Hapag Lloyd AG

XETRA:HLAG

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Jasmine, your Chorus Call operator. Welcome, and thank you for joining the Hapag-Lloyd Analysts and Investors Conference Call on the Q1 2018 Results. [Operator Instructions] I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Yes. Thank you very much, and thank you, everybody, for joining. And we'd like to take you -- as I'm sitting here together with Nicolás Burr, we'd like to take you through the results of the first quarter.Maybe if we start on Page #3, a couple of opening remarks. First of all, when we look at synergies, the ramp-up from the UASC integration, that's on track, and we expect to realize to up to 90% in 2018. And we think the start of the year has been solid. So when we compare it to last year, although the environment -- the market environment has been challenging on the one hand because we've seen spot rates being under pressure, especially in the second half of the quarter, but also because we saw bunker cost and charter rates creeping up.When you look at the sector, midterm, we believe that the sector fundamentals remain favorable in the midterm. Order book, despite the number of orders that have been placed, remains at a fairly low level and demand continues to develop well.Financials. You've read the numbers, an EBITDA of $270 million compared to $144 million last year on a 100% comparable strong operating cash flow, quite a lot better than last year. If you look at our priorities going forward, it remains focused on delivering the synergies, make sure that we continue focusing on profitability and also on deleveraging.When looking at Page #4, looking at the synergy ramp-up, I think not much more to be said here. We are on track to deliver those synergies. We expect to hit 90% or close to 90% in the course of 2018.When we look at the financial highlights on Page #5, probably 2 things to be mentioned there. One on transport volume, of course, that's helped a lot because if you compare with previous year, we now have also the UASC numbers. Important to say that on a pro forma basis, volume is up around about 2.5% to be pointed out there that last year we had an extremely strong quarter in the -- in Q1, and we expect that percentage to creep up throughout the year. That means that our outlook that we will continue to grow in line with the market or possibly a little bit more than that. We will hold that up. And when it's around the freight rate, at first glance, it looks that year-on-year that freight rate is down. However, if you look at that on a pro forma basis, the freight rate is actually up around about 70 -- 7%. EBIT, EBITDA, the group results, all known. Equity remains very solid at $7.2 billion. Liquidity reserve, on the upper end of what we've always given as our guidance. And our net debt continues to come down.If we look at the sector update, maybe starting with bunker price on Page #6. There, we clearly see that the bunker price has gone up -- has come up. Last year, clearly below -- still below $300 a tonne. And now we are at the $354. And as we all know when looking at the market, there is certainly further upward pressure to be expected going into Q2. Global volumes definitely up our last estimates, although no stats are probably fully final yet. It's continued growth between 4% and 5%, and we have also seen that -- we've seen from a volume perspective, actually, quite a good start into the second quarter, so that makes us also cautiously optimistic looking forward.When you take a step back and look at the official forecast from IHS and also from IMF, the latest data we've gotten from them on Page #7 continue to indicate a volume growth both for this and next year that could hit up to 5%. I think we are a little bit more cautious there. We would expect the growth will potentially be a little bit lower. That also means that if we indeed see 5-plus percent that will certainly be a big supporting factor for the industry.If we look at the order book on Page #8 and also at the orders that have been placed so far and what we have as idle fleet, I mean, that's actually quite a healthy situation, an order book of 13%, taking into account that, that covers about 2.5 years with an annual growth in the market of 4% or 5% and scrapping of -- even if that's only 2.5% to 3.5%, I would still say that, that order book is on the low end of where it actually should be. But of course, look at the deliveries that we've seen so far this year, that's probably a fairly healthy percentage. And that also means that when we look midterm at the market, one should expect a recovery of the market in the second half of 2018 and hopefully a continued strong market in '19 and '20. Idle fleet remains very low, which, of course, is a good sign and certainly an indicator, together with charter rates that have -- where we've seen quite a lot of upward pressure. There's the sentiment in the market today is, definitely there is going to be a recovery, though, admittedly, when looking at spot rates post-Chinese New Year, those have shown quite some weakness up to a couple of weeks ago.If you look at Page #9, there you can see, as we're saying, short-term supply pressure will persist, but we do see the midterm supply-demand closing further and further. I think that's where the picture on the supply-demand balance, as you see it on the right-hand bottom of Page #9, certainly gives you a good flavor of what is expected to happen over the upcoming couple of years with only low supply growth in 2019 and very likely also supply growth in 2020 that will be below market growth. And that, of course, will help the sector. And when you take into account that idle fleet today is at an extremely low level, those are definitely encouraging signs.If you look ahead on Page #10, maybe one other point to be mentioned, when we look at the new fuel regulations that are now pretty much around the corner, I think it's fair to say that the oil industry will face -- will have to face a significant challenge there as the new regulations will kick in as soon -- the beginning of 2020. I think our perspective on that is that in reality, the industry has 3 options. One is move to LNG, which is probably for many newbuilds a viable option. For those vessels that are already being operated today, there are some that one could convert. But for the vast majority of the ships, this will be an option that's highly questionable. Then, of course, we have the option to install scrubbers, which is less capital-intensive and allows you to continue to use high sulfur fuel, but also that has some pros and cons. And then, of course, the third one is use compliant fuels. If you look at where we are -- what we are doing today, we are clearly looking at all 3. We're, on the one hand, looking at what can we do to convert vessels onto LNG as we have 17 vessels that are LNG-ready, the last 2 classes that were built by UASC. We are also evaluating what -- which vessel classes are potentially suited for scrubbers, and we already know that a big chunk of the vessels will need to be operated with compliant fuel also because it's technically simply not feasible to convert a large percentage of the fleet before the 1st of January 2020. We'll probably come out with a firmer position on that after the release of the half 1 figures. But I think it's fair to say right now that we are evaluating all 3 of the options, and it's not unlikely that in the end some kind of combination between the 3 will be the outcome.That then brings me to the numbers for which I'll hand it over to Nicolás.

[Nicolás Burr, CFO & Member of Executive Board]

Thank you, Rolf. Good morning, everybody. So volumes are up, as Rolf commented, 48% due to the margin which you will see. When you compare the pro forma -- on a pro forma basis, then the increase is 2.5%. The freight rate is 2.6% lower than last year. But when you compare in the pro forma basis, it's 7.9% increase compared to last year. For that reason, the revenue increased by $2.74 billion. The bunker went up 19%, which is the main problem that we are facing today and also the industry is facing today. And that led us to an operational -- an improved operational result compared to last year, of around -- an improvement of $58 million, from $8 million to $66 million. In terms of dollar per TEU, it's from USD 4 per TEU to USD 23 per TEU. And the reason behind this improvement is the incorporation, of course, of UASC, the volumes that gave the merger the first synergies. And this is partially compensated by lower rates and a higher bunker price.If you go to the one-off, not so significant this time, but we wanted to make a follow-up on that. So you have there the one-off in Page 12 that occurred in 2017, which is basically the year in which we have the bulk of them, only $3 million, and we expected this quarter the first. And we expect $7 million to come in the second quarter, and then we should finalize the one-off related to Safina -- or the integration with UASC.In the next page, you have the details for the volumes, as I commented 48% with nice growth in most of the freight, especially in Latin America and so as Far East. But when you compare on a pro forma basis, that growth is a little bit more moderate, along -- I mean, in line with the market, but 2.5%.And when you look at the next page, the rates, you see there graphically the 2.6% decrease in rates compared to last year and the 7% when you look at the pro forma given the fact that the composition of rate, when you look at the mixture of UASC and Hapag-Lloyd, it's lower than you compare 961 to the 1,029, and that gives us 7.1% up in rates.In terms of the bunker consumption, you see the bunker, it went up, so 19% up compared to the same period last year. And the best way to react to this increase is basically to lower the consumption, which is basically what we have done when you look at the specific consumption of 0.38 tonnes -- bunker per TEU move compared to 0.42. That is basically explained by the fleet of UASC, the increased efficiency and the high quality of their vessels.In terms of the unitary cost, we continue improving a little bit. It's 6% this time despite the increase in bunker, so the bunker went up USD 7 per TEU, but you see an overall improvement of around USD 58 per TEU, which is basically 6% compared to the same quarter last year.In terms of the cash flow, I think this is the highlight of the quarter, a very good operational cash flow, a little bit higher than the EBITDA of the period because we tightened our working capital, $42 million, so total operational cash flow of $312 million with an EBITDA of $270 million. The investment capital is $72 million negative, meaning -- and that's basically driven by some investments in vessels maintenance and containers, it's 96. Then we have the disinvestments or the sales of the Panamaxes that we informed to you, $24 million positive. And then we have a financing cash flow that reflects the continuing deleveraging effort that we are making. And that gave us a cash result -- a cash balance of $738 million at the end of Q1, which, along with the credit lines that we have, our liquidity reserve is over $1.2 billion.Finally, a little bit of the balance sheet before I hand it over to Rolf again to the outlook. We still have a healthy equity ratio. You see the equity on the left upper side of the slide, $7.2 billion; the net debt of $6.65 billion; and the liquidity reserve, a little bit more than $1.2 billion. Equity ratio is maintained more or less at 41%. And the debt reduction that we made during the quarter is around $141 million, as I commented in the previous slide.With that, we go to outlook with Rolf again.

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Yes, I think in terms of -- thanks Nicolás. I mean, in terms of way forward, I mean, the outlook remains unchanged. We do expect the transportation volume to go up, to increase clearly. We expect the average freight rate to be comparable to last year. And again, this is based on the externally published numbers on a pro forma basis. That would mean that it's going to be up somewhat. Bunker price, increasing clearly, in line with what we said earlier. The EBITDA, we still expect to increase clearly, and the same for the EBIT. If we look at our financial policy, we think that's also rather pretty much unchanged. Profitability focus, of course, supported by improved fleet ownership structure and also the realization of synergies. In terms of investments, we have no planned vessel investments at this point in time, as our objective is to maximize free cash flow to bring down the debt. The deleveraging target remains unchanged. We will maintain an adequate liquidity reserve for the size of the company that we are. And we are currently working on developing our mid-term strategy to further strengthen our position in the market, and we should -- we intend to communicate more about that in the second half of 2018. And I think that brings us to the introduction from our end, and we'll be happy to take any questions that you may have.

[Operator]

[Operator Instructions] The first question comes from the line of Andy Chu of Deutsche Bank.

[Chi Onn Chu, Research Analyst]

Three questions, please, for me. Just in terms of the fuel issue, is it possible to sort of talk about sort of -- you mentioned the sort of mix of solutions. Is it possible to give us a sort of range or flavor of what CapEx and OpEx might look like to make you sort of fully compliant for the low Sulfur regulations? First question. Second question in terms of the mention of the sort of tough, tough comp in terms of volumes and volumes picking up and a good start to Q2, could you just talk about what sort of volume growth you're seeing at the moment? And on the cost front, in terms of the unit cost reduction, ex bunker, what should we be thinking about, please, sort of this year and medium term in terms of the ability to continue to reduce the unit costs?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Okay. Maybe first one in terms of fuel regulations, I mean, if you try -- if you want to make a calculation with ballpark figures, you want to convert a vessel to LNG, I think you have to assume a CapEx per vessel of between $20 million and $25 million. If you look at scrubbers, a little bit dependent on the size of the vessels. In many cases, we'll be looking at a number between $7 million and $10 million, and then dependent on how many might qualify to be retrofitted to LNG or -- and how many might qualify to get scrubbers, you can calculate what the total is. But you also have to take into account that, that's going to be an investment or CapEx that will have to be spread over multiple years with probably a little bit from '19, but the majority probably in '20 '21 and '22. In terms of volume, I think what we see in Q2 is mid-single digits. In terms of costs going forward, there's going to -- there's various factors there. On the positive side, we have, of course, the synergies that are kicking in, but we also have to be a little bit realistic that there are also some factors that are pushing us in the other direction, but where on the hand, we have the bunker price that Nicolás has already alluded to. We also see charter rates for vessels going up significantly in pretty much each and every category. We also have trucking costs going up in some markets where there is continued shortage, first and foremost, the U.S. And then finally, you also have the exchange rate between dollar and euro that has moved quite a bit. If you compare that, the first quarter of 2017 with the first quarter of 2018, you have a move of about $0.15, which has a material impact on our cost when measured in U.S. dollars because quite a lot of our costs not only SG&A, but also, for example, terminal costs are in euro. So when you look at the development of cost, you clearly need to look at these factors, and that makes it a little bit difficult to put a percentage on there. Of course, our intention is to continue to try and become more efficient year-over-year, but it's also pretty clear that there are some cost categories that are currently moving us in the same direction. That's also why I'm not going to put a percentage on that at this point in time.

[Operator]

The next question comes from the line of Neil Glynn of Crédit Suisse.

[Neil Glynn]

If I could ask 3 questions, please. The first one following on the cost side. The charter costs and bunker are obviously squeezing margins. Just interested in terms of how that may influence capacity decisions. I guess, at this point, given your comments, you expect a decent peak season. But how do you think about the timing of capacity decisions if indeed rates don't follow charter and bunker fuel rates up? And second question, your other operating income, it was the highest since the second quarter of last year, the second highest since the fourth quarter of '15, just interested in the key driver there. And any timing effects to be considered for the rest of the year? And then a final, broader question. In the -- in your slide, I think Slide 8, plotting the supply growth equation for the next couple of years, I noticed that delayed deliveries or slippage in 2019 and 2020, they look like the lowest numbers in recent years. So just interested in your take on the prospects of a positive surprise there to maybe balance with your conservatism on the volume outlook.

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Okay. Well, maybe I'll take questions 1 and 3, and ask Nicolás to comment on point 2. I mean, if you look at the first one, which was around capacity decisions and charter rates, I mean, normally, you see that the charter rates are a little bit of a leading indicator of what's going to happen in the market. So what you see is that the rising charter rates reflect, I think, a fairly decent level of confidence in the market that we will actually see a recovery in the second half and, as you said, a decent peak season. If that does not come, then you will start seeing adjustments, I think, already in the third quarter. But admittedly, that does not look so likely at this point in time. In terms of supply growth, I think your observation in and of itself is correct, yes. But looking at what we expect, the deliveries in '19 and '20, I also think that there is not going to be that much slippage because capacity could be quite tight if demand continues to grow at the base that we see at this point in time.

[Nicolás Burr, CFO & Member of Executive Board]

In other operating income, the answer to that is basically exchange ratio -- exchange rates gains. So even though the net effect of the appreciation of the euro is negative because we have more costs in euros than revenues in euros, we accrue for the effect in a separate manner all the income or the gains in other operating income and all the expenses and the losses in other operating losses. And that's the reason why we have a significant chunk of other operating income because -- also because of the fact that the company is bigger, but also we have some income or revenue in euros, and that's the reason why we have a positive number there.

[Neil Glynn]

Understood. I had actually looked at other operating income minus other OpEx, and that's also similarly high, highest in the second quarter of '17 and the second highest since second quarter '15, but certainly there's nothing else to consider in that equation?

[Nicolás Burr, CFO & Member of Executive Board]

Nothing else.

[Operator]

The next question comes from the line of Robert Joynson of Exane BNP Paribas.

[Robert John Joynson, Senior Transport Analyst]

Three questions for me, please. First of all, if I look at the charter capacity, I see there's been a material increase in the size of CapEx chartered fleet since the end of Q1. I think it's up by about 18% between the end of March and the middle of May. Could you just provide some color on where those ships have been deployed and also whether you'd expect the higher chartering cost that will come from those additional ships to be fully compensated by high volume in Q2, i.e. could utilization rates temporality squeezed down was because of the higher chartered capacity? So that's question 1. Question 2, just on the transpacific. Obviously, we're at the time of the year where the contracts have mainly been concluded, I think, now. So maybe you could give an update on what you see on transpacific contract rates. And then the third question on synergies. My previous understanding was that 30% of the synergies have been realized by the end of 2017, but Slide 4 suggests that it is now around about 50% have been realized by the end of 2017. Was I mistaken on the 30% or has something changed in the calculations there?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Thank you. Let me try and answer those. In mean, in terms of capacity, I think we have not seen a material -- I mean, we've seen a bit of an uptick in the number of charter vessels. But frankly speaking, in the first quarter, also because of Chinese New Year, it's seasonally down typically a bit. If you compare it to the end of last year, there's actually not a big increase in the number of charter vessel. The percentage is a lot lower. I think the only specific thing, which has changed in terms of a new service that's from the 1st of April, where we phased in a few charter vessels, smaller ones admittedly, is into East Africa. In terms of the transpacific, you are right that we are in the process of concluding that tendering season. I think we signed up the volumes that we wanted to sign up. In terms of the rates, there's still quite a lot that needs to be finalized. But I would say that on the West Coast, we have seen rates, the tendency being a little bit up compared to last year. On the East Coast, we still have a lot of open issues at this point in time, so a little bit early to say that. In terms of the synergies, we said we realized 30% in the calendar year 2017, but admittedly a big chunk of that or pretty much all of that was realized in the second half year. And that's where I think the confusion potentially comes from because the run rate in the second half year was up to 60%, and then that's why we're now going to increase that further in the course of 2018, and that's why we're going to get up to 90% in 2018.

[Operator]

The next question comes from the line of Johan Eliason of Kepler Cheuvreux.

[Johan Eliason, Analyst]

Yes. Coming back to this Sulfur regulation and then you mentioned what the average CapEx would be for updating your ships. How should we think about the CapEx, the CapEx [ wholly ] that you've been talking about? Should we sort of pencil in significant CapEx hikes in 2020, '21 and '22 and then it's lower over holiday again by 2023 and forward versus the CapEx levels where we are today? Or how should we think about that? And secondly, it seems like at least initially it has to be the low Sulfur fuel that you have to use and your competitors as well. That will obviously bring up the fuel cost quite a lot. Do you think there will be a significant chunk of slow steaming happening again? Or are we already running at, at the very slow rate, so that will not have a significant impact as we face this higher fuel cost 2020 potentially?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Well, I mean, maybe first about the CapEx. I mean, we've always said that after 2019, our CapEx will most likely get back to a level which is around about depreciation. I think that's still our guidance today. A chunk of that will likely be related to these fuel regulations. Whether we have to do more than that, that remains to be seen. I don't think you should assume a CapEx holiday beyond 2022 though. In terms of the increased fuel cost, well, I think the first effect of that will be that it will have to be passed on to the customer because the increase in the fuel cost will be so significant that it is simply not possible for anyone to absorb that, and we will just have to pass that onto the customer who will most likely also understand that, also reflecting a little bit on those questions that we've had with customers so far. It will result in an adjustment most likely of most of the bunker factors. Whether it will result in more slow steaming, I personally do not think so, but one can never rule that out. I mean, most of the ships today are technically performing at their best, at the existing speeds. And going much slower would not yield a very material saving in bunker fuel and it would also require more capacity. So I personally don't think that, that is likely.

[Operator]

The next question comes from the line of Joel Spungin of Berenberg.

[Joel Adam Spungin, Analyst]

I've got 3. If I can start maybe just to understand in terms of this year's CapEx, where you now expect that to come out. Is it reasonable to sort of take the $100 million you had in the first quarter and multiply it by 4? So if you could just clarify, that would be helpful. My second comment was just on the volume growth that you reported in Latin America, just interested if you could give us a bit of flavor on what you think is happening on that [ trail ] at the moment, whether or not that volume growth has been as a result of the Hamburg Süd-Maersk merger and you picking up volumes as a result of that. And my third question is just sort of thinking longer term about supply and demand. Obviously, you've got demand growth outstripping supply in 2019, probably into 2020. Given the window that's required to order new vessels, it sort of feels likely that we'll see a pickup in ordering activity over the next sort of 6 to 12 months. Is it fair to say that you're willing to sacrifice market share in order to focus on delevering the balance sheet over a couple of years? And at what point do you think that, that equation changes and you have to start thinking about how to add additional capacity?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Maybe take them one by one. In terms of CapEx, we've always guided $400 million to $450 million, and there's no reason to change that guidance for this year. So that's roughly in line with the -- what we saw in the first quarter. In terms of Latin America's rates, I mean, you always -- when you cut off the quarter, you always have some decent drops and some things that look a little bit more than average and some that look a little bit less than average. In general, we're also growing in line with the market into Latin America, if we look at the first -- the 5 or 6 months. And in terms of supply and demand, our intention is definitely to continue to grow with the market. We think we can still sweat our assets as we have them today a little bit more. We also could go to the chartering market if and when that would be required. If that at some point in time is no longer enough, then we will have to reconsider whether we want to put in orders, but that is not on the table at this point in time.

[Operator]

The next question comes from the line of Danielle Ward of JPMorgan.

[Danielle Ward, Analyst]

I wonder if you could expand a little bit on some of the outlook comments that you've given. You said that the industry market conditions are challenging at the moment, but your underlying freight rates in the first quarter were up 7%, I think, you said. And you're pointing to an improvement in the second half. I just wanted to kind of reconcile, are you implying that the second quarter will be a particularly tough quarter for the rates and margin environment? Or am I kind of overreading into this? You seem to be referring to the cost pressures there. And then somewhat related to that, I'd just be interested to hear a little more on your thoughts on the move-up we've seen in spot rate indicators in the past couple of weeks. Do you think that this move-up, whether it can be sustained? And then finally, for me, you mentioned that the transpacific rates agreed so far have been a little higher. Has that been sufficient to cover your higher bunker costs there? That will be great.

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Let me try and take them one by one. In terms of the outlook, I think your interpretation is not incorrect. I mean, we've seen quite a lot of pressure on spot rates between Chinese New Year and, as you rightly pointed out, some weeks ago. Of course, as we record our results on -- and the volumes basis, that's pretty much the period that we expect to deliver the rate -- the goods in the second quarter. So yes, I think you're right. I mean, I think the second quarter is not going to be easy. I think the outlook for Q3 and Q4 are materially better. In terms of spot rates, I think you're right that there's been an encouraging trend over the last few weeks. We also see that utilizations are high, so that is certainly an encouraging sign if you look ahead into the second half of the year. But as we all know, this is probably the period of the year where there's usually more uncertainty than normal, but as you point out, encouraging signs the last 2, 3 weeks. In terms of transpacific, it's too early to say whether the uptick in rates that we've particularly seen on the West Coast, whether that's enough to cover the bunker costs because we haven't wrapped up the contract season fully.

[Operator]

The next question comes from the line of Adrian Pehl of Commerzbank.

[Adrian Pehl, Analyst]

Two questions left from my side. First of all, coming back to costs or units cost, if you want to. So I saw that as a component of your total transportation costs, the container transport cost, in particular, per TEU were down quite nicely. And in the conference call, you mentioned again that obviously trucking expenses have gone up. So I was just wondering whether you could give us some additional information here. What were the driving forces? And secondly, coming back to the trades a little bit, somewhat linking to the question that has been asked on Latin America with volumes being strongly up, but also the freight rate was up quite substantially versus the trend that we saw last year. So I was just wondering whether there's any change of competitive dynamics or any particular impact on Hamburg Süd. And having said this, I found at least a little -- I mean, momentum seems to be improving in terms of growth rates, but an Atlantic rate below 1,300 looked a bit low given that volume was also quite solid. Maybe the same question here, whether or not there were any kind of changes in competition.

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Okay, thank you. I think in terms of the unit cost, to be honest, for a more detailed explanation, we'd have to revert to you separately. I mean, if we look at the quarter-on-quarter developments from Q4 to Q1, it's actually fairly stable. The drop that you referred to is very much compared to Q1, where we were still looking at Hapag-Lloyd on a stand-alone basis. But I would suggest that we follow up with you on that separately. But I suspect it had to do with the changed composition of the business post-merger. In terms of trades, when you -- you mentioned Latin America. Yes, we've seen good volume growth there. Rates year-on-year were good, but we've clearly seen rates being under pressure and especially in the West Coast of South America over the last, say, 8 to 10 weeks. So that's not automatically going to continue. On the Atlantic, we've actually seen a fairly normal development there. We have not seen any massive changes there, so nothing extraordinary there to report. Also, there, when you compare to the '17 figures, you have a little bit this effect of the UASC business being added in there.

[Operator]

The next question comes from the line of Christian Cohrs of Warburg Research.

[Christian Cohrs, Analyst]

On the idle fleet, you mentioned that the charter market is a good indicator of confidence. But maybe put it the other way around, are you really expected or virtually expected that the idle fleet would go up massively on the back of newbuilds entering the market and now the idle fleet remains at low levels? Isn't there the risk that we see quite massive capacity upgrades with owned and chartered vessels in the market that could prove -- which prove to be too ambitious? Would you agree on that one? And secondly, in light of the rise in bunker costs, when do you expect that you can implement additional surcharges to cover for these? And lastly, your Alliance partner, the so-called ONE network is, I think, facing some teething issues with regards to booking systems, et cetera. Does this also have some negative impact on you as an alliance partner for these?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Maybe try and take the one on idle fleet first. I mean, of course, you are right that if new supply comes in, then there always have then NFD, and if the idle fleet does not go up, that there's potentially a risk. I would say, though, that we've also seen strong demand growth and the fact that spot rates have actually been going up over the last 3 weeks or so and they seem to hold seems to indicate that, that risk that you're referring to is not kicking in, at least not to the order of magnitude that could be seen in a worst-case scenario. So I think that has actually been probably a little bit better than I expected. In terms of bunker cost, that typically takes us 1 to 2 quarters before you see that reflected in the rates. So you have an increase in the bunker in Q1 and you see also a further increase potentially in the bunker in Q2, and then you'll see that it takes us 1 or 2 quarters to pass that on. And I think to your last point, I mean, we have not seen any operational impact from the start-up of ONE on our business.

[Operator]

Next question comes from the line of Frans Hoyer of Jyske Bank.

[Frans Hoyer, Senior Analyst of Equities]

I was wondering if you could rank the different categories of vessels in terms of cost efficiency. I'm thinking about newbuild LNGs that have been converted and those fitted with scrubbers and those opting for compliant fuel, how do these 4 categories compare? It's probably a bit early days to be very firm on it, but some thoughts on that, please?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

I mean, I think as you rightly pointed out, I mean, that is really too early to say. The challenge we have in this whole -- in the current environment is that there's a lot of things that are unclear. It's a little bit unclear what exactly the consumption will be of LNG vessels. That's only calculated in theory. It's unclear what the exact delivered price will be of LNG. And it's also unclear what will be the spread between high Sulfur and low Sulfur fuel. And those will determine very much on which vessels are going to be the most efficient. I think it's fair to say that both LNG-powered vessels as well as vessels that are operating with scrubbers should have lower operating costs than those that are going to have compliant fuel. But you have to also put some CapEx against it. So there's not much more that we can say about it, unfortunately. At this point in time, we would also like to have that clearer because that would make it easier for us to make the right investment decisions. So as you rightly pointed out, I mean, not much to be said about that yet at this point in time.

[Frans Hoyer, Senior Analyst of Equities]

So a little extra one then. To order a newbuild with LNG engine, is that going to be more expensive than ordering a vessel with traditional engine?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

The answer is yes.

[Operator]

The next question come from the line of Piotr Ossowicz of Ironshield Capital.

[Piotr Ossowicz]

First, maybe starting with the disparity between the movement in the freight rates and the time charter rates. You mentioned that the TC rates have normally -- precedes the movement in the freight rates. We have really seen them going into 2 opposite directions over the past few months. So could you please provide some color on what are your views why this is happening and why would that change?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

I mean, I think as I said, the time charter tends to be a bit of a leading indicator. That means that it goes -- you see it earlier than what really happens on the freight rate. I mean, I think the fact that you see that those rates are going up, I mean they've been going up for a couple of months now, and we see now spot rates picking up in the last couple of weeks. So I think that underlines that trend. And the other piece of -- another data point there, I would say, are the rates that we have seen for Asia and Europe, which is a contract season that has clearly been concluded. We've seen that on average the contract rates for Asia and Europe were close well above the spot rate and also about last year, which also signals that the market believes that when you look at the whole calendar year 2018, the average rate will actually be higher than what we have seen in 2017. So -- and it's always a little bit looking into a crystal ball, admittedly. But again, we can only give you the picture of what we see in the market and what you typically see as trends, and those seem to paint a fairly consistent [ picture ]. But of course, the proof of the pudding will be in the eating in the second half of 2018.

[Piotr Ossowicz]

So if I look at the spot rate, it's actually improved quite materially early in the year, then there was, again, very material drop to the levels we haven't seen it for 2 years. And now they start to improve a little bit. And over the same period, the time charter rates have been fairly steadily increasing. So I don't know, maybe this is just the volatility of the spot rates and you see a different picture in the contract rate, but I mean, this is the picture that we see. So yes.

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Yes. And I think it's fair. I mean, the spot rates, of course, are more volatile, almost by definition. And that's I think why I also tried to add in the perspective on what happened on contract rates, where if you look at the trades that have been concluded, Asia, Europe, there, the contract rates were up compared to what we saw last year, which reflects more confidence in the market. And we've seen that in a few other trades as well. For the [ TP ], it's still too early to say.

[Piotr Ossowicz]

Okay. I understood. So moving on, on the TC rates. To what extent have you already been affected by higher time charter rates? And when we think about the leased fleet, to what extent is your fleet now is below the market? And to what extent it is above the market? So is there more upside or downside from the tightening TC rates for you?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

I mean, of course, we get -- everybody gets affected by the TC rates when you have to renew charters. We typically go predominantly short, so that means less than 12 months, and that means that we now steadily start incurring higher TC cost as time moves on. But as our time charter percentage is relatively low compared to others, I still think that the impact that, that has on us is probably less than average.

[Piotr Ossowicz]

Okay. And lastly, you also talk a bit about new capacity potentially changing the supply-demand balance. What freight rates do you think are required on a stable basis to grow this [ sticking ] to incentivize people to go out and order new ships?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

I mean, that's impossible to say because that depends on so many factors, and I really cannot say that. I mean, that's a very hypothetical question. And I would also say that having stable freight rates is also something which we have not seen for a very, very long time. And so that means that people will always have to base their investment decisions on the midterm confidence that they actually have in where the market will go.

[Piotr Ossowicz]

But have you seen any trend just in the capacity ordering behavior over the last couple of months?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

No, not really. We've seen a number of orders coming in since autumn last year. And as we said earlier, the order book today is still -- certainly not on the high side. I believe many people are today, like we are, is studying what is actually the impact of the new fuel regulations and what does that mean for new ships. And based on that, people will make their judgment in terms of what will need to be done going forward.

[Piotr Ossowicz]

Okay. So you have seen -- just to be clear, so you have seen some increase in the orders, but you're not seeing this getting out of hand and start running into ordering trends that we are seeing in the previous cycle?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

I mean, I don't think that when you look at the order book -- the order book in and of itself has been at a reasonable level already for quite some time. We have seen some more over the last 8 or 9 months, but we're still only at 13%, which is nowhere near to what we had 10 years ago when we were even above 50.

[Operator]

The next question comes from the line of [ Otto Talib ] of Deutsche Bank.

[Unknown Analyst]

I just want to clarify the current dynamics in the transpacific negotiation rates. You mentioned that for the volumes, you guys were advanced in the negotiation, but there was room for negotiation on the rates. You mentioned that there was kind of disparity between the West Coast and the East Coast with rates being slightly up year-on-year on the West Coast, but it was difficult to get an idea on the East Coast. Can you clarify why then there is such a disparity in terms of negotiation and why also the timing for negotiation dragged this year on transpacific?

[Rolf Habben Jansen, Chairman of the Executive Board & CEO]

Well, I mean, the negotiations at transpacific tend to drag on almost every year, and then we say that it's typically late. And I was just trying to give you a bit of a flavor what we see. But on the West Coast, rates seem to be up a bit. And on the East Coast, that seems to be less the case for now. But the season is not yet concluded. I would also add that you need to be cautious drawing too many conclusions from this because we are a rather small player, particularly on the West Coast. And as such, what we see may not be entirely representative for what you see in the market. I just don't know that.

[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, Chairman of the Executive Board & CEO]

Okay. Well, not much to add from our side. Thank you very much for joining and thank you very much for your questions, and we'll speak 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.