Hoegh LNG Holdings Ltd. (HOLHF) CEO Sveinung J.S. on Q1 2020 Results - Earnings Call Transcript

Hoegh LNG Holdings Ltd (OTC:HOLHF) Q1 2020 Earnings Conference Call May 28, 2020 3:00 AM ET

Corporate Participants

Sveinung J.S. - CEO

Håvard Furu - CFO

Sveinung J.S.

Thank you very much. Ladies and gentlemen, a very warm welcome to Hoegh LNG's presentation of our First Quarter 2020 Financial Results. My name is Sveinung J.S., CEO of Hoegh LNG. And first let me start by saying that, I hope you all are healthy and will going continue to stay so during this unprecedented times caused by the coronavirus pandemic. I have with me today, Mr. Håvard Furu, our CFO and Mr. Knut Arnholdt, our Head of Investor Relations for the presentation from our Oslo office this mornining.

So, turning to Page 2, we have the forward-looking statements. So, please have a look at that.

Turning to Page 3 and looking at a COVID-19 update as we have called it for our company. First, I'm very pleased to report that, because we implemented a mitigation action plan in early February to ensure the health, safety and continued operations for our people and our assets, no Hoegh LNG employees have been infected by the virus, and we have seen very limited operational and no contractual impact on our business so far.

All assets are operating in accordance with our plans and their respective time charters. Obviously, we have in order to address those certainties that has been raised by the ongoing pandemic, implemented a dividend suspension and cost saving plan in order to address this, and we will come back to this in a few minutes.

I can also add that, we are seeing some very positive developments, when it comes to addressing the main operation issue we have, namely the ability to conduct the crew changes on our fleet. In that, over the last few weeks, we have been able to conduct crew changes at different places around the world. We will within the week or so have been able to do that on at least half of our fleet. So that's a very positive development, and it seems that this is going definitely in the right direction, and we will of course mean that we will be able to continue to operate our fleet as we expect.

Turning to Page 4 and going on to Page 5 on the highlights. So, we report an EBITDA of $59.6 million for this quarter, and a net loss of $1 million. The EBITDA is in line with the fourth quarter. And if we adjust for the non-cash currency loss, the net results would be also more or less in line with the previous quarter. The company paid a dividend of $0.025 for the first quarter, and we have the full contract coverage for this year and I will come back to the level of contract coverage a little bit later in the presentation for the long-term.

We have had a very busy period with completing refinancings, and asset listed here, if we include also the refinancing of the independence debt facility. We have actually completed all the refinances that we have on our list for 2020, already by this time of the year. On the subsequent events, pleased to report that we have been selected the preferred bidder for two new projects in Latin America and that we are making good progress also another project in our pipeline. In Australia AIE is making steady progress to reach the FID during the course of this year as they have previously announced. We have also completed the boil-off dispute that has been ongoing Total, so that has been settled down and we have very pleased with that. And finally we already see the positive effects of the cost reduction plan that we have put in place, in particular on our administrative costs. So a busy period, busy quarter, especially pleased with the commercial progress and of course on the financial side.

So turning to Page number 6, and the cost savings plan which is in motion. We target 6 million to 8 million in OPEX and administrative cost reductions. We are postponing some dry dockings that we're planning for this year. We have suspended the dividend. And all of this, of course, means that this would put us in a better position given the uncertain times that we are in likely will be in for quite some time. But we are not stopping here. The company will continue to work hard to improve efficiency and reduce cost where possible in order to also continue to become more efficient and in particular see what we can do in reducing both operating costs and administrative costs.

Turning to Page 6 and two, that's the 7 is the company update and Page number 8, which gives an overview of our ongoing project pipeline. And this slide as you will see looks a lot more busy than it did the last time we presented it, which of course is a very good sign and it might be a bit surprising, but we are actually making very good progress in securing new long term contracts. As I mentioned, we have been selected a preferred bidder for two new projects and short listed for a third since we presented in the last quarter. So if you look at the left side of slide number 8, the box shows where we have been selected as the FSRU provider, obviously the two projects in Australia we have already announced. And then at the bottom there are two additional projects with both based in Latin America.

We are still in the box in the middle in ongoing tenders where one of them, we have been shortlisted that's also new and we are continuing to develop bilateral projects or actually own developments run in the Atlantic basin and we are still looking at the potential for setting up a FSRU input facility in Cyprus. So this shows that, the FSRU market actually continues to function quite well, and I think it's fine to ask why is that so? And the answer for at least the way I look at it is very simple. It's the price. LNG today is cheaper than a coal. I think that's something to reflect on. LNG is cheaper than coal, but that's absolutely the first time in history and this is why new LNG importers are taking advantage of this and moving ahead with their decisions to put in place necessary infrastructure to take advantage of disposition and that is with their pandemic are not going on. I think that, this Slide here shows that the activity in FSRU market is very high and in my view we continue to stay so.

Turning to Page 9. So, how does this fit into our contraction coverage? First, let me say that, we have been able to secure contracts for our units trading LNGCs and now have coverage of 100% for 2020. We are working on doing the same for 2021 there as it's shown here, there are also options on both for the Giant and for Esperanza further extensions with those clients. On the Gannet, we have issued a new charter, which lasts until the middle of next year or late May. And that means that is actually only for the Gannet where we would see that there are some months that needs coverage for 2021.

So, where does that put us in terms of securing long-term contracts for Giant, Gannet and Gallant? Well, if you look at the portfolio of projects that I showed you on the previous slide, we have those three FRSUs to cover, and we have 7 potential projects to do so. And off those 7, we have already been selected as the preferred bidder for 2.

This means that, we feel pretty good about our contractual coverage for the long-term, but obviously we need to make sure that, those charter parties are completed, signed and be confirmed. But, we definitely see a very positive progress on the commercial side, and we feel very strongly that, we will be able to secure the long-term contracts to having been place within the next year or a year and a half.

Continue on to Page number 10 and covering our ESG and operational KPIs. This has been a very good quarter. We have put in place new sustainability targets for 2020 and that's can be seen on the right side LTI for the first quarter and the technical availability of a 100% across our fleet. I think we are very pleased with that and i don't think it's possible to do it any better.

Moving over to the market updates and coming to Page number 12. Actually the first quarter of 2020 the LNG market grew with 13%, and that is of course a very, very good result driven in my view mainly by very competitive prices. Europe continues to be the main market for growth, but also in Asia where India, South Korea main growth markets.

If you take India as an example, India's imports in the early part of this year was significantly up 15% to 20% and this again was driven by very competitive prices, but also the need for that country to continue with their switching away from coal to gas in order to reduce pollution. China, obviously in the first part of this year was impacted by the COVID-19 pandemic, as that's where it all started. But we also see there that now that is China is coming back with starting to import more and more LNG and actually we have been there for a couple of times delivering cargoes. So, clearly the market going forward, it's very uncertain how much of the demand will be affected by the ongoing pandemic and the strong economic effect that would have. But, I think that would vary a lot from country to country. So if we go and look at what is the expectation for the LNG demand going forward.

Turning to page 13. We will see that despite the COVID-19 pandemic, the market continues to grow. So if you look at the graph on the left, is illustrated that, what was the expectation at the beginning of this year which is the second line. Clearly now the expectation is that demand will be affected. And in particular for this year with the -- you can see that the line is shifted to the right, and with significant reduction expected for the total of 2020. But that's after that, the market will recover and continue to grow, of course, at the slower pace than look was anticipated. But after two to three years, it is expected that the demand would pick up with a much more strongly reaching somewhere around 450 million tonnes by the start of 2024. I think it's also very important to see where, the expectation is that, the reduction of exports will take place. So, it should look on the right side, the graph on the right, at least the major, the same graph but then of course takes the numbers and shows where one expects the reductions to take place, on the export side. And you will see that in particular, in the beginning of the period from 2023 to 2022, the expectation is that, the reduction will take place mostly from U.S. exporters. And why is that? Well, simply because the U.S. export agreements are very flexible and the off-takers have the right to reduce their off-take. And in addition to that, the U.S. exports are not tied to a particular gas reservoir. It's the whole upstream market in the U.S. So, it's easier to make adjustments and reduce the exports. This is of course not the case in other places in the world, and which is why you see that is the expectation. But I think the overall picture is that, despite the COVID-19 pandemic and the assuming economic downturn, the expectation is that the LNG market actually will continue to grow, of course at the slower pace, but it will still continue to grow. And this is why, it's important to keep in mind that the LNG market is not the oil market and should not be competitive with that at all.

Turning then to Page 14, and look at the market -- FSRU market and the order book. This picture looks more or less the way it has over actually the last couple of years. We have not added any new bid orders even though there's been reports of few Q-Max order from MOL, but the statements from the shipyards DSME says that, it's a conditional order, it's not the firm order. So, we are not put it this on the list yet. But we have added under the capital column two conversing orders, one for a project in Salvador and one for a project in Africa. However, for us this means that, the competitive situation has not changed from the previous quarter since we focus on large-size, high-capacity new bid FSRUs and there the picture is exactly the same as it was before.

With that, I will now hand over to our CFO Mr. Håvard Furu.

Håvard Furu

Thank you, Sveinung, and good morning everyone. Turning to Page 16, we have the company's quarterly results. Total income decreased from $94.2 million in the fourth quarter to $86.7 million in the first quarter. The first quarter EBITDA of $59.6 million whatsoever, almost the same as in the previous quarter, as the lower revenue was offset by reduced expenses. Owing primarily to unrealized loss on currency hedges for our 2020 admin expenses, the net results decreased from a profit of $4 million in the fourth quarter to a loss of $1 million in the first quarter. The net profit variation is illustrated in the waterfall graph and is largely explained by the following factors.

Fourth quarter had a negative one off tax accrual of $3 million related to our Indonesian operations. SG&A expenses were reduced by $3.9 million from the previous quarter mainly as a result of the announced cost saving measures. I’ll chime on Hoegh Gannet, which came off its time chartered contract in March and planned off-hire an upgrade of Hoeh Galleon reduced the results by 3 million compared to the previous quarter. Hoegh Giant index linked charters suffered from a lower market in the first quarter and the results declined by $1.9 million.

Currency hedges for our 2020 admin expenses pulled down results by $4.8 million in the first quarter because of large movements in exchange rate between the Norwegian kroner and the U.S. dollar. There are also other smaller factors equal to a net effect of $2.2 million negative explaining the variations between the two quarters.

On the next Slide, we have the company's balance sheet showing total assets of $2.6 billion which was almost the same as per end of December. By the end of March, the adjusted book equity ratio was 31% and the net interest bearing debt was $1.6 billion. The company has only limited remaining CapEx commitments.

On Page 18 we have included a cash flow statement. Cash flows from operations declined from $78 million to $51 million quarter-on-quarter, mainly explained by significant one off positive effect in the fourth quarter related to working capital changes. In both quarters cash flow related to investors were minimal. Cash flow related to financing declined from a negative of $58 million to a negative of $116 million quarter-on-quarter. During first quarter, we raised $72 million in a new bond loan and we paid 65 million of outstanding bonds. Regular debt service remained at the same level as in the previous quarter.

The negative development in the first quarter was there for largely driven by significant increase in cash collateral for hedging instruments related to our two NOK-denominated bond loans and Hoegh Galleons expected. By the end of the first quarter $59 million had been posted in collateral up from $4 million in the quarter before. These hedges are entered in terms of so called credit support agreements with the swap banks and the demand for custom collateral was caused by a decline in the value of these hedging instruments driven by sharp decline in interest rates and weakening of the Norwegian kroner against the U.S. dollar. As the NOK has strengthened recently some of these collateral has now been released. Currently collateral about $44 million remains with the swap banks. .

On Page 19, we have shown the company's debt repayment schedule debt maturities for this year have all been addressed and the remaining $65 million outstanding on the HLNG 02 bond loan will be repaid at maturity in June with money from the new up to $18 million credit facility, which was put in place in the first quarter. In April we completed the refinancing of independence by extending and outsizing the existing debt facility. The maturity was extended to end at 2024 matching the tenor of the charter with Klaipedos Nafta. The $45 million outsize announced, is available for general corporate use and was drawn upon completion of the transaction in April.

And with that, I hand it back to over to you Sveinung to summarize the presentation.

Sveinung J.S.

Thank you, Håvard. So in summary, we deliver a strong Q1 result in a very challenging environment with an EBITDA of $59.6 million. We are making good commercial progress being selected as preferred bidder for two new FSRU projects, and continuing to lengthen our pipeline. We have completed all maturity refinancings for 2020 and thanks to the solid contribution from the entire Höegh LNG team, we have limited operational and no contraction impact of COVID-19 to-date.

Thank you very much for your attention, and we will now go to the Q&A session, so we look forward to your questions. Thank you.

Question-And-Answer Session

Operator

Sveinung J.S.

Okay. Thank you very much, if there are no questions, so thank you everybody for listening in to our presentation and please everybody stay healthy, Thank you and good bye.