Hapag-Lloyd (ETR: HLAG) posted significant third quarter earnings and revenue increases as it managed to nudge up freight rates.
The container shipping giant, which operates a fleet of 231 container ships with total transport capacity of 1.7 million twenty-foot equivalent units (TEU), saw revenues climb 6.2% in the third quarter to 3,244 million euros ($3.57 billion).
Earnings before interest and taxes (EBIT) jumped 21.6% in the period to 253 million euros and, despite average industry-wide spot freight rates having been lower for most of 2019 compared to a year earlier, Hapag-Lloyd managed to claw a 2.7% increase in freight rates measured in USD/TEU from customers during the third quarter (see below).
Over the first nine months of 2019 the carrier's results were even more impressive. Hapag-Lloyd posted EBIT of 643 million euros, up 115% from 299 million euros a year earlier. Revenues over the period totaled 9.5 billion euros, compared to 8.5 billion euros a year earlier, while transport volumes increased 1.2% to just over 9 million TEU.
Rolf Habben Jansen, chief executive officer (CEO) of Hapag-Lloyd, told FreightWaves by telephone this morning (Nov. 14) that "slightly better volumes, cost control and also better rates on average" explained the strong results.
"You need to get the best paying cargo onboard and we try to be quite active in that process," he added. "We think we have done a reasonable job there, but having said that we've seen post-peak season spot rates coming under pressure. But right now they're coming back up again, which is good news."
The IMO 2020 Challenge
One of the main challenges facing the container shipping industry in the coming weeks is the introduction of IMO 2020 low-sulfur fuels, which become mandatory under International Maritime Organization rules Jan. 1.
Hapag-Lloyd is in the process of retrofitting scrubbers on 20 vessels accounting for 14 to 15% of capacity to avoid the use of premium low-sulfur fuels. The carrier will also introduce an IMO2020 Transition Charge (ITC) for short-term contracts on Dec. 1. Earlier this year it introduced a ‘Marine Fuel Recovery' mechanism to facilitate the recouping of higher fuel costs on longer-term shipping contracts.
Asked whether he was confident Hapag-Lloyd would be able to recoup the costs of low-sulfur fuels, Habben Jansen said customers had been understanding.
"I think it's very clear that today we have to put one type of bunker in our tanks and tomorrow we have to put another type of fuel in our tanks and the difference in cost is about $250 per ton," he said. "Everyone can see that. So people understand that our costs do go up and we have to adjust our prices. The initial reaction from our customers has been constructive."
Asked if that would translate into 100% IMO 2020 cost recovery, Habben Jansen replied, "I think in the end we will be able to recover that cost. It may take a little while to get to 100%, but the attitude from the market has been quite constructive so I expect we will be able to recover that cost in 2020."
2020: No Sign of a Demand Cliff
Aside from IMO 2020, Habben Jansen assessed the key challenges facing the container shipping industry next year. "The main thing is what happens to demand," he told FreightWaves. "We saw last year very strong growth in the market. This year growth is less, especially in the second half [of 2019]. I don't expect a lot of growth when compared to last year which was very strong."
He also said, "In 2020 we don't see any sign that things are falling off a cliff, so I would expect to see some growth, but how much is too early to tell."
Hapag-Lloyd has a "relatively modest" share of the trans-Pacific trade of around "5 to 6%." Habben Jansen said as a result of the U.S.-China trade war, volumes from China to the U.S. had "definitely come down" but the carrier had also seen "markets like Vietnam, Indonesia and especially India to the U.S. develop very well."
He added, "I think we have a small minus on the trans-Pacific but nothing too major."
Hapag-Lloyd's share price (ETR: HLAG) has been on the rise for much of 2019 as its two largest shareholders, Klaus-Michael Kühne and the Luksic family-controlled CSAV, have battled for control of the line. Habben Jansen said this had not been distracting for executives.
"Two of our shareholders have tried to increase their shares as they both believe in their investment in Hapag-Lloyd and would like to have a couple of percentage more," he said. "That's one of the reasons the share price has developed as it has."
He continued, "For us it's not much of an issue because we see them [Kühne and CSAV] working together very well. I don't think there's a big dispute between then, they just want to buy a couple of percentage more."
TTEU = Thousand TEU
For the full financial year 2019,Hapag-Lloyd expects an EBITDA (Earnings before interest, taxes, depreciation and amortisation) in the range of 1.6 to 2.0 billion euros and an EBIT in the range of 0.5 to 0.9 billion euros. "Based on the business development in the first nine months of 2019, it can currently be assumed that EBITDA and EBIT will be in the upper part of the guided ranges," said a statement.
"This includes a currently expected earnings effect from the first-time application of the accounting standards IFRS 16 on EBITDA of 370 to 470 million euros and on EBIT of 10 to 50 millio euros. The effects of the first-time application of IFRS 16 are also currently expected to be in the upper part of the guided ranges."
As FreightWaves' Chris Dupin reported Nov. 13, Hapag-Lloyd has been taking steps to upgrade its trans-Atlantic services by adding a sixth ship to its U.S.-flag Atlantic Loop 3 (AL3) service that calls on ports in northern Europe and the U.S. East Coast and Gulf Coast.
The company said the additional ship "will improve the reliability of the AL3 service for our customers and support our strategy of being number one for quality."
The Supervisory Board of Hapag-Lloyd has also appointed Mark Frese to the Executive Board effective Nov. 25, 2019. On March 1, 2020, he will become the new chief financial officer (CFO), replacing Nicolás Burr.
Frese, 55, was most recently employed as the CFO of Ceconomy AG, the former Metro AG. Before that, he held various management positions at Metro AG and Kaufhof Holding AG.
Nicolás Burr, 44, will leave the company Feb. 29 to pursue new projects in Chile. He began serving as CFO of Hapag-Lloyd AG in March 2015.
"During his five years with the company, Nicolás Burr has significantly contributed to its success, particularly when it comes to the mergers with CSAV and UASC, as well as the initial public offering that took place in 2015," said Michael Behrendt, Chairman of the Supervisory Board.
"Nicolás Burr is among those responsible for the good financial position that Hapag-Lloyd enjoys today. We wish him all the best for the future."
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