Hapag-Lloyd Aktiengesellschaft
Q4 2021 Earnings Call Transcript

Published: 10 Mar 2022

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Hapag-Lloyd Analyst and Investor Full Year 2021 Results Conference Call. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO, Mark Frese, CFO, and Heiko Hoffman, 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 making the time to join us here today. Maybe just as we get started, we're coming of, of course, a quite an extra ordinary year. And if we look at situation today than we are, again, in a very extra ordinary situation with I think all of us looking anxiously at the developments in Ukraine. And we like pretty much everybody else, I guess, is deeply concerned with this war in Ukraine and as such, I think we've taken a fairly clear position on that. We stand with the international community. We up hold all the sanctions and would like to see a very quick deescalation of this crisis so that we can hopefully prevent further human suffering. And in line with, I think what also our corporate values, what we tried to do is try to do our at most to ensure the safety and well being of our colleagues. And we're leaving no stone unturned to do whatever we can to help them. And we try to do that, especially for our quarters in Odessa. So that does an introductory comment. and then I'd like to switch over to the reflection on 2021 and a bit of an outlook also into '22, maybe a couple of opening remarks. If we look at last year, I think last year was characterized with strong demand for consumer goods and a lot of operational disruption. We've done a lot in order to try and take countermeasures to alleviate the pressure on that, but I think it's fair to say that the entire industry has had a tough year in terms of service delivery. We have reviewed our strategy throughout the year as we are more or less halfway or a little bit beyond halfway in our five-year plan, and based on that, we have decided to change a few things and adjust course a little bit here and there. In terms of numbers, because of the combination with very high demand and very tight capacity, which of course then results in a sharp rise in freight rates, we have seen extraordinary results where our EBITDA more or less quadrupled in 2021 compared to 2020. We also have seen, especially in the latter part of the year, transport expenses going up and that's a trend that definitely continues also into 2022. We had strong cash generation, which means that our net debt has gone down to pretty much zero. In terms of market, we have seen not only demand, but we have also seen quite a lot of orders coming into the order book, and that should also help to reduce the pressure on the market. Somewhere realistically from the second half of this year, but certainly also going into next year. When we look at '22, I think we believe that we will continue to see strong earnings momentum in the first half of the year and then in the second half we'll need to see, as we believe that congestion will ease, we do think that we're going to go back to a somewhat more normal situation. A couple of words on what I said before, what are the key drivers of the results as we've seen it. Well, first of all, simply consumption of what consumers do. I still think that the graph on the left-hand side and top shows it very clearly that if you look at the period before the pandemic and you look at where we are now, then you can see that there is a lot higher spend on goods and a lot less spend on servers or so a lot of the growth in the stimulus to has been put out there by many governments, has gone into that direction. And of course, then combining -- then taking into account that there have been many COVID related restrictions. We also see a significant effect of port congestion. And I think the graph on the left hand side shows that also quite clearly. Gives a little bit of a flavor of how much time ships spend in ports. The pandemic shifted consumer demand. We have seen a lot of disruption, service quality, even if it has certainly been better in the second half of the year, is not satisfactory, particularly in the beginning of '21. And our operational costs are going up not only Ponca, but certainly also on the charter side. We've seen a lot more storage expenses, and also railing inland have gone up quite significantly. What have we tried to do? We've tried to do our utmost throughout '21 to alleviate operational challenges by on the one hand, investing, but also by trying to refine and adjust sometimes a little bit the way we do things. We'll talk maybe first about where have we invested. We have bought about 300,000 TEU of containers to make sure that we have enough boxes available to carry older cargo. I do think that that has worked quite well by compared the situation in '21 with the bottlenecks that we had towards the end of '20. The situation has been materially more relaxed throughout '21, even if the terms are still very low because until today takes us because of all the congestion long before we get to boxes spec. We have ordered new ships in total in the calendar '21 for about 270,000 TEU, which makes our overall order book around about 400,000 TEU if we add in also the 23,000 that we ordered just before Christmas in '20. We hired about 1,000 extra people, especially in our customer service centers to take care of all the requests and demand that we get from our customers. Then we reviewed our strategy, have launched five additional quality promises, also launched a number of new projects -- products. From the one hand, we launched our, what we call the quality freight product, which is basically guaranteed space on our ships for an extended period of time, week in week out. That gives some certainty to our customers, but it also makes things more predictable for us in times where we typically have to do with very high no-show percentages. Then we put more emphasis on sustainability. We have done that on the one hand by financing our investments in a greener way. We had the sustainability linked bonds. We had also the green financing of all of our ships. We published a new sustainability strategy. And of course, on the back of our financial results, we've also seen our credit rating improve. Then if we look at slightly more strategic, I think we've always said we would like to grow more in some of what we would call the attractive markets or markets where we think that in the long run there is going to be above average growth. For us there, India and Africa are two important markets. In 2021, as we also commented in previous earnings releases, we've completed the acquisition of NileDutch. That is meantime fully integrated and we're very happy about the way that process has gone. And that actually helped us to further strengthen our market position, especially in the southwestern part of Africa. Earlier today, we also announced the planned acquisition of the Europe South Africa specialist Deutsche Afrika-Linien, which we believe will really complement our service offering in the African market. In this case, mainly from Northern Europe to South Africa. Company founded in the late 19 centuries in Hamburg with main offices in Germany and South Africa, carries close to a 100,000 TEUs a year, and has in itself are well-established network and works in a consortium with partners more and ONE. Want to highlight, I think for '21 is that we started to offer customers multiyear contracts at fixed rates to give them certainty that they get the allocation. And for us also, that it helps us to improve efficiency. I think in times where there is so much uncertainty and whether it's a lot of -- when capacity is tight, I think there is some merit in providing people some certainty on that front, also for longer periods of time. I don't think there's many customers who would put all their volume into this type of product. But I think it can be quite a good base order, I think we have also seen really good uptake on this project. A product which we had targeted to become around 10% for our overall business. I think, in the end we are going through with round about 11, at least it's the it looks right now. So with that, I basically end my introduction and would hand it over to Mark who's going to talk us through the numbers. Mark over to you.

[Mark Frese:]

Yes. Thank you, Rolf. And good afternoon to everyone. Also, from my side, looking at the next page, we really can see that 2021 was an absolute outstanding year for Hapag-Lloyd. Also, and very much so from a financial standpoint. While the corona virus pandemic continued, and it's put strain on supply chains and resulted in severe, real severe operational challenges. The tight capacity situation lead to an unprecedented increase in global freight rates, which in turn has pushed our earnings as you can see. As a result, we were able to improve our profitability and strengthen our balance sheet. And in spite of strong demand, transport volumes were only slightly up due to the ports congestion's and a lot of operational problems and challenges. While the tide transfer situation, transport situation that to a sharp rise in freight rates, transport expenses on the country went up clearly as well. Nonetheless, EBITDA, as already said, quadrupled to $12.8 billion, leading to an EBITDA margin of around 49%. Due to the strong cash generation, net leverage was completely reduced in 2021. So, jumping to the next chart, a couple of KPIs was closer look our P&L year. Here, we can see that the earnings trends accelerated even further in the fourth quarter. '21 revenue increased by over 80% to $26.4 billion and EBITDA jumped with ads to $11.1 billion. That led to that exceptional EBITDA margin of 42%. Group profit in 2021 came in at more than $10.7 billion. Now, having a look at the transport volumes, you can see, in spite of strong demand, transport volumes were only slightly up to $11.9 million to you, mainly due to long waiting times at an outside of ports, particularly in North America and to some extent in South East Asia and Europe. As a result, transport volumes on the transpacific trade decreased slightly while the volume development on the far east trades was more or less flat. And in order to meet the strong demand from container transport. We have deliberately redeployed vessels from the intra Asia trades to other trades to try to supply what is possible. In contrast, we have seen healthy growth in Latin America and Middle East where these aforementioned port congestion problems were less of an issue. On the Africa trades, our acquisition and integration of NileDutch into the Hapag-Lloyd network last year resulted in a rise in transport volumes, and we are happy to welcome hopefully soon the colleagues. Jumping now to a view on freight rates. While, as said, higher volume growth was impeded by the continuing supply chain disruptions, our average freight rates increased strongly due to a high demand hitting the tight capacity situation. At the same time, bunker prices continued to rise, and as we see, will further continue. The average bunker consumption price in Q4 2021 stood at $443 per ton. With that, it's we have to say surpassed to the level we have seen in Q1 2021 when the introduction of the IMO low-sulfur regulation kicked in and led at that time to a temporary surge of bunker prices. And now, lets look on Chart 12 on the cost side, and the general upward trends observed in the last quarters continued due to the global supply chain disruptions, as well as general cost inflations we have seen. As already pointed out on the previous slides in rising bunker prices resulted in much higher bunker expenses. And in addition longer 12 times at the ports and intel and terminals, that to rising storage costs for laden and empty containers. While depreciation and amortization was also up due to the rise in the percentage of ship charted in on a medium term basis at simultaneously higher charter rates as the resulting increase in right of use. And please remember that in 2020, impairment losses in the context of the ship portfolio optimization and the write-down of intangibles had a negative impact of roughly $14 per TEU on . Adjusting for this effect to increase of , expenses would have been much more pronounced. Having a look on our cash flow, we can see that due to the strong earnings development, operating cash flow increased to $12.3 billion. We have used the strong cash flow mainly to step up our investments in our vessel and container fleet. So in particular, we invested into the mentioned transaction NileDutch on additional container capacity to keep up with the demand and purchased tech content, tonnage. And on top the first installment payments for the ultra large container vessels that we have on or that we talked about already. In spite of higher investments, free cash flow went up to $10.9 billion in 2021. So while we have paid down financial debt further and increased our dividend distribution in '21 the liquidity reserve increase to substantially numbers from $1.4 billion at the end of 2020 to $9.3 billion by the end of 2021. What does -- all of that mean for our balance sheets in the last 2 years, for Hapag-Lloyd, but also for the whole industry. We always enjoyed incredible success in terms of financial performance. Thanks to that exceptional market environment. We were able to strengthen our balance sheets very substantially. Here let me say that it's fair to say, and we have to admit that a return on invested capital of 70%, as wonderful as it might sound is not the new normal and that freight rates will come back to more sustainable levels sooner or later, and that maybe they should. Therefore, we will continue to stick to our prudent financial policy in future to execute on the strategy 2023 and hopefully we'll talk about that in more depth in a moment. Let me conclude with a view on our dividend proposal, based on that strong results in 2021 and the very positive outlook for 2022, the executive board and supervisory board proposed through the AGM, which we will have in May, a dividend payment of €35 per share. This represents tenfold increase in comparison to last year's dividend of €3.50 per share. That's the payout ratio remains virtually unchanged, so we clearly stick to our dividend policy. And after a decade of lower dividends and after such a period, it's fair to such an increase now. That means a significantly higher dividend is a result of the earnings and not of any change in our dividend structure or dividend policy. Once again, we will, for sure, remain cautious and are willing to maintain our prudent financial policy by keeping the right balance between shareholder participation, additional investments, and credit-type interest. And having said that, I would like to hand over back to Rolf again for a market update and our way forward. Thank you.

[Rolf Habben Jansen:]

Thank you, Mark. Going ahead and talk about markets, I think we can't come around talking a little bit about supply and demand when we talk about shipping. I think we've seen last year that the order book has come up significantly from a, I would say too low number as we've commented also a couple of years ago already of too low level of around 10% to now somewhat above 20. I personally think that that's good. Is it too high? One can always debate about that, whether there will be a little bit above our capacity here or there. But also when we look at the idle fleet on the right-hand side, idle feet has simply being too low over the last two years because basically everything that we could find has been sailing. And I do believe that in a global market or global industry like ours, there should always be a little bit of slack in the system. And also taking into account that scrapping has been incredibly low over the last year, so that will go up, and we will also have new environmental rules kicking in, which have an effect on effectively available capacity. I do think that the order book is set among probably roughly there where it needs to be. When we look at scheduled deliveries, most of that is coming in '23 and '24. Of course, a lot of it was ordered early last year, but it simply takes time before these ships are built and before they can be delivered. And as such, I think we'll see a bit of a peak in '23 and '24. On the right hand side, you can see they're scrapping is still very, very low. Always saying that you're keep in mind did a shift on average is in service for about 25 years. So the long term average of scrapping should be around 4%. That's a number that we have not seen for a very long time. And that will come back somewhere within the next 3, 4, 5 years. Then when we look at the balance of supply demand, I do think that these are the official outlook. Of course one can have a lot of comments on those. I would say though that I mean, if you look at this on a slightly longer time horizon than that seems to indicate that things are reasonably balanced. The rates, however, of course, a lot of uncertainty in the market these days, and I would also say that the effective supply growth is probably going to be a little bit higher because when congestion eases, then, of course the real available capacity on a weekly basis will also go up. And I guess that was all the inflationary pressure that there is. And with similar programs running out, there is certainly also a scenario thinkable in the upcoming couple of years, demand growth is less. Trying to take all of that into account, and looking at where our business is today and also where rates are, we then came up with the outlook for 2022, where we do believe that transportation volume will go up slightly. That means a slow start to the year, also because congestion is pretty much at its highest peaks that we've seen so far, but then gradually getting better in the course of the year. Bunker consumption price will increase clearly. I mean, we all look at the market today, I think bunker is around $1,000 per tonne, that would represent for us more than $2 billion additional costs compared to last year. We do think that the average freight rate is still going to go up, even if in the course of the year it will likely come down as market start to normalize. But if you look at that, it ends up with an outlook that is not so far from where we landed in the end last year. Probably with keeping into -- but then probably something to keep in mind is that whereas last year, we saw results improving further and further as we came further into the year. This year it will probably be the other way around where we will have strong earnings momentum on the back of the rates that were closed last year, and as the market starts to ease, one would also expect somewhat of a normalization in results. Also, because there is tremendous pressure on cost. already mentioned charter as well, and certainly also from England and Rio. Then when we look at our strategy, we said we had another look at it. When we defined our strategy in 2018, we said we have 3 main goals. One is to be profitable through out the cycle. Second one is to remain a global player with a market share excluding integration of around 10%. And number 3 is to continue to try to become number 1 for quality. During our review we've added one thing to it, because even if we already did quite a lot in the area of sustainability, if we look ahead into the next 5, 10, 20 years, we have to put that always on our agenda and very high so that's why we've added that. When we look at the priorities for the upcoming couple of years that came out of this review, we've grouped them in 3 pillars. 1 is simplified which is all about making sure that we simplify our model, if and where we can. That means simplify the network. Try to optimize a feat and where possible, deploy bigger ships to ensure that we keep costs under control and get unit costs down. Look at our hub and transshipment strategy and network and potentially consolidate transshipments in fewer hubs, and also look at the depo network, which in some cases is very extensive. In other cases, it may actually have to be expanded a little bit. A number of things where we can do better if we want to truly become #1 for quality, we still need to do more on digitization and invest in innovation and to future proof our IT. For us, that's the migration to a new operating system. But it's also simply being able to do things quicker and more agile. I think we made really good progress last year as evidenced also by new products that we've been able to launch, but I do believe that we can still do more. We need to continue to grow and attract markets. That's where the acquisition of NileDutch and Deutsche Afrika-Linien certainly steps in the right direction. I don't think we're fully cracked the code on inland yet. We do quite a lot of inland business, but I do believe that that's still has a lot more potential, and as I said, we need to double down on sustainability and decarbonization. We will also invest, as Mark already alluded to. We have a strong balance sheet, and that means that if we have the right investments on the table, we will do them. On the one hand, we're looking -- we'll invest in people and capabilities because we believe that in order to retain and further develop the best people, we need to invest more in them than we have done so far. Of course, we'll continue to invest in chips and in containers, and where possible and where useful, we will also look at external growth, but that's only if and when the right opportunity comes by. So that sums it up I think from our end, and then, we feel very happy to take any questions that you may have.

[Operator:]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wishes to ask a question, . One moment for the first question, please. First question comes from the line of Sathish Sivakumar from Citigroup. Please go ahead.

[Sathish Sivakumar:]

Yes, thanks again for your presentation. I got 2 questions to start off with. So, firstly on your slide, when you talked about multiyear contract volume, and you aim to have about 10% of the volumes on multiyear contract by '22, if you could actually give some more color, out of the pricing mechanism workforce at year 2 onwards, maybe year 1, year 2, onwards. And when you say about mutual commitment, do you get actually compensated for not meeting minimum volume commitments in the year or it will be just be followed up by an additional volume and the following year. So what does it mean by mutual commitment from an shipper perspective? And then the second question is actually related to the bunker. You did actually mentioned that you include at some bunker related charges. Now, what percentage of your volumes are at currently on bunker related surcharges? I guess that your contract rates are negotiated X bunker. So those in you would get reset. So we're just talking about reset charges just wondering for the spot volumes and within that, what is the percentage? And then just to remind us actually with regards to the scrubber. What percentage of the vessels are on scrubber? Again, this is just trying understand what's your exposure would be for low sulfur versus high sulfur. Thank you.

[Rolf Habben Jansen:]

Maybe let me try and take them one-by-one. First question was on the multiyear contracts. In essence, these contracts are structured in such a way that the customer end we commit a certain volume on a weekly basis, and we agree the rates for the upcoming three years between us, and that can either be a flat rate or it can be something that goes up or something that goes down dependent on what you agree. It is a mutual commitment because it means that the shipper needs to make sure that we get the boxes and that they fill the slots because otherwise it's guaranteed space, so then, you also have to pay, and it's the same for us. If we don't provide the boxes or if we don't provide the slots, we also need to compensate the customer. So it's a two-way street.

[Sathish Sivakumar:]

Sorry. Just a followup there. So if a customer this week is supposed to give you 2,000 TEU worth of boxes and if they don't turn up, so you still get paid for it?

[Rolf Habben Jansen:]

Yes. Not in all cases -- not always the full amount, but yes there is a significant compensation payment and it also works the other way around. If we have an agreement with you that we move 100 boxes for you and we give you only 80, then we compensate you for the 20.

[Sathish Sivakumar:]

Okay, got it. Thank you. That's quite helpful.

[Rolf Habben Jansen:]

Then, the second question you had was on bunker and how much of that is covered through contracts. I mean, pretty much all of our long-term contracts contain bunker clauses, which means that there will be an adjustment even if it will be with a time delay. And if you look at the long-term contract, it's roughly half of our business.

[Sathish Sivakumar:]

Yes. And you actually -- sorry go for it.

[Rolf Habben Jansen:]

No, go ahead.

[Sathish Sivakumar:]

You said that you -- in the presentation you said you had started to do some bunker related charges. So those charges are applicable only for the spot mix or?

[Rolf Habben Jansen:]

I didn't say that. If I said that -- I really didn't say that. We do not have any -- we have bunker clauses in our contracts and those will be applied. I mean, the spot market, is a spot market which typically just an all-in rate. And then your last question was on scrubber and what is roughly the share that we have, we are around 20%. I think, if I'm not mistaken.

[Sathish Sivakumar:]

Perfect. That's quite helpful. Thanks again.

[Rolf Habben Jansen:]

Glad .

[Operator:]

Next question is from the line of Carolina Dores from Morgan Stanley, please go ahead.

[Carolina Dores:]

Hi. Good afternoon, everyone. I have three, if I may. I wonder if you could comment on the conflict in Ukraine and any impact you believe it could have on seafarers. There's a large amount of your -- of the industry seafarers that are either from Russia or Ukraine. My second question is, if you give us your view on the Biden administration allegedly offensive investigation against ocean shipping industry. What do you think come out of it? And my final question is, it's -- we were expecting some easing on congestion in the second -- in the first quarter of the year. This now seem to have pushed on the second half. How do you think the easing of the congestion plays out? Is this going to be just demand driven or actually -- or there's actually some improvements in supply that could help untangle the congestion? Thank you very much.

[Rolf Habben Jansen:]

I think maybe your first question was on how much is our business impacted from Russia, Ukraine, crisis. It's a fairly small percentage of our overall business, I think in total is between 1 and 2% of our global business. So that is definitely manageable. So far because you also we alluded to the seafarers I mean we do not have a lot of Russian and Ukrainian crews and so far, that seems to go as far as we are aware, at least within our own fleet, I think we in total have about 30 people across both nationalities. That is that is okay. Then you asked about the I think the Biden administration, but I guess more in general, I would say that when you look at the last 2 years and the situation in this industry has been very extraordinary, so I think it's a very logical that there are a lot of regulators that asked questions about what is going on. I think that's perfectly justified and I also think that they are just generally doing their job. That's not only in the United States, but also in many other jurisdictions and we just try to come up with the answers to those questions as good and as swiftly as we can. And then your last point was on easing. Easing will not go from today to tomorrow. And of course, a crisis like we are now just facing in Ukraine really doesn't help but I do think that we start seeing some first signals that things are easing a little bit and they're -- on the one hand, we see that the delays that we face in Asia have come down very significantly. And then we also see that COVID related restrictions for people going to work, are being easing in many countries. And one of the root causes why productivity has been down and why capacity has been down being also because we've seen shortage of labor, especially important. And even if we still see many cases in many countries, I'm still cautiously optimistic that within a few months at the latest, we will see many more workers, again available in those ports and that will push up capacity, and that will also help. And to your point on demand, I also think we're going to see some effect on, on demand as well from high energy prices and inflation as we see it today. Whether that's a short-term effect or longer-term effect that remains to be seen.

[Carolina Dores:]

Okay. Thank you.

[Operator:]

Next question is from the line of Sam Bland from JPMorgan, please go ahead.

[Sam Bland:]

I have two questions, please. In the first one actually is pretty similar to what you just answered, which is -- we're talking about normalization in the second half of the year, kind of feels like we've been talking about normalization probably 18 months now. It probably relates to what you just answered, but are there kind of particular metrics you are looking at. How is your normalization in, let's say six months is more likely now than it was 12 months ago? The second question is on the transport expenses and the unit costs. We've seen those come up, particularly as last year went on. Are those sort of related to congestion and the high freight rates? So, as congestion eases and freight rates come down, you'd also expect some of those transport expenses to come down? Obviously the -- maybe the least cost one, but probably the handling and haulage cost might? Thank you.

[Rolf Habben Jansen:]

To your questions. I think the first one on easing or normalization. I mean, the metrics we look at are the type of metrics that we also discussed briefly in the presentation like congestion indices, but we look also very much about how quickly do we get the boxes back. Today, it still takes significantly longer than normal before we get the boxes back. That is something that hopefully start coming down, but we see there at least at the peak that it doesn't go up any further. And if anything, I think we see some first signals and it's starting to come down a little bit. It's those types of things that we look at. And in terms of unit costs, unit costs is definitely elevated. A portion of that, mainly the storage component, when you look at terminals is probably a one off, but in fairness there's a lot of stuff that will also result in structurally higher cost because fuel is up that has an effect on trucking, on railroads. We see that also in negotiations with terminals and other providers as capacity of cars, handling rates are also growing up. We see feeder costs becoming more expensive. We see charter scoring up. So that's also where you have a little bit of a mismatch because you in this market, you see first freight rates go up and then costs come only later. And that's why of course you then see quite a bit profit right now, but you shouldn't forget that for the upcoming couple of years not only us, but all of the shipping lines have had to already accept a significantly higher cost rate than we've had before because of some of the factors that we just alluded to and that's something that's not going to go away. And when prices start to come down, okay, then we'll see that costs, at least for a while are probably still going to go up or at least remain at an elevated level.

[Sam Bland:]

Yes. Understood. Thanks very much.

[Operator:]

Next question is from the line of Parash Jain from HSBC. Please go ahead. Mr. Jain, can you please unmute your telephone?

[Parash Jain:]

Sorry. Yes. Thank you. And I have probably one question for Rolf. Based on your recent discussions with your customers, particularly on Asia, Europe, are you seeing that your customers are holding back from their orders, or they are trying to delay any of the contract negotiation or any of the orders given the uncertainty arising out of Russia and Ukraine situation? And secondly do you see some off the rail volume that were using Russia, Ukraine, Belarus border would have a potential to move to the ocean, and as a result, offset any negative impact? Thank you.

[Rolf Habben Jansen:]

I think -- we've not seen a lot on Asia, Europe yet. I think post-Chinese New Year, there's been a fairly robust recovery of demand. It's too early to say whether there will be any impact from the conflict. I think your point on rail is valid. The likelihood that at least some of that volume, if not most of that volume, will be shifted back to ocean, I think that likelihood is high and that could certainly give some short-term relief. Having said that, it's only a very small portion of the overall traffic that there is between Asia and Europe. So it's probably not going to make a tremendous -- it's probably not going have a tremendous impact, and it also remains to be seen how long that situation stays the way it is today.

[Parash Jain:]

Perfect. Thank you so much.

[Operator:]

There are no further telephone questions at this time. I would turn it over to Heiko for written questions. Please, go ahead.

[Heiko Hoffman:]

Thank you very much, Stuart. We have indeed received also some questions written, so to say, because one of the analysts have not been able to dial in due to technical problems, which is actually Anders Karlsen from Kepler Cheuvreux. I think we have covered most of his questions already, which was around the split of contract versus spot. Rolf commented on that, also the multiyear contracts on how much we have there. Also signs of easing and it was the global supply chain and . But there's one question that is still open from his end, is around the outlook and he's asking what is meant by moderate increase in rates for 2022? And I think I can take that one if okay. It's in the range of 5% to 10%, so mid to high-single-digit. That's it basically. And with that, I hand it back to Stuart and I think we've got two additional questions that are coming in. Maybe Stuart, you can take that up.

[Operator:]

Thank you, Heiko. The next question is from the line of Tan from Please go ahead.

[Q – Unidentified Analyst:]

from here. And thank you for taking my question. Two questions, and one relating to your ambition to become #1 for quality, do you have a view on where you stand today? Are you in top 3-5? And how do you expect to measure this? So what actually will decide whether you have reached the top spot on quality? That's the first question. The second question is on return on invested capital. When things normalize, where do you see your return on invested capital will be? Would we go back to all the others have risked that we potentially go back to a period where this industry is value destroying for a number of years or do you expect it to be able to make value or create value for shareholders for a long period following? Thanks.

[Rolf Habben Jansen:]

Maybe let me try and take the first question first, which is around our ambition to be number one on quality. I think how we measure that. Well, first of all, we measured that across the 10 quality promises that we have defined, which are around responsiveness, accuracy of documents, invoicing accuracy, on-time delivery. All the things that one can think of. I do believe that that's a good measure. Apart from that, we do a biannual survey of our customers, out of which we are measuring an score. And we do believe that that allows us to benchmark reasonably well within our -- not only within our industry, but also with comparable industries and to also underline our commitment to quality we, this year we have also put in place a quality-related boldness to all of our employees around the world, which means that every six months, we will measure the improvements that have been achieved. And dependent on how good or not so good they are. We will pay additional quality-related incentive to everyone here in debt particularly area on top of regular salary. In terms of return on invested capital, I think Mark may want to say something about that too. But of course, I'm not going to tell you that we're making a plan where we do not return a weighted average cost of capital. I think we've set ourselves out when we defined our strategy, '18 to '23 to come up with a model where we always make money and over the cycle, at least earned back our weighted average cost of capital. I would say that also before the pandemic hit, we were actually on a very good track to get there.

[Rolf Habben Jansen:]

And I think that also without the pandemic, we would have been able to do that right now, and that's also why we did our strategy review last year. We're looking at what more can we or should we do to ensure that also in the midterm, we can still earn a decent return on the capital that we have deployed. So I don't know Mark, where there's anything you want to add to that.

[Mark Frese:]

Well, not really much to add to what you said or only maybe one comment that these times here '20 and '21 for sure have used to optimize structures and invest intelligently that we are even more able to earn our cost of category or even more than that over the cycle. So fully right for sure what you said even before the pandemic and we use that time. Therefore, no plans out there as you said, not earning cost of capital or even more.

[Q – Unidentified Analyst:]

Okay. Thanks a lot.

[Operator:]

Next question is from the line of Lars Heindorff from Nordea. Please go ahead.

[Lars Heindorff:]

Good afternoon, and thank you also for taking my questions. A couple of questions from my side. Firstly, regarding the -- Rolf, I think you covered a little bit earlier on the cost side that obviously the bunkers cannot, but also on the time charter in that part of the fleet which you actually lease. So I'm a little bit curious if you can maybe give us an indication about the length or the average length of the CCN that you have, which I'm pretty sure must have gone up. That's the first part.

[Rolf Habben Jansen:]

I think when we look at the average duration of the time charter commitments we have today, I'm also looking at Heiko as I say it, but I think it's between 2.3 and 2.5 years.

[Lars Heindorff:]

Okay. Then, the second one again, maybe a followup on some of the earlier one about is the pace of normalization and exactly when it will happen. Some of the data, that at least I track, is from sea intelligence, which we can see that reliability for the industry in general is still hitting new lows. You mentioned that one of the things that you track is how fast containers are coming back. But we're hearing about slight improvement in congestion in various places and stuff like that, and then, I'm just a little bit puzzled about the reliability, which appears to also be in the industry in general. If that's one of the signs that you look at how you view that if that's maybe a sign that it will take a bit longer than you expect?

[Rolf Habben Jansen:]

It depends very much on how you measure these type of things. I mean, if you look at the way sea intel measures, I think they -- they look at rival within 1 day plus or minus compared to published schedules. If today in many cases we are 1 or 2 weeks off scheduled with certain sailings that even if we get back to say 4 days within scheduled -- from scheduled -- from 7 days from schedule, you will not see that in the schedule reliability. And when we look at the standard deviation or the average delay for example, then those type of things start to look a little bit better, which gives me some comfort that some things are moving in the right direction. In terms of real schedule reliability, which is within plus or minus 1 day versus original schedule, that is still going to take a while before it gets better. But if we own -- if we are starting to recover from 7 to 3 days for example, that's of course a good step forward. And it's more that type of data that we also look at.

[Lars Heindorff:]

Okay. And then the last one is regarding the -- you mentioned the split between spot and contract volumes. But what I'm interested in is to get a sense for the maybe the design of those longer term contracts. If your customers are still seeking protection to the same extent that's done previously. And hence that the sort of key challenge here is just to, first of all, secure space and then move the goods and then maybe look at the rates at later front. And also if you have those longer term contracts, I mean, how many of those are fixed and maybe if you had to a fixed one for hold on periods, are customers willing to fix the price?

[Rolf Habben Jansen:]

I think when we look at the QFPs that we talked about, the multiyear contracts, I think that's -- it's about 10% of our overall business. I think we've closed 11% of our overall business more or less. Most of them are for a three-year period, and -- so that's actually -- and as I said before on one of the previous questions, they contain significant compensation clause for both parties in case they don't deliver. And I think what we see is that the customers that we close these contracts with, they tend to put only a portion of their volume on these type of products and then probably have other slices where they either play the spot market or make a normal contract. It's a bit -- I always compare it a little bit with what you see in the airfreight business, where you can have block space agreement for a certain chunk of your business, then you can have an allotment where you have a certain level of space protection, and then you can also go spot. And if you mix the three, that will also protect you quiet well, normally against too strong fluctuations of the rate, and the rate that you wanted too far from market is not so significant then. As you see in our case, we lock in 10%, 11% of the volume on a long-term basis. That still means that a big chunk of it is not locked in on a long-term basis.

[Lars Heindorff:]

Thank you very much.

[Rolf Habben Jansen:]

Your welcome.

[Operator:]

That was the last question for today, please direct further questions to the investor relations team. I would like to hand the conference call back to Rolf Habben Jansen for closing comments. Please go ahead.

[Rolf Habben Jansen:]

Well, thanks, everybody for making the time to listen to us today. I hope we were able to give you a bit of an overview of where we are and try to also give them as coolest possible answers to the questions that you post. Thank you very much and have a good rest of the day.

[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.