Hapag-Lloyd Aktiengesellschaft
Q2 2021 Earnings Call Transcript

Published: 13 Aug 2021

[Rolf Habben Jansen:]

Thank you very much, and thanks, everybody, for making the time available to join us here at this investor presentation. Mark and I will try to take you through that over the next 20, 25 minutes. And then afterwards, we'd be very happy to take your questions. Maybe a couple of opening remarks, if I may. I think when you look at the situation today, then if you want to characterize the first half, strong demand, high freight rates but a lot of operational challenges. We are doing a lot to try and tackle that. We'll talk a bit more about that later on. But we also see that the situation, which has improved in a couple of places actually throughout Q2, I think the industry did quite well on the aftermath of the Yantian -- sorry, of the Suez situation. But then of course, we saw Yantian and right now some challenge in Ningbo, so certainly not only smooth sailing. For us, it's been a good half year. And of course, closing the acquisition of NileDutch was for us another milestone. On the numbers, earnings very strong, mainly driven by higher freight rates and solid volumes. Costs are going up, yes. Charter rate is probably the most visible one but certainly also bunker prices have come up significantly compared to several months ago. If you look at the market, I think there, we've changed a little bit our perspective. We were initially a little bit more optimistic that the things would go slower in the second half year. If you look at the situation today, then we have to conclude that also the second half year will very likely be very strong. We do expect that demand growth continues to outpace capacity growth. Looking at the order book, which has come up, and rightfully so, yes, that is going to give some relief mid-term but not so much in '21 and '22. And that means that until then, the only thing we can do is try to produce as much allocation as we can and, in the meantime, put also effort on improving service and driving up customer satisfaction. When looking at the market and looking at monthly transportation growth, I think we've seen quite a bit of growth. If you look at the last month here, certainly more than capacity has grown, and you also see that when you look specifically at the Transpacific, the growth, that, that's the place that has been driving the growth very much. On the right-hand side there, two small graphs which gives you an indication about all these operational challenges and what that actually means, yes. If you look at container usage, we need significantly more boxes to move the same amount of cargo as we get them back on average, 15% to 20% later than normal. And also when you look at ship delays, they have sort of tripled compared to a year ago, which, of course, means that for -- to produce the same amount of weekly volume, you simply need more ships. Looking at what is that we have done on that front, looking at container capacity, the one that we've talked about before. I think right now, we're up about 11% compared to the end of the year. I think that's a pretty significant investment, and we will still do more there. We see that turn times have come down, but this should actually help. Vessel capacity, not that much change, in fairness, because there are simply no more ships available and every available ship is sailing. I think when you look at capacity that's in the water, that's probably a bit -- picture would probably look a little bit better because we have also been moving dry docks and other things out, which means that of the ships that we have, pretty much nothing is not operational. Staff were up a little bit but actually a fairly flat. Then looking at things like schedule reliability, still at a very low level. Relatively speaking, I think Hapag has actually been doing a bit better. We've always had in our objectives that we want to be at the top third in terms of schedule reliability, and I think somewhat ironic, we are since 5, 6 months. But of course, the overall schedule reliability is really too low. A couple of other things worthwhile mentioning when we look at the first half year. NileDutch, I already mentioned, we closed the acquisition as expected around mid-year. I think official closing was on the 8th of July. We opened up a couple of new offices, here is the one in Senegal mentioned. We did convert the options that we had to take another 6 large ships that are going to be dual-fuel-powered. Then we started vaccination campaigns in multiple countries to find who are utmost to help people both at sea and onshore to get vaccinated as quickly as possible. And then we've launched a number of additional things to create more transparency on where every box and every shift is. And then finally, before I hand it over to Mark to talk about the numbers, a few things around sustainability. We'll talk more about that, I think, after Q3, yes. But here are basically the themes that we will address or that we are addressing in our sustainability strategy. Because it's not only about greenhouse gases, it's also about clean air. It's also about sustainable supply chains. But it's also about diversity and how do we make sure that we are a good corporate citizen. And of course, the whole element around compliance, how do we deal properly with resources, take good care of the boxes that we travel and watch biodiversity are important elements. I think our sustainability strategy will be built around these three main themes and these eight items underneath. For each and every one of them, we are developing programs and will set ourselves also short- and mid-term targets. And we'll talk more about that after we close Q3. And with that, I will hand it over to Mark, who will take you through the numbers.

[Mark Frese:]

Yes. Thank you, Rolf, and good morning to everyone also from my side. Now some details concerning the financials. Looking at the picture, we can say that while operational situation was very challenging, clearly we benefited from higher freight rates and, from a financial point of view, are looking back to a very good first half year. We were once again able to improve profitability on that basis, strengthen our balance sheet and earn our cost of capital. And we can see that here, the return on invested capital at 47% is extraordinary. But I think we should not forget that for the last decade, the entire industry was struggling to earn and generate positive results. Earning back cost of capital seemed to be a daunting task for most of the players in our industry just 2 years ago. Taking a closer look at our P&L. We see that much higher freight rates and somewhat higher transport volumes led to an increase in revenue, up around 50% to USD 10.5 billion. And on that basis, EBITDA more than tripled to $4.2 billion. The EBITDA margin jumped to 40%. EBIT was also significantly up on previous year at USD 3.5 billion. And H1 '21 group profit came in at USD 3.3 billion. The transport volume increased in the first half of '21 by 4.3% to roughly 6 billion compared with the prior year period. Growth was mainly driven by strong demand from export goods from Asia and, therefore, drove volumes, especially on our dominant legs. Transport volumes, on that basis, on nondominant legs, however, stalled to rather soft developments, we can say that. And despite the strong demand in dominant legs, delays at ports and a shortage of additional vessel and boxes to cover the increased demand had negative effect on the overall volume growth in first half '21. While the higher volume growth was impeded by the continuing supply chain disruptions, our average freight rate increased strongly due to strong demand and due to the capacity of vessels and containers. Bunker prices continued to increase quarter-over-quarter. But I think important to say that our average bunker price is, in the first half of '21, still slightly below previous year, which was impacted strongly by the introduction of the low sulfur regulation, IMO 2020. Transport expenses per unit and including D&A in the first 6 months of the financial year '21 increased by 4.8% to $1,081 per TEU as compared to the prior year period. And clearly, lower bunker expenses were more than offset by the negative effects of port congestions and COVID-19-related restrictions. In particular, we can clearly see that here, handling and haulage expenses increased by over 11% or $54 per TEU, respectively, due to the higher storage and labor cost at ports. In contrast, depreciation and amortization was almost flat as higher volumes offset higher D&A expenses. Due to the very good earnings situation, our operating cash flow has been also absolutely strong. You can see that here, we used the cash flow to significantly increase our investments in boxes and vessels to cater for our customer demand. And we paid out a dividend of EUR 3.50 per share. On top of the order of 12 new dual-fuel big ships that will be delivered in '23 and 24, we have purchased 5 secondhand vessels in the first half of '21. Investments in the second half year are expected to increase even further. We plan to invest more. And in total, CapEx in '21, excluding the right-of-use, is likely to be above USD 1.5 billion. Looking at the balance sheet ratios. We see also a very pleasant development. As you can see it here, net debt decreased further to USD 3.9 billion and net leverage decreased to 0.6x based on the last 12-month figures. Moreover, liquidity reserve improved nicely to around USD 3 billion at the end of June. In addition, we have used the first half to develop a green financing framework, which is part of our sustainability strategy and arranged green financings of more than USD 2 billion in the first half. And with that, I would hand it back to Rolf to give a market update and our outlook.

[Rolf Habben Jansen:]

Thank you, Mark. Yes, I think maybe as a market update, in the end, if we look at the economic recovery, we've seen good growth this year. I think predictions right now are that demand will grow around 5%, 6%, yes, which I think is -- seems also to materialize when we look at actuals today. And there's certainly still some backlog in the pipeline as well. And also for next year, the outlook right now is fairly healthy. When we then look at the supply side, of course, the order book is coming up. As I've said already, I think, 2 years ago, it had to come up also as well. Of course, you're now going to see a little bit of a spike in deliveries when you look at '23, '24. All in all though, I still think that the order book, and we've also seen that the ordering of new ships has actually slowed down over the last a couple of months, is that it's still not out of control, one should also expect some slippage. And let's not forget that with carbon tax coming and new rules for older ships, we also will see scrapping going up, and we'll see that we need some capacity to replace also those older and smaller ships. When we look at deliveries, not a lot expected over the upcoming year. And that also means that when you look at the supply-demand balance that both for '21 as for '22, it looks like it's going to be fairly tight. And in reality, we probably need some easing of the congestion situation to get to a somewhat more normal situation. We also shouldn't forget that when we look at '23 and '24, that there will be a large number of ships that will have to go into dry dock. Because right now, everybody postpones that, and I think for good reasons, to maximize output. But that will have to be caught up. And that will also help a little bit to keep things in balance also when we look beyond '22. Looking at our earnings momentum, as you have seen from the announcement that we made, we expect that to remain very strong in the second half. And that's why we also adjusted our outlook and raised the outlook for both EBITDA and EBIT to the numbers that you can read here on this chart. So wrapping things up before we hand it over to you for questions, looking at our focus for the second half and beyond. Deliver our strategy, make sure we improve schedule reliability, improve the quality of service to our customers and also customer satisfaction. Seamlessly complete the integration of NileDutch, we closed on time. Now the preparation work is ongoing, and we intend to complete that integration before the end of this year. On the financial front, we'll continue to remain prudent. We will consider some selective investment opportunities here and there, mainly to make sure that also in 3 or 4 years from today, we are still going to be competitive. And of course, we'll have another look at what more we may be able to do to further reduce our carbon footprint even faster. But on that topic, sustainability more after Q3. And then finally, let's not forget our people. Everybody is still working under a lot of stress. There's a lot of COVID-related restrictions still in place in many places around the world. We must take good care of our people and in parallel, also develop a good way of working beyond COVID as there's certainly quite a few things that we've learned over the last 1.5 years about what is and what is not possible. And we need to make sure that we keep the good things and combine them with the good things we also had before. So with that, I think we wrap it up from our end as a first introduction. With that, we happily hand it over to you for questions.

[Operator:]

First question is from the line of Sathish Sivakumar from Citigroup.

[Sathish Sivakumar:]

Actually, I've got four questions. So firstly, on the vessel utilization, if you could actually give some color, how has that been progressing in Q2, both in the front and back haul? And how does that compare, say, back in Q2 2019, probably that would be a good comparison? And the second one is regarding the EU Fit for 55. What is the -- your initial thought around the implication for the container shipping sector? And how does it actually change your plan towards the other vessel orders in terms of the technology? And how do you -- would you comply with that? And the third one is around the Quick Quotes platform. Obviously, there was a big aspiration in terms of adoption of volumes going through the online booking platform in 2019. But how the last 12 months, what has been the adoption? Has the current disruption kind of altered the adoption rate? I just wanted to understand. Are we still looking more like spot booking, online digitalization is still being not opted despite the disruption? Or does kind of pull back the adoption rate? And finally, the fourth one is around the capital allocation. Given the -- some year, you lag in terms of free cash flow, and even that 50% payout ratio, it's actually a significant step-up in dividend. So two questions actually on that. Would you consider a one-off special dividend? If not, would you look at, say, further M&A opportunities since you are done with the NileDutch integration?

[Rolf Habben Jansen:]

Thank you. I couldn't completely hear your first question. But I believe that you asked about asset utilization, yes? And...

[Sathish Sivakumar:]

Yes. The first one is around the vessel utilization levels and how it is actually on front and backhaul trades. And how does it compare with 2019?

[Rolf Habben Jansen:]

Okay. I think when you look at vessel utilizations, on headhaul, was very high. I mean, pretty much all trades very close to 100%. That's probably a little bit higher than it was in 2019. If we look at backhaul, there, we have had to prioritize also moving the empties back every now and then, so their utilization in terms of laden boxes tended to be a little bit lower, particularly on the Transpacific trade. Your second question was on the FIT for 55 program. I mean, that will certainly have an impact on our business. To be honest, it was about 2,000 pages, I think, that were published. So we are still sort of studying some of it. It's a little bit early to say what that will exactly mean for our business. I would say that, for sure, a carbon tax will come. I think that is also what was to be expected. And now we'll need to see how quickly that is being scaled up. And then when you look at fuels and what people are going to ask from us, I think that's also more or less in line with expectations. We'll read it carefully. And yes, it will impact some of our investment decisions going forward as we just need to make sure that we also invest in those type of fuel, whether that's land-based or whether that's at sea, that comply with the rules that people are trying to set. But in all honesty, I don't think there was any huge surprises in that program because quite a lot of that around emission trading and around what is going to be allowed in terms of fuel was more or less as expected. And I also think we haven't seen the latest on it yet because there's still going to be quite a bit of consultation before a final decision will be made on how the program will exactly look. Your third question was on Quick Quotes and how that has developed. Well, I would say it's developed well also last year. I think whereas we initially had an ambition to have about 15% of our volume on that platform by 2023, I think we are right now hovering around 25% and, at the moment, also going to try keep it between 20% and 25% because we also need to keep sufficient space for other sales channels. Then there was a question on free cash flow, I believe, if I understood the last question correctly. Whether we're going to do a special dividend or not, that is currently not planned. But of course, one should expect a healthy dividend when looking at next year. And then there was a question on M&A. I wouldn't rule out that there is something that we do. On the other hand, one also has to be realistic. These days, the prices of many of the assets are very inflated. And I think that is generally not a good practice to buy inflated assets. So I think also there, we'll still be fairly prudent, and you should not expect any revolution from us on that front.

[Sathish Sivakumar:]

Okay. Just a quick follow-up on the utilization levels. You mentioned the backhaul in Transpacific has been lower. Are we looking at, say, a 10% difference between what we used to see in 2019? Just wanted to understand the delta actually between 2019...

[Rolf Habben Jansen:]

I mean, it's not a huge difference. It's just a little bit, yes. And I think that's where -- our priority was, of course, to make sure that every ship sails completely full on a TEU basis. And sometimes that meant that we had to prioritize empties a bit. But in fairness, it's not a huge difference, it's just a little, yes.

[Sathish Sivakumar:]

Okay, got it. And then just on -- sorry, on the backhaul again, have you seen the proportion between the loaded boxes and empty boxes change. Because as you pointed out, the priority is now to carry the empty boxes back to east. So have we seen that split change?

[Rolf Habben Jansen:]

So I mean, I think, as I said, I think utilization backhaul also out of Europe was a little lower when you look at laden boxes, yes, not hugely but a little bit, yes? So that's it.

[Operator:]

Next question is from the line of Marc Zeck with Stifel.

[Marc Zeck:]

I guess, three questions. One, on the situation in the U.S. currently, I guess, ships waiting at L.A./Long Beach is currently going up again. Do you see any additional issues with the truck and train capacity that is transporting container inland U.S.? Is this worsening as well? Or is this just the vessels waiting at L.A./Long Beach? Second question, related to the Europe train, railway capacity was damaged by flooding most recently and now we have a strike of Deutsche Bahn operations. Is this, to some extent, affecting container turnaround times in Europe? And if this strike continues for an extended period of time, what would be like a breaking point, 2 weeks, 3 weeks, 4 weeks, once train capacity rebounds, an issue for container turnaround times in Europe? And the third question is kind of a follow-up on the question from my colleague on the FIT for 55 EU program regarding the applicability of carbon trading for extra EU trades of which half should go into the program. Does it apply for like the last ports of, say, from Asia to Europe, you can stop at the U.K. and then just head into the EU and just pay half for U.K.-EU distance? Or does it apply for like China-EU in total? If you could elaborate on a little bit.

[Rolf Habben Jansen:]

Yes. Maybe start with the last one. I think the way we interpret the rules right now, it is indeed need everything outside of the last port of call outside of the EU. And of course, then if you call U.K. first, yes, that's not so far and certainly a lot closer than China. That's the way we interpret it right now. But whether that's entirely correct, that remains to be seen. To your other point, on U.S. situation, terminal situation there is definitely still under pressure, but also because the volume is simply up so much, the number of ships that they need to handle is up a lot more than they probably can cope with it at this point in time. And yes, that puts also additional strain on the inland operations, be it rail or truck. Also there, capacities are very, very tight. And I don't expect that to ease over the upcoming months. Then you asked about the situation in Germany around the floodings and now the strikes. Does that have an impact? Well, at the moment, it remains limited to a few days. That should be manageable. But to your point, if this is going to take 2 or 3 weeks, yes, then of course, that will start having an impact also on turn times in Europe. I don't think we should overrate that though. But if it starts taking a couple of weeks, yes, then it's going to have an effect there as well. But right now, I don't expect that.

[Operator:]

The next question is from the line of Sam Bland from JPMorgan.

[Sam Bland:]

I just have a couple of questions, please. The first one is on any thoughts around how your customers -- I know it's a little while away, but the new contracting season towards the end of this year, any initial thoughts on how customers might approach that? Potentially, there will be a normalization in spot rates at some point next year. But on the other hand, I guess, spot is a lot higher than contracted today. Just any thoughts on that? Second question is, I think you said you don't think the market will be sort of normalizing much between or until at least the first quarter of next year. Is there anything special about that first quarter of next year that means the normalization could happen then? Or is it just sort of 6 months away, and so there's enough time that maybe something could start to normalize in that period of time? And actually, I'll ask a third one. I guess, there's -- is there sort of one single cause and root of this current situation, whether it's shortage of containers or port capacity or lack of ships? Or is it sort of a combination of everything? Or is there one dominant issue or problem, whether it's demand or supply-related, that's causing most of this current situation?

[Rolf Habben Jansen:]

I mean, first question in terms of contracting customers, I think those discussions are just starting. So it's too early to say anything about that. I think what we see is that there is a little bit of a trend towards longer contracts because it seems to me that there could be in everyone's interest to just make firmer contracts, where we really commit from our end and so does the shipper and then to potentially extend the duration beyond the traditional year or so. A bit too early to say how successful that will be. But I think that's certainly a trend that we see in the discussion, so firmer contracts and longer durations. And I think that, in the end, would be in everybody's interest. The second point about why do you say it will not be even until Q1? Well, we now see, of course, a strong peak season and then we'll see the pickup towards Chinese New Year, which I think is relatively early next year. So until then, I think we have a fairly high certainty that things will stay strong. Normally, we would then enter into the slack season post the Chinese New Year. How much of that will come is difficult to say at this point. And that's why we commented on Chinese New Year because I think that's a period where we have reasonably good visibility. Beyond that, we don't have that. But I would still expect that if the situation around COVID eases a bit, that will result in less congestion and that will mean that we can make more capacity available and that should help markets to ease a bit. And that ties into your third question, saying what are the main bottlenecks. I think there are not just one single bottleneck. But I would say that the port and inland infrastructure because they are, of course, always on the receiving end of all these boxes. And they are also the hardest hit by all kinds of COVID-related restrictions. I mean, they are the ones that probably have the toughest job at this point in time. And that then, of course, carries on to the shipping lines. We need more ships to offer the same amount of capacity and who need more boxes to make the same number of boxes available on a daily basis. So I mean, it is a little bit of a combination of factors, where I do think that the congestion at destination is probably the biggest one, but that certainly has a ripple effect also on box availability and the need to put in more ships.

[Operator:]

We have a follow-up question from the line of Marc Zeck from Stifel.

[Marc Zeck:]

Yes. Apologies for a follow-up question. I was just interested regarding charter rates and your current charter fleet. Could you give us an idea about like the average charter duration pre pandemic and then what charter duration you currently lock in for your chartered fleet and give an idea how much of your charter fleet has seen a renewal of charter rates and recently is about to see a renewal in the next half of the year? So basically, what I want to know is what the cost for -- concentration for the renewal for charter rates will be for the foreseeable future?

[Rolf Habben Jansen:]

I think duration has definitely gone up. I think we used to have -- I mean, our policy has always been to go fairly short on chartering ships, especially the smaller ones. I don't know off the top of my head, but I think that the average duration has probably gone up with 1.5 years or so if you compare it to a year ago. Because most of the contracts that need to be renewed are now being renewed for 2, 3 years, sometimes even more than that. And I think we can be somewhat lucky that certainly last year, during the pandemic, we actually renewed quite a lot of our charter contracts and also sometimes for longer periods of time. That means that the number of ships that we need to renew is somewhat manageable when we look at this year but also when we look ahead into 2022. But of course, when you charter or extend charters these days, then the rates tend to go up quite a lot. And I mean, you can read that in the press that instead of for some vessel classes paying $7,000, $8,000 to $9,000 a day, you now could easily end up paying 3 or 4x that amount.

[Operator:]

Next question is from the line of Christian Cohrs from Warburg Research.

[Christian Cohrs:]

Just two left for me. First, in the U.S., there's a discussion about an Ocean Shipping Reform Act. So what is your view on that? Do you think that it is, yes, proper instrument to improve quality, ocean shipping quality for U.S. customers? And second question, in light of the supply chain disruptions, which we are going to see already for more than -- or roughly 1 year already, do you fear some that customers will actually seek for options to nearshore their supply chain in order to get more resilient and that this could actually be a harm for your industry mid- to long term?

[Rolf Habben Jansen:]

Yes. Maybe let me start with the second one. I tend to think that when you look at ocean shipping, one of the reasons why container shipping has been so successful over the last 30, 40 years is not only because it was standardized, but also because it was fairly cheap and efficient. And I do believe that it's important for us to get back to that type of situation. That's also why I would like markets to normalize because otherwise, over time, you might indeed start seeing what you are describing. Having said that, I mean, if you look at the average freight rate, the average we have these days is, what is it, $400 or $450 more than it was last year around the same time on average. That's not a huge number. The problem is, of course, the excessive spot rates that we see right now. But those are only applied to very few boxes. But I do think is that you will see that people will do less single sourcing but will do more a dual or multiple sourcing simply not to be dependent completely on one specific supply chain. Because there, you see that if Yantian closes or if you have a problem in Vietnam or Ningbo or wherever, that all of a sudden, your entire supply chain is disrupted. So I think people will do that. Your other question around regulations and oversight that we see. I think it's perfectly normal that people check and validate and look at other regulations that we have in place. Are they still the right ones? Looking at the extraordinary situation we see in this industry at the moment, I think that's very normal. We're very happy to work with regulators and provide people with the information that they need. My experience on new legislation is that it always takes some time and quite a lot of good debate before something gets changed. And on the whole, I think most of the legislation that I have seen over the last 30 years actually makes sense. And the fact that legislation evolves and then it gets changed every now and then, I think that's perfectly normal. And that's also how it should be.

[Operator:]

That was the last question for today. If you have any further questions, please direct them to the Investor Relations team. I would like to hand the conference back to Rolf Habben Jansen for closing remarks.

[Rolf Habben Jansen:]

Well, not much to add, I think we tried to answer the questions that you had. So thank you very much for attending. I hope it was somewhat informative for you, and hope to speak to you again soon. Bye-bye.

[Operator:]

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