Hapag-Lloyd Aktiengesellschaft
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Hapag-Lloyd Analyst and Investors Q1 2021 Results Conference Call. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO; Mark Frese, CFO; and Heiko Hoffmann, Head of Investor Relations. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. . I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.

[Rolf Habben Jansen:]

Thank you very much. And thanks, everybody for taking the time to join us here today. I guess today we'll talk a bit as usual about the latest developments, the numbers, how we look at the market and what we see as important things going ahead. I'll make some introductory remarks and then Mark will take over for the financials before we'll wrap it up with a market update and some comments on the way forward from my end.

[Mark Frese:]

Thank you, Rolf. Also, good morning from my side to everyone. From a financial standpoint, Q1 was, and 2021 was really a truly outstanding quarter. We were once again able to improve profitability, strengthen our balance sheet and our cost of capital. We have to say why volumes were down slightly at first step significantly higher freight rates resulted in much higher earnings and cash generation. Taking now a closer look at our profit and loss statement. We see that higher freight rates led to an increase in revenues of 33% to USD 4.9 billion. EBITDA almost quadrupled to USD 1.9 billion. The EBITDA margin jumped to almost 39%. And it was also significantly up on the previous year at USD 1.5 billion. Hence both EBITDA and EBIT were in line with Q1 guidance, which we have given in February.

[Rolf Habben Jansen:]

Thank you, Mark. A few comments on the market. I think nothing too new for most of you. Here you see a picture that that illustrates again, what happens with the global container volume growth compared to the global GDP. As we can see still a very high correlation. Of course, it doesn't mean that every year, it's going to be exactly the same.

[Operator:]

Ladies and gentlemen, at this time we will begin the question-and-answer session. The first question is coming from the line of Andy Chu with Deutsche Bank. Please go ahead.

[Andy Chu:]

Thank you. Three questions from me, please. Well, I've just back to the orderbook. And obviously, you mentioned that sort of 20% sort of level as being sort of comfortable, but clearly the way the orderbook is sort of flowing is a lot of that is coming in 2023, which kind of suggests sort of a high single-digit percentage of supply coming in 2020. And obviously demand unless there's something extraordinary won't be anywhere near that. So are you worried about that short-term sort of lumpiness in the orderbook? And then on scrapping U.S. Hapag-Lloyd have plans and I guess in the medium-term to increase scrapping, because as you pointed out that scrapping has been low for a long-time and ridiculously low, but it hasn't moved for a very, very long time. And then on your - one of your sort of, one of the largest player, obviously, Maersk was talking about the long-term contracts being signed to the two-year contracts and have stated that 55% of their contracts are on sort of long-term contracts. So maybe you could talk a little bit please on the contracting, the contract position at Hapag? Thank you.

[Rolf Habben Jansen:]

Well, first one to the orderbook. I think you're right. I mean, right now it looks like there's going to be a little bit of a spike of deliveries in 2023. It always goes like that. And of course, we would always like it to be exactly the same every quarter for the next 10 years. But unfortunately, you can't steer it like that. So yes, there's going to be a little bit of a bump. So that may take the market a couple of quarters to absorb that. But I think that that's quite normal, that tends to go a little bit with ups and downs. And let's not forget that there may also be delays and performance and all these things that we normally see. So all in all, yes, we're going to have more deliveries in '23. But we probably need them also, after very low deliveries in '21 and '22. On scrapping, yes, we have some ships in the queue to be scrapped over the upcoming couple of years. I don't know off the top of my head, how many exactly. But in principle, we stick to our rule that as soon as ships are way above 20 years, then we start looking at should we still continue with them. And then in terms of long-term contracts, I wouldn't give a percentage, but also, we have seen that the number of requests that we get and the number of - for long-term contracts has increased. And we have also suddenly closed some more. We've also closed some, we also have some multi-year contracts. I'd still say though that, that's still the minority of the contracts that we closed. Most of them remain for one-year.

[Andy Chu:]

Thank you very much.

[Operator:]

The next question comes from the line of Frans Hoyer with Handelsbanken. Please go ahead.

[Frans Hoyer:]

Thank you very much. Good morning. Just a question on the market trend that you saw. I understand that your own volumes are little bit affected by sort of volatility last year, but what was the year-on-year market trends in Q1 as you see it, please.

[Rolf Habben Jansen:]

I think I mean - I think still a little bit early to say that. I think the year-on-year market trend was definitely significantly up, I would say mid to high-single-digit, yes. I think when you look at our numbers, and if you compare them, for instance, with Maersk I mean, you saw Maersk reported last year, I believe minus five, and this year, they are plus six or so. And we've reported last year plus four, and now we're minus two. So if you compare that '19, over '21, which are two normal years, whereas last year, we were just hitting the beginning of the pandemic, I think that's actually directionally similar. We've also seen that, when you look at volume that on our side that volumes on the dominant legs has grown, whereas the volume on some of the non-dominant legs has really been down. So as such, I think you - there's certainly a little bit more nuance to that. And overall, I'm not really happy with the volume, because I think we should have done a couple of percentage points more, I also think we're going to get some of that after.

[Frans Hoyer:]

Okay. I was interested in your comment that the voyage delays had tripled. And I was wondering, what is frequent from what to what percent? Is it possible to put it like that?

[Rolf Habben Jansen:]

I think you always have some delay. And you also calculate that into the schedule. I mean, if you would, if you're in a normal situation, and don't take me on the exact numbers, but they are directionally right. Yes, normally, we would always assume that a ship loses on a voyage, a couple of days. Yes, and you build that into the schedule, that's a select that you haven't schedule. But if instead of two days, you all of a sudden lose a week, then you get into trouble. And bear in mind that this is the average. And we have also quite some services that run normally. So you can clearly see that this indicates that there are quite a number of services where you have several weeks delay. And this is a little bit to point out, I mentioned, I believe after we spoke about the annual results, where I said that for a service where you normally need 12 ships, you would need 14 today, or for a service to the U.S. where you need six, you now need eight. And that's the type of leg that that is simply not there in the global fleet. And that's also why in general, the overall production capacity is certainly somewhat constrained.

[Frans Hoyer:]

Okay. Thank you very much.

[Operator:]

The next question comes from the line of Sam Bland with JPMorgan. Please go ahead.

[Samuel Bland:]

Thank you. I've got two questions, please. The first one is we've heard from yourselves and others about how the market might start to normalize in the second half of the year. Just interested in what the sort of mechanism is for that to happen. I guess demand will probably stay quite strong. Q3 is usually peak season, what is it? Is it more containers coming into the market or something else? And the second question is, you mentioned in the talk about you having some slack in terms of order book is not a bad thing. But I guess that there's also probably mean that container shipping lines in Hapag-Lloyd makes less money than they do today? How do you balance this sort of need to provide a good service versus your own level of profitability? Thank you.

[Rolf Habben Jansen:]

Okay. I mean, first of all, as related to the market. I mean, demand is probably the single most difficult thing to estimate going forward. I think we've certainly learned that over the last year, year and a half. I would think that as the congestion eases, then all of us will be able to produce more allocation or more space. And as such, that should help the market to settle down. And I hope that we can do that sooner rather than later, as I believe that it's in everybody's interest. In terms of slack in the orderbook, I think what we see right now is that there is actually not enough slack in the global fleet. And there is a bit of a problem. And we need to have some of that because I believe that in the end, the type of the volatility that we have seen in rates over the last quarters, even if this does go up, it's just not good. It's too much. And we know that this business is cyclical. So yes, there will also be some periods where it's a bit down and where demand is a little bit weak and when rates are low, that's normal. I think we just need to hope for a situation where these types of slack periods are no longer 10 years long as they were running up to 2019 or 2020, because that's too long. And then you see that people don't invest in the industry and as a consequence of that, when there is then some disruption, as we see right now, the market gets very much distorted. Then in that context, I'd like to think that, over time, we can have a global fleet that where we have a little bit more spare capacity. So we can react a little bit more flexible, if there are peaks in demand. And on the other hand, that we also just provide then - by doing that, that we're also able to provide better service.

[Samuel Bland:]

Okay. On the first point with congestion easing, does that require demand to slow down? Is that the way that we're basically going to use a congestion at the port?

[Rolf Habben Jansen:]

That's one element of it. Of course, the other element is that as more and more countries are hopefully going to get out of the pandemic, I'd expect that labor availability in the terminals is also going to be better again. And that will mean productivity will go up. And that will probably be the single biggest, or that will also be a big factor.

[Samuel Bland:]

Okay. Thank you.

[Rolf Habben Jansen:]

And of course, you had the one-off effect from the Suez Canal, which we're also going to get behind us. And as we said before, it's a multitude of things. But I think they're starting to slowly move in the right direction.

[Samuel Bland:]

Thank you.

[Operator:]

The next question comes from the line of Alexandra Thrum with Morgan Stanley. Please go ahead.

[Alexandra Thrum:]

Hi, good morning, just two questions from me. The first one is on scrapping again, it's Slide 15, where you say you accept the market scrapping to increase significantly from 2023. I just wanted to know what you think is mainly driving this? Is it also linked to say environmental regulations and ship efficiency? Or is it just predominantly the age of the fleet? And then the second question I had was your latest views on future lower emission fuel technologies, and how you're thinking of investing in capacity from here. Will you continue to invest in the dual-fueled LNG ships? Thank you.

[Rolf Habben Jansen:]

Yes, maybe the first one on scrapping. I mean, I do expect it to trend upwards after '23 when exactly is impossible to predict. But that's going to be a combination of two factors, I believe. One is just ships getting older, and we get more and more ships that are going to be 25 years and older. The second point is as you also rightly pointed out environmental and sustainability related reasons, we do expect that regulation will be tightened and will be tougher, that will mean that smaller and older ships are going to be economically less attractive. And that will also accelerate the scrapping and as by the average age and although ships may actually come down a little bit. To your point of technology, we right now still believe that the dual-fuel charge that we made for the order that we placed in December make sense also because those ships can or those engines can also run on different types of fuel. And we don't see a very good other alternative available at this point in time. And definitely is a step ahead, compared to what we have today.

[Alexandra Thrum:]

Thank you.

[Operator:]

The next question comes from the line of Parash Jain with HSBC. Please go ahead.

[Parash Jain:]

Hi, Rolf and Mark, I have two questions. First, regarding congestion, I mean, would it be possible to help us visualize, how much percentage of shipping capacity would be tied-up to the ongoing congestion related to probably the equipment shortage or the port congestion or because of the Suez Canal? And is that baked in into your reaffirmation of full-year profit guidance because given superior first quarter results, and where the spot rates are trending in the second quarter, it seems like the freight rate need to capitulate to meet your guidance or shall we think your guidance more now as something which has an upside risk? Thank you.

[Rolf Habben Jansen:]

Maybe to answer your question guidance first. I mean, we've guided the way we did it, which is qualitative. Apart from that, we're going to try and give you an indication every quarter on what we see for the upcoming quarters because of the volatility that we'll still see. We don't think it makes much sense to comment in depth about the second half here. I do believe, though that if you take our guidance where we said, Q2 is probably going to be similar-ish to Q1. And after that, it's going to tail off that should allow you to make a reasonable estimate of where the year will end. In terms of congestion, how much does that mean, what's the effects of that. Well, I would say that, in the end, on a global scale, that's probably a low to mid-single-digit percentage. To give you a bit of a flavor, if I look at the Transpacific trade, there we were missing in the first quarter between of more as an alliance, we were missing more than 40 voyages, which indicates that you actually lose quite a bit of capacity. So a low to mid-single-digit percentage of capacity is probably an accurate estimate at this point in time.

[Parash Jain:]

Perfect. Thank you so much. That's all from my side.

[Operator:]

The next question comes from the line of Christian Cohrs with Warburg Research. Please go ahead.

[Christian Cohrs:]

Yes, hello. Good morning. Thanks for taking my question. Just one, there has been lately a resolution of the - or in the German parliament to push the European Union for an evaluation of the block exemption for the liner shipping consortia. And also, I think they're pushing for a review of the application of the tonnage tax regime. Do you see or do you fear any clouds on the horizon coming from that side?

[Rolf Habben Jansen:]

I think with these types of things, if you have an exceptional situation as we see it right now in our industry, then it's very logical that people ask questions. And people want some things to be double and triple checked. So, to me, that's fine. I think people should do that. And then people need to look at that and I have no reason to believe that they will then come to a different conclusion than what they did before, because to, in my opinion, the current situation in the market has very little to do with, for instance, the block exemption or the tax regime here.

[Christian Cohrs:]

Okay. Thank you.

[Operator:]

At this time, there are no further questions. So I hand back to Rolf Habben Jansen for closing remarks. Please go ahead.

[Rolf Habben Jansen:]

Thank you. Not much words from our side except thanking you for taking the time to listen to us. We hope it was informative. And hope to speak to you again soon. Thank you.

[Operator:]

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.