Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Hapag-Lloyd Analyst and Investor Q1 2022 Results Conference Call. Hapag-Lloyd is represented by Mark Frese, CFO, and Heiko Hoffmann, Head of Investor Relations. Throughout today's recorded presentation, all participants will be in listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Heiko Hoffmann. Please go ahead.
Thank you very much, Corrine. Also from my side, hello to everyone, and thank you for joining our Q1 call today. Unfortunately, Rolf Habben Jansen can't be with us today due to unforeseen circumstances. Therefore, Hapag's represented by Mark and myself. Mark will guide you through the presentation, after which we will be happy to take all your questions, as already mentioned and explained by Corrine. Now I would like to hand over to Mark to guide us through the presentation. Please go ahead, Mark.
Yes, thank you, Heiko, and good morning. Welcome to everybody to the Hapag-Lloyd Q1 2022 Results Call today. Let me start with a couple of opening remarks. As we all have experienced, the first quarter was characterized again by ongoing disruptions of the global supply chains, where we have seen first signs of recovery at the beginning of the year with the Russian invasion of Ukraine, but also the strict COVID-19 control measures we have seen in China put further strain on already the disrupted global supply chains. That spot rate ex-China has softened since the beginning of the year due to usual seasonality, but certainly also due to first signs of lower demand in some regions like Europe due to the circumstances we all know.
Our Q1 2022 earnings increased further above expectations, we have to say, as peak freight rates have more than offset the significantly increased operational costs we have reported about even over the last quarters. Overall, financial KPIs remain on an exceptional high level. Looking at the market data, we see that volume growth is expected to be lower than previously anticipated due to the high inflation and the geopolitical risks which weigh on consumer sentiment as we all feel it. New build order activity continued in Q1, pushing order book to fleet ratio of around 25%. Regarding the expected timing of supply chain recovery, we would say that we do not expect it to improve until the second half of this year.
Based on the currently favorable business performance in Q1 and Q2, we have updated our previous earnings outlook for 2022 at the end of last month. Even though we expect spot rates to fall in the second half of the year, our newly concluded long-term contract should offer some downside protection. Our mid-term targets remain valid. We will continue to implement our simplify, strengthen, and invest measures in line with our Strategy 2023 targets, and I will talk about that in a minute. As already outlined at the beginning, port congestions worsened due to the Russo-Ukrainian war and due to the COVID-related restrictions, especially in China. The Clarksons Port Congestion Index increased strongly to a really all-time high. In contrast, the SCFI Index declined since the peak in January.
However, the quarterly average was still slightly above compared to the quarter before the preceding quarter and substantially above Q1 2021. Yeah. With the next slide, I would like to give you now an update on our simplify, strengthen, and invest measures that we have introduced to you at the Capital Markets Day in November last year.
As an instant measure to reduce our CO2 footprints, we have started with our fleet upgrade program. Retrofits, like for instance, the new propellers, will further reduce the fuel consumption of our vessels and contributes to our CO2 reduction goals. To cater for the high demand we are seeing right now, we have purchased five secondhand vessels. In that time, we have resolved to equip all our dry containers with tracking devices. These devices will be able to transmit data on a real-time basis from each container.
They can supply location data based on GPS, measure temperature, and monitor any sudden shocks to the container. Additional sensors will be added through Bluetooth. This will make the supply chain more transparent and efficient in future. Overall, we have extended our position in attractive markets by launching new services, but also via the acquisition of the South African specialist, Deutsche Afrika-Linien. A transaction we plan to close end of Q2. We have also received final regulatory approval for our participation in JadeWeserPort in Wilhelmshaven, which was announced in September last year. With this closing of the transaction, we will now take over ownership of 30% both in Container Terminal Wilhelmshaven and a 50% stake in Rail Terminal Wilhelmshaven, while EUROGATE will continue to hold the remaining share as it was planned.
Furthermore, we have announced on Tuesday that we will, together with our partners, develop and operate a new container terminal in Damietta in Egypt. The new terminal two is expected to start operations in the course of 2024. It will have a final total operational capacity of around about 3.3 million TEU and serves as an important Hapag-Lloyd dedicated strategic transshipment hub in the East Med. Most participations are a key part of our Strategy 2023 to invest into strategic assets to strengthen the quality of our ocean product for our customers. Now, before we go into the financial details, I would like to address a topic, I guess, which moves all of us right now. We are deeply worried about the current war in the Ukraine and the well-being of our colleagues in Odessa.
We, as Hapag-Lloyd, are working closely with international organizations on multiple measures and with our logistics partners to support the Ukrainian people and the Ukraine abroad, in Ukraine and abroad. This includes donations, transport of relief goods, as well as the support of refugees and for sure, of our local employees there. After a brief summary of key events in the last quarter, let me now go into more depth concerning the financials. While volumes remained flat, we continued to benefit from rising freight rates, which have boosted our earnings to new record levels. As a result, all financial KPIs improved further. Revenue grew by 83% to $9 billion in Q1, and EBIT more than tripled to $4.8 billion. This resulted in an exceptional annualized return on investment.
Despite strong demand, transport volumes were only more or less on previous year level because of the congestions and global operational challenges in the whole industry. Now, before you ask about our volume development in comparison to the market development, which declined by 1.8% according to Container Trades Statistics, I would like to point out once again we talked about that the market statistics are not entirely comparable to the way we account our competitors do that. While we count volumes at the end of the voyage, Container Trades Statistics are based on volumes at the start of the voyage. This has, however, nothing to do with revenue recognition. It's simply about counting containers and something like a timing effect for the statistics.
As you can see on the next chart, freight rates increased strongly by over 84% year-on-year, while bunker costs were also considerably up by 60% in the light of the development we are seeing overall on energy prices. The ongoing operational challenges and the rising oil price have also contributed to much higher transport costs, especially handling and haulage and equipment and repositioning expenses increased due to higher storage hinterland and transport costs. Vessel and voyage expenses increased due to higher operational expenses for charter vessels and rising slot charter costs on third-party vessels. Depreciation and amortization expenses were primarily up due to the rise in percentage of vessels chartered in on a medium-term basis at simultaneously higher charter rates, so a phenomenon we have talked about over the last quarters.
I have to say, nevertheless, our high rate of ownership and our program, which you might know, Less or Longer at the beginning of the pandemic, also pays off now. Quite a good position we are seeing here despite the overall market development. The strong cash generation continued in Q1 2022, despite higher investments in ships, in ship equipment and new containers, leading to an increased liquidity reserve of $13.6 billion. Part of this liquidity will be redistributed to our shareholders after the AGM, as we have proposed to pay a dividend of EUR 35 per share or EUR 6.2 billion in total to our shareholders. Our balance sheet and credit ratio continued to improve.
Equity increased to $23 billion, which is a very healthy equity ratio of 66%, while net liquidity increased to $6.9 billion at the end of Q1 2022. As can be seen in the chart on below left, we have used the currently favorable financial position also to increase the volume of our revolving credit facility and extended the tenor. The RCF volume is now at $725 million, which remains undrawn at the moment. Due to the very healthy credit ratios, Standard & Poor's has once again raised our company credit rating in Q1 2022 by one notch to BB+. This is the highest rating Hapag-Lloyd ever had, and it's only one notch far from investment grade. I think overall, a very positive development.
I think with that, I can close the view on the financials, and let me now jump over to the current market conditions. As said already, order activity continued on a high level because of the tight vessel availability. The order book ratio is now at 25% or even slightly above. This shows that we, as an industry, are really determined to resolve the current vessel shortage, and we will see what the consequence in future will be, of that. Demand growth is expected to slow down to more sustainable levels, while capacity influx will increase in 2023 and onwards.
At the same time, we expect scrapping to go up due to stricter environmental regulations after that phase we are in right now, and the simple fact that there is a growing fleet of old and inefficient vessels which continue to be deployed because of the vessel shortage. Once the situation normalizes, we have to expect that vessels will become obsolete over time. In the years to come, the demand-supply balance should become more balanced. Now let's have a look at our guidance for the financial year 2022. Very short term, we expect the exceptional profitability level to continue. Based on our business performance today, we have upgraded our earnings outlook for the current financial year.
EBITDA is now expected to be in the range of $14.5 billion-$16.5 billion, and EBIT to increase to $12.5 billion-$14.5 billion. While spot rates are expected to decline further, our long-term contracts, which account for roughly 50% of our business, should safeguard our earnings, at least to some extent. Our priorities for 2022 and beyond remain unchanged. In line with our Strategy 2023 objectives, we will double down on our efforts on quality and for sure customer satisfaction, and that is needed.
Invest in our fleet and competitive cost base, ensure seamless integration of Deutsche Afrika-Linien after the closing, and strengthen our sustainability effort. Whatever happens, we stick to our prudent financial policy, and last but not least, take care of our people as well as invest in their development and in our capabilities. With that, I would hand it back to the operator for your questions. We are happy to take them. Thank you very much.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Sathish Sivakumar from Citigroup. Please go ahead.
Yeah. Thanks again for the presentation. I got three questions. First of all, to start off with the China situation, if you could actually clarify or just give any color, where is the production output out of China today versus, say, last year? Just to get a sense like how much of the capacity is being impacted from China lockdown. Secondly, on your contract volume, how much of your targeted volume that you have covered so far in the contract negotiation?
Just to understand, is that the rates that we have seen is actually there is some more upside in terms of contract rates as we go into the Q2 and Q3. Where do you see the split for 2022 on spot versus contract? What is the average duration of the contract volumes? The third one is around the bunker, actually. If you could give any color on your split or exposure to HSFO versus LSFO, that'd be super helpful. Yeah. Thank you.
China, 20%-25%.
I missed out on that, China.
Yeah. Sorry. Yeah, first of all, concerning your question on China, we see now that volumes are down by around about 20%-25%, especially when we talk about Shanghai. So that's not the total market. In respect to that, we see strongly for sure that effect, focused on the lockdown situation there. Both it's the congestion are in port, but also in the hinterland business as especially the factories are more or less closed.
Concerning the contract volumes, when we look at the total volume with what has been negotiated and where we are right now, when we look at our QFP product, we are a little bit ahead of targets overall for this year, so slightly above the targeted 10% for the QFP volumes. Longer term contract assets in total somewhere around 50%, and we are in some regions or in most of the regions more or less final with that, so the effect on this year can be seen with that. Your question on spot rates.
Overall, our perspective is, as said, that in second half we will see beginning stronger reduction of that, maybe over time, we will see even the changing between long-term and short-term rates, that spot rates are going below that. Overall, our perspective, especially on the basis of full year guidance, is that spot rates in the second half, somewhere in the third quarter, stronger will go down. Lastly, exposure concerning the bunker shares and question was on low sulfur share, concerning low sulfur share approximately 75%-76% currently.
Okay, got it.
It's a little bit above 10%.
Okay, got it. Thank you. Can I ask a quick follow-up? Sorry. [crosstalk]
That will change over time concerning due to the installation of scrubbers. We will see, and I think we have explained that over time will see slight development on that share.
I got two follow-up actually, if I can. Firstly on, just on the scrubber itself. What percentage of your fleet do you expect it to be fitted with scrubber by end of this year, and where is it actually today? On China, you said 35% production cut or output cut. Is it got worse as we came into May, or is it like. Just trying to get a sense that in fact, have you seen an inflection or is it likely to get even more worse as we go into later part of May? Just wanted to any color on that should be is helpful. Thank you.
Yeah. First on scrubber. So the, let's say, completed scrubber installation is somewhere around, today, somewhere around 15%. Over time, we will increase that to north of 25%, somewhere between 25% and 30%, in total, concerning our total fleet. On China, for our perspective, for sure, the actual situation we are having right now, we see that that will over time normalize and situation is coming back in China, and that is also built into our perspective on guidance for this year.
Got it. Thank you. Can I just actually ask another question, if I can? On the quick quotes, right? Any color on quick quotes, what percentage of the volumes are actually going through that platform? I promise this is the last one from my side. Sorry.
Where we are coming from. I think over time that has strongly increased, and we can say that especially the situation over the last couple of quarters have supported that strongly. We are now above 25% of total bookings.
Thank you. Thanks very much.
The next question is from the line of Sam Bland from JP Morgan. Please go ahead.
Yeah, thanks for taking the question. I've got two, please. You mentioned spot rates onto the Chinese exports softening. Can we have a bit of info on what you're seeing on spot rates in other regions? H ave they gone up to compensate or kind of spot rates generally down everywhere? The second question is on this sort of piece around market situation not expected to improve until the second half. Is that, I guess by market situation, do you mean sort of congestion, disruption, those kind of things?
Should we view the sort of disruption and congestion as being the same as freight rates? If there's a lot of disruption, that also means freight rates very high? Can you have disruption and congestion going on for a while, but actually spot rates still coming down, which I guess is roughly what we're seeing around China today. Thank you.
Yeah. Yeah, first of all, spot rates, for sure there are regional differences, but overall the trend is the same. We are seeing a softening of spot rates nearly globally. On the market situation, the question where that is coming from, if that is all based on the assumption that congestions go on, I think it's the mixture of demands, softening of demand and of congestions. Yes, we even would anticipate that even if congestions stay at the level or there are maybe even new reasons for that due to the overall sentiment we are seeing right now, that demand is softening. For sure, I'm not talking about a new wave of COVID we are not seeing right now. Taking that apart, I think we would say that it's both demand and congestions to some extent.
Yeah. Understood. Thank you.
The next question is from the line of Anders Karlsen from Kepler Cheuvreux. Please go ahead.
Yes, good afternoon. A couple of questions. In terms of your long-term versus short-term contracts, if you can give a split on that. If I understand correctly, you have around 50% contract coverage. The second question is, if you have any expectations around the upcoming negotiations on the U.S. West Coast with the port workers. Also, if you can shed some light on whereabouts, what rate level are your average contracts being entered into?
Yeah. Long-term share of total is around about 50%. That's question number one. Negotiations for port employees, let's put it that way, we have no insight, to be very honest, so no deeper insight than you might have or we can read. Therefore, very difficult to predict and will also differ. Let's put it differently. The negotiation will evolve over time, and the effect, difficult to predict right now. The contract rates, especially when we talk also about QFP rates, they are overall somewhere around our average rate of today, the longer-term contract rates. You might know for sure QFP rates longer term are higher than that, but average is close to that.
Okay. Can you your 50% long-term contract portion say anything about the duration? Is that, like, two, three, four years, or whereabouts is the duration?
Everything above one year is long term. Yeah, there are, there is an increasing share, also due to our QFP product, which is normally a three years product, also for sure contract with a longer duration. Durations of three years.
Okay.
In total, if I may add to that, it's slightly above 10% currently, the longer terms. The QFPs, yeah. The QFPs, which are two to three years or something like. The majority of the long-term contracts which Mark was referring to is around about 12 months. As I said, slightly above 10% is longer term, two to three years.
Okay. Thank you.
The next question is from the line of Marc Zeck from Jefferies. Please go ahead.
Hey, thank you for having me. A couple of questions first on spot freight rates. You said that on average you see a softening. But if you look at the slides, you put up slide there that say that the SCFI to U.S. West Coast, it's pretty stable. I would say, Transatlantic from Drewry or other providers says that Transatlantic rate, Europe to U.S. is actually up quite a bit. It's only Shanghai, North Europe and Shanghai, Latin America, which is really weak. Could you elaborate a bit on what is driving the divergence on spot rates for those trade lanes? That's my first question. Thank you.
Yeah. Referring back to the question right at the beginning we had, so what we are seeing, the softening of spot rates is for sure especially focused on everything that is outgoing from China. We are also seeing that it's softening on non-dumps, which then also has an effect on average rates on the different trades.
For, let's say, for the U.S. trade or for the Transpacific, it's still strong, no? I see the SCFI, the chart that you put up on page 20 or so. It's still at roughly $8,000 per container, which is just a touch below peak levels.
Yeah. I think, first of all, there is also a little bit of timing effect. For sure, our, let's say, information we are seeing what's incoming right now. There is a softening, but it's slightly or it's for sure lower, especially on these trades you are mentioning. That's absolutely right.
Second question would be, with the Far East trade softening and let's say Transpacific rather stable, is it conceivable or possible that some of those vessels that currently serve the Far East trade are diverted to the Transpacific? Maybe not from this side, but from the Asian carriers. Or, due to the length of the journey, doesn't it make sense to go with Far East vessels on Transpacific trade lane?
Yeah. A couple of points concerning that. First of all, the basis for all of that is, and that's why we see the differences, is that demand in North America is still relatively strong. The slight downturn of demand is not the same everywhere, and that's why the trades to the North of America are still stronger. To redeploy assets to more questionable, so to say, or more asked trades, yes. We have done that over the time of the pandemic for sure. To be of service for our customers, and that is still our guiding principle.
If there is freight and if we have contracts, for sure we will keep our vessels in the trade to serve our customers. It's all about right now being reliable and delivering quality. Some ships, you also know that, cannot be deployed everywhere due to nautical issues, let's put it that way. Yes, for sure, we are also looking to optimize our asset allocation to network and the demand, not taking away the customer satisfaction aspect, which is quite important for us.
Thank you. Yeah, [Fred], just another one. You mentioned that the order book to current capacity is somewhere above 25. Do you have like could you give an estimate what this figure, the percentage, might look like if you deduct replacement, scrapping and new group regulation that comes in in 2023? Would it be more like 20% or is it just touch and go?
Yeah. To be very honest, no, it's not possible to say that because that's so heavily dependent on the behavior of competition for sure, also of ourselves. That's very difficult to say. It's for sure the most dominant influence has the demand. When everybody needs the vessels right now, every type of thing is running right now, so there's nearly no scrapping.
That from our point of view, scrapping will increase, but not tomorrow. It will take a little bit longer. When regulations are kicking in and it's not efficient anymore to use the ships, then they will be put out of service. To really do a calculation there is very difficult and something which we do internally, but it's not. We discuss internally strongly to have a good number here, and it's nearly not possible to do a prognosis on that.
Okay. Thank you. That's for me for now. Thank you.
As a reminder, if you would like to ask a question, please press star followed by one. Our next question is from the line of Danielle Ward from J.P. Morgan. Please go ahead.
Hi. Thank you very much. I have a couple on your credit rating and financial policy. As you said, you've been upgraded to BB+ at S&P. Do you have any desire to be investment grade rated, or are you happy in the BB category or any targets there? I know you had a 3x leverage target previously, but any update on that considering your net cash position at the moment? Just linked to that on uses of cash, you've already communicated on the dividend, but any plans beyond that, relating to debt paydown potentially, and any particular type of debt that you'd be looking to target?
First question, a no and a yes. No means no, we are not targeting investment grade rating level, and yes, we are happy with BB+. We are feeling very comfortable there. And that guides us into your second question on cash levels and what to do with that, if we would like to do more debt paydowns and what our overall target is for the leverage. Over the cycle, we still keep the target intact to be between 2.5 and 3, somewhere around that, maybe more to the 2.5 position. That will mean something over time for sure, both investments and structuring the balance sheet. Over the cycle, we see that as a good ratio for us and a good use of proceeds and capital.
Thank you.
The next question is from the line of Deepak Maurya from HSBC. Please go ahead.
Hi, Deepak here from HSBC. I had two questions. Firstly, when we say that 2 Q could exceed expectations, are we meaning that 2 Q could be as strong as 1 Q? My second question is that when you say demand is softening, is it because of the delays or the supply chain issues which we are seeing out of China? Or is it that once the issues are resolved in Shanghai, we could see some pent-up demand bounce back during, say, possibly 2 Q or 3 Q?
Yeah. Q2 performance higher than expected is for sure referring to our perspective at the beginning or before the second or the upgrade of our guidance. Yes, concerning that or related to that, we think Q2 will be better than that. Not possible to guide the Q2 single right now, but should be somewhere slightly south of Q1. Demand and if we could see a rebound, so to say, after China is opening again and everything is normal. Yes and no. Yes, we will see for sure when China is reopening, we will see that.
Overall, I think we have to accept that demand is going down over time slightly. That starts in different reasons in different regions. You can see that consumer sentiment is changing over time. Consumer behavior is changing, inflation is going up. Disposable income is pressured a little bit. Therefore, we will see a general trend from our perspective on demand. Yes, when China is reopening again, there will be also some rebound, so to say.
Okay. Thank you. Maybe if I can follow up on that. Since we are mentioning about softening of freight rates and possibly demand also softening, and this would possibly lead to some congestion easing as well, do you think that you will be able to bring down the costs back to where they were before? Basically unwinding of the congestion and the network-related extra costs which you are incurring at the moment because of the delays and other aspects. Of course, the fuel price is something which is out of hand. The network and congestion-related expenses, would we see those unwinding back in line with the softening of the freight and demand? Some of it is, like, more sticky in nature and then would remain.
Yeah. A very operational question we are asking ourselves for sure. First of all, I would say a big part of the cost development we have seen will be or will change again when overall situation changes. That's quite natural because when you don't have to store your container, you don't have to pay for it. Now storage is up, handling and haulage is up. Everything which is really a result of congestions will for sure go down again. That is quite a big part of the overall cost development. I would assume it's more than two-thirds, maybe up to 75%, which is or will go down over time. That will not happen overnight, but will go down over time when situation is easing.
There's also the risk that parts of the cost will stick to the system and our target and what we are constantly doing. that we have initiated a strategic cost program, and that is addressing absolutely these points to be sure that after that period where you had to accept higher costs got to you, that we bring them back to a very competitive level. That's why we have invested into these cost positions. It will take time, for sure.
Okay. That's from my side. Thank you so much.
Our next question is from the line of Christian Cohrs from Warburg Research. Please go ahead.
Yes. Hi. Thanks for taking my questions. Just two left from my side. First, when will you start to include the JadeWeserPort Wilhelmshaven into your network? And does this actually mean that you will, yeah, transfer cargo or the cargo will actually be transferred from Hamburg to Wilhelmshaven? Question number one relates to, yeah, these questions about de-globalization, et cetera. In light of all the supply chain disruptions we have experienced over the past two to three years and also the changed geopolitical climate, do you observe among your customers any intention for, yeah, some nearshoring of production, different sourcing strategy, localization of supply chain, et cetera, which could hamper or harm your business in the longer term? Thank you.
First question, we already have included Wilhelmshaven into our network even before the transaction was concluded due to all the congestions globally. Therefore, Wilhelmshaven is starting to be, let's say, an important part of our hub strategy. It's not so much about transferring from Hamburg to Wilhelmshaven. It's much more about creating new products, which then will head to Wilhelmshaven over time. Therefore, yes, there might be some shifts, but overall it will not have the major effect on Hamburg. It's more, as I said, creating very competitive products for Germany overall. Second question, de-globalization.
I think it's much more what we are seeing right now is based on de-risking, and therefore we will not only see niche nearshoring, but we will see more differentiated sourcing strategy, let's put it that way, so that you are not so dependent. I think you could nearly say we all, even as a state, we're learning our lesson right now quite hard what that means. This de-risking overall will be an effect and is important that will lead to more differentiated networks of our customers that will have an effect in a sense. I think overall will not have strong effect on volumes. On the other side, we have to see that growing global population will also lead to growing global demand over the cycle for sure.
Therefore, I think the effect on especially our business will not be dramatic. It might be strategic, and we have to cater for that, for our customers will not have, from a volume perspective, a very strong effect. I think there's even a counter tendency that customers have learned, as we have learned it overall, how crucial running supply chains and in that ocean freight and ocean long haul legs are. Therefore, I think we will see a little bit a change in the relation we are having and building reliable networks for our customers.
Understood. Thank you.
This was the last question today. Please direct any further questions to the investor relations team. I hand the conference call back to Heiko Hoffmann for closing remarks.
Yeah. Again, thank you very much for joining today and for your interest in Hapag-Lloyd and also in our industry. In case of further question, as Corrine just said, please reach out to either myself or the entire IR team. As always, have a nice rest of the day. Stay safe and goodbye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.