Hapag Lloyd AG

XETRA:HLAG

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the Hapag-Lloyd Analyst and Investor Annual Report Full Year 2022 Results Conference Call. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO; Mark Frese, CFO; and Heiko Hoffmann, Head of IR. [Operator Instructions]

It's my pleasure, and I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead, sir.

[Rolf Habben Jansen, Chief Executive Officer]

Thank you very much, and thanks, everybody, for joining either call or the webcast for the investor presentation from our end, where we'd like to talk a little bit about 2022, but of course, also looking a little bit ahead into '23. Maybe a couple of opening remarks from my end. I think when looking at the year '22, it was essentially a year of 2 halves, where in the first half of the year, we still had congestion, strong demand and high rates, whereas in the second half, congestion eased on the back of all the things that are happening around the globe.

Demand weakened, we saw restocking and as such rates also came down to more or less pre-pandemic levels. What we did in this year is to try to continue to follow our plan, which means we continue to implement a number of initiatives in the context of our Prepared For Tomorrow program to simplify, strengthen and invest I also believe we made good progress in building up our terminals and infrastructure portfolio.

Financially, of course, on the back of the high freight rates, we had a tremendous financial performance with an EBITDA of over €20 billion, a net profit of around €18 million and in the end, a net cash position at the end of the year of €13 billion. And that also means that we propose a large dividend of €33 per share. Mark will talk later a little bit more about the numbers. In terms of market, I think we've seen a subdued market for the last number of months, and we actually expect that to continue for a little bit longer as the destocking cycle is being completed.

We would expect a bit of a rebound though in the course of the year when exactly, I think that always remains very difficult to estimate, but certainly somewhere in the course of this year. Market-wise, we also see quite a lot of new ships coming even if a little bit less as originally anticipated because we have quite a bit of slippage. But nevertheless, we do expect that for '23 and '24, the supply growth will outpace demand growth. So, that means you can expect normalization of our earnings throughout this year. We will continue to do what we have been doing before. In addition to that, we'll start working on our strategy towards 2030.

A little bit deeper on market. I think these 2 graphs pretty much tell it all. When you look at volumes, pretty solid until mid of the year, July and after that, clearly weakening demand, as we said, high stock levels in many places after 2 years of COVID. And as congestion then is, of course, the inventory built up even further, and we don't see that going away completely in the upcoming couple of weeks, but certainly a recovery to be expected in the course of the year.

When you look at SCFI, pretty much back to pre-pandemic levels. That is a problem because when we look at unit cost these days, that is definitely at an elevated level for everybody, which means that over time, freight rates will have to bounce back somewhat because they won't stay below unit cost for a very long time.

A quick look on the numbers before Mark talks a bit more about that later on. EBIT margins, of course, extremely healthy and also a return on invested capital probably never seen before, at least not in the 175 years of Hapag-Lloyd, absolute record results. I don't think we're going to see any of that back any time soon.

So what did we do this year? I already said, we continue to work on simplifying our business, invest there where needed and also strengthen a number of things where we believe we could still do better. A couple of highlights when we look at quality. It's been at the heart of our strategy and will remain so probably also going forward. Very significant improvement in all the customer-related KPIs and also feedback from customers a lot better at the moment than what it was, say, 2 years ago.

We have been growing in attractive markets, be it on the back of the acquisitions that we did in Africa with NileDutch in '21 and Deutsche Afrika-Linien in '22 or also organically in a number of other markets because we opened up additional services. We continue to invest in sustainability and decarbonization. We launched a Big Fleet Upgrade Program, which in the end will result in about 150 ships being upgraded, which means that they will get, in many cases, we will improve the loadability, but we'll especially work fuel consumption, which, of course, makes us which helps to decarbonize, in addition to that, done quite a bit on biofuel as well last year, where we will step up our efforts most likely this year even more.

On the network and equipment side, a focus there to simplify our network, in essence, less services with bigger ships. In addition to that, we announced early last year that we are going to put tracking devices not only on our reefer boxes, but also on the dry boxes. That process has started after the first devices have been delivered towards the end of next year. And now this year, we need to make a big step forward to get hopefully to 80% or 90% of our fleet covered before the end of the year.

On the digital front, ongoing investment there as well. We launched the quick quote spot product. We launched another bunch of digital tools to help with all kinds of self-service elements and we invested in 2 companies that will help us to boost our innovation capacity and also specifically some of the payments and document process processes.

Then going to the investments that we have done on the terminal side. Well, as you know, we have been in Hamburg here in CTA for a very long time. We committed ourselves to Willumsen in '21 that was closed that transaction closed last year. Apart from that, in Europe, we also have Tanger and Damietta, which are the 2 hubs that we have for the West and East Med. And then last year, we signed an agreement with Spinelli Group to take 49% there. That certainly gives us a much better entry into the Italian market, and that transaction closed in the month of January.

We also signed a binding agreement with SAAM Ports and Logistics to reinforce our position in the Latin American market. Latin America for us, absolutely critical also post the merger we had with CSAV. We have a strong market position there and believe it is important to also be secure access to key infrastructure. And that's why we decided to invest in some. We do believe that Hapag over time is a better owner of SAAM than the previous ownership because we can bring synergies. That project is currently going through the regulatory approvals, and we would expect that to close towards the end of Q2 or the beginning of Q3.

And then finally, in January this year, we signed a binding agreement to acquire 40% of J M Baxi, which is a port and logistics company in India with a presence around the continent. As you can see on the map, port operations in Kandla, Lavasa, a new concession, Tuticorin, Visak and Haldia. In addition to that, capabilities on the rail side and also when it's around inland depots. For us, an important step into that market as we do believe that India is going to continue to grow over the next 10 to 20 years, most likely faster than many other markets. And also given the sheer size of the market now is a good moment to get in there and to ensure that we have a strong position there. And hopefully, when we look back on that investment in 5 or 10 years of today, we will say, "okay, that has been another enabled for us to retain our top 3 position there or maybe even make it stronger."

So when you look at the entire map and look at what we have been doing on the infrastructure side, I think that's actually been a good success story over the last couple of years. If you would go back, we would have been able to show Hamburg CTA on that as Tangier opened up in '21. We signed [indiscernible] in '21. And now of course, we have SAAM and [indiscernible] coming on top of that. Why do we do that? Because we believe that it helps us to further improve our ocean product and also the relevance that we have for the terminal operators allows them to further grow.

And then finally, of course, I think we, at some point, showed you the map where we said these are the 12 or 14 locations around the globe, which we call hubs and where we do most of the transshipment also there, it will definitely help.

So that has an introduction from my side, and now I'll happily hand it over to Mark to you on the numbers.

[Mark Frese, Chief Financial Officer]

Yes. Thank you. Also from my side, welcome and a very good day. We are looking back, so to say, the outstanding year for Hapag-Lloyd 2022 where we were able to achieve really exceptional financial results and further strengthened our balance sheet. And while transport volumes remained flat, the tight transport capacity at the beginning of the year led to a further increase in freight rates, which in turn, had a very positive effect on our financials.

EBITDA, as said, increased to US$20.5 billion, and our net cash position grew to US$13.4 billion at the end of the year. For this reason, the Executive and Supervisory Board jointly proposed to the AGM to pay out a dividend of €63 per share.

Now taking a closer look on our financial performance. We see that the revenue grew by 38% to $36.4 billion and EBIT increased even by 66% to US$18.5 billion, and the operating profit was in the middle of our updated outlook range from July 22.

Return on invested capital, as already mentioned, over 110%. I strongly believe these figures perfectly show the exceptional nature of profitability level in 2022. And at the same time, it's clear that returns of this magnitude are unfortunately not sustainable. As a result of the changing market environment, we experienced right now profitability started to decline in the last quarter of last year, although still being on an exceptional high level.

Despite the market being almost minus 4% in 2022, we have managed to keep our transport volumes at prior year level, particularly due to the strong growth in Africa, where we benefited from the acquisitions, NileDutch and Deutsche Afrika-Linien. On the other trades, we look at the demand on the lenient, which remains resilient, while on the Transpacific and Far East were initially impacted by congestion but followed by weaker bookings at the second half, especially fourth quarter of the year.

Our average freight rate increased clearly by 43% to over US$2,800 per TEU. And as these planning spot rates were more than compensated by higher contract rates that supported. However, despite our high share of contracted business, we are, for sure, not immune to market downturns. Our average trade declined clearly in Q4 as compared to the previous quarter, as you see here on the right -- far right side of that chart. Average bunker price was also up quite considerably. Even though bunker market prices fell gradually in the second half of the year, we see also that there is always a time lag between purchase and consumption.

Jumping to our unit costs; three reasons for continued increase. We saw a said significantly higher bunker prices, congestion-related higher storage, and handling costs and driving versus charter rates. And now following the unwinding of congestion in the fourth quarter, related cost items, such as storage has started to decrease, and we expect this trend to continue. On the other hand, we have to bear in mind the persistently high inflation rates globally, which will surely have a negative impact on our cost base. And therefore, we have already initiated additional measures to counterbalance.

Looking at our liquidity and free cash flow situation due to the described strong earnings performance, the operating cash flow amounted to US$20.6 billion, and the free cash flow came in at US$16.3 billion, and you have to bear in mind that in the investment cash flow, you see that there was an outflow of €3 billion, which is attributed to turn deficits with a duration longer than 3 months and therefore, are recognized under other financial assets in the balance sheet. If you would adjust for this accounting effect, free cash flow would be at 19.3% for that period.

Investments we made in vessels and container fleets were around US$1.5 billion. We received the first payout of new vessels already, and they have a size of 13,000 TEUs, the remaining 3,000, 13,000 TEU ships and to 12 Megamax vessels will be delivered in the quarter '23 and '25.

Closer look on our balance sheet. Balance sheet and credit ratio improved further to a very healthy level due to that performance equity at US$29.8 billion, which results in a ratio, equity ratio of around 72%. Net liquidity increased to 13.4%. And the figure includes now the mentioned time deposits number of €3 billion. Based on that performance, as said, we proposed together with the supervisory board to the AGM in May a dividend of €63 per share. That amounts to a total payment of €11.1 billion. And I think it's good and important to say that even after that dividend payment in May, we assume to retain a net cash position, a positive net cash position.

So before I hand over back to Rolf, I would like to just conclude with some more general remarks on our financial priorities. So based on that result, we, for sure, improved our financial resilience. Going forward, we will remain prudent and keep our prudent financial policy in place and try to balance the interest of all stakeholders. With rate rates approaching now pre-COVID levels again, cost control will become, again, a very strong key success driver. We will, therefore, again step up our continuous efforts to maintain competitive cost basis. We already launched beginning of the year a program, which we call Profit Focus Program to work on that.

As part of our efforts to become climate neutral by 2045, all financing as they were already the last -- more than the last 2 years, financings will have a green components. And for sure, we will and hold indicated that we will sustainably invest in our core liner and into our infrastructure business to make the Ocean product stickier and increased quality.

Having said that, I hand it back now to Rolf for the market view and the outlook.

[Rolf Habben Jansen, Chief Executive Officer]

Thank you, Mark. Yes, just a few words on market as I think most people are familiar with this picture. Here, we see the 2 charts on the supply and [indiscernible] situation. First of all, if we look at the global order book that is sort of stabilizing at the moment at around 27%, 28%, which, of course, is a bit on the high side if you purely look at replacing existing ships, but not unexpected after what happened in the last couple of years.

When we look at ships that are supposed to be delivered, we do expect to see quite a lot of deliveries in '23 and '24. We also see some slippage though because in quite a few of the yards, there have been delays because of the aftermath of COVID or less progress during the last months of COVID.

Idle fleet is still relatively low, but I would expect that to creep up a bit further in the months to come. When we look at the fundamentals of the market, when you look at the official forecast, then that seems to signal that there is a reasonable balance, I would say, though, that also if we take -- if we look at all the factors that play a role, whether that the inflow of new ships or the easing of congestion on the one hand and on the other hand, the additional need for capacity because of CII and of course, increased scrapping. Then on the whole, I think there is a bit of -- than one should expect that the supply growth outpaces demand growth even if it's not entirely possible to estimate to what extent is there are simply more uncertain factors these days than normally. Again, because of CII but also because there's quite a lot of dry-docking that needs to be caught up.

When we look at our outlook before we come to the wrap-up, I would say that we would expect to see a gradual normalization of earnings in the course of the year. Transportation volume, I think the year has not been off to a great start, but we would still say that when looking at the complete year, we expect to see volumes growing slightly, bunker consumption going down, freight rates going down and the outlook for EBITDA being between €4 million to €6 billion or €4.3 billion to US$6.5 billion and EBIT, €2 to €4 billion, which equals €2.1 billion to US$4.3 billion.

What does that mean -- going forward, that means that we will continue to be quick on our feet. The last years, we have learned that the market can change very rapidly, and we need to be prepared for that and sufficiently agile to move things around. We'll continue to focus on simplifying our business, strengthening where needed and invest where we get the right opportunities.

Quality remains at the center of the things that we are doing, and we would also like to drive our customer satisfaction further. Sustainability and decarbonization, good progress in '22, but still more to be done as we would like to stay ahead of the targets that we have set ourselves.

We'll continue to work on building up the terminal portfolio on the one hand by integrating the businesses that still need to be closed, but there may also be one of the other opportunities pop up throughout the year. Of course, in this process, we need to ensure that we take care of our people because keeping, retaining and developing talent is probably one of the most important long-term success factors for any business.

And then as we said earlier, we are going to start -- or we have started the project to work on our strategy towards 2030 and we hope to conclude that process before the end of this year.

So with that, I think we'll wrap it up from our end, be happy to take any questions you may have.

[Operator]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] One moment for the first question, please. We have the first question from Sam Bland from JP Morgan.

[Sam Bland, JPMorgan]

I've got several really on this slippage data that's in the presentation. You've got sort of roughly $1 million in '23 and $2 million in '24. Can you talk about sort of has that actually happened? And so we can see that, okay, these orders have slipped? Or is it things -- slippage that could happen if the market doesn't improve? Maybe if you could -- I don't know if you've got data on sort of how much slipping there has definitely already been. And I suppose the sort of follow-on is, what's the cause of it? Is it that the shipyards aren't capable of delivering on time? Or is it sort of the carrier saying, we'd like to delay if we could, please?

[Rolf Habben Jansen, Chief Executive Officer]

I think the slippage is an estimate from our end based on all the information that we have. I think what we see is that there are quite a few yards where one thing we see is that for them to scale up the activity from a very low period to now a very busy period simply takes a little bit longer than some people would have hoped. There are certainly some issues also around availability of materials here and there, though most of that is meantime been resolved. And then if you look back over the last year, 1.5 years, there were all kinds of COVID-related restrictions still in a number of places and yards also around the globe, which has also caused some delay.

So I think on the whole, you're not going to be talking about -- you're not going to be talking about delays of the years, but even if everything moves back or just 3 or 6 months, that has a material impact on a number of ships that's going to be delivered.

[Operator]

The next question comes from Anders Karlsen from Kepler.

[Anders Karlsen, Kepler]

I was wondering in terms of your ability to manage your fleet size, how many ships can you redeliver this year under charter agreements and also into next year, if you see that demand is keeping up at very low levels.

[Rolf Habben Jansen, Chief Executive Officer]

Yes, I don't know that exactly off the top of my head. I think it's around 10% or so that we can -- of our overall capacity that we could redeliver this year. I don't expect any real difficulties there, though, because apart from redelivery, when we look a little bit further out, we will also add some ships that need to be recycled, which probably has an effect as well if you look at the next 2 or 3 years.

[Operator]

The next question is from Sam Toto from Kandy.

[Unidentified Analyst]

It's actually Bantou [ph] from Carnegie. In terms of how you view '23, you say a normalization of rational normalization here? How should we view the earnings level here between -- is that where you see this business also going forward? Or does it still include some, you can say, windfall contracts rolling in 2023. And hence, in that respect, could we expect maybe '24 to be lower? And do you also see '23 as a very, so say, front-end loaded in terms of profitability. Some flavor on that.

[Rolf Habben Jansen, Chief Executive Officer]

I think what you will see is that I think you were right in saying that profitability in 2023 will be somewhat front-loaded. One would expect that because you still have some tailwind from the contracts that were closed last year. I think it's way too early to say anything sensible about 2024. That remains very much -- that depends very much on what's going to happen in the second half of the year. Right now, we, of course, went into this year with volumes being somewhat under pressure, but I think our volumes are actually holding up reasonably well throughout Q4. So we went into this year with a fair -- with a reasonable momentum. Now we need to see how that momentum comes back after the summer. So it's difficult to judge where things will land. That's also why we've come up with a reasonably broad range in our outlook.

[Unidentified Analyst]

Can you also -- one follow-up here. Can you also give some color maybe on the cost base, which costs would be sticky and stay elevated and which cost do you expect to done quickly adapt to some say, the market situation, whether things are easing up. And so how should we view the various cost things?

[Rolf Habben Jansen, Chief Executive Officer]

I think if you look at the 2 main cost categories where I would expect to see a normalization fairly soon. One is on the storage cost on the terminals, which was a considerable burden in -- over the last 2 years. The other one where I would expect things to normalize relatively quickly, is on the feeder side because third-party fees have gone up a lot when capacity was scarce. Also, that market is easing. So I would expect those rates to normalize. Some other costs that are related to regular inflation, increased bunker costs because of the IMO rules or -- yes, so time charter, bunker, terminal costs are probably a bit more sticky.

[Operator]

[Operator Instructions] We have a follow-up question from Mr. Bland.

[Sam Bland, JPMorgan]

I was going to ask, we've seen -- we know that sort of rates are maybe not that good on the Transpacific, but they seem like they're staying quite high on other lanes, Atlantic and volume to the Med. Any sort of obvious reasons why the rates aren't being -- capacity not being moved around and the rates to bid down the rates on those regions faster than it's happening?

[Rolf Habben Jansen, Chief Executive Officer]

I mean I think the Transpacific has been the front runner. I think that's right, but we also see rates in pretty much all the -- pretty much all other trades eroding. I mean, if we look at Asia, Europe rates have been down significantly as well. Asia, LatAm has been down, raised into the Middle East have been down. So I think it's certainly not isolated to 1 or 2 trades.

[Operator]

Next question comes from Christian Cohrs from Warburg Research.

[Christian Cohrs]

I actually would like to know your thoughts about the sector environment also with regard to the alliance landscape, given that the 2 analyses is it going to discontinue. Do you see increased competition going forward? And do you -- and how do you judge actually the tie and partnership within your alliance in the alliance? And second question relates to the risk of regulatory headwind. The FMC in the U.S. recently was quoted quite aggressively on the container shipping sector. And in the EU, if I'm not mistaken, there will be soon some statements regarding the block exemption regulation. Do you see some risk materializing on that front?

[Rolf Habben Jansen, Chief Executive Officer]

Well, maybe first on the alliances. I think the fact that Maersk and MSC were not continuing after the end of '24. I think it's not a huge surprise as the company said vastly different strategies. So I think that was somehow to be expected. I think they both also have the scale to go alone and maybe selectively still work together here and there. I don't expect that to have a massive effect on the other alliances. I think the relationship within our alliance is good. We have also contracted last until 2030. So I see no reason why that would materially change.

On the regulatory front, yes, there's been a lot of activity over the last years. I think rules tend to develop over the years, and I believe that's also good. Personally, I think some of the rules that in the U.S., the FMC is some of the rule-making they are doing, I would actually say that almost being quite positive because some of it a little bit depends on how it shapes out. But in itself, to have clearer rules for everybody is usually not a bad thing because then everybody knows what they need to do, and I welcome that because that hopefully, going forward, gives less debate.

I think in Europe, we have the discussion on the book extension. We believe that it would be wise to extend that because over the last 20 years, we have seen that with that type of regulation in place, efficiency has gone up tremendously, and I don't think we should get ourselves distracted by 2 very extraordinary years.

Having said that, maybe there is going to be -- are going to be some modifications here and there. And if that is the case, then we will adjust to that and deal with this.

[Operator]

[Operator Instructions] We have a follow-up question from Mr. Cohrs.

[Christian Cohrs]

I was wondering a little bit in terms of slow steaming. What kind of speeds are you currently running at compared to earlier? And how much of it has been implemented? And what is the lag between when you can -- when you start implementing and when it starts to take effect?

[Rolf Habben Jansen, Chief Executive Officer]

I think the main effect we see right now is because of the CII because in a number of cases, you have to slow down in order to comply with those regulations. If I would have to estimate how much of an effect that has on the speed of the overall network, I would say, we're probably at once not difference or something like that.

[Christian Cohrs]

Okay. What is the achievable reduction in speed compared to where you're currently at?

[Rolf Habben Jansen, Chief Executive Officer]

I mean so far, I think at the moment, for this year, I think it's going to remain round about that one not whether there's going to be more of that going forward. I don't know, but there's not a tremendous amount of further potential in there. That's probably another not in there, if that's what is needed. But at some point in time, you have to take other measures, which is replace the older ships by newer ships and start to take them out of the fleet.

[Operator]

The next question comes from Lars Heindorff for Nordea.

[Lars Heindorff, Nordea]

Question regarding the volume move you think you mentioned in the presentation that you expect low single-digit growth throughout this year, but you said that this -- the volume has started off a bit soft, there's inventory production going on. So just wanted to sort of try to test you a little bit on the assumptions, particularly for the second half of this year. Do you expect a rebound so -- is that caused by just the collection volumes following the events we see now? Or do you see consumer demand picking up?

[Rolf Habben Jansen, Chief Executive Officer]

I think what we see at the moment is still subdued demand because we see destocking in quite a few places. That means that today, if you would look at regular demand is actually a little bit higher than what we see on a day-to-day basis. And then of course, we also have the normal seasonality. So I would expect indeed that volume is going to pick up in the second half of the year. How much and how strong, I think that is always very, very difficult to predict. And yes, you are right, we've been off to a somewhat slower you could also argue a normal start of the year. As in the last couple of years, we saw that there was barely a dip after Chinese New Year.

And this year, there has been a dip as we used to see it, which means that you've had a couple of weeks with slow volume and now we are actually back to the levels we saw pre-Chinese New Year. But we didn't have a pre-Chinese New Year rushed, but we did have a usual weak period after Chinese New Year. I think that's the difference with what we saw in the last couple of years. We're going through extraordinary strong before Chinese New Year, and we barely saw a dip because there was so much pressure on all the supply chains.

[Operator]

This was the last question today. Please direct any further questions to the Investor Relations team. And I hand back to Mr. Jansen for closing comments.

[Rolf Habben Jansen, Chief Executive Officer]

Yes, not so much... Thank you very much for making the time and for joining us today. We hope it was informative and hope to speak to you again soon. Thanks for your questions, and take care. Bye-bye.

[Operator]

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