Hapag Lloyd AG

XETRA:HLAG

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Hapag-Lloyd Analysts and Investors Conference Call 9 Months 2020. 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]

Thank you very much. And thank you, everybody, for making the time to listen to us today. And we certainly hope you enjoyed the music that was playing until a minute or so ago.Maybe a few remarks from my side to get the things started. On the current situation, I think it's pretty clear that the performance in our sector in Q3 has been better than anticipated. I would say that's mainly on the back of an unexpected strong rebound in demand. That also means that idle capacity is down to pretty much 0 these days. And from our side, I would also say that we're happy with where we are today. And earnings have been good, of course, also on the back of lower bunker prices and good cost savings of our PSP program. If you look at the financials, I'd say what you see in Q3 is a combination of stable freight rates, lower bunker prices and active cost management. In the end, I think it's also a continuation of what you have seen from us for a longer period of time coming with a fairly solid set of numbers. I think it's also worthwhile mentioning that the credit rating agencies have recognized that and have basically upped our credit rating, which we think is a good thing.When you look at the market in itself, I think it's still not a very stable market. All our forecast and predictions have been -- I would say proved to be sometimes right but also sometimes not if we look at this year. I mean we started off this year very, very strong. Then we were hit by the COVID crisis, which led to a very strong decline in volume in the second quarter.And then as from especially August, I would say we've seen a very strong recovery in the market, probably stronger than anybody expected. And as a consequence, despite the fact that a lot of capacity has been reinjected, we still see that space these days is tight. And we also know that the entire market is struggling to get the boxes back to the places where we need to be as the balances have simply been unusual throughout this year. And if we look ahead at the market today, I would still say that at least until Chinese New Year, the market looks like being pretty strong.In that context, we have also updated our earnings guidance because we saw Q3 being stronger than expected and the outlook for Q4 also strengthened. I would say apart from that, we're going to continue focusing on costs because that's, in the end, the thing that also in the long run will help us to remain competitive. And we do pick up the work that we are doing on the strategy. If we look at the market over the last couple of quarters, I think this illustrates quite clearly what I just said in Q1, actually a fairly good start. Only in March, volumes were down. Then we saw Q2 coming down actually quite a lot with about 10% on a global basis and on some trades, clearly more. And then in Q3, if you look at it on a start of shipment basis, we saw volumes picking back up again.And if you look at the right-hand side of the chart, you can also see that, that as a result of that, we saw, of course, capacity coming down after Q1 because if you lose so much revenue from 1 day to another, you simply have to react. But I'd also say you can see that the capacity has been injected back into the market after that where -- both here and, for example, the Transpacific. But also in Far East, we see weekly capacity going up quite significantly and, in some cases, being well above where it was at the beginning of the year and also above what it was last year.We look at the market and look at the rates. We have seen, as I said -- especially the last couple of months, we've seen spot rates coming up a lot. I think that's, in reality, a combination of a much stronger surge in demand than anyone anticipated. And even if every ship that we have is currently sailing, there is still -- capacity is still tight.Also worth pointing out here, though, that this is, of course, only what happens on the short-term market. And we've definitely seen that many of the contracted rates have either remained stable or have actually been adjusted downwards because bunker clauses kicked in as from Q3. Bunker prices recovered a bit after the low from the second quarter but it's certainly still lower today than we probably anticipated a year ago.When we look at our priorities, I would say that, that remains unchanged. First priority, make sure that our team remains safe both at sea and on land. We've had to take measures again there in the last couple of weeks as we see Europe entering into a second wave. So again, we have a lot more people working from home these days than we have some weeks ago. Also, crude changes are still going but it's certainly not without challenges. And we've certainly seen some COVID cases also on a number of the ships, which certainly causes a fair amount of disruption, which we need to -- and we need to do our utmost to mitigate it as much as we can.Volumes recovered in Q3 and as we said, especially in August and September, but remain, in our case, well below previous year. Probably worth mentioning there also that we do end-of-voyage accounting. So as such, some of the effects on volumes that are picking up, you will see only in Q4.I already mentioned the upgrade done by S&P and Moody's. And we are reasonably happy about that because we think that was definitely justified. I would hope that we can make some further steps on that front in the not-too-distant future.And looking ahead, we will continue focused on -- focusing on the PSP. We'll also keep a very close eye on the market as we still think that whilst the market is very, very strong today, there's certainly a fair amount of uncertainty in the market if you look a little bit further ahead because it is not logical that it will just continue like this for the next couple of years. But if and when and how much that impact will be, I think that's a little bit too early to tell.And with that, I hand it over to Mark to talk a bit more in-depth about the numbers.

[Mark Frese, CFO & Member of Executive Board]

Yes. Thanks, Rolf. And also from my side, good morning to everyone. As already pointed out by Rolf, we were able to improve profitability and to strengthen our balance sheet in the first 9 months. And that's in spite of COVID-19-related demand slump and that was especially true in the second quarter. Revenues were only marginally below the previous year as lower volumes were largely compensated by somewhat higher freight rates. EBITDA, however, improved strongly on the back of strict cost management and our PSP program and the already mentioned lower bunker cost. This has led net profit to nearly double compared to previous year.We have used the good earnings momentum and, for sure, also our cash generation to further reduce our financial debt. In addition, we have kept our liquidity results elevated as a precautionary measure. As a consequence, the ratio of net debt-to-EBITDA has decreased to 2.3x, the lowest level in more than a decade for Hapag-Lloyd. This is also one of the lowest leverage ratios in the shipping industry as of today. Also, it's worth noting that we have reached our goal to earn our cost of capital as return on invested capital has clearly improved in that phase.Taking a closer look at our profit and loss statement. We can see here that despite marginally lower revenues in the first 9 months, we were able to significantly improve our earnings. Our EBITDA increased by around about 20% to roughly USD 2 billion. EBIT was up around 34% to USD 965 million. Q3 EBITDA margin was 21.5% and EBIT margin stood at 11.4%. Consequently, group profit almost doubled.Looking now at our quarterly transport volumes, we see a very mixed picture here following the positive development of transport volumes in the first quarter. The political measures to control the COVID-19 situation had a clearly negative impact on the second quarter, with transport volumes down by roughly 11%.In June, we have seen a steady volume recovery and it started here with the demand particularly picking up momentum at the end of Q3 and beyond. In comparison to Q2, all freight except the Atlantic posted strong volume increases. Nevertheless, Q3 volumes were still down year-on-year by 3.4%.In contrast, as you may remember, we have shown on Page 3 that the global container throughput has grown by 2.8% year-on-year. In Q3, this difference is largely attributable to a mix effect and the different statistical methodology.Let me have a word on that. While market volumes are counted at the start of the respective voyage, when the container is loaded, we as Hapag-Lloyd apply the so-called end-of-voyage principle, recognizing volumes at the end of a voyage when the container is, at the end, really offloaded. Hence, our volume statistic lags the market data by a couple of weeks. This means that increased cargo loadings in August and September, we will largely only see and will be recognized in our volume statistic in October and November.The average freight rate in the first 9 months was USD 1,097 per TEU, which was roughly 2% up on the prior year period. This was largely driven by higher bunker prices and, hence, increased bunker surcharges at the beginning of the year as well as a positive spot rate development towards the end of Q3 and that was especially on the Transpacific trade. However, the average Q3 freight rate was somewhat weaker than in Q2 due to the trade mix and the fact that we have fully passed through the lower bunker cost to our contract customers. This resulted in lower bunker surcharges and hence somewhat lower freight rates in Q3.Please -- and also here, keep in mind that as we recorded transport volume, average freight rates are also based on the end of voyage principle in contrast to the reporting methodology of most other carriers. That means that rising spot rates that we have seen towards the end of Q3 are not fully accounted for in the average freight rate for Q3 up to now.In spite of lower volumes, we were able to reduce our unit cost. This was, of course, mainly driven by the lower bunker expenses. However, various PSP measures have helped us to reduce our transport expenses, too. Cost of vessel and voyage decreased due to network optimizations, including the well-known blank sailings and a higher share of charter vessels considered as right-of-use with a respective negative impact on depreciation. Besides the right-of-use-related increases, depreciation and amortization increased also due to the investments in scrubbers, as we know.With free cash flow at USD 1.866 billion, our cash generation remains pretty strong in the first 9 months. Investment were kept on a low level in order to preserve liquidity and were primarily related to containers, ship equipment and the rates for fitting, as you know, in the light of IMO 2020. Our liquidity reserve was substantially, substantially improved due to the strong free cash flow and the precautionary measures we have taken.As already outlined in the beginning, we have used the good earnings momentum to strengthen our balance sheet further. Equity increased to USD 7.8 billion in spite of EUR 229 million dividend payments to our shareholders at the end of Q2. The corresponding equity ratio increased to 42%. As compared to year-end 2019, we were able to reduce our net debt by roughly USD 600 million. Net debt-to-EBITDA ratio stands at 2.3%.As a result of the good operating performance and our continuous debt reduction efforts since the UASC acquisition in 2017 as well as already mentioned, rating agencies Standard & Poor's and Moody's raised their credit ratings for Hapag-Lloyd now, from B+ to BB- and from B1 to Ba3, respectively. This is the highest credit rating Hapag-Lloyd has received since the first ratings in 2010 and confirms really our efforts to strengthen our continuous -- our balance sheet and our financial and business profile.And with this, I would hand back to Rolf for some comments on the market development and the way forward and for closing remarks.

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

Thank you, Mark. Going on to market and maybe first look at demand. I think here you'll see a picture of how global container traffic has developed over the last couple of years and has one of the latest numbers for 2020 and 2021. I guess the numbers for 2020 and 2021, I think you have to take somehow with a grain of salt because this is where averages really don't tell you all that much. I mean the market was growing in the beginning of the year then the pandemic hit. Then we saw a strong decline yet we see a recovery. If today, we look at volumes that we expect for the fourth quarter, I think one should expect that the volumes of the fourth quarter will be around or slightly higher than what we saw in 2019, also looking at the entire market.So yes, we've seen a dip but, all in all, when you look at Q1 and Q4, we'll probably still see some continued growth. And as such, I don't think the -- that when you look into 2021, we should expect to see a market that is roughly at the level of 2019 or a tiny little bit better. But of course, the main difference for this year will be in the period from March to June, July.When we look at the order book and idle fleet and orders, very small order book at this point in time. I think we've seen a steady decline there since quite a long time now. I do expect that, that order book will go up a bit because, in reality, the order book is almost a little bit too small. And at some point, we need some orders to replace ships that are getting older as scrapping will go up in the years to come.So far, very few orders placed this year, as I said, also when we closed Q2. One should expect that somewhere in the next 9 to 12 months, a number of orders will be placed and I think that is also needed. You see idle fleet is, in reality, pretty much 0 these days. I mean, officially, it's 1.8%. But if you take out what is in regular write-offs and is a maintenance, then almost nothing is left. So in reality, every ship that's available today is sailing, which you can also see when you look at the charter rates that are today at record highs.When looking at the supply/demand balance, I think here, again, the yearly view doesn't really tell you all that much. We have seen a lot of adjustments throughout the year. But as we also mentioned in the beginning, when you look at what we deploy as capacity today, then both on a Transpacific trade but also in Asia/Europe, we today deploy more capacity than we did 12 months ago as an industry. So there's definitely a reaction to the strong demand. But in fairness, the recovery that we've seen in the last month is much stronger than we anticipated.That's also why we updated our earnings guidance. We've said from our transportation volume will be down in the end only slightly. I think you'll see minus 3-point-something percent for the first 9 months. The full year will probably even be a little bit -- will be a slightly smaller number even than that.Freight rate, as expected, I don't expect any material change there towards the end of the year that will be up a couple of percentage points. Bunker price will likely be down a little bit. Today, we are, I think, hovering around a little bit. For the full year, we are about $20 or so below last year. We'll see how that develops. EBITDA, we increased the range and we should land within that bandwidth and the same goes for EBIT. Then looking ahead into the priorities for the upcoming months before we get to Q&A. First and foremost, continue to be focused on the safety and health of our employees at sea and on land. Try to do our utmost to support our customers to safeguard uninterrupted supply chains and optimize the flows. I think we all recognize that in this very unusual year, not everything is probably running as smoothly as we would like because we have seen a lot of disruption in global trade. We've seen -- we've had to move to home office back to the office and back to home office again and many of our customers have experienced same things. And we've seen a very strong rebound of the volume. So certainly, a tight market at this point in time. But hopefully, that will settle down a little bit over the upcoming couple of months.We'll continue to follow a very prudent financial policy. And we'll keep focusing on costs and we'll still liquidity as needed. We pick up all the efforts that we're doing around our strategy 2023 and I think we've made still fairly good progress there this year. And hopefully, we have to do a bit more in 2021.And then the final point. I think there is a fair amount of uncertainty still in the market more than usual, which also means that we will need to remain on our toes. And we'll have to react to things that are going to happen because there will be unexpected things coming our way over the upcoming 3, 4, 5 quarters. And I think we just need to be prepared to react swiftly if and when something happens. And that sums it up as an introduction from our side. And with that, we happily hand it over to you for questions.

[Operator]

[Operator Instructions] The first question is from the line of David Kerstens from Jefferies.

[David Kerstens, Equity Analyst]

I've got 2, please. First of all, I was wondering. You talked about the end-of-voyage accounting. Can you explain what are the benefits of this rate of accounting versus the accounting that is done by your peers? Does it lead to less volatility in your earnings? And I was wondering, are there also other factors besides the accounting methodology that explain why freight rates and bunker prices are lagging the spot rate development, for example, hedging policies or relatively high contract coverage?And the second question is on new ordering. I was wondering if you have already finalized the plans for a new vessel order. I think you were thinking of around 7, right? And what the impact would be of that order on your CapEx for 2021 and beyond?

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

Okay. Well, maybe let me take the second one first. I mean on newbuilds, I think it's not a secret that we have been speaking to yards as we regularly do but there has not been any final decision made. And as soon as that would be the case, then we would get back to you on that, whether it's a yes or a no. On the accounting and freight rate, I think freight rate is always a mix of many different things. And as we have said many times, our portfolio is fairly balanced across the globe, both when you look at it across the trades but also between contracts and spot rates. And that's also why our freight rate tends to be more stable than what you see when you just look at spot rates.And if you look particularly at Q3, where the freight rate is, in essence, stable compared to last year, I would say there's a couple of important effects to take into account there. One is trade mix, where we see that in some of the trades, the short-term rates have gone up a lot but in others, they have not. And for example, on the Atlantic, rates have not gone up and actually moved a little bit down, whereas on the Transpacific, where we are relatively small, rates have gone up. If we look at contract rates, those have typically gone down because most of the contracts have bunker clauses and that results in lower bunker charges in Q3.And then in terms of vendor invoice accounting, I don't think that has any particular benefit or merit. It's just that we account -- we recognize revenue when the voyage ends. And that means that if rates go up in August, they typically get booked, shipped. But before they are delivered, it's well into September or even October. And as such, you see a little bit of a time delay of probably 30 to 45 days on average. Whether -- in the end, I don't think that's better or worse. It's just a timing difference.

[David Kerstens, Equity Analyst]

Understood. Can I ask a quick follow-up on the contract rates, please? Are you already seeing any indications of customers wanting to renegotiate contracts? And will there be a lot of upward pressure on prices in these new contracts, particularly on the Asia/Europe trade lane?

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

I mean I think that the contracting season is more or less starting now. So it's too early to say what's going to come out. But I mean if the spot rates give us any guidance -- and normally, what happens in the spot market, it sets at least a little bit of the tone for the contract rate and it would be very odd to see contract rates go down.

[Operator]

Next question is from the line of Andy Chu from Deutsche Bank.

[Chi Onn Chu, Research Analyst]

So Rolf, just on that contract rate remark. I mean surely -- I mean contract rates have to go up, right? I mean as you say, it'd just be very odd or more than odd, I'd say, if the contract rates were to go down. So in terms of the initial discussions, when you're having those rate discussions, what's the sort of magnitude -- or what are your customers saying and what are you saying to customers about the rate hikes on Asia/Europe at this point in time? Just in terms of the CapEx comments, is there any sort of time frame? And you said nothing concrete, but will that be sort of 2021 for announcement on the sort of 23,000 sort of TEU ship orders that the market has been kind of speculating?And then in terms of unit cost, if your volumes which are likely to grow sort of modestly in Q4 as you lead it to maybe at or above the sort of 1.7% growth rate in 2019 that's reflected in Q4, what should we expect, please, for unit cost improvement in Q4?

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

I mean maybe -- I mean in terms of contract rates, that's just too early to say. But I mean my expectation is like yours that, in the end, the contract rates will go up and we need to see in the end how much actually comes out.In terms of the CapEx and newbuilds, as I said, no decision just yet. But in reality, we will take a decision between now and 6 months. And we're not going to push it out with another debt decision out for another 2 years.In terms of unit cost, it's a little bit too early to say because, I mean, right now it's a little bit of a strange Q4 because, on one hand, we have very high demand. On the other hand, we have to make a lot of extra cost to reposition containers. And we also see that charter rates are at a record high. So I wouldn't expect only good news on the unit cost front because there are clearly some factors also that drive cost up. And we accept that cost also because we need to provide the capacity that's needed to move to boxes. But I would not expect that to move to -- I would not expect a big improvement in unit cost in Q4.

[Operator]

Next question is from the line of Sam Bland from JPMorgan.

[Samuel James Bland, Research Analyst]

2 questions, please. First one is whether we could have an update on the Quick Quotes product and the penetration there on the spot side and whether there's any sort of targets in place for where the penetration of that product can get to. And actually on that, what the reaction has been like from freight forwarders to that product.And I guess the second question is more around capital allocation. Obviously, your net debt is coming down nicely and also the leverage. Is there a point in time when maybe your focus will turn towards returning additional cash to shareholders?

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

I think maybe to take your first one, your first point on Quick Quotes, I mean that continues to develop nicely. I think -- right now, I think we have moved about 1.2 million TEU via the channel this year. So we're going to land between 1.3 million and 1.4 million, which is a nice 40% growth over last year. The channel is predominantly used by forwarders so I must assume that they like it because I think that between 80% and 90% of the volume has moved forward. So I think it's actually specifically something for them so not a lot of pushback on that.And then in terms of cash to shareholders. To be honest, if the industry for the first time in 10 years is going to earn more than its cost of capital, then that would be a nonlogical moment to go and return cash to shareholders. But rather, I think make sure that we have a proper capital allocation and that we do invest in those parts of our business that makes the business better. And that's not only shifts but probably more making sure we have the right number of boxes that we improve on the digital front and then end. So that's question #2.

[Operator]

Next question is from the line of Dan Togo from Carnegie.

[Dan Togo Jensen, Financial Analyst]

Dan Togo from Carnegie here. Could you maybe -- I'd like to get back to the contract issues mentioned earlier. Could you maybe elaborate a bit on where contracts that you made last year are right now compared to spot rates in order to get some sort of sense of the level here?And I agree that they would be probably looking at them going higher next year but how much of your volumes to actually move from an annual contract? And how much -- in the range of 3% to 6%? And how much is actually on spots? That would be helpful.

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

I mean if you look today at where contract rates are in terms of spot, I mean they are way below -- a little bit dependent on which markets you look at and what you take as a reference on the spot rate. I would say that we have today quite a lot of contracts that move at a price that's less than 50% of the spot rate as we see it right now.In terms of what's the contract coverage, I mean it varies a little bit by trade. But I tend to -- I would say that if you look at our business, it's roughly 1/3, 1/3, 1/3, which is 1/3 is contract rates with the 12 months' duration. We have 1/3 which is anywhere between 3 and 6 months. And then you have 1/3 which is less than 3 months so it's -- which is predominantly spot. It varies a little bit by trade, but that's -- if you want to take a proxy, then you can roughly look at that.

[Dan Togo Jensen, Financial Analyst]

Yes. Okay. It looks like a pretty industry standard then. Then on 2020 and the capacity here. Because carriers have used the tools of blank sails in 2020, in your estimate, how much have this, sort of say, removed the capacity in 2020? And I guess when we look into '21, that will sort of swing back. Most likely, carriers are not likely to do blank sailings to the same extent in '21.

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

Yes. I mean to be honest, if you look at the last couple of months, we blank pretty much nothing, yes. I mean every now and then, even when there is a blank -- so-called blank sailing in the market, in most cases, that is because we are off schedule and basically have to -- and because of that, the ships are returning too late. And because of that, we lose a sailing.Today, every ship we have is being deployed in order to carry the boxes that are being offered in the market. And I would also expect, to your point, that 2021 is probably going to be more normal, where you will still see that after Chinese New Year and in Golden Week and in periods where the demand is very weak, that we then, in a much more planned way, will not sell certain voyages but that's indeed going back to normal. But in fairness, we are already there since a while. That's also why deployed capacity today, for example, the Transpacific is materially higher than a year ago.

[Dan Togo Jensen, Financial Analyst]

Good. And then just a final question on North/South rates. These trades have swung back. They started out pretty weak and are now basically -- depending on, of course, what lane you look at but more or less at record levels, at least when you look at CCFI rules. Can you give some color on this? Is this driven by high demand or simply because capacity is seeping away into most -- into markets that are stronger at the moment?

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

I mean, also there, you see a recovery of demand. If I look at the weekly volumes we carry on the North/South trades, they have really also rebounded. The rebound just came a little bit later. I think what you should also not -- what you should add there, though, is that the spot rates on the North/South routes tend to be more volatile than on some of the East/West trade. So they can go up very quickly but they can also come down again very quickly. So they tend to react even faster to what happens in the market. But to answer your question, also there, we've seen a rebound in demand.

[Operator]

Next question is from the line of Adrian Pehl from Commerzbank.

[Adrian Pehl, Head of TMT and Consumer]

Actually, 2 questions from my side. First of all, could you update us on where we actually stand in terms of our scrubber upgrades, where Hapag is currently standing versus the market?Secondly, a question related to the trades again. Well, we saw that Middle East was pretty strong. I was wondering what do you expect here in terms of the short-term Q4. And potentially looking into Q1, is that picture staying the same more or less in terms of strength? And on the other hand, it seems like the Atlantic trade is lagging a little bit. But obviously, as you were referring to high volumes, I was just wondering whether we should also expect a brighter picture for the Atlantic trade in the next couple of months.

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

In terms of scrubber upgrades, I think there's not much to report. I mean we are doing what we had originally planned. That means also in terms of the percentage of the fleet that we have with scrubbers, we are somewhat below the market. We may gradually still move a little bit closer to the market average but I think we're going to remain on the low side.On the trades, Middle East has indeed developed well. That's mainly India related in our case, which in the way we define the trade belongs to India. That trade has been strong and has recovered fairly well after the COVID crisis. And I would expect that to remain fairly strong at least until the end of Q1, which is the end of the fiscal year in India.On the Atlantic, you're right. It's been a little bit sluggish. So I believe that most of the -- if you look at the whole recovery that we've seen post COVID, we've seen it kicking in on different trades in different points in time. And I agree with you that the Atlantic has been a little bit -- lag us there but we also see some signs there now that bookings are picking up. And I would not be surprised if also there, we're going to see a recovery in demand, especially some of the industries that are traditionally based on that trade are getting back up to speed like, for instance, the automotive industry.

[Adrian Pehl, Head of TMT and Consumer]

Right. So that was not a problem that it was a topic on that very trade due to higher supply, just industry related.

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

Yes. I think when you look at -- if you look at the Atlantic, I think that's been very much -- there, you typically move a lot of industries in cargo. That was impacted quite heavily by the crisis. And we see the old volumes now coming back. So I think to your point, do we expect a recovery there? I think yes, we're going to see that as well. I mean we see shifting now again completely full also on that trade.

[Operator]

Next question is from the line of Danielle Ward from JPMorgan.

[Danielle Ward, Analyst]

I have a couple of questions from the debt side. As you mentioned, you've recently been upgraded by both rating agencies. Is this a level that you're happy at now? Or would you be targeting further upgrades from here?And then secondly, your higher bond is currently callable and trading well. Do you have any plans to redeem or refinance this note?

[Mark Frese, CFO & Member of Executive Board]

Thank you, Danielle. First on the ratings we are having right now. As Rolf already mentioned, we think that the actual upgrade was really necessary in light of the development of the last year and the performance and financial performance. So therefore, yes, that was one thing.The other thing is that we target for more due to the good rating KPIs we are having. And the development, we think have more steps will come and that is very close to all our targets.On the bond side, I would say as we, for sure, maintain overall our financial prudency, we always look to strengthen our balance sheet and, for sure, also in light of that reduced our financial debt. We always evaluate all financial liabilities we are having and look at the whole finance structure for Hapag-Lloyd.So we look also for opportunities to maybe redeem things like that. That also includes, for sure, the outstanding corporate bonds, which would be redeemable since July of this year. If we do something like that, it for sure, not clear yet, would be an opportunity. But no decision is taken yet and it's a very individual decision on that special structure.

[Operator]

Next question is from the line of Lars Heindorff.

[Lars Heindorff, Analyst]

The first one is regarding the volume recovery that you've been talking about and also maybe looking a little bit ahead into next year. I would like to get a sense for how much of that volume recovery is actually do you believe is caused by restocking and how much is sort of just underlying demand. And the reason why I ask this is because if you believe that there could be a chance or risk that we see that as we head into next year, volume will start -- volume growth will start to fade again and then with all capacity more or less deployed globally, that we will see sort of an imbalance again as we head into the parts of next year.

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

Okay. I mean I guess it's not easy to judge that. But based on what we see right now, most of this is indeed driven by demand and not so much by restocking. I think what you saw when the crisis hit is that a lot of people cut their orders as soon as they could to -- and then inventories basically went down. Then demand came back. And from all we hear, a lot of people have not yet been able to properly restock. So I actually expect that, that will certainly be a positive factor when looking into 2021.I think one thing that a lot of people probably underestimated, including ourselves, is that as the economy came to a standstill, some of the spend into some sectors, be it restaurants, hotels, travel, airlines came almost to a standstill. But there was a lot of stimulus and support from a lot of governments. And instead of spending money on those type of things, people also spend at least part of their money on new furniture, doing things in their garden, et cetera, et cetera, which in and of itself, of course, has a positive effect on the international transport and on container movement.So my assessment right now is that there's actually not a lot of restocking has taken place. It's really driven by demand. And I would actually expect that there is going to be a little bit more restocking going into 2021. And what may even come on top of that is that people may decide to have a little bit more safety stock in some of their supply chains as we have seen so far. So I think when you look at those factors, then those are certainly positive factors when looking at what's going to happen in our market for the upcoming couple of quarters.

[Lars Heindorff, Analyst]

Okay. Very clear. The second one is regarding more specifically on Asia/Europe. We've seen fairly large increases in import into the U.K. now with respect to the Brexit situation and also that some carriers -- and I'm not aware if you have actually changed some of your loops with Felixstowe still now getting to the end of some of the loops that I'm hearing about. The shortage of both equipment both in the U.S. and Europe, and maybe particularly here in Europe, how is that -- is that something that actually affect rates? Or is that more sort of on special surcharges, the equipment situation?

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

I mean the equipment situation is difficult. And then that's because too much equipment gets stuck in the wrong places. I mean we have on hire then bought, I think, a record number of boxes this year because -- just to be on the safe side. But still, we also face tightness. We are also tight on equipment in quite a few places.And one of the biggest problems is to get the boxes back. I mean you mentioned the U.K. The U.K. is unfortunately a good example. We have quite a lot of empty boxes stocked in the U.K. at this point in time and we would love to get them out and back to Asia. But because of this unexpected surge in demand, you'll see that a lot of the infrastructure just clogged up. And that is what basically prevents us and others from moving these things back. So -- and in the end, of course, that result is costly for us. I think that situation is going to get a little bit better over the next 6 to 10 weeks but it certainly, today, is still a fairly big challenge.

[Lars Heindorff, Analyst]

But is the equipment surcharges that I can see pop up in certain areas lately and most lately here -- you also, I think, have one in Port of L.A. and Long Beach. I mean are those -- have those increased significantly? And is actually -- that part of the increase, the development in the overall average freight rate, is that visible?

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

No, because I mean that tends to apply to -- but we try to sometimes work with these things to also incentivize people to use other types of boxes that are available because sometimes it's also simply the container type. And a lot of people might also be able to work with a 40-foot general container rather than a high cube. And that's how we try to steer the usage of containers.We've also had a lot of new reefers that we had built, for example, that we had to ship to South America. And in a situation like today, we try to also fill those with cargo and then we do that at a discount because by doing that, you can actually release the pressure a little bit on the equipment situation. And that's how you try to steer that.

[Operator]

Next question is from the line of Frans Hoyer from Handelsbanken.

[Frans Hoyer, Analyst]

I have 2 questions. We have seen some headlines lately regarding regulatory bodies looking at the situation in -- with the rocketing freight rates in container shipment. Could you just talk about the situation and the risk that might -- you might see in North America, Europe and China, please?

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

I mean I think it's totally okay that people look into that. I think it's in everybody's interest that the things go the way they should go.I would also call out, though, that when you look at the overall development of freight rates, they always tend to go a little bit up and down. And if you just look at the numbers that we have just published, you see that year-on-year. If you look at the third quarter, our freight rates across all trades are flat, whereas if you look at it year-to-date, they are up about 2%. I don't think that it's rocketing freight rates.Of course, there are segments where you see that on the back of a very strong demand, space is tight. And as a consequence of that, rates go up. On the other hand also, trade rates go down. And we also see that in those people that have a lot of contact with us, that the rates were adjusted downwards in Q3 because the bunker clauses that were agreed resulted in lower freight rates. And I think that's also very proper and fair and square.So yes, it's good that people watch that. I'm good with that. I'm just saying that sometimes we tend to look at a little bit too small of a segment of the market because when you look again at overall freight rates, year-to-date, we're up 2% and in Q3 we were actually flat year-on-year. So I can't -- it's difficult to see that as skyrocketing rates.And will they go up at some point in time once we're 10% or 12% or go down with 10%? I mean that happens as well. But I don't think that the swings, if you look at the overall portfolio, tend to be much bigger than that.

[Frans Hoyer, Analyst]

Okay. My second question is regarding the sector's extraordinary ability to adapt supply to demand during the volatile period in 2020. And is this an ability a phenomenon that is linked to the volatility around the virus? Or is this something that will be sustainable going forward? As we see, as you mentioned, there is uncertainty and the volumes might go this way or that way. But is there a reason why we should not expect that ability to remain to adapt and to fine-tune and calibrate capacity to match demand volatility, say, in '21 or '22?

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

I can only speak for us, for Hapag. I think what I can see is that if demand all of a sudden breaks away, you have to cut cost. So let me illustrate that by what happened in the month of April. I mean if you look at the month of April, then all of a sudden, we saw demand coming down with about 20%. In our case, that means that all of a sudden, $200 million of revenue per month breaks away. Then you have to react and you cannot just continue because otherwise, you're going bankrupt very, very quickly.And the other point there to keep in mind is that if we do not sail a ship or so we adjust capacity, we cut about 60% of the cost. So if you take that example, if I missed $200 million of revenue, then I can avoid $120 million of cost by adjusting my capacity to demand. I have to do that because otherwise, we get into trouble very, very quickly. And then I think that's what you have seen. And I think that's very much rational behavior as it is equally rational that you today see that more capacity is being deployed than we had last year around this time even if charter rates are very, very high.

[Frans Hoyer, Analyst]

Yes. I agree. It's very rational, but it didn't used to be the case. Not so long ago, the industry didn't do that and suffered the consequences. So it is kind of just, let's say, quite exciting to see whether what the development, the behavior of the industry will be as we move into more normal territory hopefully in the not-too-distant future.

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

Yes. I can only share that I also think that that's fully rational. And I think we can also agree that when you look at the last 10 or 12 years, that the industry has not made any money and has never earned its cost of capital. So at some stage, one would also expect then that the people acting there start to behave more rational but I can only talk for Hapag.And I think if you look at our major not only this year but also in the last 4 or 5 years, we have always been very focused on taking out cost if the market is not there because that's the only thing that, in the end, will help us to get better. And again, also if you look at result improvement that we see this year, that is for the first 3 quarters, very much driven by our Performance Safeguarding Program where we took out the cost and that helps us then to deliver better results.

[Operator]

Next question is from Peter Jurik from Tresidor.

[Peter Jurik]

Just one from me really. I'm just trying to understand the level of potential conservatism within the current guidance as of today. And the reason why I'm asking that is you pre-released about a month ago. And I just wondered to myself if any of us really expected freight rates, at least from what we can observe, to have done what they have done in the month since then. So I don't think you've referenced potentially expecting guidance to hit the upper end of the range or anything like that.So I'm just wondering, with maybe 2 to 3 weeks of risk left in the quarter given the way that you guys recognize revenues, how should we really feel about that guidance? And if you can give us a little bit more clarity on where you think we will end up given you should have pretty good visibility on this quarter?

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

I think if you look at what we've done in terms of guiding the market, I mean we provided guidance to the market in the beginning of the year, contrary to many others. We stuck to that guidance also until we saw some weeks ago that, that market was rebounding stronger than we had anticipated and then we made an adjustment. I see no reason right now to change that assessment that we made at that point in time. And I think that's also consistent with the way that we've always been is like we try to remain predictable. We try to give you guidance where we actually are going to land. And whether we are then in the end going to land in the middle, a little bit less from the middle or a little bit right from the middle of the guidance, I mean that remains to be seen at the end of the year.I'd also say that one of the things that's always very particular, of course, at the end of the year is that there's always more valuation effects that are very difficult to predict. So right now, I think we're comfortable in saying that we're going to land within the range that we have predicted and I think that's what it is.

[Peter Jurik]

So if I could just follow that up in -- because I guess from my perspective, you probably have 2 to 3 weeks left of risk in the quarter given the way -- like I said, the way you recognize revenue. So are there -- what are the risks that we should be thinking about as those next 2 to 3 weeks, maybe 4 weeks develop?

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

I mean those risks are the same as usual. But to be honest, right now, there's not a lot of risk left that we are not going to hit the guidance.

[Operator]

That was the last question today. Please direct any further questions to the Investor Relations team.I would like to hand the conference back to Rolf Habben Jansen for closing remarks. Please go ahead.

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

Well, not a lot to add. Thank you very much for taking the time. I appreciate you always dialing in, in fairly significant numbers. Thank you also for the questions and hope to speak to you again soon. And as said, if you have further questions, Heiko and the team will be happy to respond to that also bilaterally. Thank you very much.

[Mark Frese, CFO & Member of Executive Board]

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.