partially the pure transportation cost, but also a sort of supply chain costs that makes at least on any large flows of cars, most -- all of our customers strongly preferring RoRo over container as long as the sort of pricing is not totally out of line. Then obviously, if you have 10 cars going somewhere, then containers might be fine. So it's -- but if you have 3,000 a month, it's simply quite cumbersome. And most of our large flows and most of our large customers are more in that territory.

Thank you, Andreas. Yes. And the next questions, with car manufacturing margins in China severely under pressure, to what extent, we expect continued export growth versus capacity rationalizations? Our export margins higher -- much higher than the domestic ones that could lead to the continued growth?

I mean, I don't think we have full transparency on that, but we have strong indications clearly that the export margins are substantially higher. So that -- and we had that discussion when tariffs were introduced, where the messages we got from, from our customers was that it doesn't really impact their volume aspirations. And I think you also see the car exports growing in more markets. So it sort of get that sort of diversification out of it. You see -- also see high and heavy and equipment growing, creating sort of a broader cargo mix. But I mean, I think it would be exceptional if the Chinese growth should continue at the current pace. I think we do expect that some production will be shifted closer to market and some of those kinds of things. But for us, it seems like -- I mean, looking at the volume aspirations, both of our automotive customers and the high and heavy customers we believe the likelihood of continued growth is still high. So the situation is positive and product price point margins, as you said, is supportive to that. And that also comes in the sense that we are a bit surprised because the Middle East has been a high-growth market also for Chinese cars, and that has been choked by lack of transportation options. And you've seen this kind of exceptional growth regardless of that. So I think there is also still opportunities on adding additional markets, whether that's Africa, other parts of Asia, South America, Middle East and then broadening the product mix probably offset by some localization of production to, for example, in Europe, where volumes are high. And still, the market share is still -- I mean, it's growing rapidly, but it's still not so high that it necessarily some limits to it. But we don't expect the first half growth rate to continue. That's -- and I don't think that would be almost impossible to serve from our point of view.

Thank Andreas, yes. And the last question is about the fleet ambition. Is it already addressed for by Andreas earlier, so I want to just skip these questions. I think that brings us to the end of the Q&A session today. And of course, if you have further questions, feel free to reach out to us via Investor Relations mailbox and we will address that question to you later. Thank you very much for your attention today, and we look forward to seeing you next time.