Hapag-Lloyd Aktiengesellschaft (OTCPK:HPGLY) Q3 2022 Results Conference Call November 10, 2022 5:00 AM ET
Company Participants
Rolf Habben Jansen – Chief Executive Officer
Mark Frese – Chief Financial Officer
Heiko Hoffman – Head of Investor Relations
Conference Call Participants
Sam Bland – JPMorgan
Lars Heindorff – Nordea
Marc Zeck – Stifel
Anders Karlsen – Kepler
Deepak Maurya – HSBC
Rolf Habben Jansen
And thanks, everyone, for making the time to join us this morning, yes. As always, we’ll give you a short presentation on the main things we see, and then we’re happy to take any questions afterwards. Maybe a couple of opening remarks. I think, when we look at what were for us the highlights of Q3, I think for us really a milestone — or two milestones that we managed to sign the agreement with Spinelli Group for a participation of 49% in their business in Italy.
And we hope to get the final approval for that still before the end of this year. And then another milestone to sign the agreement with SAAM ports and logistics in South America, which will give us access to 10 terminals but also the capabilities to run terminals, which for us is a major step ahead. On the market, I think not that many surprises. I think we all read the papers. Spot rates are dropping, clearly, yes, on the one hand reflecting probably a somewhat weaker demand, but I’d also say that, because of the easing of congestion, we see inventories in warehouses have gone up, yes, which certainly also results in some short-term drop in volume.
And in the end, there’s always the question. Is it mainly caused by an inventory correction, or is it weakening demand? I’d say it’s probably a little bit of both. In terms of financials, I think volumes remained flat. Freight rates were strong, and as a consequence of that, we were able to post an exceptionally good result for the first nine months, yes.
And we also closed with strong liquidity. And yes, we saw a slowdown of demand, but we haven’t seen much of that in the results of this quarter. And we also don’t expect that to have a major impact on Q4. Way forward, we confirm our earnings outlook. Of course, the spot rate will have an impact on our earnings in Q4, but we still believe that — as said, that we hit the guidance.
And that will also still allow us to execute the things that we want to do. In terms of going forward, as you know, we’ve said since a while that we need to prepare for the new normal that is going to come. I believe we already said end of ’21 that we expect to see a normalization in the course of the second half of ’22. That’s also what we see. That’s why we have started to prepare for that.
And that means look at our hubs; look at the way we do transshipment; adjust our network and fleet; make sure we continue to put emphasis on those markets which we believe are still going to grow; and in parallel, make sure we do the right type of investments, on the one hand, in our people because we need to make sure that we retain them and help them to develop and create more opportunities for them, on the other hand invest in infrastructure and adjacent services, where I believe that what we’ve done is a good illustration of that.
If you take a step back and look at what we did on that front in the last 1.5 years, then I think you can see that we made a number of steps. We invested in [indiscernible], where operations, meantime, have started. We took over 30% of the JadeWeserPort. We invested in the Damietta alliance, a newbuild project in Damietta which is about to start — at least, development is about to start.
And then we signed with Spinelli Group in September. And then in the beginning of October, we signed with SAAM ports and logistics. I think all quite consistent with what we have. A few more words on Spinelli. Maybe Spinelli, for us, a key investment also because the market of — the Italian market is very important for us.
Hapag-Lloyd is traditionally strong in Italy with a leading position in Genoa. That’s also why Spinelli, with their core strength in and around Genoa, is a key acquisition for us, but I’d also point out that, that will also allow us to strengthen our offering on the intermodal side, get access to depots. And also the port of Salerno, where Spinelli has a 30% stake, yes, is one that we regularly call. You see some numbers here on what they have in terms of people, number of trucks that they operate and the throughput that they have through the — especially the Genoa terminal. That gives you a bit of a flavor of the size of the Company.
Very happy that we managed to do that; I think, also culturally a good fit. And now we need to make sure that we together develop that business further. Then when we look at SAAM. That’s, of course, a different project because here we acquire a terminal operator that is active particularly on the west coast of South America, which is a key market for us. I guess for us the main reason to invest in that is that we believe that, by having Hapag as an owner, SAAM can develop better over time.
If we look at where the terminals are based: There are quite a few of them in Chile but clearly also key presence in Ecuador, in Costa Rica and some other ports in Mexico, Colombia and Port Everglades in Florida. All in all, throughput through those terminals, between 3 million and 4 million TEUs, yes; solid results. And they employ about 4,000 people. Coming back to market and nothing you don’t know but still good to talk about it for one minute. I think on the right-hand side you see that rates are normalizing.
I think that’s very much as expected even if some may have expected that some of that is going to go slower or faster. I think, when you look back in history, adjustments in this market always tend to go fast. And I think that’s what we’ve also seen in — now in the second half of ’22 after actually an extended period of enormous tightness on available capacity. When you look at volumes, I think we see a dip in the month of September when looking at global container volume but also when looking in particular at the Transpacific; probably two comments to be made to that. One is that, of course, we compare these numbers here with very strong numbers that we have seen, particularly on the Transpacific, in the last two years.
The other thing to say is that this whole — that the global economy is certainly not shrinking with 10% or 20%. And as such, for sure, there is a significant element in here of a correction of inventory, which of course also has to do with the easing congestion, as we’ve had a long time where we had a lot of boxes stuck in global supply chains. And now we see that those are being delivered to the warehouses, so those, of course, fill up quicker than probably anticipated, which means that people logically react and saying, “Okay, now I better slow down a little bit with new orders.” The question is just how long that will take. When we go to the next page and say something on port congestion before I hand it over to Mark. I believe that, last time we spoke, I predicted that this graph would show — would go down significantly in the months after that because we can already see that.
We can predict the same again for the charts that we will look at in three months from today because we see congestion significantly easing. I mean in Q3 we still saw it going up in North America. That is certainly easing as we speak. And also the situation in Europe has — is currently more relaxed than it was before. And West Coast U.S. and China, I think, are largely fluid at this point in time.
So with that, I’ll hand it over Mark — to Mark to talk a bit more about the numbers.
Mark Frese
Yes. Thank you, Rolf. Also from my side, good morning. And a couple of comments on the [cold] numbers. As Rolf said, while markets are turning as we speak, we can report for the first nine months of 2022 an outstanding financial result.
Our transport volume remained stable. The average freight rate increased clearly, thereby meaning the main driver of our strong earnings growth. As a result, EBITDA increased to USD 16.6 billion after USD 8.2 billion in the prior year period. And net profit grew by $8 billion to around USD 14.7 billion. All other financial KPIs improved accordingly, and we are coming to that.
Revenue grew by 59% to USD 28.4 billion and EBIT more than doubled to USD 15.1 billion in that first nine months period. With an EBIT of $5.2 billion, Q3 was another record quarter in Hapag-Lloyd’s history. Following the previous quarter result of [5.2 billion], return on invested capital continued to be above outstanding 100%. Coming to our transport volumes. They remained at the previous year level.
While demand was robust in the first half of 2022 and further growth was primarily impeded by supply chain disruptions and capacity constraints, the recent slowdown of demand was only partially visible in Q3 of — Q3 transport volumes. And we have to say that, in addition, on our Africa trade we benefited from the acquisitions of NileDutch, as reported earlier, in Q3 2021; and the recently acquired Deutsche Afrika-Linien. On the freight rates. Average freight rate increased clearly to USD 2,938 per TEU and as declining spot rates were compensated by the long-term rates. And even quarter-over-quarter, the average freight rates increased moderately despite gradually declining spot rates as we see them right now.
Due to our balanced geographical exposure and a high share of long-term contracts, the decline in spot rates ex Asia will materialize in our freight rates and average freight rates and hence in earnings only with a certain time lag. Our average bunker price was also up considerably even though bunker market prices [fell] gradually in Q3, as there is also always a time lag of a few months between purchase and the consumption period.
As reported over the last quarters, also here unit costs continued to increase due to significantly higher bunker prices, congestion-related higher storage costs we all know and rising vessel charter rates. Some of these cost items are expected for sure to diminish as congestion unwinds and the market environment cools off. However, it is absolutely sure that the persistently high inflation rates globally will negatively impact our unit costs in the coming quarters.
Due to our strong earnings performance, cash generation continued to be on a very high level. After the first nine months, free cash flow stood at USD 14.3 billion. The investment cash flow also includes a cash outflow of USD 785 million for time deposits with a duration over three months, which are no longer recognized as cash but now included within current assets in our balance sheet. As you know, end of May, we have used part of our available liquidity to pay out a dividend of €35, respectively USD 6.6 billion in total. Nevertheless, our liquidity reserve increased further to USD 15.5 billion end of September ’22.
And for sure, our balance sheet and credit ratios improved further. Equity increased to USD 26.5 billion, and with that, equity ratio stood at 69% roughly. Net liquidity increased to USD 9.5 billion. And this includes here in this chart the just-mentioned USD 785 million for the time deposits with a duration of more than three months. I would say, at that moment, this concludes my review of the financials.
And I will hand back to Rolf to comment on our way forward. Thank you.
Rolf Habben Jansen
Thank you, Mark. I think, when looking ahead, of course, we can’t — we should always look at supply and demand in this market. What I’d say is that the order book remains relatively big, yes. I think we’ve said before that, over time, the industry probably needs an order book that’s a little bit smaller than what we see right now. We do see, though, that ordering activity has come down this year compared to last year; and I think that also makes sense and is not unexpected.
We have a fair number of scheduled deliveries going into 2023. And I would also say that — when you look at the global supply-and-demand balance, that it is likely that next year we will see more supply growth than demand growth. Even if there are a number of mitigating factors around — and uncertainties around what’s going to happen around CII, in this thing we also assume that there is not going to be any major congestion but that congestion actually will ease.
And when looking at that, one should also not compare it to the situation that we see today, but we should compare it to the average that we have seen throughout this year. So not so much easing compared to what we see in the month of September or October, yes, but much more an easing if we compare it with the entire year.
When looking ahead at the remainder of the year, already said our earnings outlook is confirmed. We do see a softening freight rate environment. That will have an impact on profitability, which we already anticipated or expected. And when you look at the individual components: Volume, we think, will be roughly on previous year level. Bunker consumption price will be up; freight rate, same.
And EBITDA and EBIT will land within the ranges that we have indicated. If we look ahead, what’s going to be our focus going forward? Make sure that we continue to give very good service quality and try to drive up customer satisfaction. Our latest customer satisfaction showed a clear increase compared to what we’ve seen before. And I think it’s been the best score that we have had for — since we started measuring that [structurally].
So we’re quite happy with that. We will continue to adapt to what happens in the market. Market is volatile and we need to make sure that we are quick on our feet if and when that is required. We’ll continue to focus and probably focus even more on costs in the end. We’ve always said this industry is also above cost because it is about being the most efficient mode of transportation internationally.
Financially, we’ll continue to maintain a prudent financial policy. We will continue to invest into the future, whether that’s in sustainability and decarbonization or in further terminal opportunities. If and when they arise, that remains to be seen and to be decided later. And of course, we will also continue to do whatever we can to take care of our people and especially also invest in their further development and learning, as we need to ensure that we retain the talent that we have and attract more in order to further develop our business in the future. Which then brings us to the Q&A section.
And for that, [we’ll] hand it back over to you, Stuart.
Question-and-Answer Session
Operator
[Operator Instructions] First question is from the line of Sam Bland from JPMorgan.
Same Bland
I have two, please. First one is can you talk about the level of actions you’ve seen by either yourself or other carriers to reduce capacity. I mean I think [that’s what] happened in Q2 2020. Have we seen any much similar to trying to align capacity with demand? And the second question is when you think about volume and demand.
It sounds like that got worse sort of around August, maybe September, time. Does it feel like it’s reached a bottom? Or are you kind of still seeing that, month-on-month, week-on-week, things are getting worse from a demand point of view?
Rolf Habben Jansen
Yes. First, on the capacity side, I think we will always try to adjust capacity to demand, yes. In fairness, we’ve not taken out a lot, so far, also because our first priority right now is to get all the ships back into position as congestion is easing. That means that we have some savings that have slided simply because ships were back in Asia later than originally anticipated, as they were stuck, for instance, here in Northern Europe for a while. Having said that, going forward, keep in mind that, of all the costs that you have when you sail a ship, about 60% to 65% of it is variable.
So that means that we would never sell — sail two ships with 50%, yes, but would always sail one ship with 100% because we simply can take out a tremendous amount of cost. And especially with ships getting bigger over the years, that in absolute terms is always a lot of money. When you look at volume and demand. I think we saw a very steep decline in demand in week 34, 35 especially. After that, things rebounded a bit.
And we had Golden Week, and ever since, it’s been a little bit up and down. Last week was relatively weak. This week started again stronger, so I don’t think the bottom is falling out of the markets, yes. I also expect that our overall volume in the fourth quarter will be pretty close to the volume that we had last year, in Q4. So it’s just as I said.
It’s quite volatile, but that gives you, hopefully, a little bit of a flavor. We had a big dip in 34, 35. After that, we saw things rebounding. Then we had Golden Week; after that, rebounded again. We had a weak week last week, rebounds again this week.
And overall, Q4, we expect to be roughly in line with last year.
Operator
Next question is from the line of Lars Heindorff from Nordea.
Lars Heindorff
The first is regarding your rate development. Obviously there is a bit of delay because of the share of contracts. I don’t know if you could give us any insight or share some details [of then], firstly, the share of contract volumes; and then maybe secondly, how you handle the current situation with your larger customers which are on longer-term contracts. Are you actively or proactively engaging in negotiations with the customers at this point of time? And then the last one is regarding the new IMO rules.
Any thoughts about how you will adapt to those? And what kind of impact that will have on capacity.
Rolf Habben Jansen
Yes. I think, in terms of rates, if you look at our portfolio, I think roughly 50% of the cargo that we move, maybe a little bit more, is running under contracts. The rest is on shorter-term contracts. Right now I think, if I look at Q3, yes, then we’re still seeing pretty decent contract compliance, but of course, sometimes there are some questions raised by customers as the delta between the contract rates and the spot market is increasing. And that is certainly a challenge going forward.
As for IMO, that will have an impact next year. As I believe I’ve said before, the CII is going to have the main impact. How much of an impact that exactly will have on available capacity is a little bit difficult to predict, as the opinions of the experts on that still vary a bit. Our estimate remains that it’s going to have a single — high single digits effect on available capacity because that will be needed to — in terms of new ships that need to be added, to ensure that all the ships are still compliant, but I know that the estimates that are out there in the markets vary anywhere between 5% and 15%.
Operator
[Operator Instructions] Next question is from the line of Marc Zeck from Stifel.
Marc Zeck
Just a quick follow-up on the share of contract rates. Could you specify the share of contract rates that run for one year or longer? Is that also like — [is it meant by like] 50% of contract, or is it a bit less? Then second question would be if we, for the years to come, could expect that you’ll provide a bit more color on the terminal business like you did from before [indiscernible] divisional breakdown [or on] profitability and such like we see from your March and April [in Denmark]. And I guess the last one would be on current volume trends.
Do you feel like that the lack of the peak season [is also attributed to the fact] that quite a lot of customers have already ordered Christmas stuff early, after the experience of last year; and that — once, let’s say, Q4 is done and we start with the next year, that this effect will normalize? That’s from my side.
Rolf Habben Jansen
Okay, rolling them up from the back. I think, when you look at volume, I tend to agree with you that people have been ordering a bit earlier, yes, for Christmas this year. I think that’s why we saw very strong volume also at the beginning of peak season. And it’s certainly a slowdown after that, so I tend to agree with you that, yes, we saw the peak probably a little bit earlier than normal. That’s why we see limited orders right now.
Together with the — combine that with the weakening economy and also easing of congestion, I think that’s why we see this [valley] right now in terms of demand. When you look ahead, the global economy is still expected to grow a couple of percentage points next year, so one would certainly expect somewhat of a bounce back. In terms of your first question, on long-term contracts, which share of that is multiyear, I would say it’s roughly 1/4, yes, if the long-term contract is multiyear. And as far as the terminal business, yes, we’ve done a number of investments in that area. Now we need to make sure that we get regulatory approval on all of that, and then we will need to ensure that we bring that into our group.
I mean realistically, over time, that will be a — I mean it’s a separate infrastructure. It’s a separate line of business, and as such, over time, we will also start providing more insight into that.
Operator
[Operator Instructions] We have a follow-up question from the line of Sam Bland from JPMorgan.
Same Bland
It was on spot rates. I guess a lot of the indices we see focus on exports from China. Think about SCFI and things like that. Just talk about how spot rates are faring in other regions, intra or North, South or other places we might not have some visibility on.
Rolf Habben Jansen
I mean I think generally the spot rates out of Asia have come down a lot. That’s, of course, also where the major pressure was, yes, when you go to — through the last 2, 2.5 years. We see also in other markets that spot rates are under pressure but not in the order of magnitude as we see it in the exports out of Asia.
Operator
We have a follow-up question from the line of Lars Heindorff.
Lars Heindorff
Maybe it’s a little bit premature, but we are entering into what I’ll characterize as being the contract season. And I know you can’t probably say anything about rate levels and contract levels and stuff like that, but I’m more interested about how you come about those negotiations when you enter into talks with the — with your customers. I mean, what is the key focus here for the customers? Is that continued focus on reliability and hence ensure capacity? Or has the focus changed now towards more on price, obviously, with the spots going down?
And where sort of the focus is on those negotiations, if you can share that.
Rolf Habben Jansen
I mean I think, as always, the — it’s always a mixture of making sure you secure capacity and get the best possible rate. In the last couple of years, capacity has been extremely tight, so there was clearly more emphasis on securing space, yes. Right now we see rates coming down from a very high level, so right now there is more focus on costs, which is, yes, not unexpected.
Operator
We have a question from the line of Anders Karlsen from Kepler.
Anders Karlsen
I just had a question on your fleet size and your thoughts around your current size. And also what kind of flexibility do you have in terms of redelivering ships under term charters?
Rolf Habben Jansen
Yes, well, I think our fleet size is known. We have a number of ships coming in. We have also a number of ships that we can redeliver. We certainly have still a fair bit of flexibility. I think — but speaking under high cost control, I think we can roughly redeliver about 1/4 of the chartered fleet until the end of next year if we would want to do that.
Normally that percentage would probably be a little bit higher, as we in the last couple of years, like everyone else, have closed more longer-term charters than we’ve seen before. So from that perspective, ’23 is still a transition year, but to me being able to redeliver about 1/4 of our chartered fleet within the next 12 months is still a — yes, that’s still a decent flexibility, also because we have a number of ships in addition to that, that we could scrap yes, yes, if and when that would be required.
Operator
Mr. Karlsen, are you finished with your questions?
Anders Karlsen
Yes, I am.
Operator
We have a follow-up question from the line of Marc Zeck from Stifel.
Marc Zeck
2, if I may, one on capacity management. Do you feel like that, let’s say, political considerations might [suppress] [indiscernible] clearly like that you or others [don’t want to have like pressure lines], saying that carriers hold back capacity at still high freight levels — freight rate levels and that might cause a [release with that much]. And second question would be — and I’m not saying that you do this, but let’s assume some carriers might feel like they have over-ordered, I mean, vessels, [so] how could they actually manage to maybe delay this [deliverance? Is their] mechanism, like, speaking to yards? Or [indiscernible] or is that — how did you still view — or how would that work?
Could you like maybe give a bit of a comment on that?
Rolf Habben Jansen
I think, from our side, if we look at whether we could take capacity in or out, in the end, that is purely driven by cost. As I said before, 65 — 60%, 65% of the cost you incur when you sell a vessel is variable cost. If you look at it from a cash effect, that percentage is even higher, so that means that, if you don’t have enough volume to sail a — to have a profitable sailing, you will always try to take out that cost because that simply helps you to retain cash, yes. I don’t think there is much more to it than that. And in terms of, if I heard you correctly, because the question was not so clear, whether we were looking at delaying newbuilds or something like that, I don’t think so.
We try to get the ships as quickly as we can. Having said that, there are some delays in the yards here or there because, especially in Asia, we have certainly over the last couple of years seen quite a few COVID-related delays or work stoppages, which of course have some impact on when the ships will be finished, but I don’t expect that to be — to have a massive impact.
Marc Zeck
Let me — to clarify that — maybe you can give a bit of a history lesson here. Is it common or set in stone that all the vessels that are currently ordered will be delivered, more or less, on time, [whilst the shipping industry has a bit of a habit] that — if there’s, let’s say, a sense of over-ordering going on, that in the past, carriers reach out the yards and late — the deliverance of the vessels?
Rolf Habben Jansen
I mean it depends a little bit on when your deliveries are scheduled. I mean, if I order something now for 2026, then of course, I can still go to them and say, “Can we pull that forward or move that backward?” dependent on when I need it for my fleet planning. If you look a little bit on the short term and you look at the ships that people have started building, which in essence is everything which is going to be delivered in the next 1.5 years, yes, then the options are, yes, typically quite limited, yes. And you are dependent on when the yard is going to be ready.
Operator
Next question is from the line of Deepak Maurya from HSBC.
Deepak Maurya
I had mainly a question on your scrubber exposure. [I mean], any thoughts on [shrinking] that exposure from current level given Q1’s is still elevated?
Rolf Habben Jansen
[It’s] very difficult to understand, but I think you asked for a — for what’s happening to the scrubber share of our ships, yes. I mean that is slowly going up because we have — some of our new ships that will come are equipped with scrubbers. And then we have also a number of longer-term charters that will come into our fleet that comes up. Having said that, in the end, it’s we’re going to be probably around about industry average or a tiny little bit lower than that. I think, if I look at what we have in the plans right now, we’re going to move up to about 30% of our capacity in terms of scrubber-equipped ships.
Deepak Maurya
Okay, okay. No, that is helpful. And with respect to your contracts, if you could provide some color on how much of that is index linked…
Rolf Habben Jansen
Okay. I mean the — your question was how much of our contracts are index linked. Well, the answer to that is: very few, pretty much nothing.
Operator
We have a follow-up question from the line of Sam Bland from JPMorgan.
Same Bland
It was a question on capital allocation. I think I’m right in saying the dividend policy is at least 30%. I think, last year, it was about 70%, but I guess now we’ve got weakening market. Maybe CapEx needs might go up if ships are getting a bit more expensive, but also we might have other ways of spending money on terminals, so I guess I’d just be interested in if there’s any thoughts on dividend at this point given those other needs for cash.
Rolf Habben Jansen
Yes. I would say there’s plenty of thoughts but nothing to be shared. I mean, in fairness, I think all — I think, in fairness, all the considerations that you are giving are also considerations that go through our mind. We know, however, also that a decision on dividend only needs to be taken in February, yes, beginning of March; and that’s also when we will do it. We’ve seen markets change so rapidly over the last couple of months that it would really be premature to speculate right now on what our dividend will be.
It will for sure be in line with the policy, yes, but beyond that, it’s really too early to comment on that. So I’m not trying to — maybe my initial sentence was a little bit that I was ducking the question, but I really think it’s too early to comment on that.
Same Bland
No. It’s fair enough.
Operator
That was the last question today. Please direct any further questions to the investor relations team. I would like to hand the conference back to Rolf Habben Jansen for closing remarks. Please go ahead.
Rolf Habben Jansen
Not much to add. Thank you all very much for making the time. We really appreciate your interest in Hapag-Lloyd. Hopefully, we were able to give you some further context on our results and respond to your questions and looking forward to speak or see you again soon. Thank you.
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.
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