Compania Sud Americana de Vapores SA

SGO:VAPORES

Earnings Call Transcript 2024-Q3

[María Elena Palma, executive]

Good morning, everyone. We will now begin with the investors call to give the results of this third trimester -- third quarter of 2024. I have with Roberto Larraín with me, CFO; and Oscar Hasbun, CEO of CSAV. I'm Maria Elena, I'm representing this meeting. This will be done in Spanish and English. So those of you that need to change the language, you can click at the bottom of the screen, you'll see an icon of a Globe. So please click that icon and choose your language. Thank you very much.

And I'll leave you with Oscar Hasbun.

[Oscar Eduardo Hasbún Martínez, executive]

Thank you very much, Maria Elena. Hello, everyone, and welcome to the investor investment call of the third quarter. We will now begin projecting the presentation. At the end of the presentation, you will have the possibility of asking questions that will be done openly. So we will allow you to speak from here. Well, we had a very solid third quarter with results explained by the result of our Hapag-Lloyd, in Germany. This quarter was marked by very high volumes with higher tariffs than the previous years and also by costs that went up due to logistical problems.

What we see in 9 months of accumulation is a very high demand growing around 7% on a global level. Group utilities have [ $1043 million ] around the third quarter. In 9 months, $1,833 million. We have a Terminals & Infrastructure new business segment that we've been working on for the last 3, 4 years with an EBITDA of $114 million in 9 months.

Hapag-Lloyd changed their market outlook on October '24, with an EBIT that we'll be looking at, at the end between 2.8 and 2.4, and that's the range that we're projecting for -- we confirmed the order of 24 new container ships around $24 million of investment. This ships will be built in China, and we'll have them available starting [ 2027, 2024 ] for our new fleet of boats. We'll be going more into detail later.

Regarding CSAV, we had a third quarter with $325 million in utilities. That's explained by having this result of $1.43 billion and with a positive effect due to the exchange rate between dollars and euro, we got a higher result, and this has a very positive effect for us as a company. We have around 500 million accounts payable to the German treasury. And since they are in euro, the dollar-to-euro conversion means it's a positive gain for us. We have a positive result there. We have a regulation owing to 9 months. We had a negative result of 6 months at the beginning of this year, and we are now at a positive result of $194.6 million which is negatively impacted by the payment of $343 million payment that is still due.

This is due to dividends received from abroad. That is generally paid between April and May in Chile. When you do look at the profit before taxes, we're talking about $537.7 million of 9 accumulated months. A very important piece of news is that we were able to extend the shareholders' agreement with the HLAG, which is the subsidiary of Kühne Holding with Klaus-Michael Kühne who is investing in Hapag-Lloyd.

When you take a look at the evolution of the demand, you see a growth of around 7% in the first months of the year compared to the previous years. And the third quarter had a smaller growth regarding the rest of the year because the first 9 months of the year, the first half of the year is positively affected by higher transit times generated by the Suez Canal issues. We had a lot more inventory on water than what we had at the beginning of the first quarter.

So the third quarter reflects the true situation around growth for the company. So when you look at the fleet that is inactive, we see a very, very low inactive fleet. We are getting these ships out they are undergoing repairs. It's only 0.7% of the idle ship. Almost all the fleet is being used. We see an increase in the amount of ships that went into the global traffic. We have increased our fleet, increasing transpacific transit that it will now go through the Cape of New Hope instead of the Suez Canal. This is a very important change for this fleet. This has required us to use all available ships in the market.

Here, we can see starting from July. We see a normalization towards a decrease in tariffs. These tariffs -- these rates saw a small increase since October and November 15. This was last Thursday. These rates are a bit lower currently from last Thursday, they are still above what we saw in 2023 and above what we saw at the beginning of this year as well. So there's still a very good growth in rates, and we will see what happens ahead, what the future has in store for us.

When you take a look at the cost of oil -- fuel costs that we see a slightly higher fuel cost than previous year per ton. But as we will see fuel cost on a level of Hapag-Lloyd is increased as well for any shipping company because consumption has increased due to increase in miles -- in mileage due to having to go all the way around at the Cape of New Hope and also having a bigger float and due to restrictions in the canal and the effects that we can clearly see now and the offset that we'll have to do regarding carbon emissions due to all traffic related to Europe.

We see the current state of the order book around 25%. Through this deal, we've seen a 7.7% of increase of the fleet -- the global fleet, very low scrapping because we have less idle fleet and scrapping is related to idle fleet. although it might be expensive to operate this, we have a very little incentive to continue with scraping -- scrapping, I mean, I apologize. We want to show a deeper analysis of this index because it's always important to have this in context to understand the structural supply and demand.

When you take a look at the global order book, as a whole, we have that today, the order book is around a 7.8 million of allocation, we have around 30 million TEU. This is around 26% of the order book. Now when you take a look at the ships themselves and how they will be coming in, we know that the orders that will be incorporated currently will not affect the supply up to 2028. Until 2027, we are really certain of the size of the fleet, and the biggest increase in the fleet in raw terms will have -- happened in 2024. So there you can see here is 3.2 million TEU. And this is what has been absorbed by the crisis that we went through.

Next year, we spent -- we expect an increase of 1.9 million TEU. When you take a look at the upper right chart, looking towards 2027 because in 2028, we could increase the amount of ships that will be increasing towards the future with 7.8 million TEU. Now we are currently building. That is the full bar towards 2027. We'll have 2.2 million TEU of ships that will have -- there will be more than 25 years of age, meaning that all that you can see there is potential for scrapping, meaning around 30% of this TEU could be ship replacement for ships that are all around 25 years age.

If we see that in 3 more years, this number will increase twice -- so that's the potential scrapping that we are accumulating, which is very important because the fleet has been growing older. And after pandemic, we saw a high demand for ships. So all scrapping has been kind of a delayed towards the future. So we see this in the graph at the bottom right, we're basically since 2018, there's almost no scrapping. It's some very relevant data because if you calculate the ships last around 25 years for scrapping, we should see around 4% of the fleet here. But at the level that we currently have for TEUs, these numbers should be closer to 1 million or 1,200,000, but we're not seeing this currently. So this raises a few alarms. And at some point in time, this will generate very high demand of shipyards for scrapping.

Well, we see the balance of supply and demand. We see that the fleet in 2025 was around 5.2% towards 2024, increased 11.2%, and we see how it's moving around 3%, 3.5%. And it's important to understand that this 11.2% is the net increase of the fleet when we consider the increase in mileage, which is in blue, the blue line, this increased in 18%, meaning this 11% meant an 18% of increase in miles. So that is why we have not seen an increase in the demand -- of over demand because the demand went up 5.5%. Now they need to travel more with more mileage. So when we look towards the future, we don't really see an element that will throw us off regarding the amount of ships coming in, in 2025.

But of course, all of this is directly related to what is going on with the development of the crisis in the Red Sea. As the crisis in the Red Sea continues towards next year and ships continue to go with the rerouting that they're currently going with, we'll probably maintain a situation of the current balance of supply and demand that we are seeing right now in this image. So if this were to change, of course, this could generate more availability of an additional fleet that could impact the balanced conditions of supply and demand.

When we take a -- look at the results of the quarter, we see an increase in revenue of around 18% in the accumulated, we see the same revenue, let's say, higher volume because the average rate is lower from what we had last year. This is what happened in the accumulated. For the quarter, the rates are higher this quarter. This means that EBITDA grew $1.6 million, and the accumulated EBITDA is lower after 9 months because if you remember last year, we had a higher results, and we went down towards the end of the year, we lost money the last quarter of last year.

And this year, the trend has been the other way around. We started off a little weaker and now we're seeing better results. So as we can see this and the accumulated figures here in the EBIT, we basically have 1 billion 61 thousand dollars, which is higher than last quarter. The accumulated, we still have a decrease in 35% compared when last year. We have lost $1 billion in comparison with the accumulation of last year. Regarding profit. The profit of the quarter is $1.043 billion. Wwe see a decrease of 46% due to the impacts that we've had this year in comparison with last year.

When we make this bridge to understand what changed, in comparison of the 9 years of the previous year and compared with the EBIT of this year, we see an effect of positive volume growth of around 5%, which generates $684 additional millions of dollars for this line in contributions. But with a rate that is $113 lower, and this will, of course, have negative impact going from $126 million that will decrease as we can see there in the last line. Regarding costs, we have an increase in costs of $29 per TEU. And this is mainly explained because of increased expenses in fuel and increase handling and hold -- haulage, all related to the issues in the Suez canal. All of this has been partially compensated with higher volume and higher rates regarding what we saw in the fourth quarter.

When you take a look at the cost per transport, TEU, we saw that last year for the quarter was $1,269 and when we take a look, it was $1,222, and now we have $1,298. So we have an increase of 6% in the cost per TEU. So it's once again explained that you can see here the components of emissions and fuel, which is mainly the effect that increase as well as handling and haulage. The rest of the cost looks stable with a few increase in vessel and voyage because of the issues in the Suez canal.

When you take a look separately at the Liner Shipping business and Terminal business, it's still very relevant when it comes to the use of the liner shipping business of the total of the group. We have only $22 million coming from the terminal business and then we have in the line of shipping $1.038 billion. So we have -- we have $96 million in the terminal infrastructure and 1,884 from the liner shipping. This is also related to what we have been doing in India and some other synergies that might come up in other places of the world. That's why this segment will surely be showing better figures in the future.

Well, today, the main job of the company is focused around the launch of this new alliance with Maersk that started last year. We are already selling -- we're selling the booking for next year. This will be feasible starting 2 weeks from now and in 10 more weeks, meaning the 1st of February, the full operation, the go-live will be operational. Of course, all of this has relevant costs that will probably, in fact, at the beginning of next year, particularly in the first quarter and second quarter.

But in the midterm, we expect that this will generate more adhesion from our clients because what we expect is to be sure that we have a much better transit time that we have better scheduled reliability and that eventually we'll have a few savings in the network operation.

This project is now considered assuming the situation in the Red Sea will not be resolved. Of course, there is a backup plan because we have a network that's prepared in case it is resolved, but the base scenario for next year, especially at the beginning of this alliance, we will continue going through the Cape of New Hope and not going towards the Red Sea because we see a very important risk for our operations. You have the new orders that we have, it's a very relevant order. The most relevant one that Hapag-Lloyd just made in its history, it's around $4 billion investment.

We'll be financing $3 billion with a financial commitment and the ships have newer characteristics, the orders of around 312 TEU, we have a 3.2, so it's a very important increase in our capability. There's a very organic growth where we'll also be replacing the old fleet. We will consider the new workhorses in the industry, they have [ 16,000.8 ] TEU. They will be built with potential being used either with petrol or LNG, the LNG engines can also be used with biomethane, which is a fuel that generates around 90% fewer CO2 emissions. This biofuel also generates 25%, 80% less greenhouse gases than oil. They will be ready to use with ammonia if it is feasible to develop this in a stronger way for the development of the industry.

We're also creating ships that will have the same technical characteristics and features, but they are smaller in size, I don't have 9,200 TEU. We see there the delivery is same towards the second quarter of -- we'll start getting in the fourth quarter of '27 up to the fourth quarter '29. That's our growth plan, but also our commitment with lowering our emissions. Now when you take a look at the new outlook, the company created towards October '24. If we look at the most relevant part, the last part here, we see what I said just before that the new EBIT growth is between $2.4 billion and $2.8 billion. So for now, these are the results of Hapag-Lloyd.

Now I will continue with the results of CSAV. When you compare the 9 months of this year with those of last year, a bit of what Oscar was saying, Hapag-Lloyd results are around halfway of what we had last year. This is what explains lower results in our operational level of CSAV because -- when it comes to administrative expenses, we are pretty much aligned with what we should -- there's a lower expense on the part of directors. When we take a look at the financial result we have a positive result of $13 million quite a bit higher than last year. This happened because you have to remember that towards the end of last year, we had to pay the financial debt at CSAV. And today, CSAV has no debts. So we have this result considered as income considering what we had to pay last year, also exchange rate difference because we have an account with assets in euros. It's negative this quarter, but much more positive if we consider the 9-month accumulation of last year. And what it's also mainly moving this -- driving this result is a big chunk of taxes to be paid.

Although it's very big, it's half of what we had to pay last year. We have to remember that this happens because as we continue receiving dividends from foreign countries from Germany, we have to recognize these tax expenses. This year, we have shared $1.1 billion to our shareholders against last year that we shared $2.2 billion. And with this in mind, we have this result of 9 months with $195 million, $62 million less than last year.

When we took a look at that graph of the results, how we went from $257 million at the 9 months previous year towards $194.6 million of this year. The 2 main accounts that drive this change have had fewer results from Hapag-Lloyd compensated by lower tax expenses on a CSAV level. These 2 are generally offset by other things, and the result can be seen as a very similar thing, but we completely different explanations. The current tax assets in our balance sheet is very similar to what we saw towards June, the retentions to be paid -- rather have remained the same. There's been no new news from here. We have a total of EUR 487 billion to recover from Germany. And we have credit that to be used for taxes paid in Chile from Chile towards the foreign countries.

Regarding assets, assets went down from $8.2 billion to $7.3 billion. The main movement is lower cash flow. This happened mainly due to dividends that were paid in May for our shareholders of $1 billion, just above $1 billion. This is offset by the flow that we got from Germany and Hapag-Lloyd and retentions that we gained in March. So the asset -- account of assets to be recovered, of withholdings is increased in March. And the Hapag-Lloyd account is aligned with this because although results are positive, we have an increase in $541 million.

In Hapag-Lloyd, we've got a dividend of $525 million. So the net increase has a $15 million increase. Liabilities, when you compare December '23 with September '24, they are very aligned -- $180 million against $183 million. The main variables of the accounts are lower commercial accounts of liabilities payable especially due to the lower operational expense and also additional tax expenses for foreign investors. On the other hand, we also paid corporate taxes in Germany. And this account has a balance of 0 in September regarding liabilities payable for the long term.

Except for current, this account goes up due to the dividends that we brought to Chile. And this is a deferred tax payment and also the result that we see that -- the result of this period is lower than what we had in December of 2023. It has a lower provision of payment of a minimum tax payments of 30%, still to be paid. Equity decreases in around $900 million. This is due to the payment of taxes -- of dividends, I mean, for investors, offset by the positive payment that we had to this date.

cash flow, we closed our cash flow in September with $93 million, and we had started the year with $278 million. The main changes are lower payment for operational activities, relevant payments in taxes of tax recognition of $375 million, which is, in part, offset by withholdings received and dividends received from Hapag-Lloyd towards CSAV.

Positive account for interest received for deposits and cash flow -- cash flow investments and payments towards our investors of $1,154 million. Exchange rate is lower. Thus, the cash flow is positive. As we mentioned, we have a 0 negative balance for other accounts. We continue working committed with Port cities. So on this front, we'll be communicating more things related to why we had in this year towards the end of the year. We're working with the San Antonio City port. And with this, we will now open the floor for any questions.

[María Elena Palma, executive]

[Operator Instructions] [indiscernible].

[Unknown Analyst]

My question is if there's -- there are any projects, will it be possible to work with the Port of Chancay in Peru that will begin working in January. The Chancay port will be a port that naval companies will generally use, and we will certainly be using at some point in the short term, we are seeing the operational part, but it truly is a port that will help decongest what we see in Callao currently.

[María Elena Palma, executive]

Fernan Gonzalez, go ahead. I don't know if you could please say where you're coming from and introduce yourself.

[Fernan Gonzalez, analyst]

Fernan Gonzalez from BTG Pactual. I want to ask about the unchartered because there's still more than half of the fleet of Hapag-Lloyd. Will you continue with this kind of contracts or agreements for a longer time of what we expected before or will we see a decrease in the dependency of these kinds of ships in the following years. And along the same line, after the agreement with Gemini after it goes into full force, how do you compare the current capability of Hapag-Lloyd with this agreement, especially considering the kind of ship that will be required. Could there be an excess in capability for some kinds of ships?

[Oscar Eduardo Hasbún Martínez, executive]

Fernan, first of all, just clears things up. Currently, Hapag-Lloyd owns 60% of their capability. So we have more property than the average in the industry. It's the other way around of what you said. Now renting boats. Our target is to move between 55% and 65% of property of our ships. We do not want to achieve 100% of property of our ships.

We understand that this flexibility allows us to eventually shrink of it or to have a bigger availability for technologies. So this desirable number of ownership is not 100%. Our goal is around 55% and 65%, and this is what we have maintained during the last 7 or 8 years. And the orders that we have are aligned of around 800,000 TEU, and it's increasing in that direction as well.

We are growing organically in our fleet. Of course, we have to understand that today due to the reasons of operational restrictions, we need more ships as an industry to do the same. If you take a look at 10 years back, around 2% of fleet of the world every year has been lost due to inefficiency. So in the accumulated, there are many ships that are not helping towards growth. They're just adding towards an operational part. Gemini, what we estimate is that with the fleet that we currently have. We still have a very short ways to go regarding what we need to launch the operation.

The launch will be in February. So we don't have much time to make any changes. But this should generate some degree of efficiency when it comes to the creation of more space for us at a considerably lower price because that will be more efficient than the current fleet. So with the fleet that we currently have, we have a potential of growth that is very important for the next 2 years. I would say that generally, without increasing -- considerably increasing our total allocation, that is, as I said, 2.2 million TEUs.

Our objective is to keep growing in allocation because this is a growing industry where size. It's very important to give the relative size for competition. We do not see at any moment now that we will have an excess of ships in any segment really. I don't know if this answers your question.

[Fernan Gonzalez, analyst]

It's perfect. And just a second question here. You mentioned that around 30% of the order book will be candidate for scrapping at some point in the upcoming years, and that you're accumulating a lot of capacity. So is there a global capacity of scrapping for the amounts that you expect for the future in the upcoming years? Or could this be a relevant limitation that will make this process a lot slower than what we expect.

[Oscar Eduardo Hasbún Martínez, executive]

I think there are 2 limitations here. The first limitation here would be that these ships, many of them have a contract for more than 5 months, generally, 20-year-old ships in normal circumstances in the industry, they are rented for a shorter periods. These contracts for these ships, currently, during the pandemic, they were extended. And now during the Suez canal crisis, they were extended once again. So there are not contracts that are expiring in the next 6 months. So here, we have a new restriction for scrapping. Even if the Suez canal crisis is resolved, we have a very accelerated path forward. The second one that you mentioned, effectively, the capability of the world for ecological scrapping "ecological" is much more limited than what we had before where scrapping was basically any kind ecological and not so much. So this could also be a limitation.

Now we have to understand that if the rate scenario is such that it generates losses and costs cannot be covered, we'll get to a point where it's a lot more economical to just stop the ship. And this could mean that the idle ship -- idle fleet goes up. It's just 0.7%. So if you take out all the boats -- all ships that we have in shipyards. So this is what could happen in complex situations, it's reached 10%, 12%. So it could start happening that the economical equation means that all the ships due to higher emissions, higher fuel costs that they have and higher costs of docking that older ships have it could mean that economically, it would be much more viable and profitable to hold them instead of continue operating even if we do not have scrapping due to the current situation.

[María Elena Palma, executive]

[ Sathya Silva]. Go ahead.

[Unknown Analyst]

I have 2 questions. Well, 3 questions really. My apologies -- I have 3 questions. How do you consider that freight demands will be next year? Will it be similar to this? I know this depends on the Red Sea situation. So my other question is, if the Red Sea issue was resolved today, let's say, how long will it take the world to come back to reality. And my other question is about tax withholding. When do you expect to receive this? Those are my questions.

[Oscar Eduardo Hasbún Martínez, executive]

Regarding demand, we estimate that the GDP of next year will be the main driver of freight rates. So this will be around that 3%. So we would demand that demand will go up between 3% and 4%. That's our estimation for next year. That's a bit less than the growth that we'll see this year. But it's important to understand that the effect of the Red Sea in demand per volume on this first half of the year. It's not that -- well, there are import increases in demand, but part of this growth is related to a higher availability of inventory at water. So we see -- we have 20% more traffic of ships going around. This means that in this particular traffic, transpacific traffic, you have a 20% increase of shipments on sea and at some point, you have to consider this. So it appears as volume growth, and it's important to look at consumption figures.

When you take a look at the figures of consumption in the North American economy, they're now growing 50%. They're growing at a level of 4%, 5%, 6%. So physically speaking, regarding money or dollars I saw that a few months ago, it was growing 3% in its consumption rates in North America. So you could believe that as interest rates start going down, then we could see a better growth in global consumption that will kind of look the other growth that we've seen. But that's why we have an investment of around 3% or 4%. And regarding money, do you have the chart there?

Please show it to me. We have to make a distinction here. We have EUR 486 million yet to be recovered. Of this EUR 487 million, I have EUR 486.5 million -- EUR 487 million, I would say, the only figure where we have reasonable estimation is regarding this -- withholding and refund -- versus refund entity is at EUR 129 million. We have recovered twice this first refund we should be getting it before June of next year. Last year, this money was refunded in March, the previous year at the end of May or August.

So this year. We estimate that for next year, we'll have it in our hands, we'll have to understand that this EUR 129 million now have there. When we get them in Germany, we have to bring it to Chile. So they have another reduction due to exchange rate. So regarding all other resources that you see there, where it says the refund entity is CSAV Chile. These are the second withholdings we've gone through. So this adds the difference between the EUR 129 million and the EUR 485 million. So we have those millions of euros there. So we do not have any clear date for the German authority as an average, has taken 20 months in refunding these resources.

So volatility is very high. There are people that have been awaiting this refund for 4 years. So we have to look at the reality. So when you take a look at the date when these resources were paid and you take a look at the first payment, the oldest payment was done in May of 2023. So 20 months should have gone by already this year more or less, and thus, one could think that we could get there. But if it takes longer, we'll get it on the second half of next year. So we use between 20 or 30 months as an estimation for us but it's a estimation based on the experience of saying the general delay in this refund, but it's not in our particular case because this is an authority that holds no meetings.

You cannot visit them. So it's a very anomalous as a situation, right? It's pretty cheap financing for the German treasury. So I believe they don't have much interest in hurrying up with this process. So that's what I can say for this.

[María Elena Palma, executive]

[indiscernible] go ahead. I believe you have your mic muted. I don't know if anyone else has any questions. All right. So those were all the questions. So thank you very much for participating in this call, and we'll be seeing each other when we publish the results of year-end results as we usually do, we'll do this in person. So keep an eye out for our invitation. Have a nice day, and thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]