Hapag-Lloyd Aktiengesellschaft (OTCPK:HPGLY) Q2 2022 Earnings Conference Call August 11, 2022 5:00 AM ET
Company Participants
Rolf Habben Jansen – Chief Executive Officer
Mark Frese – Chief Financial Officer and Chief Procurement Officer
Conference Call Participants
Sathish Sivakumar – Citigroup
Sam Bland – JPMorgan
Anders Karlsen – Kepler Cheuvreux
Marc Zeck – Stifel
Operator
Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Hapag-Lloyd Analysts and Investors H1 2022 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. [Operator Instructions]
I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead, sir.
Rolf Habben Jansen
Thank you very much and welcome everybody and thank you for making the time to join us on this earnings call. As always, we’ll try to give you an overview of where we are, how we look at the market and be happy to take any questions that you may have.
Maybe a couple of opening remarks, when we look at the situation today, the first-half year, we still saw quite a lot of supply chain disruptions. I think they’ve moved a little bit around the globe, whereas in the beginning of the year, it was the West Coast of the U.S. and then we had the COVID lockdowns in China. I think right now most of the pressure is on the East Coast, U.S. and particularly also in Northern Europe. That has certainly limited the volume growth and we also have seen that spot rates are starting to ease, which I think is in line with what we have been saying for quite a while is that, we will start seeing the first signs of easing in the first-half of ‘22 and probably more of that in the second-half.
When we look at our numbers, half one certainly above expectations, I think the two other points to highlight here is that, costs are also still going up on the one hand driven by charter rates, but also storage costs are high and fuel is up significantly. Our cash position remains very healthy. In terms of market, effective capacity remains tight at this point in time. As you can also see from very low idle fleet and high chartering costs. We’re now starting to see some ships coming and being delivered that hopefully will ease the situation a bit. But, of course, there’s also on the other hand, the demand side where we definitely see signs of the economy cooling down and hopefully that will also help markets to normalize in the months and quarters to come.
And we’ve given an update on our outlook, which was higher than originally anticipated, and our cash flow will remain strong in this year, which will also help us to execute on our strategy, which is very much around the key themes that we also introduced last time, simplify our business, strengthen our business model there, where needed and invest when the right things pop up.
When we look at congestion on the — today, I think, this graph indicates that congestion is currently at record high levels. I would still say that this is somehow was — I don’t think this tells you the entire picture, because we do see some signs across the globe that things are easing. West Coast, U.S. clear improvement, Med running fairly smooth, Asia clearly improved, compared to a couple of months ago. When we look at container availability, clearly better than what it was some months ago. So I think we see no signs. And I would also expect that this congestion index is going to show an improvement over the months to come.
When we look at volumes around the globe, we always look at CTS then we see a small decline in the first-half year of a little bit less than 2%. I think June in and of itself was a bit more positive. Also, when we look at various trades, TP still up, but nowhere near the increase that we have seen in the years before. The other markets, a bit more subdued. And, of course, we also see when looking at the spot rates, and whilst they are still at a high level, a decline of 27% is not small and we would also expect that that trend is going to continue in the remainder of the year.
What we’ve been doing before I hand it over to Mark, I think we’d be doing a number of things to further strengthen our position and to pursue some of our strategic goals. On the fleet side, we have certainly — we’ve launched our Fleet Upgrade program, which should help us on loadability, but also on fuel efficiency. We bought a couple of second-hand vessels, nowhere near to what some of our competitors have been doing, but it’s a few. And we decided to start installing tracking devices on all our boxes, including the dry ones where the first ones are being done, as we speak.
We’ve launched a couple of new services to respond to additional demand. I think that’s been all off to a good start. We closed the acquisition of Deutsche Afrika-Linien, which you were all aware of. And then, of course, also on the humanitarian front, we’re trying to do whatever we can also in our push to, on the one hand help and care for people, but also to develop a business model that is sustainable in the long run.
And with that, I would hand it over to Mark.
Mark Frese
Yes. Good morning. Thank you, Rolf. Also from my side, a warm welcome. As you can see, the exceptional freight rate environment continues to be the main driver of our financial performance in the first-half. Transport volumes in the first-half remained on the previous year’s level, mainly due to congestion, the average freight rate increased strongly at around about 77% to over $2,800 per TEU.
As a result, our EBITDA increased to $10.9 billion after $4.2 billion in the prior-year period. Net profit reached $9.5 billion. And with that, a free cash flow of over $9 billion in H1. We were able to grow our cash position again to $10.4 billion, despite distributing the dividend of $6.6 billion in May.
So revenue grew by 76% to $18.6 billion in the first half. EBIT almost tripled to $9.9 billion. With an EBIT of $5.1 billion in Q2, Q2 was another record quarter for us and the return on invested capital continued to be above 100% for sure an unusual level for asset-heavy business like ours.
As already outlined, our transport volume in H1 remained on previous year level, while global markets overall declined by slightly to 1.7% or by 7.1%. Currently, markets are talking intensively about weakening demand. I think it’s nevertheless important to know that despite all the bad news demand remained robust in the reporting period. So — and further growth was primarily impeded by supply chain disruptions and capacity constraints. And yes, as Rolf indicated, second half will look differently, and we will talk about that later.
In particular, the Transpacific trades, but also the — to some extent, the Latin America and Europe trades were impacted by the lockdown measures in Shanghai and some port congestions. On the Africa side, we saw very pleasant development, which is, for sure, mainly driven by our acquisition of NileDutch in Q3. Last year, transport volumes increased by over 40%, 44% precisely in that trend and we are very happy that we can further expand our service coverage in Africa with the recently acquired Deutsche Afrika-Linien.
The average freight rate increased, as said, strongly by close to 80% year-on-year. And even quarter-over-quarter, the average freight rate increased moderately despite very declining spot rates as said. Positive development was mainly driven by higher rates for our annual and multiyear contracts, which became effective in Q1 and Q2.
Unfortunately, the horrible war in Ukraine and the resulting uncertainty on the international energy markets also drove oil and hence, bunker prices up substantially. So the strong increase of oil prices was, therefore, the main driver for rising unit cost, leading to a much higher bunker expense and indirectly affecting the other cost components due to higher hinterland and transportation costs as it is very clear. At the same time, the line items handling and haulage and vessel and voyage were further impacted by higher congestions related and these expenses related to that.
Depreciation and amortization expenses were primarily up due to the rise in the percentage of vessels chartered in on a medium-term basis at simultaneously higher charter rates. The exceptional earnings performance has led to a strong free cash flow and you can see that here we generated $9.5 billion. We have used part of the available liquidity to pay out dividend of EUR35, as you know, respectively $6.6 billion. Nevertheless, our liquidity reserve increased to $11.1 billion in that time period.
So our balance sheet on that basis and our credit ratios remained on a very, very healthy level. Equity increased to $21.4 billion and net liquidity increased to $4.5 billion, so net liquidity to $4.5 billion at the end of first half ’22. And as already mentioned in our last call, we have used the currently favorable financial position to increase our revolving credit facility and we extended the terms, so the RCF volume is now $725 million, which is for sure undrawn at the moment.
In June, Moody’s has upgraded our credit outlook from Ba2 stable to Ba2 positive, while raising our unsecured bond rating by one notch from B1 to Ba3. And as you know and as a reminder in February, Standard & Poor’s has already raised our company and bond rating by one notch to BB+.
So that’s it from the financial front. And with that, I would hand it back to Rolf for market updates and additional remarks.
Rolf Habben Jansen
Thanks, Mark. Yes. Briefly on the market update. As always, a few comments on the order book, I think we have seen the order book going up further, right now, standing at about 28% of global fleet, quite high in fairness, compared to the last couple of years and also in absolute terms, of course, a very significant order book, which means that we will get quite a lot of new vessels into the fleet going forward.
In the end, how much of that will be absorbed by demand or by new environmental regulations? I think an increased scrapping that remains to be seen. But if we look at the idle fleet today, I think it’s still very clear that today the effectively available capacity is still very tight as idle fleet is at a record low. And going forward there’s actually going to be a little bit of a catch-up effect on ships that will need to go into dry dock.
If we look ahead into supply and demand on balance, I think we clearly see that over the upcoming 24 months that supply growth will outpace demand growth. I think that’s good, yes, because that means that markets will ease a bit, but if we also create a little bit more space to catch up on some of the dry dockings that need to be done to do modifications on ships to make them more environmentally friendly and to deploy, in some cases, also some extra ships to deal with the new IMO regulations, they are going to kick in from 2023 onwards.
Looking at the outlook that we have already commented on earlier, we published that I believe on 28th of July. What we said, transport volume probably going to be slightly up, yes, consumption price of fuel definitely going to be up. I mean, there we’ve seen a very significant increase. Same goes for freight rates and on the back of that, this is the ranges that we have communicated that we expect to see on EBITDA and EBIT.
So looking ahead and looking at our way forward, what’s our focus, make sure that we continue to do our utmost to improve service quality and drive customer satisfaction. We have seen some good progress on that in the first half of ‘22 both in the feedback we get from our customers, but also objectively in the KPIs that we can meet and measure across our entire organization, compared to the objectives that we’ve set ourselves. We’ll continue to invest in fleet and in a competitive cost base going forward. We’re working hard to seamlessly integrate Deutsche Afrika-Linien. Our financial policy will remain prudent. We will step up our efforts further on sustainability and decarbonization.
And of course, we will also continue to do everything within our power to take care of our people and also to invest in developing them further as they, in the end, remain our most important assets and are absolutely critical to deliver the results that we would like to see going forward also at Hapag.
So with that, I think we wrap it up from our end, and then we hand it over to you [indiscernible], I think to moderate the questions if there are any.
Question-and-Answer Session
Operator
Ladies and gentlemen, at this we will begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Sathish Sivakumar from Citigroup. Please go ahead.
Sathish Sivakumar
Thanks again for the presentation. I actually got three questions. Rolf, you mentioned at the start about congestion easing and you expect things to improve as you go into the year. Obviously, you’ve flagged one of the reasons might be the vessels coming onboard would help to ease the congestion. Where do you see the congestion will start to actually ease or normalize apart from the West Coast, which is more of a shift from East to West, right? But in your view, what are you seeing right now? Where do you think which part of the market will start to see normalization?
And then the second one is actually on the Rhine River level, right? So obviously there has been news flow around that impacting the flow of commodities. But what does it mean for container ship trade? And especially within your network, would it actually results in, say, a bottleneck on the short sea route?
And then the third one is around the contract rates. Just to get a sense that is — on the Transpacific, is there any percentage of the volumes that is still left to be renegotiated? And then if you would have actually negotiated some contract volumes in the last, say, couple of months, how do those contracts have been signed, just to say, the ones that have been negotiated back in April or May? Thank you. Those are my three questions.
Rolf Habben Jansen
In terms of the easing, which part of the market will see normalization? I think, in general, yes, there has been a little bit of shift if you want from East to West. I would say that we also see though that some of the receiving markets, if you want, are coping with it better meantime. I mentioned the Med and also West Coast U.S. where things are definitely better. Yes, I would also say the situation in Latin America is a little bit better than it was some months ago. Today, that the real issues we still have are on the East Coast of the U.S. where things are not deteriorating, but not improving rapidly. And then in Europe where this is also driven by a number of, let’s say, labor — also driven very much by labor tension in a number of the big ports. And I would expect that once we have that behind us, that we will actually see further easing there.
On the Rhine River, yes, that has an impact on the carrying capacity of the barges, because they simply can’t carry less boxes or they can go less far. That means in reality that those boxes need to move to rail or predominantly truck. And, of course, as capacity there is tight, that doesn’t make things easier.
Then on TP contract negotiations, I mean, this is typically a very condensed part of — condensed period where all the contracts are negotiated. I mean, we have not closed anything substantial on the Transpacific in the last couple of months. This is all about the contracts that have been closed, say, between January and April.
Sathish Sivakumar
Okay, got it. Yes, thank you.
Operator
The next question comes from the line of Sam Bland from JPMorgan. Please go ahead.
Sam Bland
Hi, thanks for taking the question. It’s Sam Bland. I have two questions, please. The first one is, I think I’m right in saying about 50% of your volume is on these long-term contracts. What proportion of those resets on a calendar year basis versus some way through the year?
And the second question is, I guess, we’re seeing — well, I know we’ve talked about it, but we’re seeing some evidence of congestion going up but spot rates still coming down. So just want to get an idea of how weak is demand? Is it sort of substantially weaker, would you say demand than it was a few months ago or only a more modest weakening? Thank you.
Rolf Habben Jansen
Well, I mean, first point, I think, yes, your point is right, if we look at what do we have as a long-term commitment, that’s between 45% and 50% on average of our overall business. So, yes, that’s correct. The vast majority of that is being renewed throughout the year. The percentage that really switches on the 1st of January is relatively small. Most of it is 1st of April or 1st of May, 1st of June in that part of the year, but there is also some on 1st of January. I wouldn’t know the exact percentage, but I would — I think it’s less than 25% of the year of the contract rates.
When you look at spot rates, I think you are right, I mean, there is a fairly material easing of demand. I mean, we used to be multiple times oversubscribed on every ship system. We are still oversubscribed today, but not as strong anymore as it was. And that’s also why you see the spot rates indeed coming down with something like 27% or so, I mentioned earlier. We shouldn’t forget though that the spot rate, by historical standards, are still at a very high level. So it’s not that there is no tension whatsoever. But there are certainly some signs that market is easing somewhat and we also see that in the bookings and quotations that are being requested.
Sam Bland
Understood. Thanks very much.
Operator
The next question comes from the line of Anders Karlsen from Kepler Cheuvreux. Please go ahead.
Anders Karlsen
Yes. Congratulations on the good results. My question is a little bit on fleet flexibility and also a little bit on the contract rates. First of all, fleet flexibility, how much of your capacity is rolling off and needs to be replaced with new tonnage in this year and in the coming years just to get some feel of your expenses on chartering tonnage?
And the second part is, can you give any guidance in terms of what level are your contracts entered into as a recent take compared to current spot rates? And are you also seeing any needs or questions from customers in order to give rebates to the current contract rates?
Rolf Habben Jansen
Well, in terms of flexibility, if you look ahead for the next 12 months, I wouldn’t know it exactly, but it’s fairly limited. I mean, we have seen that in today’s market, a lot of contracts have been extended for longer period of times than they typically do, which means that our ability to reduce tonnage, I mean, it’s not nothing, but it’s certainly also not 20% or 25% of our overall fleet.
In terms of rates, I mean, yes you are right that, I mean, in essence, you have two types of rates. One is spot and the other one is contract. I mean, spot means you pay whatever the market does on that specific day. And then contract means you commit yourself for a year or for half a year or for three years whatever you agree at a certain rate. And then there is always the risk that during some periods, the spot rate is lower than the contract rate, that’s not a reason though to then all of a sudden, say, okay, then we also lower the contract rate because then we don’t need to make any contracts anymore, but then we just make — that we just do spot rate. Because that would mean that the contract in future is then a combination of a rate plus a downward adjustment. If the spot rate is lower, that doesn’t make any sense. I mean, that’s why you have these two types of contracts.
Anders Karlsen
Okay.
Operator
[Operator Instructions] The next question is from the line of Marc Zeck from Stifel. Please go ahead.
Marc Zeck
Thank your for taking my questions. One quick follow-up on the demand side. I guess, it’s pretty clear that container volumes into Europe are quite weak. But I believe that container volumes into [indiscernible] actually spot rates [indiscernible] and up quite well in the second quarter, I guess. Could you comment a bit on the U.S. consumer, what you see for, let’s say, peak season or back-to-school season right now from the U.S. consumer?
Rolf Habben Jansen
I think when you look at the U.S. consumer seems to be holding up reasonably well. I mean, even if you look at volumes in the first half year, we still see the Transpacific volumes have been growing, which is quite remarkable if you look at the steep increase that we saw in ’21 versus ’20. So, from all we see, U.S. consumer demand seems to be holding up reasonably well, whereas, certainly, in Europe and some other places there, there’s probably more nervousness and uncertainty, even if we don’t see demand falling off a cliff anywhere.
Marc Zeck
Thank you. My second question would be, let’s say, on the EBITDA or earnings development for third and fourth quarter. Is it fair to assume that, by and large, the third quarter will look not too different from the second quarter and that any, say, transport freight rates will mostly then be [ within ] the fourth quarter?
Rolf Habben Jansen
So I think if we see markets weakening throughout the second half of the year, then I think your assumption that the third quarter will be better than the fourth quarter is not so far from how we read the market as well.
Marc Zeck
Thank you. I guess, my last question then would be on the impact from environmental regulation comes in place next year and you briefly touched on that already. And I guess, we heard from your competitors and trade for orders that they expected probably 5% to 15% of the current fleet of capacity might be taken out due to slow steaming and replacement of vessels. Would you put your estimate in the same, let’s say, ballpark? Or do you see a significant higher or a lower number?
Rolf Habben Jansen
Yes. I think what you can see from the comments that have been made is that, the range that people estimate is fairly wide. The rules are fairly new and everybody is still trying to come to grips with it and also means it depends on what you can actually do on the Fleet Upgrade program, for example, that we are running. I think the bandwidth that I’ve seen so far is indeed 5% to 15%. If I look at the impact that we expect in ’23 and ’24, which is probably the most relevant, then we are probably more in the 5% to 10% type of range than above 10%.
But this is also — we gain more insight as we move forward. If you would have asked us half a year ago, we probably would have assessed the impact smaller for ’23 and ’24. Now, we’re probably looking at something between 5% and 10% as our best guestimate at this point in time. But that’s also one where we will learn as we go and we also know that some of those formulas will still change over time. So it may mean that we have to adjust that a little bit upward or downward, but we would currently assume high single-digit.
Marc Zeck
Thank you. [indiscernible]
Operator
We have a follow-up question from Sam Bland from JPMorgan. Please go ahead.
Sam Bland
Thanks for taking my follow-up. It was a question on infrastructure. I know there’s a lot of data in the presentation about supply of new ships coming through. There has been some talk from elsewhere about how infrastructure both at the ports and maybe in land might be another quite relevant bottleneck and that might be a bottleneck over the longer term. Just wondering if you have any thoughts on that, particularly around ports. Thank you.
Rolf Habben Jansen
Yes, I think we see that as well. And we believe that getting controlled access to infrastructure is important. That’s why we have a number of those investments also in Hamburg, in Wilhelmshaven, in Tanger, in Damietta, many of them done over the last years. One can certainly not rule out that we’re going to do a bit more on that, because in order to run a good network we have also learned again over the last two years that having control over to transshipment ports and some of your hubs and also over a number of the main gateways is critical. And that is something that we are working on and we’ll probably still do more on that over the upcoming couple of years.
Sam Bland
Okay. Thank you.
Operator
This was the last question today. Please direct any further questions to the Investor Relations team. I hand the conference call back to Rolf Habben Jansen for closing remarks.
Rolf Habben Jansen
Not much to add from our end. Thank you very much for taking the time. Highly appreciate it, and hope it was informative for you, and hope to hear or see 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.
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