Compania Sud Americana de Vapores SA
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Good afternoon to everyone. Thank you for participating on this call. We will have different presentations of the results of Q3.
Well, first, as you saw in our publication, we have a strong financial results, this due to the results of Hapag-Lloyd during the first 9 months of the year. This result is strongly driven by an increase of freight rates. When you compare it with the first 9 months of the year, there has been an increase of 62%.
[Operator Instructions]
Regarding expenses, there is an increase that continues very resilient when compared with the first 9 months of the year with a 22% increase. And this, as a result - 2 things to mention. First, oil. That explains 45% of increase and other costs as well that we have been affected by the pandemic and some will remain for a not very short period of time due to basically higher leasing costs, terminal costs, truck costs, all costs that have grown not only due to oil, but also labor costs and contracts that are more expensive. And that will affect not only ourselves, but the industry as a whole for a longer period of time. In the case of Hapag-Lloyd, we have an EBIT, $15.1 billion, which is twofold of the same EBIT of the same period of last year. However, we've seen since August a fall in spot prices, spot rates of importance with peak levels of $5,000. Today, we are of about prices lower than 4,100, and that is a signal that the market is weakening regarding its demand. On the other hand, the decongestion of ports that increases the amount of available ships, and therefore, the supply rises and that brings spot prices down. In addition, the company has continued with its strategy to invest in ports. There are 2 acquisitions that were announced that are in the process of being approved. An Italian company at the port of Geneva and that has other facilities for storage. Then we have the acquisition of the Ports & Logistics division of SM SAAM with 10 terminals in America - and this all focused with the perspective of improving our position with ports.
[Foreign Language]
When you observe traffic, there is an important reduction of port traffic that has continued 8.6% of decline with a fall in volumes, with a strong decline in transpacific traffic, which was the route that most grew during the pandemic. As we see in volumes pre-COVID and post-COVID. And when you observe traffic, on the right side, you can see an improvement in traffic in Continental Europe, North America, the West Coast and an increase in East Coast and due to this increasing congestion in some places, the global situation seems normal. Now this indicator here is important because this explains what we are seeing, and what we will see is there is a recovery of inventory stock levels. As you see in Europe, it is at higher levels than pre-pandemic moments and in the U.S. as well. The inventory in billions of dollars and we are at historically high levels and due to this, probably we will see fire sales or to reduce the levels of inventory and to return to normal levels of imports during the first half of next year. If you see the levels of overstock, these are not of importance. We have to consider that these are levels of 1.3 months of inventory. So if you have 20% more it's basically 10 days or 15 days of sales. So it's relatively fast to make the adjustment, and nobody wants to be overstocked because it is very likely that we will see fire sales or in different areas, which is important for the economy. Regarding freight rates, as we had mentioned, we have a shortfall in the spot prices - or spot rates, where we had historical levels of $5,000. This represents a part of a shipping revenue... Because the amount of contracts have been important. We have 50% - 52% of our volumes are under contract. And that, therefore, explains why in the last quarter of the year - We hope that it will be less in the fourth quarter -- third quarter will continue to grow at a steady rate.
The counterpart freight rates, are charter rates, and what happens in reality is that ships have been chartered and the market is very small. As you see on the green bars on the right, you see the amount of transaction compared to 2020 is very low. You can see that charters have fallen, but they continue to be, in many cases, have exceeded pre-pandemic levels. We expect that this will correct itself by 2024, 2025. And that should create an increase of the level of scrapping that we expect will be low during the next 24 months. However, higher than 2021, but lower than a point of equilibrium as ships have been chartered for 2 or 3 years. When we observe oil, that for us is an important cost item, we have average levels of 2022 of $753 per TEU compared with $506 of 2021, which has important impacts in our cost structure. Our costs have gone up 22%. And an important share of that is due to oil. Now, this has been falling since July, and therefore, we hope eventually that the average, especially if we are in a recessive environment, will continue to go down. Our spread also has increased between very low sulfur and high sulfur and at some point in 2020, the spread was only $57 and now we have spreads of $200, but makes it much more competitive to install scrubbers as it allows you to use oil with higher levels of sulfur. Here, we see our order book that hasn't suffered substantial changes in 2022. What has changed is the new orders, when you observe total orders in 2021, we have 4.2 TEUs by 2022. To date, we have 1.9 million TEUs which reflects the acceleration of new orders. And this has explained that the most relevant players - or because there is uncertainty of the impacts of new emission standards and if it's worthwhile to build a ship today that we will not know for how long we will be able to use in the future as it requires important levels of CapEx. So that is a signal of that. Now, regardless of that, the deliveries that we'll have for 2023 are relevant. We will have, in terms of new supply and demand a growth of imbalance, we'll have more ships entering than demand. And that is an element of concern and this is an important issue as well. I won't explain too much of the details, but there is a new regulation that will enter into for us in 2023. It seeks to categorize ships regarding their emissions that they generate in specific traffic lines that they operate in. This means that ships will be categorized A to E, A being the most efficient and E the worst. Now, any ship that appears in E during the year will have to comply with requirements to move to a category that allows it to continue to work. A ship that appears in category B will need 3 years to return to its level of most efficient operation. Now given that there isn't alternative fuels, the only way that the industry has to avoid ships to fall into these 2 categories is to deaccelerate them or to remove them. It is estimated that the impact of the emission standard could be about 10% of the global fleet. That means that either via scrapping or to decommissioning or to reducing speed, we could be facing that in 2023, 2024, the global fleet will reduce by 10%. And when you observe the order book and you consider that this could cost 10% of fleet effectiveness plus normal annual scrapping that one expects, that implies that the order book will not be very dis-adjusted and will be large for the industry. It's true that it will be important for 2023. But in the midterm, we don't see it as a permanent factor of imbalance.
Well, to explain this, we had $7 billion of EBIT. We had increase in volume that creates a $17 million[indiscernible] our main impact is increase in rates that creates $8 billion of additional EBIT, a negative impact of $1 billion due to oil and about other $1.3 billion of negative impacts due to all the other factors that has to do with charter rates but also in depreciation that includes charter rates. Haulage has also been affected due to port cost increases due to the excess of containers in operations and higher transportation costs.But all this combined creates an EBIT of 9 months of $15.1 billion, which is obviously is a large number, and it's likely we will not see it, I don't want to say never again, but for a while, I imagine, unfortunately. Well, this is a summary of the same simply just to have - we'll have $14.7 billion of net profit during these 9 months, the first 9 months of year.
With all this, Hapag-Lloyd has maintained its guidance of EBIT for the end of the year, which is 37 and 19 and - 17.5 and 19.5. Which was consistent with our outlook for the year. And very quickly to say in the case of CSAV, our net income of last year from 1.9, we have an increase due to Hapag's results. We have an SG&A of $13 million due to the variable participation, financial results and certain tax expenses, $28 million, which is basically Spain due to the effective tax that we have to pay in Germany due to the dividends paid from Hapag-Lloyd at that moment. And with that, we have an accumulated EBITDA of $4.3 billion, as you know, which is the historic result ever in the company. So we're very happy, of course, to present to you these numbers.
So in terms of the balance sheet, you can observe that the assets have grown. When compared to December of last year, our cash flow increases as well. The current financial assets - which are other current financial assets, where we convert the debt that we had taken to finance and the current tax asset is $463 million will be received in Germany. On the noncurrent assets, the result is due to mainly the participation of Hapag-Lloyd and during the results of the other quarters of the year, dividends were distributed on liability. On the liability side, we see that a level of short-term debt of $566 million that increased regarding of December, mainly because we paid $450 million at the beginning of the year, and then we had a higher debt to finance the retentions -- the current commercial accounts increased by $40 million. This is caused by a withholding of additional tax that we haven't paid and then we have the provisions of tax to pay in Germany. And noncurrent financial liberties, we reduced the portion of financial debt, which is passed to current debt. And then our equity increased due to our participation in the result of Hapag-Lloyd discounting the provision that is in liabilities related to 30% of the dividend that we have to pay in April of next year. After, if we observe the cash flow, we started the year with a cash flow of $30 million. Administrative expenses have been of about $22 million. Then the cash flow increased due to the dividend received from Germany that registers $1.4 billion financing reduces explained by this increase of debt, as explained before by the payment of dividends that we did to shareholders - added to the higher payment of interest due to the higher level of the end of the year and that we would close the quarter of September with $110 million.We can observe the share price evolution versus the EBITDA, the stock market to year, the share price has risen and we have to continue to monitor the evolution. There are parts of [indiscernible]that we have to incorporate such as the payment of dividends. On the debt side, we have a level of debt of $666 million with a cash of $110 million, which gives net debt $556 million. All the financial covenants leverage, total assets and free asset ratio all with space. We keep our strategy of sustainability, our work with communities and to promote global trade being an active player within the industry. During the quarter, we had many activities with shareholders and groups of interest in, many related to our 150-year anniversary, so we continue very committed with the strategy. And I think with that, we can move to the questions.
Just to reiterate that we we are an efficient vehicle to invest in Hapag-Lloyd with a solid balance sheet and results as we see that the industry is tending back to normalize, traffic is falling, but this will be protected by long-term contracts that we have with the industry and also will help us to confront the new environmental standards.
[Operator Instructions]
Good morning. Thank you for the presentation. First of all, we congratulate you for the excellent results. I know that the industry is going through some turbulence due to the fall in spot prices. Two questions, if you can help us clarify. Today, the levels of idle fleet is about 5% when compared to the standard, which is low. But by 2020, when the pandemic hit, idle fleet rose also, would it be expectable to see idle fleet? Will it continue to increase as freight rates, spot prices are too low to turn a profit with the ships?Second question is there's another index that measures global prices of all the industry, if I understand correctly. That index has only fallen 4% according to the latest public number. Is it expected that average prices of large shipping companies such as you will correct themselves gradually similarly, the same way as they rose because spot prices, if I remember correctly, multiplied fivefold but shipping prices rose gradually because of the contracts. So the price correction averagely globally, should it also lower gradually in the same way?
Thank you for the question. Regarding the last part it is correct that our rate for the fourth quarter is not falling by 45% as the industry, it will be more gradual than spot prices. Now if it will be similar or not, I cannot affirm that because I would be talking of the future but in any case, we have contracts and many of these contracts that have to be renegotiated now by the end of the year. So I would say that when Hapag-Lloyd conducts its guidance for 2023, we'll have incorporated in those guidance our outlook for the company of how 2023 will be. And the first question, what was that? Oh, the idle fleet question. And regarding the possibility of continuing to have more idle fleet, that exists, and it's logical. There is nothing more expensive than to run a ship with low demand. But when ships are chartered at higher price, it's different to stop a ship that pays $100 a day that ones that pays $40 a day. So the breakeven of stopping a ship is more rigorous. So it could be that a restorer process, could be also that the global demand is not the one as we saw when you talk of 2020. But yes, we should expect an increase in idle fleet. There won't be much incentive to be running ships without breaking even.
Good afternoon.
Who's speaking?
[Indiscernible]So 2 or 3 questions. The charter contract durations are long. There are 3 questions. The contracts you mentioned that the majority will be negotiated in December. Is that 0.5%, 80%? And the third question is, we are importers and exporters. So I also look at rates. And I see that Chile's rates have fallen a lot, but not so much from Europe to here or from here to U.S., the global rates have fallen, but have they fallen in the same magnitude as from China to here?
Well, I didn't write the questions down. But I'll start with the last one. Indeed, not all rates have fallen in the same magnitude. The market that's most affected has been Asia. This is a consumer's market. You considered from Chile to Europe and U.S., that is not a consumption goods market. This has to do with food. Basic raw materials, copper, wheat, cellulose. And the demand of those things in general is pretty stable. But we see a sharp fall in consumer goods, Asia in this case. And there you can observe the drop in volumes and the adjustment in freight rates. In our case, in our exports, total volumes of copper, wood and of other products, is expected this year to grow when compared to 2023. These are smaller markets, yes, but less affected. And regarding the contracts, we indeed -- the total of contracts, this is 50%, 52% of our volumes, and about 80% of those contracts is 40% of our volumes a bit less, will be renegotiated during November and February. So those contracts should suffer an adjustment in rates if spot rates continue at these levels to that date. So to highlight that will have an impact on the rates that we start to have during the second quarter of next year.Aside from plot rates. Now just to remember, these are rates from deporting to Chile, but there's also rates from returning to Chile, but those rates are more stable than exporting from Chile. And that helps that the total average doesn't fall at the same speed nor rises at the same speed as the Shanghai index, which is more volatile. I don't know if that answers the question.
And also contracts, it's a mixed bag. I'd say that the industry has a duration of 2 years, 1.5 years. This is a duration as one talks of a bond, by 2024, 2025, these contracts in general are all due. And we have longer contracts, but these longer contracts in general haven't overpaid months, and it's been 15% over - or more expensive, but they have longer durations. Also the ships are more expensive. The ship today is more expensive than it was before the pandemic. So charter prices that are higher reflects the higher prices of ships. Now this is a group of ships that represents a small percentage of the shipping fleet. But you can see it in the costs. And we are observing our depreciation costs and that will continue to be salient in our cost structure.
Now Francisco Paz Diaz.
Good afternoon. I have 3 short questions. One, if the company has an estimate of dividends for 2023. Second, if there are plans for financing the withheld dividends for next year. And thirdly, if there is clarity regarding the tax credit that would exist for Vapores in Chile.
Unfortunately, I don't have answer for any of those questions because they're all related, and it's a matter that only the Board can decide and they'll decide it when it corresponds. So there is nothing to anticipate of your questions now. As an objective observation, we have a dividend of dividends at Hapag-Lloyd, which is a minimum of 50% profit. In Chile, we have a minimum dividend[indiscernible]mandatory, which is 80%, that could be calculated with the accumulated - anything over that is something that has to be decided by the Board, whether provisional or not provisional and how that is financed, if it is financed at all. So there's nothing else that I can add in that.
Danielle [indiscernible]
A question on the long-term results of Hapag. And I've heard you as executives - I just wanted to clarify that. And today, there was a recent article from the Financial Times that the industry is in a[indiscernible] Is there a public number that is reasonable to think of a balanced result for Hapag after overcoming all the situation that was suffered by [indiscernible]simply to clarify, we have no official data or forecast of what will be the equilibrium result and it's hard to estimate. Now I think - first, we're facing a scenario when capital cost has risen globally. So the WACC is higher for the industry. The asset base of the company has grown despite that an important part is cash flow. When you see the market cap of Hapag-Lloyd, practically half of it is cash flow. It's important to consider that a part of that cash flow, we expect it to be given out as dividend, but the rest plus and a part of the debt capacity of the company will be focused on assets, either ship set of an order and the purchase of ports that we have an interesting pipeline of projects. And these are businesses that have to have a return that we hope will be at least at the level of capital cost. So we see that the total levels of assets of a company like this could be about $30 billion. There along those 2 variables, capital costs and total assets, can give you an idea of how much the equilibrium should be for the industry. We have been the company that has had the largest dividends when you see what our competitors have done. Their asset base has grown faster than ours. So we think we are in good footing that the industry equivalent will be over the levels that we saw before. Now when you see the historical returns on the industry, excluding the bad years, we're talking in a bid of 9%, 10%. Somebody who's better at finance can use that to get to a better result. But this is based on a market equivalent and when we see that there's oversupply and that the business goes South and as it would happen during these last 2 years, there's no indication of return over assets. But the long-term equilibrium that is can allow us to build a model.
[Operator Instructions]
Hello. Thank you for the presentation. I have 2 questions. And one is that it is obvious that spot prices do not reflect the freight, when you see the average price, you start to observe spot prices, they are reaching very dangerously. So it's true that there are contracts and things that make repricing relatively slower. But in that sense, what are you observing maybe looking towards the second half of 2023, when it reflects more of a market scenario? How are the negotiations advancing? And what should we expect on that side? Should costs go down together with rates?
First, I have no vision to share that has any value or predictive or statistical of what will happen in the second half of next year. Still, the year is very open and is open to what will happen with contract negotiations, what happens with idle fleet. It's an open scenario of what shipping companies will do regarding emission standards. So I'm not in a position to make a prediction. And the first protection that the company will make will be in February when contract negotiations that are underway are close to being concluded.
Maybe the last question, but in the internal discussions, we have accumulated a cash flow. With these high requirements of investment, what would be the long-term debt of Hapag-Lloyd?
What would be logical would be 2x EBITDA, I think, because the type of asset that we have are long-term financing and in general and it's financing that is acquired at lower cost, lower than corporate debt. So I think a long time will pass until we reach that level of debt because we're not going to expand that amount of capital to reach that level of debt. So I think a lot of time will pass where the company will have a debt level lower than the optimal level.
Clear. And maybe the last one question. And where the industry has gone through a period of consolidation after being underwater, how much is the concern of keeping a balance sheet that is crises-proof?
I resist to think that we have to store cash flow for future losses. I hope that in the case of a crisis that the management will make all the decisions to be able to face this crisis, to reduce its fleet. That is a situation that we have lived in other occasions, and I hope that the funds that are stored in the company, even if you distributed 50% of dividend or 60%, 70%, the amount of cash flow that the company will have is considerable. And we hope that that cash flow is invested in good projects. And just to keep it away, that would be a very bad signal. I'm of the opinion that the industry is not comparable as you mention. Even though it's volatile, we mustn't forget that we've been falling from a historical peak that we had never seen before. So obviously, it is a sharp fall. I do not foresee that this is a company that enters a structural phenomenon has that. We have 60% invested in fleet. When you look at our EBITDA, our conversion from cash flow to EBITDA is high. And we have a depreciation of $2 million and there, we have a reserve of cash flow. And if we have to do that, what has to be done is to reduce the level of investments. So we have levers and resources to face a crisis and dramatic situation that I do not foresee. You can always have a good or bad quarter.
Thank you. Francisco [indiscernible]Thank you for all your comments. I follow Hapag-Lloyd. We are talking of a company that provides 50% in dividends. And of that 50%, 30% is part of a different world, where we have the 5 largest shipping companies among Hapag-Lloyd and of what shareholders of Sud Americana has 30%. It's not as in the Asian crisis where we had 100 shipping lines. There was a very smart decision to purchase the logistic company in Italy. New purchased containers in the north. They are building ships and opening new routes Africa. So I think Hapag-Lloyd anticipated this area and used its assets to make a world-class company. So my question is, as the Compania Sud Americana receives 30% of its participation, what are we going to do with that 30%? Are we going to buy a bank to store that money?
I don't know if the question is clear. Well, just as I've said in other occasions, are we going to have to return it? No, I don't think we have to return it. I didn't understand that part, but - No, I don't think we have to be able to finance the original company.
So all the cash that Vapores does, what are we going to do? Is it going to be given away?
I repeat again, the decision of the dividend policy, the proposal is proposed by the Board to shareholders conducted when meetings are held, and that is something that we will inform at that moment when it has to be informed. Now as an objective piece of information, we have said that the interest of the company is to give to shareholders the cash flow that comes from Hapag. So that is my answer.
That seems fine. It seems okay. We can maybe - there's some more space to give more away.
Thank you. I'll propose it to the Board. I should have a meeting. Maybe that item should be talked about.
There's nobody else with their hand risen. I think we are on time.
Well, thank you for your attendance, and we hope to see you soon for the presentation of the year closing. Good afternoon.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]