HAFN

Operator: Welcome to Hafnia's Third Quarter 2024 Financial Results Presentation. We will begin shortly. You will be brought through today's presentation by Hafnia CEO, Mikael Skov; CFO, Perry Van Echtelt; VP, Commercial, Søren Winther; and EVP, Head of Investor Relations, Thomas Andersen. They will be pleased to address any questions after the presentation. [Operator Instructions] During this conference call, some statements may be considered forward-looking, reflecting management's current expectations. These statements involve risks, uncertainties, and other factors, many of which are beyond Hafnia's control that could cause actual results, performance or plans to differ significantly from those expressed or implied. Additionally, this conference call does not constitute an offer or solicitation to buy or sell any securities. With that, I'm pleased to turn the call over to Hafnia CEO Mikael Skov.

Mikael Skov: Thank you, and hello, everyone. I'm Mikael Skov, CEO of Hafnia. Welcome, and thank you for joining Hafnia's third quarter 2024 earnings call. Joining me here today are our CFO, Perry Van Echtelt; our VP of Commercial, Søren Winther; and our EVP and Head of Investor Relations, Thomas Andersen. Together, we will walk you through Hafnia's performance for the third quarter of 2024. Today's agenda focuses on four main areas. I will start by highlighting our key achievements and milestones from the third quarter. Next, we will recap Hafnia's key investment opportunities. We will then review recent commercial developments and provide our outlook for the product tanker market. Finally, we will review the quarter's financial performance before concluding with an update on our ongoing ESG initiatives. Let's move to the next slide. Before proceeding, you should all be aware and take note of the mandatory disclaimer. Some statements in this call may be forward looking and carry inherent risks. This call does not constitute an offer to buy or sell securities. Thank you for your attention, and let's start the presentation. Let me begin by outlining some of the key highlights from the quarter. We now move to Slide #4. I'm proud to announce that Hafnia has delivered another strong quarter of financial results. For the third quarter, we achieved a net profit of $215.6 million, bringing our total net profit for the first nine months of 2024 to $694.4 million, marking the best nine months performance in our company's history. Our cooperations maintained their momentum to deliver robust earnings, supported by contributions from our adjacent fee-generating businesses, which added $7.8 million to our results this quarter. Additionally, I'm pleased to share that Hafnia has successfully completed its redomiciliation from Bermuda to Singapore. Singapore's position as a global hub for shipping, ship management, and its robust financial and legal sectors present significant advantages for our organization. Importantly, the redomiciliation has no impact on dividend treatment as Singapore imposes no withholding tax on dividend distributions for all shareholders. Moving to Slide #5. Next, I would like to provide an overview of Hafnia and highlight our key investment attributes. Hafnia is a global leader in the product and chemical tanker market, operating one of the largest fleets in the industry. As owners and operators of approximately 200 vessels across eight pools, we offer a fully integrated shipping platform. This includes technical management, commercial and chartering services, pool management, and a comprehensive bunker procurement desk, which has serviced over 1,400 vessels, both within our pools and for external ship owners. As of the end of the third quarter, we owned and chartered a diverse fleet of 130 vessels with a net asset value of approximately $4.6 billion. This equates to a net asset value per share of around $9.07 or NOK95.2 at the end of the third quarter. With the current exchange rate, the NAV per share has exceeded NOK100. Our key value proposition today runs deeper than ever. This has been achieved through our active management and deep understanding of market dynamics. We will continue to lead by example, drive sustainable growth, and position ourselves for long-term success. Let's move on to the next slide, which is Slide #6. We remain committed to delivering strong and sustainable value to our shareholders. During the quarter, we made further progress in strengthening our capital structure with our net LTV ratio decreasing to 19.1% at the end of Q3 from 21.3% in Q2. This achievement enabled us to reach a significant milestone in our dividend policy, distributing 90% of our net profit for the quarter. For Q3, we will pay a dividend of U.S.$0.379 per share equivalent to approximately NOK4.15, totaling $194.1 million. This marks the highest dividend payout ratio in Hafnia's history. With a solid balance sheet and a favorable market outlook, we are well positioned to continue delivering strong returns to our shareholders. Additionally, Hafnia's Board has authorized management to explore a share buyback program of up to $100 million, scheduled to run from the 2nd of December 2024 to 27th of January 2025, subject to market conditions. Authorization will be reviewed on a quarterly basis. We will disclose the structure of the program and details of any buyback as it occurs. The funds utilized for this buyback program will be deducted before declaring dividends for the fourth quarter 2024. This ensures that the combined total of dividends and share buybacks aligns with our payout ratio under the dividend policy. This approach underscores our commitment to shareholder value while maintaining strategic flexibility. Søren will now be sharing an industry review and market outlook.

Søren Winther: Thank you, Mikael. Moving on to Slide 8 in the deck. Hafnia primarily operates within the product tanker segment, where various factors influence charter rates and tonnage supply. In the following few slides, we will provide an update on current market conditions and share our outlook on the coming months. Product tanker markets has enjoyed an extended period of strong earnings over the past couple of years. This has been largely driven by geopolitical unrest, including Russia-Ukraine war and tensions in the Red Sea. These events have created new trading routes and increased vessel rerouting. In recent months, the market has experienced seasonal softness, primarily due to refinery maintenance and lower refinery margins. Despite this, underlying demand remains robust. Volumes of CPP and chemicals on water continue to grow steadily, and ongoing geopolitical tensions have caused more vessels to reroute from Suez Canal toward the Cape of Good Hope. While CPP volumes on water saw a slight dip in Q3 and also into Q4, levels remain historically elevated and we anticipate strong demand for oil products to sustain high volumes through year-end. Moving to Slide 9. Strong demand fundamentals are further illustrated here. When we examine cargo volumes against tonne-miles, we observe an upward trend over years. Since October 2018, daily CPP and chemical loadings have steadily increased, reaching their highest levels early in October 2024. The disproportionate rise in tonne-miles can largely be attributed to geopolitical unrest and the dislocation of refineries, with Eastern refineries increasingly supplying Atlantic consumers via the Cape of Good Hope. We anticipate this high CPP tonne-mile to persist, driven by ongoing geopolitical instability and export-driven volume gains fueled by refinery startups in the Middle East, including Al-Zour in Kuwait, Duqm in Oman. On the other hand, DPP daily loadings and tonne-miles have slightly declined as they continue to struggle under the weight of OPEC+ production cuts. Moving on to Slide 10. Historically, periods of high product tonne-miles have strongly correlated with vessel earnings. Longer transportation distances typically reflect increased demand for shipping capacity, driving higher freight rates. This correlation has diverged in recent months. Despite tonne-miles remaining stable in the third quarter, vessels earnings have declined disproportionately. This suggests that factors beyond demand fundamentals, such as market sentiment or operational inefficiencies, may contribute to the downturn. Slide 11. Looking at the broader trend over the past three years, it becomes clear that the recent dip in product segment earnings has been driven by more market sentiment -- or more by market sentiment than fundamental factors. While tonne-miles have seen a slight decrease, they remain in line with historical averages. With that, as winter approaches, which is expected to seasonally strengthen the oil market, we can expect earnings to normalize and increase, reflecting higher tonne-mile levels. Slide 12. The drop in vessel earnings can largely be attributed to increased cannibalization from the crude tanker sector. Due to an increasing disparity between earnings in the clean and dirty markets in Q2, some crude tankers, despite high conversion costs, shifted to carrying refined products. As a result, in Q3, Suezmax and VLCC tankers transported more diesel shipments from the Middle East to Europe, a trade that is typically handled by LR tonnage. We believe we have seen the worst of this cannibalization. As winter approaches, the crude market enters usual seasonal upswing, and technical challenges with using crude carriers for refined products are also reducing cannibalization. Recent daily loading data shows an increasing number of crude tankers switching back to dirty cargo after discharging CPP. Moving on to Slide 13. Moving on to the tonnage supply landscape, the outlook remains positive. Despite the order book being approximately 20% of the current fleet for deliveries going into 2028, scrapping candidate tonnage over 20 years of age levels the supply balance. Additionally, these older vessels typically have lower utilization rates, and tonnage over 20 years of age are often involved in dark trades, which reduces available tonnage and drives up utilization for the existing fleet. With global oil demand expected to rise, we anticipate further increases in tanker demand and utilization of the current fleet. Moving on to Slide 14. Diving deeper into the current tanker mix, we observe that the average age of the global product tanker fleet is steadily increasing, with vessels over 15 and 20 years old and now comprising a large share of the global fleet. This trend has significant implications as older vessels are underutilized due to customer preference for younger tonnage. The recent market strength in 2024 and the rise of dark trades have provided some tailwind for the utilization of older vessels. Overall, the worldwide fleet continues to age in the coming years, and we can expect the fleet to become less efficient generally. Slide 15. Looking at the tanker delivery schedule, we see that the majority of the order book is scheduled for delivery between 2025 and 2026. It's worth noting that LR2s account for over 50% of the tonnage to be delivered in the next few years. Historically, around 70% of LR2 capacity delivered has been absorbed into dirty petroleum products trade. The crude sector is also aging, with the order book to fleet ratio remaining relatively low at around 10% as of November this year. We therefore anticipate scrapping levels to exceed deliveries over the next four years, effectively removing tonnage supply and pushing more LR2 capacity into the crude and DPP trade. Looking ahead, the outlook for product tankers remains highly positive. According to the IEA, global oil demand increased by 1.1 million barrels per day in Q3. Moving on to Perry, who will now bring you through the key financials of the third quarter.

Perry Van Echtelt: Thanks, Søren. If we move to the next page on the financials, as already highlighted by Søren, the product tanker market softened seasonally in the third quarter, but despite that, Hafnia has continued to perform well and delivered solid earnings for the third quarter. For Q3, we generated a TCE income of $361.6 million, bringing our year-to-date TCE income to over $1.15 billion. Additionally, our fee-focused commercial pool and bunker procurement businesses continued to perform strongly, contributing $7.8 million in fee income. This all resulted in an adjusted EBITDA of $257 million for the quarter and a net profit of $215.6 million, which includes a $15.6 million gain from the sale of a vessel. This all translates to return on equity of 37.1% and a return on invested capital of 26.7% for the quarter. And let's look at the balance sheet on the next page. Our balance sheet has strengthened further, with a cash balance of approximately $200 million at the end of the quarter and a total liquidity of over $600 million, which includes $430 million in undrawn credit facilities. At the end of Q3, about 75% of our loans were hedged at the weighted average of 1.64% base rate or on a SOFR basis. Hafnia settled a few portfolio hedges at the end of Q3 for net profit of approximately $5 million. We continue to maintain an active interest rate management strategy and we'll continually monitor market conditions while optimizing our hedging portfolio as we further reduce leverage over time. During the quarter, we also made further progress in optimizing the balance sheet capital structure. Our net LTV has been on a steady decline, decreasing by more than 18 percentage points over the past two years. For this quarter, our net LTV ratio has further decreased to 19.1%, driven by higher vessel valuations, strong cash flow generation, and the subsequent debt repayments. This deleveraging has gone in parallel with increased shareholder distributions in the form of cash dividends, including this quarter's 90% payout ratio. Of the last four quarters, we have distributed a total of $1.37 per share, representing a yield of over 20%. Then, move to the next page. As Mikael mentioned earlier, we are exploring a share buyback as part of our broader approach to enhancing shareholder returns. This decision stems from recent softness in the overall share price for product tanker companies, which saw us trading approximately 41% discounts to our NAV as at the end of the quarter. To illustrate, this means the implied value of our five-year-old LR1 vessel at the end of Q3 is approximately $33 million. This figure is below the historical averages and significantly lower than the current market value of $57 million in November. Similarly, the implied value of a five-year-old MR is around $30 million, also below historical average, far below current market values. And let's move on to the operating summary. In third quarter, our TCE was based on 10,776 earning days, and we generated an average TCE per day of $33,549. Focusing solely on the spot earning for the quarter, we had average spot TCE per day of $34,410, reflecting our ability to capitalize on a strong market backdrop and a strategic positioning. Our OpEx for the quarter was based on 9,523 calendar days with an over average OpEx per day of $8,141. And if we look at our coverage for the fourth quarter on the next page, we are well positioned for another strong quarter in conclusion to 2024. As of November 18, '24, 71% of the total earning days in Q4 '24 have been covered at an average of $24,004 per day. For the full year '25, 9% of the earning days are already covered at an average of $24,089 per day. Despite the recent market softness in Q3, we expect a stronger Q4 and '25 ahead. This slide presents two scenarios outlining our potential full year '24 earnings. One includes analyst consensus, while the other extrapolates the Q4 covered rates on the left to the available earning days in the fourth quarter. In both scenarios, Hafnia is projected to deliver exceptionally strong financial performance with net profits estimated to be in the range around $800 million. As we approach the end of '24, seasonal factors are expected to strengthen the oil market and Hafnia is well positioned to capitalize on this, setting us up for another strong year of results. And moving on, Mikael, over to you for the next few slides.

Mikael Skov: Thank you. We're on Slide 23. Moving on, I would like to provide insight into Hafnia's ESG strategy and targets. As we navigate the evolving maritime landscape, we recognize the responsibility across our operations and are committed to minimizing our environmental footprint. Equally, we're dedicated to promoting diversity, inclusion, belonging and equity within our organization while upholding the high standards of corporate governance. We actively collaborate with industry peers, international organizations, and other stakeholders to address these challenges in a collective and effective manner. Slide 24. Next, I would like to highlight some of the key ESG initiatives Hafnia is actively driving as we lead the way toward a more sustainable maritime industry. As part of our joint venture with Socatra at France, we're excited to announce that the first of our four dual-fuel methanol MR newbuilds is on track for delivery in early 2025 following the successful completion of construction and sea trials. We also continue to enhance our technological capabilities and are optimistic about our strategic investment in Complexio, a foundational AI, to advance data automation. Complexio's bottom-up approach can ingest companies' unstructured and structured data, and map it into a comprehensive landscape, enabling the organization of recurring processes such as chartering, ship clearance, finance management, and contract negotiation. Together with our expanding partnerships across the industry, these efforts reinforce our position at the forefront of maritime innovation. Slide 25. To conclude, as we approach the end of 2024 and move into 2025, I remain confident in the market's trajectory driven by robust demand and favorable supply fundamentals. We are well positioned to build on this momentum to deliver even stronger results. This will enable us to pursue our strategic objectives, invest in a greener future, and generate greater returns for our shareholders. This concludes our presentation. With that, I would now like to open up the call for questions.

Operator: We will begin our Q&A session now. [Operator Instructions] So, for the sake of good order, I'm going to take the questions first with the Raise Hand function before moving on to the chat. So, the first one I see up is, Frode. Please, can you take yourself off mute?

Frode Mørkedal: Yes. Thank you, guys. On the dividend policy, could you maybe clarify how strictly you plan to stick to this loan to value calculations? For example, let's say vessel value decline and loan to value rises above 20% again. Should we then expect payouts to automatically decline to 80%, or is there room for more, let's say, subjective adjustments under way here?

Operator: Perry, over to you. If you could take off your mic, please?

Perry Van Echtelt: Yeah. Sorry. I was on mute. Yeah. Hi, Frode. Thanks for the question. I think up until now, we've been very consistent with the dividend policy whenever we go through a threshold. That's where we adopt the dividend policy. If or when markets change or there would be something else that is something to be discussed in the Board, but we like the consistency that we have on the payout.

Frode Mørkedal: Okay. I also have a question on the market. Maybe this is for Søren. On the Suez Canal, let's say it's -- at one point it reopens, right? One thing is that the diversions around Africa have increased average calls, right? But as you mentioned in the slides, a lot of that extra tonne-miles might have gone to VLCCs and Suezmaxes, the crude cannibalization. So maybe the reopening of Suez Canal transits basically shifts more of the clean cargoes back to product tankers. So, could actually reopen Suez Canal be a positive, or is it going to be a negative event do you think?

Søren Winther: I think overall now you are stepping out of the cannibalization from the Suezmaxes and Vs, in any case because of seasonal market strength on the crude tanker segments. So, tonne-mile via Cape of Good Hope that is now, well, already today starting to accumulate on normal tonnage if you want is a positive for the market. I think it's inevitable if Suez opens and you have shorter distances to travel, shorter voyage days in essence for cargoes traveling to and from the Eastern and Western Hemisphere, that will be a negative overall for the market and create some extra supply to the overall landscape for sure.

Frode Mørkedal: Okay. Thanks for that.

Operator: Thank you, Frode. Omar, please, can you take yourself off mute?

Omar Nokta: Sure. Thank you. Hi, guys. Good afternoon. I mean, good evening. Just a couple of questions for me, maybe just as a follow-up to the capital returns. Maybe just for clarity, it could be just a simple question or stupid question, but in terms of the authorized buyback of $100 million, it says in the release that, it's to be initiated from December 2nd until January 27th. Does that mean it needs to be initiated within that window or does it actually expire January 27th?

Perry Van Echtelt: Yeah. Hi, thanks for that question. January 27 is where we go into our blackout period ahead of the financials in February, which is a month before. So that is for the quarter the trading period that we have.

Omar Nokta: Okay. Thank you. And then perhaps kind of reading into when you had the chart on the NAV valuation and all that, and obviously, you've seen the stock under pressure. It seems like perhaps you're signaling a bit more of an aggressive approach to the buyback. Don't want to put words in your mouth, but it sounds like that could be the case. Let's -- if we were to think about that and if you were to utilize the buyback into in its entirety, perhaps, and you stick to that 90% threshold in terms of capital returns, could you envision that the 4Q payout is exclusively buyback and you would forego paying a dividend in that case?

Perry Van Echtelt: Yeah, that's correct. So, what we have announced is that, for the buyback that we would initiate for that period, it's part of the shareholder distribution. So, connected to our net LTV, we go to 90% payout ratio. We have a mandate to buy back shares, but that will be in a balance of cash dividends. So, whatever we buy back in shares would go out of the calculated cash dividends, so to say.

Omar Nokta: Okay. All right. Well, thanks, Perry. Thanks, guys. I'll turn it over.

Operator: Thank you, Omar. [Sheriff] (ph), if you could take yourself off mute, please?

Unidentified Analyst: Hey, thanks for taking my questions. So, I just want to start off, piggybacking on Omar about the buybacks. Should we expect the focus, shareholder return focus that is, to shift back to primarily dividends if the share price converges to NAV, or are buybacks here to stay, given there might be a tax advantage to different investors?

Perry Van Echtelt: Yeah. So, we've always been consistent in paying out cash dividends because -- and we've never been ruling out share buybacks. As we have said, we now see such a big discrepancy between where we're trading and where the NAV is, so that the share buyback becomes an element within the dividend policy. Obviously also now trading in the U.S., we've also seen that there is a bigger interest from some U.S. investors on share buybacks as well. So, all that has been part of the equation of looking at the share buyback program.

Unidentified Analyst: And then, I want to ask about the vessels with purchase options coming up next year. It looks like those options are a bit below where the current sale and purchase market is at. And so, I'm wondering how are you balancing the exercise of those options as they come available with shareholder returns.

Mikael Skov: Yeah. I think the way we look at those is that, yeah, every time there's a purchase option up, it's obviously an issue whether we want to exercise or keep on going on time charter depending on where the rates are and what the economics look like. So, it's not -- if your question is about, do we intend to exercise to sell, that's not a strategy in itself for us. I think most of the ships we have on time charter, [with purchase options] (ph) also modern ships, so they're kind of part of our future thing. But we will be looking at more about the refinancing part of it, whether it makes sense to acquire and refinance rather than continue with TC. So, for selling assets in general, the focus is still on the older part of our fleet. That's where the sales focus is.

Unidentified Analyst: And less on the prospect of kind of acquiring them and then reselling them, but more just on the implicit value locked away and having purchase options below market, but you answered my question, so thank you very much.

Operator: Thank you, [Sheriff]. I think I don't actually see any more in the Raise Hand function, so I'm going to move on to the chat. We have a question which is about clearing up confusion regarding stock buybacks. There was a headline in trade wins in July, about $1.2 billion buyback program for the company, but today, there's an announcement regarding $100 million buyback program. Are these different? Have any shares been repurchased in the past six months? Over to you, Mikael.

Perry Van Echtelt: Yeah. Otherwise, Sheena, I can take that.

Operator: Okay, great.

Perry Van Echtelt: I think that article was referring to two different things. So, we had the annual approval for share buybacks up to 10%, which is more of the global mandate that you approve in the AGM without actually starting to do share buyback, which was for 10%, and also a renewal of 20% share sales. So, somehow trade wins at the $8 share price back then added the $400 million and $800 million together. So, we haven't earlier announced the buyback program, if that clarifies it.

Operator: Okay. So, we have one more question, which is about considering selling vessels and buying back more shares due to discrepancy between stock market and asset market.

Mikael Skov: Yeah. So, I think I can take that and as Perry explained, I mean obviously the way we look at the buyback now is that the discount to NAV is so substantial and with our view on the markets going forward that Søren explained, we think that it makes obviously a lot more sense to look at the buybacks at the moment. For the selling strategy, as I just mentioned before, our focus is still the same as we have targeted ships which is primarily due to age and ships that we don't find -- is part of the fleet strategy going forward. So, we will just continue to sell those. So, there will be some element of connection of selling ships and buying back shares, but it's not like it's a connected strategy as such. It's two separate strategies that just happen to make a lot of sense at the moment.

Operator: Okay. Thank you, Mikael. We have another question which is about, will we see an increase in selling older ships as it will be very accretive for shareholders to use the funds for buybacks as -- far below NAV?

Mikael Skov: Yeah, okay, that was -- I think that's probably what I addressed before. So, yes, we will continue our focus on selling older ships, but as I mentioned, these are two different strategies that will also work independently. But at this point, of course, they are connected since we are pursuing both.

Operator: Okay. Thank you, Mikael. I'm not seeing any more questions in the chats, neither in the Q&A and neither in the Raise Hand function. So -- and we have come today to the end of today's presentation. So, thank you for attending Hafnia's third quarter 2024 financial results conference call. You can find more information available online at www.hafnia.com. Goodbye, everyone.