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Hapag Lloyd AG
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Ladies and gentlemen, thank you for standing by. I am Sarah, your Chorus Call operator. Welcome and thank you for joining the Hapag-Lloyd Analysts and Investors Conference Call on the First Quarter Results 2019. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO; Nicolás Burr, CFO; Heiko Hoffmann, Head of Investor Relations as well as [Anne Nymark] from the Investor Relations team. [Operator Instructions]I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.
Thank you very much, and thanks, everybody for taking the time to join us for this investor presentation. As usual, we'll guide you through the charts and then at the end, we'll be happy to take your questions.Maybe as a start, I think if we look back on the first quarter, the highlights, I think are apart from generally quite good results that we've seen fairly healthy freight rate, about 5% above the -- above last year, and we've seen the growth, which is close to 2.5% for the first quarter, which is more or less in line with our expectations, as we expect this growth to be a little bit sluggish as people had been pulling orders forward before the end of the year, especially on the Transpacific trade.If we look at the market -- markets, I mean, there's not that much change to be fair, so we see a fairly stable market. We see slowing supply growth, and we certainly see good acceptance of the new bunker formulas, as everybody understands that cost will go up by 2020, and as a consequence of that, rates will also have to go up.If we look at our numbers, significantly increased EBIT of USD 243 million, including only $5 million impact of IFRS. The group profits are $109 million, impacted by IFRS with minus $13 million because we have current lowering effect and then we had a good strong free cash flow, which certainly also -- but there also we pointed out the IFRS impact. Nicolás will talk more about that later.If we look ahead, we continue to focus on implementing our strategy towards 2023, and of course, we'll try to further improve our results and continue to deleverage as we prepare for IMO 2020.A bit more on the numbers, transportation volume asset up 2.4%. Transport expenses fairly pretty stable if we compare it to previous year. Freight rates up. EBITDA and group profit we already mentioned. Equity remains healthy percentage, a little bit down, but this is truly an IFRS affect, otherwise it would have gone up. Good liquidity reserve and the net debt $7.2 billion, including all the IFRS affects, if we look at net debt on a comparable basis, we have reduced debt with about -- we repaid about $300 million in the first quarter.If you look at the market, not many updates available on that just yet. Here we took the Clarksons numbers for 2019. We predict about 4% growth, not that much more to be said, I think at this point in time. We originally look at IHS, who haven't updated their forecast just yet, they're still at 4.7%. We think that's a little bit on the -- on the upper end of what in the end it will be. But we'll have to see how that develops throughout the year. We certainly don't see anything falling off a cliff.If we look at the first 3 months, looking at the CTS data, then we see a very limited growth, only 0.5% globally, with fairly significant differences between the various trades with actually fairly healthy development on Far East to Europe and also on the Atlantic. And significantly weaker numbers on the Transpacific, but also only for Asia.If we look on the rate front, then we see we started the year quite well, and now we start to hit the curve, which we saw last year when freight rates started to pick up. Now we need to see what's going to happen throughout the second quarter and the remaining of the third quarter, because at this point in time of the year, we always have this uncertainty about when will rates start picking up as we move towards the peak season. And I think we're going to start seeing something on that within the next 4 to 6 weeks, but there's certainly always an element of uncertainty around that.When we look at the order book, not much change there. It remains at a very low 11%, and yes we've seen a few orders this year, but again, in total about 300,000 TEUs of capacity, we think that's very manageable. And if we keep in mind that market is growing 3% or 4% and order book that covers 2.5 years and a couple of percentage points scrapping them, then these are actually on the lower end of the -- of where the order book should be. And certainly, will also prevent us from getting into a big crisis, again, even if growth would be a little bit slower.We see scrapping starting to pick up. Also if we look at the outlook for the upcoming couple of years, still fairly low. We think that its not unlikely that in the end, that will be a bit higher, but as you can see, any way on the right-hand side of Chart #7, yes, we do expect that both in '19, '20, but likely also in '21, the balance between supply and demand will narrow further or at least remain more or less where it is today.I think that is an introduction from my side on the key numbers and the market. And I'll be handing it over to Nicolás, who will take you through the numbers.
Thank you, Rolf. Good morning, everybody. So in the [slide] still you can see the result of the company, volumes up 2.4%, freight rate 4.8% up, and that's the reason you see our revenue going up by $257 million or 8%. The bunker also goes -- it went 14% up. And in summary, when you look at the EBIT of the company, which you saw the most comparable number when you take the IFRS 16 affect, only $5 million affect positive. There is a difference when you take out that $5 million from $176 million compared to last year, basically explained by a better expansion rate, higher volumes and an improvement also in other revenues, especially the margin arrangement. Leaving us to a very satisfactory EAT of $109 million and an improved return on investment capital of 6.4% when you annualize the result.When we dig a little bit into the IFRS 16 affects and just for your clarification, this is a good result even without that effect. We have an EBITDA effect of -- look here you have the delta between Q1 2019 and Q1 2018. And then on the column -- orange column, on the right-hand side, you see the corrections how much will have been the difference in the case we wouldn't have applied IFRS 16. And you see there the correction in EBITDA $113 million, so the difference in EBITDA when you take out the IFRS 16 is $177 million. Then you have a depreciation effect of minus $108 million, and then I give you an EBIT difference tailwind or a positive effect of $5 million. And a negative effect in the interest component of $18 million, leading to an EAT effect, total effect of minus $13 million when you compare -- when you take out IFRS 16.Going to the KPIs, next slide. You see here the volumes of 2.4% pretty much led or driven by the Atlantic, the Far East trade and the EMAO trade, especially the ones coming in and out of Africa. In terms of the rate, here you see there average increase of 4.9% in the nominal rate. When you see the bunker going up 14%, you see anyway that the bunker rate even though the bunker went up, improves when you see the difference between the 2 curves. And that improvement is still around 3% when you take out the bunker.In terms of the consumption, specific consumption of bunker, we see in dollars per TEU are under proportionate increase in the bunker price per TEU of 9% compared to an increase in the bunker, which is higher 14% as I just mentioned, and the reason of that is impairment to inventory or the correction to the inventory that we had during Q4 2018, but it's basically recovered during this quarter.The specific consumption you see there of 0.38 metric tons per TEU is -- remains very tight at the same level of last year. And so we are pretty satisfied with the efficiency of our fleets, how that is developing over time.In terms of unit cost in the next slide, I think this has a little bit more time because this is the first time we present the unit cost, including depreciation, simply because it's much more comparable from this moment onwards to go in that way, because any variation on IFRS 16 is basically removed by taking the depreciation in. And here you will realize the differences. When you look at the total unit cost that Rolf commented that went up 1%, 1.1% to be exact, a difference of $12 per TEU is mainly explained by bunker, and you see an increase in bunker of $13 per TEU. Handling and haulage is basically less, or we have an improvement of $15 per TEU, mainly explained by FX, but also the decrease of some unprofitable inlands that we were basically performing. And therefore, that's the reason why we have an improvement in that cost item. Equipment and repositioning, we have to say here that we have a depreciation impact, an important one of $17 per TEU, that is basically reclassified into depreciation impact of $36. So when you look at the total effect, it's an increase of $2 per TEU when you take out or you basically include the $17 that are in -- within the $36 and the $2 per TEUs are explained because of more imbalances, especially in Europe and in the U.S.Vessel and voyage also have some depreciation, that is with -- also included in the 36. The depreciation was around $17 per TEU as well. And that gives us an increase in that cost item of $16 per TEU, but here, we have a particularity, because we have a compensating effect on revenue, because we have more revenues per TEU of around $13 per TEU. And that leads to a total delta compared to last year of around $3 per TEU and that is explained because of higher time charter rates, this being compared to last year.And that's basically what -- and the depreciation affect that you have there on the $36 per TEU is basically explained $34 per TEU out of the $36 are explained by the implementation of IFRS 16. So that's basically the whole explanation out of the difference, that was dollar per TEU difference that you see there between the $1,003 and the $1,015 is -- you have to consider this delta we had on the revenue side, that is coming from lost revenue, which is anyway part of the network, because you have to net up -- net that cost or increase a decrease the cost always, because it's usually something you could have considered as a decreasing cost.In terms of the cash flow, in the next slide, you see very strong operating cash flow, a little bit over the EBITDA. You see also in blue, as the considerations of IFR 16, so we have an inflated cash flow that was reclassified into negative cash flow on the financial -- cash flow that you recognize in blue also on the right-hand side. But anyways, a very strong operating cash flow, when you take out that effect of $490 million. And the investment cash flow is minus $154 million, driven by investment compared mainly $143 million as you see in investment report, and then you have some dry dock and maintenance CapEx of around $18 million. The financing cash flow is very active, minus $563 million, in which we have to highlight some net repayment of debt of around $271 million and the interest of $129 million from which $18 million is basically the IFRS affect as I commented previously.And finally, before I hand it over to Rolf again, a little bit of our balance sheet. You see there the fixed assets going up, because of the same, IFRS 16, $1.11 billion up. And when you see -- and that's mainly the whole explanation of this deviation. The equity base also going up a little bit because of the profit of the year or the quarter, compensated by some negative OCI effects especially, especially coming from pensions and the financial debt also describing the efforts that we have done on deleveraging. So you see around $300 million less debt, which are the $270 million, that I just commented but some -- plus some valuations effects. So good quarter, very positive quarter on innovational side, but also on our balance sheet.With that, I will hand it over to Rolf, who will explain a little bit of the outlook and final remarks.
Okay. Thank you very much. Yes, and not that much to be mentioned actually on the earnings outlook. We gave you the earnings outlook as we published our full year results. Basically nothing has changed there in terms of volume, we still expect that to increase slightly. We expect frankly, this will be up a bit. We still think bunker prices over the full year are going to be up compared to what we saw earlier in our guidance in terms of where we expect EBITDA and EBIT to -- and will remain also unchanged.If we look ahead into rest of the year, what are our main targets? Continue to work on profitability and also on deleveraging the business. Make sure we are fully prepared for IMO 2020. On the one hand towards our customers, we need to make sure that we get the additional cost back, but we also need to make sure that the whole transition goes smooth, technically as it is not entirely uncomplicated. We'll continue to implement our strategy towards 2023, with the ambition to create more value, not only for our customers, but also for our shareholders and other stakeholders and in our strides to become #1 for quality, and in that whole in-depth context also to develop more digitalized solutions for our customers, will play a very important role.And with that, we would wrap up the presentation from our end and we'd be happy to take any questions you may have.
[Operator Instructions] The first question is from the line of David Kerstens from Jefferies.
3 questions please. First of all, maybe on the volumes in the market. I think in March showed the strong improvements, a bit weak offsetting the lower volume in January and February, particularly on Asia and Europe. Just wondering, if you saw this trend to continue in April and May, and does that support your markets volume expectation of 4%? Then the second question is on the impact of scrubber retrofits on idling and scrapping. I saw you lowered your scrapping forecast from 2% to 1.4%. Does this have to do with the scrubber retrofits that you're currently seeing in the market? And how does that impact the supply growth that you show in the slide of 3.2%? And my final question is, can you provide any color on contract rates on Transpacific, I think some people were talking about 30% higher rates year-on-year on Transpacific? Can you confirm that, please?
I'll maybe start with the first one. I mean, if we look at volumes, they are a little bit early to say how Q2 will develop, we've seen a reasonable recovery post the Chinese New Year, and I would still expect to see growth also in the second quarter, how high or how low that will be, that remains to be seen. It's still a little bit early to say that in the beginning of May. In terms of scrapping, we take the -- usually the official numbers. I don't think scrapping will be much lower than we anticipated in the beginning of the year. The part on scrubbers is that, of course, that will take out some capacity, especially in the second half of the year as more and more fiscal into dock, and that will probably have an effect on -- somewhat of an effect on available capacity. And as far as the contracts are concerned on the Transpacific, I mean, that contract season is pretty much done, and we have indeed seen significantly higher rates for the contracts going forward, than we had for the last 12 months. But that was also needed because it was completely impossible to continue running at the rates that we had before.
Okay. Can you give some indication, I think you've provided some guidance on Asia, Europe in the last call, I think $50 to $100 per TEU higher. Is that similar for the Transpacific rates?
No, the Transpacific rates are up a bit more. I mean, we are talking about the 3 digit number there in per TEU.
The next question is from the line of Johan Eliason from Kepler Cheuvreux.
Yes, first question, of the volumes, you were growing quite a lot in this African-related businesses. Is that an area where you have taken market share and will you expect to continue to take the market share going forward this year or are there any other trade where you see particularly good performance for you? And then secondly, just I saw that you plan to install scrubbers on maybe 10 ships, but I thought, as you indicated early next year. Is that implying that you're not taking out any capacity to do the scrubber installation in the second half? Or is it just timing when you get the ships from the yards again?
I mean, maybe on volume first. Yes, we've grown quite significantly in and out of Africa, but admittedly also from quite a small base. So we're not really talking here about taking market share, but we started a few services actually last year and we now see the innovative full year effect of those services, so therefore we grow a bit there. I don't think we're not very aggressively trying to take a lot of market share, but we're trying to build our position there from a very low base. As far as scrubbers are concerned, we order 10 for our own ships, and we have started retrofitting those. So we will take some ships out in the course of 2019 because we would like to have at least most of them done before the end of the year.
Okay, good. And then just on the bunker cost, it seems like the comparison numbers are little bit different from what I've put in a year ago. Is that what you related to this inventory chart, you had to take at the end of last year? Or can you explain why the bunker cost would be a bit different per TEU than what you actually reported in Q1 '18?
Yes, it is because of the -- so we had to -- IFRS norms, basically tells you that when the price of the commodity goes significantly down, you have to impair the value of the inventory, and we have done that in Q4 2018, and that basically was around $30 million. And that is basically back in the cost of Q1 2019. And so that basically is a reason why you see a better than market -- that market price in our cost structure.
Your next question is from the line of Michael Boam with Sona.
Obviously, Q1 benefited from high freight rates and lower bunker. Looking at Q2, spot freight rates have come down very significantly. Bunker has obviously gone up. Obviously, you have the benefit of the higher contracted rate on Asia, Europe. Should we think of Q2 from an earnings perspective being weaker than Q1 for those reasons?
I mean, if you look at -- we don't give outlooks on a per quarter basis, but you are, of course, right, that when you look at the second quarter that the rates tend to be seasonally weak, which is also what we see, which is a perfectly normal pattern. Then volume tends to be a bit higher than it is in the first quarter, simply because you don't have Chinese New Year. And then we have the bunker effect, so it's a bit too early to say what will happen on the -- and what will happen with the results, but let me say that it would be -- I would not be disappointed if the results would be a little bit lower in Q2 than it was in Q1, that will still be in line with our expectation.
And then, can I just follow-up on the contracted rates question? What was the increase that you gave for Asia, Europe? What have you seen on the Transpacific REIT, please?
We said earlier that on Asia, Europe, we talk about $50 to $100 per TEU, and for the Transpacific, we talk about a 3-digit number, so a bit above that.
The next question is from the line of Danielle Ward with JPMorgan.
Firstly, I want to follow-up on the comments you made on the freight rates earlier in the call and it sounded like you're expecting some kind of pickup in the next 4 to 6 weeks. I just wanted to get your senses of how, I guess, normal, you see the level that we had since Chinese New Year has been quite prolonged at this point? So do you think there is any thing kind of more significant than the usual seasonal patterns? And what gives you the confidence in that 4- to 6-week window? And then, are you able to provide updated leverage targets now for just this IFRS 16?
Okay. I will take the first one. I mean when we look at volumes and the uptake was -- post-Chinese New Year, I think it was actually not that bad. After that, we've seen a number of weeks where it was a little bit sluggish. I think we now start seeing some signals that demand is picking up again. As far as when the rates pickup, I mean we started to see some flow signals that rates might start to recover a bit here and there, but it's always a little bit of a crystal ball that you have to look into whether that happens around mid-May or whether it happens versus June or 15th June. Last year it was fairly late, it was only around 1st of July. I don't see anything abnormal in the market right now. So that's why I basically say, it will pick up anywhere between now and 4 to 6 weeks. And with that, I would give it over to Heiko and Nicolás Burr to talk a little bit about the deleverage side.
Okay. So in terms of the deleveraging, so we maintain our target that we have announced a 3x over the time frame of strategy 2023, and we maintained that firmly. And we had a more shorter term target of going below 3.5x net debt-to-EBITDA by the end of this year. And that also remains the same. We can do -- so you have all the elements in the financial statements that we have under Investor Presentation in order to correct the EBITDA with IFRS 16 to the previous scenario. The 3.5x that we always felt was referred to the IAS 17 for the previous accounting norm and without IFRS 16. If you apply the net debt-to-EBITDA to the current numbers. Of course, we are way more or less -- we approached very quick to the target, but that's normally referred.
Okay. So we should be thinking the target against the old metrics?
We will update you on that target quick -- soon, in order to really clarify how can you translate the 3.5x into a new number with the IFRS 16 norm. Once we get there, we stabilize the listing, it will be better about the total, the final year portfolio of listings and contracts.
The next question is from the line of Tobias Sittig from MainFirst.
Can you give us an update on the uptake of...Can you hear me now? Can you hear me?
Yes.
Okay. Four from me, please. Firstly, can you give us an update on the uptake of Quick Quotes? How that's developed during the quarter because you were pretty bullish over the last presentation there? Secondly, interest costs were a little higher than I thought, that you made some debt redemptions now in the quarter, what -- can you give us an indication about the run rate for the coming quarters on the interest cost side? And then basically, unit costs were flat ex bunker, but your target $350 million to $400 million savings until 2021, so when we should see those savings flowing through your unit costs or anything that basically has prevented from those savings showing in the unit costs because of utilization or whatever? And then the last one, just to reconcile the 4% market growth that you're still sort of expecting for the year with a 0.5% in the first quarter, that means more than 5% for the remainder of the year, that looks a bit over the top. Maybe you could comment on why you still think that's a realistic number?
Okay. I'll take questions 1, 3 and 4 and then Nicolás, I'll suggest you comment on the interest costs. On Quick Quotes, I think you seen some continued growth, I mean -- and we are now around about 7% of our overall business being on that platform. We think it's going to stabilize that for a while because so far we've been very much focused on the short-term market. And we'll come from this throughout the year with a couple of other initiatives to further boost that channel. In terms of unit costs, I actually think that keeping unit costs flat in this market is a success because there are actually quite a lot of costs that have upward pressures there. I mean, you already mentioned bunker that also has an effect on trucking and fuel costs. So those basically go up, so in order to keep it flat, you actually need to already save quite a lot of money here and there. So we certainly see that the cost-savings program is on track and then in terms of market growth, we've always said that we feel that a trend of a growth of sales, 1% or so is not strange. I don't look at that only on the calendar year. I think if you look at something like this, you need to look at it more on a 12 months rolling basis, and if you look at that, then you will sometimes have a good quarter, sometimes you will have a great quarter and sometimes you will have one that's a little bit sluggish. So I don't see that trend as being broken based on 1 quarter that is actually not that strong.
And on the interest rates, so if you compare an interest rate result of 101 in Q1 2018 compared to 120, in Q1 2019. Out of that number in '19, $18 million are related to IFRS 16. So when you deduct that, then you compare 101 to 103, and the reason why we have more, relative to debt capital is basically because we have decided to repay the bond, and we have paid a full premium of around $6 million. And the second aspect is that we have more LIBOR than last year. And we have -- around 50% of our debt is linked to LIBOR, and that effect is around $10 million. So those are the main reasons why when you deduct -- when we take out the effect of IFRS 16, you will still have a similar amount of costs compared to last year.
Okay. And that would be then, I mean, the $6 million is not recurring, but the higher LIBOR is probably recurring so...
Exactly. So -- but the cost premium, of course, is not recurring.
Okay. And then the redemptions should help some, on the average interest rate?
Yes, I mean, of course, that will generate more -- further interest savings, total savings through all the year because there you have only 1 or 2 -- 1.5 -- 1 month of savings and in the second quarter, you will see a full -- the full quarter of savings.
[Operator Instructions] The next question is from the line of Edward Stanford from HSBC.
Just one question from me please. Harking back to your comments about freight rate increases on Transpacific contracts that came up for negotiation. Did you notice any appreciable change in how customers wanted to play the mix between going to spot rates versus contracted rates. We're certainly hearing from others that, that's been a bit more of a move toward spot rates this year. What's been your experience?
I mean we have not seen any material change, [ honestly ], on the behavior of the customers. Also the amount of cargo we contract for the next season is more or less the same as it was for last year and not a big change.
The next question is a follow-up from Mr. Eliason.
It's Johan Eliason from Kepler Cheuvreux here. Just a follow-up on the IMO 2020 and you mentioned that you have received or read a good customer appreciation of your -- on your sort of bunker fuel shortage methods. But isn't it so that the scrubbers will remove some of that, will not that be mainly seen on the Far East trade implying that maybe in the second half of this year when ships are taken out of use, that could have a positive effect on the rates on Far East, but then coming into 2020 and all these scrubber fitted ships will actually imply that the expensive fuel will not be used here. We should be seeing an abnormal drop in the relative rates? Or how do you see this playing out?
I mean, if you look at -- since we -- I mean in the end there is just going to be very small percentage of the global fleet, that's going to be -- that's going to have scrubbers, and they will not all be deployed between Asia and Europe, but also on other trade. So I don't think that you will see any big discrepancy between what happens on one trade or another. And bottom line, the fact remains that cost will go up up and it will be retaining a little bit of what the spreads will be between the current [indiscernible]. We still think that the extra cost is going to be between $80 and $100 per TEU on average.
And do you see any potential slow steaming on the back of this? Or do you think the cost recovery will handle this?
I don't see a lot of that, but of course, we also read the press and -- yes. So we can see that. We can see that there is some pressure, some political pressure to go and do something, but I mean, I don't see a lot of that coming anytime, so also we feel there aren't enough ships to maybe steam a little slow.
The next question is from the line of [indiscernible]
Just had a couple of follow-up questions. Firstly, I think on your point about scrubbers and the timing of when the ships should be taken off of that, out of the fleet. Just a quick question, I mean, what is the proportion of the fleet -- of your own fleet at this point in time you're maintaining to take out for retrofitting the scrubbers? I mean out of the fleet, what proportion?
Okay. I mean, we intend to take 10 ships out of the -- 10 of our own ships and I believe the number of other ships will be slightly above 100.
Okay. And that's useful. And basically, then the rest of the ships will be running on the low sulfur MGO, is that what you're going to do over the course of '19 as well?
The rest of them will run on low-sulfur fuel as from the end of this year and we will...
End of this year?
Yes, and then, we will test 1 ship on LNG with -- and we will retrofit that in the first quarter of 2020.
I see, I see. That's useful information. Just on freight rates again, thanks for giving a bit more detail on how the Transpacific and the Asia, Europe contracts work. But if you can just give us a little bit of idea in terms of the main routes, what is the percentage of spot versus contracts in terms of the take-up from customers? I mean is there any -- is there a number which you can just discuss?
If we look at it on a global basis, we have between 35% and 40% of contracts. There is a little bit by trade. On the Transpacific it's a bit over 50%. If you look at Asia, Europe, it's probably only 25% and most of the other markets are -- trades are somewhere in between.
The next question is from the line of Brian [indiscernible] from Crédit Suisse.
Regarding the encumbered fleet, last quarter, you mentioned that of the 95 owned ships, the majority was financed and encumbered. So could you just give an update on that, given your current fleet? And then -- but the real question on the back of that is, as you go forward and look to pay down debt, is there any emphasis you're putting on towards secured debt in freeing up some of those encumbered vessels and containers?
So the situation has not changed too much. So we have, of course, let them, because we will pay around -- around of contract [indiscernible] to efforts every quarter. The loan-to-value that we have in those assets is really reasonable. So if a percentage that is, of course, at least 60% -- 55%, 65% of the market value on the vessel, around that so we have still always some space to leverage up and in case, it is needed. But usually, we take advantage of that financing vehicle that is the cheapest to finance ourselves. And so the repayment of debt, the contract as we repay that debt, as we depreciate the assets, that's something that we do every quarter. The [indiscernible] repayments are pretty much on the most expensive debt that is due in 2022 and some other corporate debts that we have in UASC, credited from UASC. But that's basically voluntary repayments.
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.
Okay. Well, then we'll wrap it up here. Thank you very much for your questions. Thanks for taking your time to listening to us, and look forward to speaking to you again soon.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.