Hapag Lloyd AG

XETRA:HLAG

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Hapag-Lloyd Analysts and Investors Q1 2021 Results Conference Call. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO; Mark Frese, CFO; and Heiko Hoffmann, Head of Investor Relations. [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 thanks, everybody, for taking the time to join us here today. I guess today, we'll talk a bit as usual about the latest developments, the numbers, how we look at the market and what we see as important things going ahead. I'll make some introductory remarks and then Mark will take over for the financials before we will wrap it up with a market update and some comments on the way forward from my end. A couple of opening remarks. If you look at the first quarter, I would say that, yes, the main thing has been continued strong demand, high freight rates but also operational bottlenecks as we have seen congestion-related issues in quite a few places. When looking at our quarter, I would say that the development of the transportation volume was somewhat unsatisfactory. I mean, we were down 2.5% compared to 2.6% compared to last year. That's probably a number that's a little bit inflated because 2019 is a better benchmark. And compared to that, we are up 2%. And also if you look at the split between what happens on the dominant and nondominant legs, I don't think it is as negative as it sounds. But having said that, we're not entirely happy with that because we should have been able to produce a bit more allocation. And we do expect also that this will come much, much closer to what happens in the market in the course of the year. We've done significant investments in customer service quality. But we have to still do more there. We see in this period that when the market is under pressure and our customers and everyone is under pressure that it's more important than ever to give people timely and accurate information, and we still need to step up our efforts on that front. On the financials, we improved profitability, strengthened our balance sheet further and earned our cost of capital, very strong free cash flow. And of course, you will also have seen the upgrades from the rating agencies and hopefully also there, more to come. On the market, volumes are expected to grow significantly. We have seen the order book coming up, which was also completely as expected. Not a lot of deliveries though due in '21/'22, I think the key question is how do we look at the years beyond that, where based on the current order book, I still think we should be okay. I still think it's going to creep up a little bit more but hopefully not that much. And we also shouldn't forget that scrapping will go up. On the way forward, we confirm our outlook. We do continue to see the operational challenges. I do think though that we will start seeing some easing in the upcoming couple of months. And as said, our main focus remains on schedule reliability, service quality and making sure that we have happy customers. A bit deeper on Q1. I already mentioned the operational challenges very much around the port and inland transportation. Two indicators, I think, that show very nicely or not so nicely what's been happening. One is the increased container usage. It takes 20% longer these days before we get a container back, that in reality means we need 20% more boxes to carry the same amount of cargo. And we also see voyage delays, on average, have tripled in the first quarter compared to a year ago for every single ship. So what have we done? We did charter some additional vessels. We have also deployed extra loaders and empty loaders where possible. We've ordered up to 150,000 TEU of additional container capacity. We've taken some further actions at the end of last year and the beginning of this year to maximize allocation. And we will start seeing the first effect of that in the second quarter. We have moved some shifts around to try and accommodate the highest demand areas. We've tried to reroute and we've also added some IT capacity. But I still believe that we are not out of the woods just yet, and we will also continue to invest in offering better services. When looking at the freight rates and cost side of things, I think that's really in a way a little bit of a mixed bag. Of course, we have seen rates come up quite significantly, especially towards the end of last year. And to be fair, the rates are still high today. And I would hope that they have started to come down a little bit in the course of this year. Schedule reliability was at an absolute low in the middle of the first quarter. I think we're going to start seeing some improvement there. We've seen some first indications that schedule reliability is up a little bit. I would expect that in Q3, we will not be back to normal, but we will have made a significant step ahead. On the other hand, when we look at costs. We definitely see costs going up. Here, we've highlighted charter rates and bunker prices. But we've also seen, for instance, the cost that we have for storage and terminals, when ships are not on time, go up quite a bit. And also on the trucking side, there's definitely upward pressure on cost. So with that, we go to the numbers. And for that, I would hand it over to Mark.

[Mark Frese, CFO & Member of Executive Board]

Thank you, Rolf. Also good morning from my side to everyone. From a financial standpoint, Q1 was -- in 2021 was really a truly outstanding quarter. We were once again able to improve profitability, strengthen our balance sheet and our cost of capital. We have to say while volumes were down slightly, it was that significantly higher freight rates resulted in much higher earnings and cash generation. Taking now a closer look at our profit and loss statement. We see that higher freight rates led to an increase in revenues of 33% to USD 4.9 billion. EBITDA almost quadrupled to USD 1.9 billion. The EBITDA margin jumped to almost 39%. EBIT was also significantly up on the previous year at USD 1.5 billion. Hence, both EBITDA and EBIT were in line with Q1 guidance, which we have given in February. Q1 '21 (sic) [ '22 ] group profits of USD 1.45 billion was already significantly above full year number 2020 figure. As a result of the very strong earnings, the annualized return on invested capital was above 40%. And that is really an outstanding figure. And it's not only outstanding for our industry but also in other asset-heavy sectors. Despite the strong demand, Hapag-Lloyd's transport volume in the first 3 months of 2021 fell by 2.6%, close to 3 million TEU. Delays at ports and shortage of additional vessels and also boxes to cover the increased demand have particularly negative effects on the Transpacific volumes. And we have to say volumes in the Far East to Europe trades as well as LatAm-related trades were up. When comparing our volumes development to the markets, we have to bear in mind that in Q1 2020, Hapag-Lloyd achieved moderate volume growth of 4.2% in contrast to declining volumes of the market, which was minus 3.5%. Hence, the year-over-year comparison is a little bit distorted due to that base effect, as Rolf already mentioned. When compared to Q1 2019, we are still up 1.6%, which is, given the operational challenges and the already very high utilization of our assets, still an okay development, although, as also Rolf said, not entirely satisfactory, of course. However, volume development on dominant legs has been better than on nondom legs. And for the full year 2021, we expect our transport volumes to increase slightly and therefore to be more or less in line with market. Looking at our average freight rate development, we see an impressive increase year-over-year and quarter-over-quarter. At the same time, the average bunker consumption price was significantly below the previous year level, which was, we have to say, very high as a result of the implementation of the IMO 2020 low sulfur fuel regulation. Unit costs were only slightly lower compared to the previous year as lower bunker costs were largely offset by counter-effects caused by the current market situation with negative effect as port congestions, for example. As I already mentioned, a few times before, the increase in depreciation and amortization expenses is partly driven by the shift of passenger and voyage expenses due to depreciation due to the increased proportion of ships with charter contract medium -- on a medium-term basis. And that results in higher right-of-use assets. Operating cash flow has been very strong while CapEx remains on a low level. And I think it's fair and good to say that, that will change quite certainly in the course of the year as we will pull forward our investments in additional container capacity. And in addition, installment payments for our 6 ultra-large vessels, which we have ordered in December last year, are due in the upcoming weeks. We are also looking for some secondhand tonnage where available and might look for further investment opportunities. Overall, we want to grow with the market. In total, our CapEx, excluding right-of-use, is slightly to increase significantly compared to previous year to around USD 1.5 billion. You know we have already announced that we will pay a dividend of EUR 3.50 per share. That compares to a total number of USD 700 million or slightly above USD 700 million. As a sound fundament for the above, the liquidity reserves improved nicely to around USD 2.5 billion at the end of March. So earnings had also very positive effects on our balance sheet ratios. The equity ratio finally increased above our long-term target of 45%. And that was the target we have given ourselves in our Strategy 2023 as you know. Net debt decreased further to USD 4.4 billion. And that translates to a net leverage of just 1x. Based on the last 12 months' figure, the figure is clearly above or exceeds our long-term net leverage target of up to 3x net debt to EBITDA. As a result of the good operating performance and our continuous debt reduction efforts since the UASC acquisition in 2017, the rating agency, Standard & Poor's and Moody's raised the credit rating for Hapag-Lloyd in only 6 months twice from B+ to BB flat and from B1 to Ba2, respectively. And good to say also our issue rating was upgraded twice, now standing at B1 at Moody's and more remarkably at BB flat at S&P, equal to our issuer rating. This is the highest rating that Hapag-Lloyd has received since the rating was established in 2010, that confirmed the efforts of strengthening our balance sheet and gaining financial, and with that, strategic leeway. On the back of these much higher ratings, we replaced our outstanding EUR 300 million bond, which was originally due 2024. And we replaced that with a new sustainability linked senior note. The coupon has been more than half from 5.125% to 2.5% and the maturity has been extended to 4 years until 2028. The new bond is associated with clearly defined sustainability targets by '23. The CO2 intensity of Hapag-Lloyd's own fleet is to be reduced by 60% compared to 2008, which is a reference year of the International Maritime Organization. This will likewise be an integral part of our expanded sustainability strategy. And we will present and explain later in the year how that looks like. Having said that, I would conclude the financials and hand over to Rolf for a market update and the way forward. Thank you.

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

Thank you, Mark. A few comments on the market. I think nothing too new for most of you. Here, you see a picture that illustrates again what happens with the global container volume growth compared to global GDP. As we can see, still a very high correlation. Of course, that doesn't mean that every year, it's going to be exactly the same. Having said that, I think it's quite realistic to expect a significant increase in the course of this year, predominantly on the dominant legs out of Asia. We should expect an economic upturn as more and more countries are going to come out of the pandemic. And I think the key question will be where the consumer spend is going to go. It's clear that there is a lot of stimulus out there. It's also clear that people want to go back on holiday and go to restaurants and events and all these type of things. I think one thing one can't rule out though is that some of the behavior of the consumer has changed a little bit compared to what we saw pre pandemic, which might actually cause a slight shift of spending also longer term towards goods or services. And we need to see what's going to come out of that. But I think that's certainly something that we'll need to watch closely, not so much for this year but certainly for the years after that. And there are certainly scenarios thinkable, where growth is going to be a little bit more than 1% or 2% a year. When looking at the order book, yes, that has come up. As I've said before, that was, in a way, also needed because the order book over the last couple of years was unsustainably low, which in a way is what we also see today in the market. Because some of the scarcity of capacity is also because there is simply no slack in the global fleet. And I believe that in an industry like ours, it's really not bad to have a couple of percentage points of slack so that we can all react if something unexpected like we have seen now happens. And I think one of the things we have seen is that, that slack is just not there. And we need to make sure that we create some of that. And as such, to have a slightly higher order book than we had before definitely makes sense. I have said before that I think that the order book in the end, as long as it doesn't go much beyond 20%, is okay. I think we've seen a lot of orders now. I think there's still some more to come. I don't think though that we're going to go much over 20%. And in the long run, I would still consider that to be actually fairly okay. Also because we see that scrapping has been at a ridiculously low rate the last years if you look at the graph that we're looking at here. Bear in mind that if you use a ship for 25 years, then in the end, you would need to see scrapping of 4% more or less each year. And the average age of scrapped ships tends to be between 22 and 23 years. So we are way below the long-term average. And yes, it will not go immediately from 0.5% or 0.6% to 4%, 5% or 6%. But we should keep in mind that when we look ahead and look towards 2030 and 2035, that a lot of ships will have to be replaced. And as such, to be a little bit ahead of that curve, I don't think is entirely wrong, and we need to keep that in mind when we look at the longer-term forecast. When we look at this year, yes, we've seen -- this has been our outlook. And I think a couple of comments to that. We keep the outlook unchanged. And I think what we expect is that the second quarter will again be very strong and not so dissimilar to what we have seen in the first quarter. After that, we expect a gradual normalization of the results in the second half of the year. And how quickly that will go is, at the moment, very difficult to say. And as such, there is certainly still a considerable amount of uncertainty around freight rates, around how quickly some of these operational challenges will be resolved and, of course, also in general about the impact from the pandemic. What's our focus for 2021 and also after that? I would say that for the upcoming months, our focus is going to be -- to deliver -- continue to deliver on our strategy towards 2023, put more emphasis on schedule reliability, get service quality up and drive up customer satisfaction. We need to prepare for a seamless integration of NileDutch. This transaction, we closed in -- or we signed in Q1 and we expect to close towards the end of Q2. On the financial front, we'll continue to be prudent. We will consider selective investment opportunities if they are attractive but not at highly inflated rates. And we'll continue working on reducing our CO2 footprint as we are also finalizing our new sustainability strategy. And we will be able to say more about that in some weeks from today. But of course, we will also continue to do our utmost to take care of our people, both FTE and on land throughout this crisis. And we need to make sure we bring people back into the office and also migrate them to a better future way of working or a post-COVID way of work, which most likely will be different than what we had before, even if the -- even if it will be predominantly at the office. So that wraps it up from our end. And then we would be willing, happy to take any questions that you may have.

[Operator]

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

[Chi Onn Chu, Research Analyst]

Three questions from me, please. Rolf, just back to the order book. And obviously, you mentioned that sort of 20% sort of level has been sort of comfortable. But clearly, the way the order book is sort of flowing is a lot of that is coming in 2023, which kind of suggests sort of a high single-digit percentage of supply coming in, in 2020 and obviously demand. Unless there's something extraordinary, it won't be anywhere near that. So are you worried about that sort of short-term sort of lumpiness in the order book? And then on scrapping, are you as Hapag-Lloyd going to be then have plans, I guess, in the medium term to increase scrapping? Because as you point out, that scrapping has been low for a long time and ridiculously low. But it hasn't moved for a very, very long time. And then on your -- one of your sort of -- well, the largest player, obviously, Maersk, was talking about long-term contracts being signed, sort of 2-year contracts, and have stated that 55% of their contracts are on sort of long-term contracts. So maybe you could talk a little bit, please, on the contracting -- the contract position at Hapag.

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

Yes. Well, first one, to the order book, I think you're right. I mean, right now, it looks like there's going to be a little bit of a spike of deliveries in 2023. It always goes like that. And of course, we would always like it to be exactly the same every quarter for the next 10 years. But unfortunately, you can't steer it like that. So yes, there's going to be a little bit of a bump. So that may take the market a couple of quarters to absorb that. But I think that's quite normal, that tends to go a little bit with ups and downs. And let's not forget that there may also be delays and postponements and all these things that we normally see. So all in all, yes, we're going to have more deliveries in '23. But we probably need them also after very low deliveries in '21 and '22. Scrapping, yes, we have some ships in the queue to be scrapped over the upcoming couple of years. I don't know off the top of my head how many exactly. But in principle, we stick to our role that as soon as ships are way above 20 years, then we start looking at should we still continue with them. And then in terms of long-term contracts, I wouldn't give a percentage. But also we have seen that the number of requests that we get and the number of -- for long-term contracts has increased. And we have also certainly closed some more. We've also closed some -- we also have some multiyear contracts. I would still say though that, that's still the minority of the contracts that we closed. Most of them remain for 1 year.

[Operator]

The next question comes from the line of Frans Hoyer with Handelsbanken.

[Frans Hoyer, Analyst]

Just a question on the market trend that you saw. I understand that your own volumes are a little bit affected by sort of volatility last year. But what was the year-on-year market trend in Q1 as you see it, please?

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

I think -- I mean, I think still a little bit early to say that. I think the year-on-year market trend was definitely significantly up, I would say, mid- to high single digits, yes. I think when you look at our numbers and if you compare them, for instance, with Maersk, I mean, you saw Maersk reported last year, I believe, minus 5%. And this year, they are plus 6% or so, yes. We reported last year plus 4%, and now we are minus 2%. So if you compare that '19 over '21, which are 2 normal years, whereas last year, we were just hitting the beginning of the pandemic, I think that's actually directionally similar. We've also seen that when you look at volume, that on our side, that volumes on the dominant legs has grown whereas volume on some of the nondominant legs has really been down. And so as such, I think you -- there's certainly a little bit more nuance to that. And overall, I'm not really happy with the volume because I think we should have done a couple of percentage points more. I also think we're going to get some of that after.

[Frans Hoyer, Analyst]

Okay. I was interested in your comment that voyage delays had tripled. And I was wondering what is tripled from what to what percent? Is it possible to put it like that?

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

I think you always have some delay and you also calculate that into the schedule. I mean, if you would -- if you are in a normal situation, and don't take me on the exact numbers, but they are directionally right, yes? Normally, we would always assume that a ship loses on a voyage a couple of days. And you build that into the schedule. That's the slack that you have in the schedule. But if instead of 2 days, you all of a sudden lose a week, then you get into trouble. And bear in mind that this is the average, and we have also quite some services that run normally. So you can clearly see that this indicates that there are quite a number of services where you have several weeks delay, yes? And this is a little bit of the point I also mentioned, I believe, after we spoke about the annual results, where I said that for a service where you normally need 12 ships, you would need 14 today or for a service to the U.S. where you need 6, you now need 8. And that's the type of leg that is simply not there in the global fleet. And that's also why, in general, the overall production capacity is certainly somewhat constrained.

[Operator]

The next question comes from the line of Sam Bland with JPMorgan.

[Samuel James Bland, Research Analyst]

I've got two questions, please. The first one is we've heard from yourselves and others about how the market might start to normalize in the second half of the year. I'd just be interested in what the sort of mechanism is for that to happen. I guess, demand will probably stay quite strong, Q3 is usually peak season. What is it? Is it more containers coming into the market or something else? And the second question is you mentioned in the talk about having some slack in terms of order book is not a bad thing. But I guess that does also probably mean that container shipping lines and Hapag-Lloyd make less money than they do today. How do you balance this sort of need to provide a good service versus your own level of profitability?

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

Okay. I mean, first of all, as related to the market, I mean, demand is probably the single most difficult thing to estimate going forward. I think we've certainly learned that over the last year, 1.5 years. I would think that as the congestion eases, then all of us will be able to produce more allocation or more space. And as such, that should help the market to settle down. And I hope that we can do that sooner rather than later as I believe that it's in everybody's interest. In terms of slack in the order book, I think what we see right now is that there is actually not enough slack in the global fleet. And that is a bit of a problem. And we need to have some of that. Because I believe that in the end, the type of -- the volatility that we have seen in rates over the last quarters, even if this does goes up, it's just not good, it's too much. And we know that this business is cyclical. So yes, there will also be some periods where it's a bit down and where demand is a little bit weak and when rates are low. That's normal. I think we just need to hope for a situation where these type of slack periods are no longer 10 years long as they were running up to 2019 or 2020. Because that's too long and then you see that people don't invest in the industry. And as a consequence of that, when there is then some disruption, as we see right now, the market gets very much distorted. And in that context, I would like to think that over time, we can have a global fleet that's -- where we have a little bit more spare capacity, so we can react a little bit more flexible if there are peaks in demand. And on the other hand, we'll also just provide then -- by doing that, that we're also able to provide better service.

[Samuel James Bland, Research Analyst]

Okay. On the first point with congestion easing, does that require demand to slow down? Is that the way that we're basically going to ease the congestion at the port?

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

That's one element of it. Of course, the other element is that as more and more countries are hopefully going to get out of the pandemic, I would expect that labor availability in the terminals is also going to be better again. And that will mean productivity will go up. And that will probably be the single biggest -- or that will also be a big factor. And of course, you had the one-off effect from the Suez Canal, which we're also going to get behind us. And as we said before, it's a multitude of things. But I think they're starting to slowly move in the right direction.

[Operator]

The next question comes from the line of Alexandra Thrum with Morgan Stanley.

[Alexandra Thrum, Equity Analyst]

Just two questions for me. The first one is on scrapping again, so Slide 15, where you say you expect the market scrapping to increase significantly from 2023. I just wanted to know what you think is mainly driving this. Is it also linked to, say, environmental regulations and ship efficiency? Or is it just predominantly the age of the fleet? And then the second question I had was your latest views on lower emission fuel technologies and how you're thinking of investing in capacity from here. Will you continue to invest in the dual-fuel LNG ships?

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

Yes. Maybe the first one on scrapping, I mean, I do expect it to trend upwards after '23. When exactly is impossible to predict. But that's going to be a combination of two factors, I believe. One is just ships getting older and we get more and more ships that are going to be 25 years and older. And the second point is, as you also rightly point out, environmental and sustainability-related reasons. We do expect that regulation will be tightened and will be tougher. That will mean that smaller and older ships are going to be economically less attractive. And that will also accelerate the scrapping. And that's why the average age then of those ships may actually come down a little bit. To your point on technology, we right now still believe that the dual-fuel choice that we made for the order that we placed in December makes sense, also because those ships can -- or those engines can also run on different types of fuel. And we don't see a very good other alternative available at this point in time. And it definitely is a step ahead compared to what we have today.

[Operator]

[Operator Instructions] The next question comes from the line of Parash Jain with HSBC.

[Parash Jain, Head of Transport Research, Asia]

I have two questions. First, regarding congestion, I mean, would it be possible to help us visualize how much percentage of shipping capacity would be tied up to the ongoing congestion related to probably the equipment charters or the port congestion or because of the Suez Canal? And is that baked in into your reaffirmation of full year profit guidance? Because given a superior first quarter result and where the spot rates are trending in the second quarter, it seems like the freight rate need to capitulate to meet your guidance. Or shall we think your guidance more now as something which has an upside risk?

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

Maybe to answer your question on guidance first. I mean, we've guided the way we did it, which is qualitative. Apart from that, we're going to try and give you an indication every quarter on what we see for the upcoming quarter. Because of the volatility that we will see, we don't think it makes much sense to comment in depth about the second half year. I do believe though that if you take our guidance, where we said Q2 is probably going to be similar-ish to Q1, and after that, it's going to tail off. That should allow you to make a reasonable estimate of where the year will land. In terms of congestion, how much does that mean? What's the effect of that? Well, I would say that in the end, on a global scale, that's probably a low to mid-single-digit percentage. To give you a bit of a flavor, if I look at the Transpacific trade, there, we were missing in the first quarter between -- or more as an alliance, we were missing more than 40 voyages there, which indicates that you actually lose quite a bit of capacity. So a low to mid-single-digit percentage of capacity is probably an accurate estimate at this point in time.

[Operator]

[Operator Instructions] The next question comes from the line of Christian Cohrs with Warburg Research.

[Christian Cohrs, Analyst]

Just one, there has been lately a resolution of the -- or in the German Parliament to push the European Union for an evaluation of the block exemption for the liner shipping consortia. And also, I think they are pushing for a review of the application of the tonnage tax regime. Do you see or do you fear any clouds on the horizon coming from that side?

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

I think with these type of things, if you have an exceptional situation as we see it right now in our industry, then it's very logical that people ask questions and that people want some things to be double- and triple-checked. So to me, that's fine, I think people should do that. And then people need to look at it, and I have no reason to believe that they will then come to a different conclusion than what they did before. Because to -- in my opinion, the current situation in the market has very little to do with, for instance, the block exception here or the tax regime here.

[Operator]

At this time, there are no further questions. So I hand back to Rolf Habben Jansen for closing remarks.

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

Thank you. Not much here from our side, except thanking you for taking the time to listen to us. We hope it was informative, and hope to speak to you again soon. Thank you.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.