ACV Auctions Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 2 speakers on the call.

Operator

Everybody. I'm Christian Karloklev, CEO of Flex LNG. Today, we are presenting our 3rd quarter numbers and we'll be joined later in the presentation by our CFO, Knud Trollt, who will walk you through the numbers. Just To remind you, we also will conclude with our Q and A session. And the best question for today's question will win a gift.

Operator

This time, the Flex LNG thermos, minimize boil off and Abeni, which is nice when the winter season is approaching. This is for the Norwegian brand Amundsen, named after the Norwegian Explorer, Hoehn, who are the first guy on South Pole with a nice Flex logo. So please send in questions on the chat function or by e mail to irflexlng.com, and we will cover as many questions as we can at the end of the presentation. So before we begin, just let me remind you about our disclaimer. We will be giving some forward looking statements.

Operator

There are limits to how much details we can cover. So I would also recommend you to review the earnings release we presented also today. So let's start with the highlights. Revenues came in at €94,600,000 for the quarter, in the high end of our guidance, €90,000,000 to €95,000,000 That resulted in strong earnings. Net income, €45,100,000 translating into earnings per share of €0.84 Adjusted numbers where we are eliminating gains on derivatives came in at EUR 36,100,000 of adjusted net income, translating into EUR0.67 per share.

Operator

During the quarter, we had all Turin LNG carriers back in operation. We completed the dry docking program in the first half of the year with 1 ship in docking the Q1, and then we took out 3 ships during Q2 for the 5 year special survey. That means we are done for the year, and we only have 2 ships for drydocking next year. So with all the ships back in operation and a stronger spot market positively impacting Flex Artemis, which is on a variable higher. That is the key reason for revenues growing from the Q2 to the Q3.

Operator

The overall LNG market bought freight and product is balanced with high inventories of gas in Europe prior to the winter season. So that has also resulted in gas prices coming down to more normalized level from the very high levels we saw last season. With the stronger spot market, we do expect revenues to pick up slightly in Q4 with revenues about €97,000,000 to €99,000,000 also in the high end of the guidance. So with the Strong numbers in Q3 and the strong guidance for Q4, we are well on track to meet the financial guidance for the year, EUR 370,000,000 of revenues and adjusted EBITDA of €290,000,000 to €295,000,000 So with good numbers, our very strong financial position, our completed drydocking program. The Board has decided to pay a special dividend of €0.125 on top of the regular €0.75 of dividend.

Operator

This gives an attractive yield of 0.87 €0.05 per share. And if you look at the dividend over the last 12 months, it should give a yield of about 11%, dollars 3.375 in total during the last 12 months. So let's look at the guidance. So we are walking the talk when it comes to our guidance. We are spot on delivering the guidance we provided in Q4 when we reported in February.

Operator

Revenues are expected to come in at around SEK 370,000,000 in line with guidance. Adjusted EBITDA also in line with guidance. And we have also guided the time charter equivalent rates for the year. We have guided about $80,000 and we do expect time charter equivalent earnings on average to come in at about $80,000 As you might recall, we also did a guidance on docking. We expected 80 to 100 days of hire in relation to the 4 dry dockings.

Operator

We delivered that on 77 days. And then we also guided on the CapEx for the docking, €18,000,000 to €20,000,000 We did it at €20,000,000 So also those parameters exactly on the guidance provided. So let's look at the portfolio of ships. We have 13 ships in the portfolio, as I mentioned, all back in operation, 12 of the ships on fixed higher rate. And then as I mentioned, Flex Artemis on a variable higher linked to the spot market rates.

Operator

First fully open ships we have is 2027. We do have FlexRanger fully open end of Q1 2027. Flex Freedom, there is an option to for the charters to keep that ship to 29. Flex Aurora and Voluntaire are firm until 'twenty six, but the charterers has an option to extend those to 2028, which we think is fairly likely. FEXCO ranges and Resolute, we do expect those the charter to exercise those options and bring those ships into 2029.

Operator

So the only ships where we see potential of getting back In the near term, it's Fekes Constellation. That ship is fixed until Q2 next year. The charter has an option to extend that ship by 3 to 1 year. If they declare the 3 year option, She will be fully open 2027. Let's see.

Operator

We will know when we are presenting of Q4 numbers in February, whether this ship has been extended or not. FLEX Artemis, as I mentioned, is on a variable time charter with a minimum period until Q3 2025, but also where the charter has the option to extend that ship and well into 2,030. And as I will come back to you in the market section, we do think these positions are very attractive when comparing to the overall fleet supply and demand and also where new billing prices have been heading. So before handing over to Knut, let's review the dividend. €0.67 of adjusted earnings for this quarter, slightly higher for normalized or normal basic earnings.

Operator

We are paying then a special dividend on top of the regular €0.75 giving our total dividend for the quarter of €0.875 which gives in total this dividend I mentioned, dollars 3.375 last 12 months. And of course, the decision factors we use in order to determine the appropriate dividend level, we have been covered well in the past. Earnings and cash flow is back to dark green. Market outlook, we have downgraded to light green, and this is just a reflection of the fact that next year, 2024, there are more ships than molecules hitting the water, which has soften the term rates the last 6 months or so. So with that, I hand it over to Knut, and then I will revert with our market update.

Operator

Thank you.

Speaker 1

Thank you, Oosthen. Let's look at key financial highlights for the quarter. On the revenue side, all 13 vessels were in full operations. And combined with the increased earnings under the Variable index charter for the flex Artemis, the revenues increased by approximately €8,000,000 to €94,600,000 Operating expenses, slightly lower this quarter at close to €17,000,000 or 13,100 per day. As we have explained before, the OpEx is a bit Bumpy between the quarters, and we have guided OpEx for the full year at 14,500 and we have some expenses that will come in Q4.

Speaker 1

So we're guiding towards the OpEx per day for the full year of SEK 14,500. Net interest expenses, which includes SEK 6,700,000 in realized gains from our derivative portfolio came in at close to SEK 21,000,000 and equal to last quarter. And then long term interest continued to increase in the quarter, and We book unrealized gains of NOK 9,000,000, which then results into a net income of NOK 45,100,000 for the quarter. That gives earnings per share of SEK 0.84 And then adjusting for the unrealized gains, We have adjusted net income of SEK 36,100,000 or adjusted earnings per share of SEK0.67 Looking at the balance sheet, it remains clean and simple. On the asset side, we have cash of €429,000,000 and then we have our 13 vessels, more or less sister vessels with an age of close to 4 years at a book value of SEK2,200,000.

Speaker 1

And as a reminder, these assets are acquired at the low point in the cycle. So they are much lower than the asset values in the market today and the current newbuilding prices. And that gives us a book equity of €875,000,000 or from long term leases and 50% is term loans and RCF from traditional banks. And netting out The cash we have on balance sheet, we end up with a net debt position of SEK 1,400,000,000. And if we look at the debt maturity profile, our first maturity is done in 2028.

Speaker 1

And the combination of this financing gives us a very attractive funding portfolio. And We have this SEK 400,000,000 in RCF, which then we can repay in between quarters and save interest rate cost. At the same time, it gives us the optionality to active their opportunities in the market. This quarter, we deep dive a little bit more into our balance sheet and show here the difference between the debt and our book values and how the debt is repaid much faster then the book values are depreciated. On the balance sheet, we depreciate over 35 years down to a conservative scrap value.

Speaker 1

And as you see on the right hand side, the recent retirements in of LNG carriers is closer to 40 years on average. So even the book values are depreciating faster than the economic life of these vessels. And at the same time, the book values are low compared to the current market. However, our funding portfolio, And there is from particularly from the leasing houses and the traditional banks. They are more conservative.

Speaker 1

So our debt is then repaid over approximately age adjusted repayment profile of 21 years. And that gives us we repay This our debt, 1.7x faster than the book values are depreciated. So we are then saving up about $40,000,000 per year. Our interest rate portfolio now Combined consists of a portfolio of SEK720 1,000,000 combined, which Net of utilization of the RCF gives us a hedge ratio of about 65% for the next quarters. As you know, we've been quite actively managing this portfolio.

Speaker 1

And that gives us now a book value on balance sheet of SEK67,500,000. If we look at the period from January 2021, We have realized and unrealized gains from this portfolio of EUR 128,000,000. So we're quite pleased with the exposure we have today and believe that should protect us in this current high interest rate environment. And that concludes the financing. And back to you, Jose.

Operator

Thank you, Knut. Very efficient. So let's look at the overall market. Volume growth, fairly muted this year. In the past, LNG export growth has been typically 7%, 8%, but we are in a period now with lower export growth.

Operator

I will come back This is a bit later in the presentation. About 3% growth year to date through October. Not surprisingly, maybe U. S. Is the big contributor to the growth, growing 6,700,000 tonne or out of the 8,000,000 tonne and thus becoming the biggest exporter again, 70,000,000 tons, slightly ahead of Australia and to other big export nations.

Operator

Russia, despite war and Ukraine, they are exporting healthy levels, 26,000,000 tons, slightly below the levels last year. One outlier this year has been Algeria, which has been growing that export rapidly, both the pipeline and LNG, up close to 40% with 11,000,000 tons year to date. Yes, and then it's about 100,000,000 tonne for the rest of the producers. On the import side, European demand this year has been fairly flat. There has been less gas demand in Europe this year compared to previous years.

Operator

We've Seeing an uptick in gas demand in Europe in October, first time in a long time we have seen European gas demand picking up. But European demand is quite strong because a lot of Russian pipeline gas, which has been curtailed, need to be replaced with LNG. And European demand year to date is 103,000,000 tonnes similar to last year. So actually overall, it's China growing their imports, up 12% year to date with 6,000,000 tons more imported, while Japan, which is firing up The NUCs has reduced our demand by about 10%, leaving room for the Europeans. So I already touched upon it.

Operator

It's been a lot of supply events the last couple of years. We had the war in Ukraine, of course, which started to curtail Russian pipeline gas to Europe, especially this Happened when we had the explosion of the Nord Stream pipeline. We also had like explosion on a big U. S. Export plant, the Freeport, which sent these two events sent prices of LNG all the way up to $100 per 1,000,000 BTU, which equates to close to $600 per barrel of oil.

Operator

Since then, prices have come down a lot. And during the summer, we actually saw the lowest prices on spot LNG that we have seen since summer of 2021 as reported here by Wall Street Journal. Then during the summer, when prices hit kind of parity with the contracted LNG, which is typically being sold 20%, 25% discount to oil. This dotted line called Brent 13%. Then during the summer, we saw Bigger outages in Norway, we had a deferred maintenance season for Norwegian gas exports to Europe.

Operator

First, this was deferred during COVID because of difficulties of maintenance during 2020 and 2020 with 2021. And And then last year during the energy crisis, Norwegian maintenance season was deferred again. So the maintenance season for Norwegian Pipeline Gas Export has been very long this year, and we had a big bounce back in Norwegian pipeline gas exports to Europe in October after hitting a 4 year low in September. So with the Norwegian outages and the fear of threats or fear of strike in Australia curtailing LNG exports, LNG prices has rallied through the autumn and are now at around $15 a pretty good premium to the contracted price of LNG. And if you look forward, prices seems to be stabilizing at this kind of level.

Operator

So if you look at the overall market in terms of prices, gas is still very cheap in U. S. This is the Henry Hub. You do find places like West Texas where gas is much cheaper than $3 as well. But this gives very good economics of exporting gas by liquefying it and shipping it to international markets.

Operator

Our big parcel of LNG has a cargo value of €13,000,000 in If you put the liquefaction cost as or the tolling fee as sunk, and then you can make $40,000,000 $50,000,000 shipping that cargo either to Europe or to Asia, which is a longer route, which then entail more shipping costs. So even though prices on for LNG has come down to more at normal levels. They are still elevated, reflecting the tight product market. LNG today at around $15 which is the average of the European and the Asian prices, is equivalent to about $87 per barrel of oil, still a $4 premium to oil price. About twothree of the volumes being shipped are linked to oil prices at a discount.

Operator

And these contract volumes typically shift hands for about $10 to $12 per 1,000,000 btu, I. E. At a discount to the oil prices. If we look at drill down to some of the market, as I mentioned, China has been bouncing back in terms of demand after they scrapped their 0 COVID policies, but levels are still below the levels we've seen in 2021, but above the levels we've seen last year at 58,000,000 tons so far. So there are room for further growth in the Chinese demand, but the Chinese demand is typically more price sensitive and the economic recovery have been somewhat muted compared to maybe expectations.

Operator

Then on the other big Northeast Asian market, Japan, Korea, Taiwan, it's mostly Japan dragging down demand. The other 2 key markets, Korea and Taiwan, are fairly flat. But with the start up of more nuclear power in Japan, they can shy away from buying quite expensive LNG. Looking at Europe, which has been the big buyer of spot LNG the last couple of years, we are at the level similar to last year, but well ahead of the levels we saw in 2021 prior to the curtailment of Russian pipeline gas, to Europe. But with muted gas demand in Europe, We have seen now inventory levels hitting about 99.5% full before now we're really starting the big consumption season during the winter season.

Operator

It's worth noting that also Ukraine has allowed European buyers to utilize about half of the gas storage levels in Ukraine, 15,000,000,000 cubic meters. So far, only a fraction of this has been utilized. So there is still room to store more gas in Europe if the Ukraine storage levels are utilized. Looking at floating storage, typically when you have tank tops or where you have a situation where gas is more expensive In the future than today, we do see a buildup of floating storage on ships, and this has become quite usual during the early winter season. And we actually saw it this season as well, our rapid buildup in floating storage with the prompt prices reacting positively, pumped prices going up because of the Norwegian maintenance season and the fear of a strike in Australia.

Operator

The economics of floating storage have gone down, and we have now see reduction in the numbers of ship floating with cargoes. And of course, this is also releasing more ships to the market. So we have had when we have seen this dip in floating storage, we also seen a dip in the spot prices, but they have bounced back. And the spot rates are at very good levels. We are talking spot rates for modern tonnage at around $200,000 per day, and they are acting in accordance with the seasonal pattern where you have higher rates in the winter season.

Operator

We have made this scale on the left hand side in logarithmic scale. So it seems like it's not far away from the numbers we've seen last year, but actually they are about half the levels as we saw record rates last season with rates hitting about $500,000 per day. The forward line or the dotted line is the forward prices for freight for the rest of the year. So we do expect rates to stay at this elevated level for the remainder of the year despite the fact that we have seen a fairly low tonne mileage this year. On the right hand side on the top graph here, you do see the average sailing distance, which is fairly low, reflecting the fact that Europe is buying a lot of the spot cargoes compared to 2021.

Operator

Also worth noting, fixture activity has gone down. The term market has been active. A lot of the Charters have been fixing ships on term contracts in order to take advantage of the incredible cargo economics, which are still attractive today even though spot LNG prices have come down. And with all the charters being fairly long shipping, there are less spot fixtures in the market as you can see here on the graph on the right hand side in the bottom. And also maybe worth mentioning also that a lot of the fixtures or actually most of the fixtures being done are being done by charters, not independent owners as the independent owners have more or less left the spot market today.

Operator

So let's look at the more the term market where we are exposed as newbuilding prices have been picking up and now stabilizing at very high levels, about $265,000,000 for our newbuilding today. This has also pushed up the term rates in tandem with higher interest with higher interest rate and higher investment in order to build a new ship. You need higher term rates, and 10 year term rates has stabilized at around $100,000 per day. We as I mentioned in early in the presentation, we have guided $80,000 for this year. So we do think that there are opportunity to fix our ships when they are coming off charter at higher levels.

Operator

The 5 year rate, it's about $115,000 per day. So look at the outlook for the product market. We have had we are in a period now, as I also mentioned in the beginning, with muted export growth. We had a wave of volumes coming to the market from 2.16 to 2.19, predominantly big projects in Australia and big project in U. S.

Operator

Enabled by the shale revolution. Then with the trade war breaking out between U. S. And China, and then Once that was resolved, more or less, in January 2020, we had COVID for our extended period. And that has impacted people's ability to sanction new volumes.

Operator

So once we came out of COVID, we have seen a flurry of new projects. And this project typically takes some time to come to market. So we do expect the new wave of LNG export growth to start from about next year, 2024, but the real growth we are not really seeing before 2025, 2026 and onwards when a lot of new volumes, including U. S. Volumes and including the big expansion in Qatar, is coming to the market.

Operator

And that will drive a lot of demand for shipping, which is the next topic and the last topic I will cover. So if we look at where are we in terms of supply and demand. This is always a very difficult calculation. We have made our own model, but this model here is basis a recent model from Affinity. There is about 300 ships under construction today.

Operator

It's a massive number. But as I shown on the last graph, there's also a massive amount of new LNG coming to the market, especially from 2025, 'twenty six onwards. So how will this market balance out? We do see next year volume growth in terms of exports are quite muted while there will be a lot of ships in the market. There's also there's more export growth coming to the market in 2025, but there's also a lot of ships.

Operator

In addition, it's worth noting that about 200 of the ships in the fleet today are all steam turbine propelled ships with which are too small and very inefficient. As we have shown in our presentation in the past, about 100 steamships are coming off charters by 2027. So these are ships that have been fixed typically 2025 year contracts. And once they are rolling off Those contracts, the charters will typically not extend those ships because of the inefficiency of the ships. So this means that we have a line here, the blue top upper line, which is the shipping balance if all ships continue to trade.

Operator

Then it's reasonable to assume that some of the steam ships will leave the market. It's because they are coming off charter. It's also because of the decarbonization rules, which have come in force. And there are also new decarbonization rules coming into force from January next year, which is the EU ETS, which is a carbon tax for shipping. So all of these drivers will drive scrapping up.

Operator

And then it's a question how much scrapping will pick up. As Knut shown in his graph earlier today, Average scrapping age is 40%. We do think that number will come down a bit. So the dotted line here is that Eventually, we would scrap 25% of the steam fleet. But eventually, by 2,030, I think most of the steam ships have left the market.

Operator

So the green line is basically reducing the 100 ships coming off charter by 2027. And then, of course, you do see that this market is starting to balancing in 2026 and then becoming tight from 2027. And if you look at our portfolio of ships, we have 2 ships fully open in 20 27, Q1 and Q2. And then the last next two ships coming fully open is Q2 2028. And when you look at the shipping balance, the export growth, the numbers of ships and then adjust for sailing distance and scrapping.

Operator

We do see that this market will be a bit loose, the 2024, 2025 and then starting to tighten in 'twenty six and becoming increasingly tight from 'twenty seven and 'twenty eight, which I think will give us a good opportunity to fix ships for longer contract duration at higher levels than we have today as evident from the term rates. So with that, I think we conclude with a summary of the highlights. Revenues, as I mentioned, came in high end of the guidance, SEK 94,600,000, giving us SEK 45,100,000 of net income or SEK 0.84 per share, adjusted numbers for where we adjust all these unrealized gains on derivatives. Knud talked about €36,100,000 or €0.67 per share. As I mentioned again, all our ships are back in operation.

Operator

We will only have 2 ships for drydocking Next year, the strongest spot market will impact flexoptimist positively not only in Q3 but also in Q4. So we are guiding even stronger numbers for Q4 with revenues of €97,000,000 to €99,000,000 which means that we are well positioned to deliver on our guidance. And then we will come up provide you with a new guidance when we are reporting Q4 numbers in February. And with a good Financial position, strong numbers. We are glad to once again provide a special dividend of €0.125 on top of the regular SEK0.75 which I hope give you a very attractive return being invested in Flex LNG.

Operator

So with that, I think we conclude the presentation and we pick up with some questions, Knut. So let's see what we have of questions from the audience. Thank you. Okay. Let's see what we have of question, Grund.

Operator

Who should we start with?

Speaker 1

Again, thank you for all the questions. And I think we as before, we start off with a question from Omer Noktor from Jefferies. What's driving the divergence between the time charter rates and the spot rates? It appears to be moving in different directions over the past 7 weeks.

Operator

Yes, they've been living separate lives, but there are good reasons for this. Spot rates are for us usually a single voyage and We are entering into this winter season. Product prices are conductive for freight. So you usually do see that spot rates are high at this time of the year. Term markets is more about future expectation for whether it's the next 12 months or 3 years or 5 years.

Operator

So that is more driven by the outlook. The outlook for the rest of the year is really good with rates at around $200,000 If you are fixing our ship now on a 1 year time charter, you basically are fixing for next year. Recent fixtures or recent quotations for 12 months is at about 100,000, which historically, it's a fantastic number. But of course, it's been sliding, and it's been sliding because of People do see that there are a lot of ships for delivery next year. There are less molecules hitting the water.

Operator

So it's a bit softer. It's also driven by LNG prices. Our modern tonnage is more efficient than older ships. If 100,000 is the right rate for our modern tonnage, it's less for older type of ships. But Again, this is also driven the spreads here are driven by where the LNG prices are.

Operator

And right now today, dollars 15 is quite conductive for modern tonnage. It's, of course, much less for our whole steam ship, which is consuming about 60% more fuel in order to move the same amount of cargo. And then if you go further down the road, you have 5 year time charters, 10 years charters. We don't really see many people fixing 10 years prompt. So when people are fixing a ship prompt, it's mostly 1 to 3 years.

Operator

Last year, when we fixed a lot of ships, there was it was more prompt interest for longer term. We have seen declining Interest for term, the last 5, 6 months. So there are a few fewer of those fixtures. But still 100,000 is a good level. We do expect the usual seasonal pattern where spot markets are peaking prior to peak winter season and then that we do see a decline in the spot rates when we're getting into next early next year.

Operator

And this is usually also a result of the fact that typically a lot of newbuilding deliveries are skewed towards the beginning of this year where they get the next year vintage and then increase the availability of ships in the market. So I do think when we do have the Q4 report in February, term rates are probably higher than spot rates.

Speaker 1

And as a follow-up question, Touching upon it, it's about how liquid is the time charter market Between the different durations of 1 year, 3 year, 5 year and also up to 10 year.

Operator

Yes. I think This is sometimes a question we get and people do think that this term market is very liquid. It's not. It was very liquid, Unusually liquid last year when we did 10 year rather prompt on rainbow and then 7 year charters for Enterprise and Amber. And then we also fixed 3 ships with Cheniere for a longer duration.

Operator

It was the term market was fairly liquid until the summer, and it's been less liquid since. Once the spot rates come down from the elevated levels. If you can fix a ship for $100,000 for 12 months, you might rather do that than fix a ship for 5 years at $110,000 you had a rolled spot market. So it's become significantly less liquid. Fearnleys had the LNG report from Q3 where they actually have a graph on the number of term deals up to 3 or 5 years, I can't remember, but where we've seen a pretty big decline in term deals being done.

Operator

However, If rates get competitive enough, you will probably see a pickup in activity.

Speaker 1

Then there's a couple of questions on the Panamax Canal and the situation around that. Can you update those? What's the status with the Panama Canal?

Operator

Yes. It has been a very exciting day. Maybe I should start from the beginning to just give you a description of what's happening in Panama. So in 2,009, the Panama authorities decided to expand the Canal. And the reason for this was due to the increase in container traffic, especially between China and U.

Operator

S. China became a member of World Trade Organization, December 2001, and we saw a rapid increase in trade. And then we also saw a new class of container ships with a wider beam, which could then carry a lot more containers than the older type of ships. So this was called now the Neo Panamax, typically around 14,000 TEU. So they expanded the canal in order to facilitate more container And once the Canal opened, eventually, they've been gradually able to increase capacity in the Canal for both the Neo Panamax slot and the older Canal to about 40 transit a day.

Operator

Usually, they operate with 36 ships, but at peak season, 40 daily transit are day. Where typically the new big ships, These are ships without which are has a beam of less than 50 meters, which includes the LNG ships, but it's It's wider than 32 meters. These ships, they're usually it's about 10 transit of these kind of new Panamax ships every day. However, when they made the decision to expand the Canal in 2,009, U. S.

Operator

Was a big importer of gas. Today, U. S. Is the biggest LNG exporter in the world and by far the biggest exporter of LPG. This means that when they expand the Canal, they never foresee that certainly U.

Operator

S. Would be this huge exporter. So We always have every year, the canal has become more and more clogged because of this the growth in trade basically from U. S, both container but also then LNG and LPG. So what has happened this year with El Nino, it's been a drought.

Operator

And The canal is fed by a water source called Katun Lake. And When there's less rainfall, this is a very wet place. Usually, it's about 200 days of rainfall every year. When it's been less rainfall this year, There's not been enough water because every time you put our ship through the canal, this is like a water elevator. You put the ship through the canal and you are lifted above water level and then down again.

Operator

So every time one ship goes through, it's like 50,000,000 gallons of water being lost to the sea, which is almost 200,000,000 liters of water. So you consume a lot of water. Actually, you consume I believe it's like They can all consume 4.5x more water than the entire population of Panama. And this is freshwater, so it's not So with the draft now, Panama has restricted the numbers of daily transit, 1st from 36% to 32%. And now Last week, there were further restriction where this daily allowance will go down to 18 by February.

Operator

So this means There will be a lot less space and ships, especially LNG and LPG ships, need to find different routes. So if you're exporting out of U. S, you might rather go maybe through Suez or Cape of Good Hope in order to carry your cargo to destination, which typically is Asia. So the container ships are the one who are paying the most, and that's why they get better access and then there's less room for LNG and LPG ships. So now recently, the Canal has stopped auctions for a week, and they restarted it today.

Operator

And not surprisingly, we smashed all records today. So the price for a kind of spot slot in Panama today reached $3,975,000 so almost $4,000,000 in order to get a spot auction slot in Panama. On top of that, you also have to pay the regular transit fee. So You're getting close to $4,500,000 to use the Canal. So that is pricing out a lot of ships, including LNG ships from the and that's why you see a lot of increase in sailing distances for both LNG and LPG ships.

Operator

For us, in Flex, We have all our ships on time charter. This means that we are basically the Uber driver for our clients. They tell us where to go. If they go to a tolling station, they pay for the tolling station. They instruct where we go.

Operator

So if they choose to utilize the Panama Canal, it will be for their account, not ours. We get a daily hire and then they pay all the costs associated with the trade, this being the Panama Canal duties, port duties or next year, the EU carbon taxation.

Speaker 1

Okay. And then a final question is on the market and the market rates. Anders Westin asks The 5 year term rate is at $115,000 per day versus the 10 year at about $100,000 per day, which basically imply that the time charter rate in the future for between $6,000,000 $10,000,000 is about $85,000 per day. So This is the opposite of our assumption of the tightening market from 20 28.

Operator

Yes. It's a good question.

Speaker 1

So does the market believe that the steam ships It won't be scrapped or does it imply more new builds? Or is there a third

Operator

factor? I think it's mostly the 3rd factor because There's very few deals done prompt at 10 years. We did it with FlexRainbow last year, but except for that, I don't really have seen those kind of deals being done. So the 10 year charter rate is mostly for new buildings. So people are putting down $265,000,000 to build a new ship.

Operator

They get the ship and 'twenty seven, early 'twenty eight. So it's a pretty long lead time. So the cost when you are taking the time on your value of that ship is getting approaching $300,000,000 So when you make such a sizable investment, you want to have some security of cash flow. So that's why typically Owners today are asking to get a 10 year charter in order to make such an investment. So the 10 year rate is more a reflection of the tender market with ships for forward delivery.

Operator

The 5 year rates is more for our prompt delivery, which reflects what people do expect The rates to be over the next 5 years, while the 10 year time charter rate is more where people believe The rates would be from 2027 to 2,037. So it's a bit comparing apples and bananas.

Speaker 1

Okay. Moving over to Flex and Business Development. Anders Petersen says that there's an active M and A environment in shipping. And how is Flex Management interested or currently seeking out business for consolidation Opportunities.

Operator

Yes. I think we've said this in the past. In shipping, there are quite a lot of S and P transaction. It's a bit different for LNG, usually more industrial owners. So there are fewer transaction.

Operator

Although that said, there's been more transaction in LNG shipping the last 18 months that's been or maybe 24 months than there's been in probably history of LNG Shipping Industry. So we do participate in transaction that happens. We do see them on the radar. We sometimes put in bids. And we are happy to consolidate the business.

Operator

We have a good setup. We can expand our fleet without adding much costs. But we also have to pay the right price. You have to find the right assets, and then you have to pay the right price. So we are looking at that.

Operator

We're, of course, always exploring the yard market for newbuilds. We've seen The prices being becoming a bit elevated. And given the fact we have, as I've shown in the presentation, we have 4 ships open, 2 in 20 7, 2 in 28, we just stayed focused on fixing those ships for longer term contracts rather than adding more ships on top of that. But That said, we are open for consolidation. If we find owners with the right assets and the right attitude, we're happy to consolidate and be part of our bigger story.

Speaker 1

And the alternative growth is through newbuildings. And Ms. Raduvan from lngprime.com So it's the Qatar Energy plans to book more than 100 LNG carriers at yards in South Korea and China. And what is Flex? How is we are viewing this?

Speaker 1

When are we when will Flex book this 14%, 15%.

Operator

Yes. I think time flies, but I think we had the slide on the Qatari order. I think it must be more than 2 years ago. So if you look through our slide deck, we had our calculation where we said this is As I mentioned some time ago, we said Qatar will probably order more than 100 ships. And because we had a lot of banks worried about this, are they going to build too many ships and add too much supply to the market.

Operator

But there are good reasons for the Qatar making such big investments. Altogether, they reserved 151 berths at 3 Korean yards and 1 Chinese yard, Hun Hun Hun. And the reason for this, number 1, they are expanding their export capacity by 49,000,000 tons. So depending on trade pattern, you probably need 70 to 80, maybe even more than that ships just to cover the new volumes. Then they do have about 25 steam ships, which probably will be replaced when they are coming off charter.

Operator

So then you are at least at around 100 ships. And then they do have, which I didn't touch upon, on this graph where we have the supply and demand. We just stayed focused on the steam ships because it's easier to simplify with that. But They have 45 slow speed diesel ships, which are LNG carriers that cannot burn LNG. So these ships are burning marine diesel, which is quite costly when you have cheap LNG from the liquefaction plant.

Operator

And they are consuming a lot of power in order to reliquify all the boil off gas. So eventually, these ships might also be considered scrapping candidates. And these are huge ships ranging from 216,000 cubic to 265,000. So if you're replacing 1 of these ships, you need more than 1 conventional ship. So I think that explains why they are holding so many ships.

Operator

We are not participating in the Qatar tender. We have looked at it. But we rather focus on our own ships. And if there are good opportunities, we will act on them. We have the necessary financial resources to add ships, but we are always focused on having the right capital discipline, making sure we can pay good dividends to the investors who are investing in our company and not trying to just build our big fleet to in order to satisfy our growth ambitions.

Operator

So our Ambition is to deliver the best possible shareholder return.

Speaker 1

And you mentioned capital discipline and paying dividends. Couple of questions around the dividend policy and how to foresee or expect special dividends.

Operator

We tried to simplify our dividend policy even with some decision factors and green and lights. Basically, we are paying out everything we're earning. Actually, last lately, we have been paying out slightly more than we have been earning because we have a substantial cash balance. Knutelier did a good job in last year when we did the balance sheet the monetization program when we released EUR 387,000,000 of cash from that program, which kind of enable us to pay back some of the capital in addition to also the return on capital. So return off capital as well as return on capital because if you look at our balance sheet today, it's packed with cash.

Operator

And also actually, the net leverage of our fleet is very low compared to peers. I saw Pareto had a comment on it today. We have net leverage on our ships of $108,000,000 per ship. When you compare that to the market value of the ships, you get to a very low leverage. So we do think that it's fair for us to return some of that cash.

Operator

And then the cash we keep, we're not just sitting on that money in the bank. As Knut mentioned, we do have a SEK 400,000,000 revolver, which we can utilize on short notice where we can pay that back. And rather than paying the bank our credit margin on top of the interest rate, we can payer commitment fee of only 0.7% per annum, which gives us a lot of cash optionality. So You can expect the dividend policy to remain the same where we are paying back very substantial dividends based on our healthy earnings and also our sound financial position.

Speaker 1

Okay. That wraps up the Q and A session. So question is

Operator

Yes. Who is winning the thermos and this nice beanie. It's getting cold here in Oslo. So I think we're going to send this to you, Umar, since you are always coming up with questions for our Q and A session. So once it gets cold in New York, I hope you will do some promotion for us, okay?

Operator

Thank you, everybody, for listening in. We will be back in February for our Q4 numbers where we also will provide our guidance for 2024. Thank you. Thank you.

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Earnings Conference Call
ACV Auctions Q3 2023
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