Thank you for standing by. I am Yasmin, your commercial operator. Welcome, and thank you for joining the Hapag-Lloyd Analysts and Investors Conference Call on the full year results 2018. Throughout today's recorded presentation, all participants will be in a 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 touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.
Thank you very much, and welcome, everybody, and thank you for making the time to listen to us. Nicolás and I will try to guide you through the presentation fairly swiftly, and then we'll, of course, open the floor for Q&A. If we start with the highlights, a couple of opening remarks. I think when we look at 2018, one of the highlights is definitely that we achieved the UASC synergies or the run rate as planned, probably a little bit ahead of time. Second thing being that, we spent now post the two mergers, quite a lot of time on our strategy going forward, and we launched the strategy towards 2023 in November 2018.
On the Capital Markets Day, also afterwards internally, and I think we started to do quite a few things to put that strategy also into action. In terms of markets, we see a fairly stable container demand growth, despite a recent reduction in some trade projections and of course, there are always some geopolitical risks. We still think that our outlook there is short or that the outlook should allow us to deliver on the plan that we've made for 2019. When we look at the fundamentals, those remain favorable in the midterm. We'll talk a bit more about that later. In terms of financials, EBITDA clearly up to almost EUR 1.35 billion in 2018.
Also worthwhile mentioning very strong cash flow throughout the year, which has also allowed us to bring down the net debt as planned, significantly. Going forward, we'll continue to focus on improving profitability, making sure that we start earning back our cost of capital and also further deleveraging the company. Of course, we have also a number of other financial and non-financial objectives that we want to achieve. When looking back at 2018 on page 3, I think 2018 was a little bit of a year of two halves that were actually quite different. If we look at the first half of the year, the growth was okay-ish, but not very high. We saw significant increases in cost, mainly on charter and bunker and fuel related items.
That led us also to issue a profit warning towards the end of the year. Ever since, we've seen a much better second half of the year, which means we still land within the guidance that we have given at that point in time, but very much to the right-hand side of that. Other important points to mention here, I think is the launch of our online sales, the fact that we introduced a new Marine Fuel Recovery mechanism and the strategy that I referred to earlier. We've started with that. I think, we have good acceptance in the market of the MFR formula.
You saw the numbers that we just presented, and I do believe it's also worthwhile mentioning that Moody's improved our credit rating, yeah, just a few months ago, which I think is another reflection of the fact that our balance sheet is getting better and better. We mentioned synergies already. We have achieved them a little bit ahead of time. We are happy with that. I think that also underlines once more that the integration between Hapag and UASC went fairly smoothly, as also illustrated by the like for like growth we have seen in volume of 6%, which is certainly a little bit ahead of the market. That also gives us some confidence going into 2019 with a fairly good run rate.
When looking at our strategy and what we announced earlier, we've always said it's about three things. One is we have to make sure that we are profitable throughout the cycle. We are now posting a net profit for the third time in the last four years. I think that's at least a signal that we are starting to move in the right direction. Having said that, we don't earn back our cost of capital at this point in time, so we certainly have to improve further. Two other points, core of our strategy, become number one for quality. We believe that and that's also what customers tell us, that people are willing to pay for good and consistent quality.
Many of the things that we are doing as we speak, yeah, and which you will see from us in the course of 2019, will be around that theme. We also will remain a global player with excluding Intra-Asia, a market share of roughly 10%, which also means that in many markets we'll actually have more, yeah, be it 13%, 14%, 15%, 17%, which definitely gives us the scale needed to compete. When we look at what was done in the last number of months, around strategy, maybe a few things, worth highlighting here on page 6. First of all, various initiatives to continue working on profitability, because as we've said many times, if we want to be successful in this market, we have to be cost competitive.
Three initiatives, three bigger initiatives basically pointed out here. One around terminal partnering, a very basic, big cost block of ours where we've tested a new approach in a couple of terminals now, Singapore, Jebel Ali and Colombo. We just decided to go and roll that out throughout the organization. We expect to see from that better cooperation with the terminals, quicker turnaround times, better quality, and also cost savings. The other one is around procurement, which is very much focused on the transportation spend that we have, where we also talk about a cost book that is well over EUR 1 billion a year. This is not only about trying to get lower rates, but also trying to find the right modal split and trying to optimize the way we organize the transport. Then we have container steering.
Many initiatives these days to try and optimize that. Another cost block, which is around about $1 billion or a bit more than $1 billion a year. Nobody pays us for that.
Yeah.
That means that everything we save in that cost category goes directly to the bottom line. On quality, a number of initiatives. One, of course, becoming more digital. We are continuously streamlining and optimizing the processes that we have in the way that we interact with our customers. By doing that, we will improve also quality, but also efficiency. We also have established already a number of quality service centers, be it in Atlanta, be it in Suzhou or be it in Mumbai, which will help our organization to deliver better and more consistent quality. We will continue to put up a number of those centers across the globe in the course of 2019 and 2020.
In terms of remaining global and reacting on the things that are happening in the market, you will have seen a number of new services from us over the last couple of months. That does not mean that we are trying to go on an aggressive expansion plan. What it does mean is that we're trying to become more agile and quicker in adjusting what we actually offer to the market, which may result in quicker decisions to stop doing some things, but also some decisions to sometimes move ahead a little bit quicker and try to tap into new emerging market segments, and we posted a few examples over there. When we look at the online sales, a view of one chart on page 7.
In total, we booked about 350,000 TEUs online in 2018, which means currently, we are at a run rate of 14,000-15,000 TEUs a week.
Yeah.
We believe that we can still grow that further. Right now, this is 6%-7% of our overall business. That may not sound like a big percentage, but we should also keep in mind that a significant chunk of our business goes on fixed contracts. That means that from the short-term business, which is currently what this channel is mainly aimed at, it's actually a fairly significant double-digit percentage. I think that definitely illustrates that there is a market for that because people appreciate the ease of doing business. For us, it's also a good channel to steer on the one hand the utilization of our ships, but also to have an efficient way to interact with our customer and to instantly give them information about rates on all kinds of lanes.
When we get to the highlights on the financials, and Nicolás will say more about that in a minute. Transportation volume on a pro forma basis, almost 6% up. Freight rate on a pro forma basis, 2% up. The EBITDA margin about 9% and a group profit of, in the end, $54 million and an EBIT also slightly above previous year with a healthy equity base and a net debt that is down significantly. When we look at profitability, and we compare what we are doing with, the average of the industry, though admittedly, the sample with which we can compare is becoming smaller and smaller, so we may have to find other ways to compare our performance going forward.
When we look at 2018, our relative performance has definitely been okay. If we look at EBIT margin both in the fourth quarter as well as over the full year, 2018, I think that looks healthy. It also illustrates that the importance of scale is becoming less because the large discrepancies we sometimes show in profitability when you go 5 years back between big and small players are certainly no longer there. If we look at 2018, we were topping the ranks, but as long as we are all in the same ballpark, I think that's basically where we would like to get to. When looking at the markets on page 10, a lot of debate about what will happen with growth.
If we look at the latest forecasts, those are from IHS around 4.7% and Drewry about 4%. We know that some others are out with lower outlooks. I think in reality, nobody really knows. When we look at the start of 2019, we've certainly seen a fairly reasonable recovery post-Chinese New Year. When we look at the growth in our numbers and compare that with our plans, then we have no reason to believe that the growth that we have planned, yeah, which is more or less in this type of ballpark, is not achievable. Taking a look at the order book. The order book remains rather small, and we think that's good, yeah.
Because that means that even in a scenario where the market might grow a little bit slower, the order book is still not too big. I mean, again, keep in mind that, with 4% growth in an order book that covers 2.5 years, you need about 10% anyway to cater for the growth. Even if scrapping would only be 2%, you in reality would need an order book that's probably a little bit bigger than what it is today, probably 15%-18% or so. If growth is a little bit lower, then this order book is still pretty adequate.
Idle capacity is still not at an incredibly high number, but I think you see a seasonal trend, which means that post-Chinese New Year, you see more ships being idled, which is pretty logical. When we look at supply and demand balance, before I hand it over to Nicholas. I believe that this graph, especially the one on the right-hand bottom, illustrates that we're starting to get back to a slightly more normal market, where if you look at 2016, 2017, 2018, 2019, and 2020, you can clearly see that on top of an order book that is very much normalized, we see that in most of the years, demand growth will actually outstrip supply growth, which illustrates again that these things are coming closer together.
Please bear in mind that scrapping is still at a very low level, because the long-term average of scrapping has to be between 4%-5% a year, with an average economic lifespan of 20-25 years. Also, it does not take into account that some of the ships will be out of service for a while because we either install scrubbers, and we also don't take into account some of the capacity that gets lost because of some of these things. All in all, I think that's actually a fairly conservative view, and underlines that when you look ahead, yes, there is always a certain amount of uncertainty, and yes, there are certainly some indications that global growth is not gonna accelerate this year, but maybe a little bit slower than last year.
Nevertheless, the fundamentals look fairly healthy and, I think the industry should be in a good position to have a number of pretty normal years over the next two or three years to come. With that, I hand it over to Nicolás to take us through the numbers.
Thank you, Rolf. Good afternoon, everybody. In page 13, you can see the detailed KPIs of our income statement. You see on the right-hand side a comparison of 2018 with last year. You see 21% volumes up, a freight rate down 1% compared to last year. The bunker is 32% up, which is basically the problem that we have had during the year, as I will explain in one second. The reason why, I mean, because of these volume increases and you see the revenue going up to $3.8 billion, that's 21% up. We're gonna basically explain the result as a good volume effect compared to last year.
We have better volumes, and that generates some extra contribution that is compensated partially by a better higher allocation. We had better demurrage and detention during the year in 2018 compared to last year, and also the finalization of the synergies. All that was compensated more or less with the bunker increases and also some cost inflation that is related, most of that related to oil prices going up or energy prices going up. That's basically a main explanation of our number operational results similar to last year. When you look at the next page, you see the volumes and the details where we have grown the most. That 21%, of course, is a little bit unfair comparison.
When you compare apples to apples on the bottom of the graph, you see a very good growth in Latin America and in the MA trades, as well as you can see also good growth, healthy growth in Far East and Atlantic. When you look at the rates, I mean, you see a little bit more details here, with -1.5% when you compare the Hapag-Lloyd standalone alone. The 2.1% indicates you compare the performance and a bunker going up significantly, which reduced significantly the ex-bunker rate, especially in the certain initial quarters of the year.
When you look at the unit cost on the next page, you see a deterioration of $13 per TEU, which is 1%, mainly driven by bunker. $32 per TEU out of the total increase is basically contributed by the bunker increase. When you see the others, you see basically an improvement of $19 per TEU. That, that's basically the explanation of the unit cost moving $13 up. The next slide you see an important piece of the financials, which is the cash flows. We initiated the year with EUR 1.27 billion of liquidity reserve, a cash component of EUR 725 million.
We have delivered a very good, I would say in my view, operational cash flow this year, very similar to a year before. The cash conversion of this year has been very good. 94%, as you see, with basically $1.27 billion. That has allowed us to continue repaying debt, as you see on the very right-hand side of the bridge, repaying a significant amount of debt, around $666 million. You see also repayment of the payment of interest and also the dividend that we paid in July 2018 of an amount of EUR 137 million.
When you see the investment cash flow is minus 1.3, it is relatively low because it is compensated by some positive effects, namely the recovery of UACC, which is a subsidiary of UASC, money that arrived in December last year. We also divested some vessels and containers that gave us some money. You also see the dividends there of $40 million coming from the subsidiaries that is basically compensating the CapEx that we had during the year. When you look at the free cash flows of the company is a very good amount number of more than $1.16 billion.
That's basically a very healthy situation in 2018. We are basically making all the efforts to continue with that, those kind of numbers. When you look at the balance sheet in the next slide, you see an equity of $1.16 billion. The reduction compared to the last year is basically driven by the payment of dividends, compensated of course by the profits of the year. Also we have some negative OCI that is related to FX. On the bottom of this chart, you see the liquidity reserve, very adequate and a little bit on the higher range, I would say, compared to our objectives. We should try to maintain that at $1 billion or $1.1 billion.
Reason is basically that we received that money from UACC at the end of December. We couldn't repay debt in the very short period of time that we had until the end of the year. On the right-hand side of the same slide, you see the net debt, which is one of the highlights of the financials of the year, going significantly down and basically going down the bar of 5 times Net Debt to EBITDA, which is one of, as you know, one of the objectives for this year at the end, is to arrive or to reach the 3.5 times. A little bit on IFRS 16 in the next slide, you can see the effects. This is unaudited indicative for you to take into consideration.
We will have an EBITDA impact of $0.37 billion of more EBITDA because of the technical effects that you know. The effects in EBIT will be around $20 million positive. And the effects in EAT will be around $40 million negative. In the case we would have applied IFRS 16 in 2018, right? The effects in 2019 are not necessarily the same, but is a good reference for you to start calculating or modeling the company with the effects of IFRS 16.
When you look at the last page before I hand over to Rolf, is related to a change in the structure of our P&L, which we think will be very positive for you for understanding better the company. Three main characteristics of the new P&L that we will launch in the first quarter of 2019. First, it separates more clearly the fixed costs from the variable costs. So you will see more kind of clearly what is related to containers, and what is related to a network, and the shipping system that we have.
The second one is that we have a more structured P&L, in which we have basically separated all the pending voyages and the costs related to pending voyages from the voyages that terminated during the month. Which is very important to understand better the unit costs that we calculate every quarter. Therefore, you can follow the evolution of the unit cost in a better way with the vessels that really terminated and generated the results of the operational period. Finally, more transparent P&L in the sense that we separate the evaluation effects from the operational effects. We have kind of a scheme on the right-hand side that you can see and study.
We will continue explaining to you in detail when we launch our Q1 results. If you have any doubt, of course, investor relations will be at your disposal. With that, we continue with the outlook.
Thanks, Nicolás. That brings us to the outlook for 2019. Going through the various lines, when we look at transportation volume, we do expect that to increase slightly, roughly in line with market. If we look at the freight rate, we also expect that to increase slightly. We expect the bunker price compared to the average that we have seen in full year 2018 to increase moderately. We've seen a little bit of a slump in the bunker price towards the end of the year, but we've also seen it recovering again already in the beginning of 2019. In terms of EBITDA, we expect to see an EBITDA of between EUR 1.6 billion and EUR 2 billion, which includes an effect of IFRS 16 of between EUR 370 million and EUR 470 million.
In terms of EBIT, we predict between EUR 0.5 billion and EUR 0.9 billion of EBIT, with a limited impact of IFRS 16 of between EUR 10 million and EUR 50 million. Looking at our targets for objectives for 2019 and beyond, before we get to questions. First and foremost, we need to continue working on increasing profitability and also further deleveraging our company in line with the objectives that we've set ourselves to get to a net debt to EBITDA of 3.5 in the course of this year. To also start working towards returning our cost of capital. We need to prepare even further for IMO 2020.
We've been off to a good start there in getting most of our customers to accept our formula or else accept a customer formula, which is very similar to what we have proposed. We, however, still have a significant chunk of our business, which is more short than mid-term, and that needs to be negotiated only in the course of the year. We need to ensure that also for that part of the business we get our money back. Of course, we also need to prepare the physical change of starting to bunker different types of fuel, making sure the tanks are cleaned, et cetera. We'll continue to work hard to implement our strategy, which is aimed at creating more value for customers and shareholders as we try to strive to become number one for quality.
We will also continue to invest significant chunks of money to improve the digital solutions that we are offering to our customer. Hopefully, that gives you all in all, quite a good overview of what we've done in 2018. Why bottom line, I think we are satisfied with the result in the end and why we are also cautiously optimistic when looking into 2019. With that, we would open up the floor for questions or hand it back to the moderator.
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 touchtone 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 comes from the line of Michael Boam of Sona Asset Management. Please go ahead.
Hi. A few questions, if I may. First of all, on the contracted side of the business, can you tell us where Asia-Med and Transpacific are settling year-over-year? Are they up, flat, or down in terms of freight rates, please?
Okay. I mean, when we look at the contracts that have been closed on between Asia and Europe, those are generally up. Yeah. When we look at the Transpacific, I think the expectation is that those will go up as well, but there's not a lot that has been closed yet. That will all happen within the next 6-8 weeks or so.
Can you give us some idea of the magnitude of the increases?
It's always very difficult and dangerous to talk about averages. I think if we look at Asia-Europe, where we have a bit of a bigger data set, there we talk about mid- to high double-digit increases per TEU.
Looking at the spot side of the business, I mean, spot freight rates have declined by 26.7% since the 24th of January. Obviously, you came into Q1 with very favorable conditions, high freight rates and low bunker costs. Obviously, that position is eroding and at least the spot freight rate is now flat to where it was last year, which is significantly below where it was in the second half of 2018. I would imagine that as the quarters progressed, your earnings have kind of decreased on a monthly basis. Is 2Q likely to be like a trough quarter for the year, in your opinion? Or how should we think about that?
I mean, Q2 is always a quarter that is difficult to read because it is the traditional slack season. As such, you see spot rates going down post Chinese New Year is a very normal trend. I mean, this is always the time of year where you have the most uncertainty, more or less on how the year will pan out. As you say, we came into Q1 with reasonably good momentum, yeah. Now we have to see, you know, what is going to happen post Chinese New Year. We've seen the traditional drop of spot rates. You know, that typically picks up in the course of the second quarter as we are starting to get closer to the season.
There is no reason to believe that this year will be materially different than the last few years where we saw a fairly traditional pattern.
Well, just to follow on, is that really the case? I mean, how have your volumes been in Q1 so far? Clearly, Chinese exports in February were down 20% year-on-year. I mean, volumes must have taken some or volume growth must have taken something of a hit during Q1.
I mean, we have seen. You know, Q1 is always a difficult quarter because of Chinese New Year, and that's why you shouldn't look at individual months, yeah. We still see over the quarter, yeah, reasonable volume growth. I think last year we had, I believe, very small volume growth in the first quarter. I believe even 1% or something like that. I think this year will be a bit better than last year from that perspective. It's still too early to declare victory for the entire year. We have, however, seen a reasonable recovery, actually, post Chinese New Year.
Okay.
When you look at the exports year-over-year in China, I would recommend to look at January and February together because.
No, I appreciate January was up 10%, but overall-
Exactly.
Overall, it's still down. I know January is a bigger month as well.
It's not 20%, it's 5% in the overall, in the January. It's 5% down compared to last year when you took out January and February.
I think you can only judge it really when you also take into account March because Chinese New Year was a little bit earlier this year. You know, the recovery into March will likely be stronger than it was last year.
Okay. Then my next question, in terms of your guidance, clearly you've met your cost savings targets, but that was being done through 2018. So how much of the cost savings is effectively still to come through the P&L? I.e., how much of the uplift in EBITDA away from IFRS 16 is due to cost savings?
I mean, if you recall that we announced at the capital markets day that we still look at improving on the cost front between EUR 350 million and EUR 400 million until 2021, yeah. Well, that's roughly a 3-year period, yeah. Just as a ballpark number, that thing will go gradually. It's not that we will achieve EUR 230 million in the first year and then EUR 60 million in each of the subsequent ones. If you take one third of it in every year, then that gives you a fairly good proxy.
Approximately EUR 125 million of the uplift in EBITDA is due to cost savings.
I wouldn't know the numbers exactly off the top of my head, but it is a three-digit number. Yeah.
Okay, listen. My final question is 2019 CapEx, please, if you could share that.
We have not published any projections on CapEx, but what we have always explained is that our CapEx is currently or should be currently more or less at 60% depreciation. We cannot sustain that situation forever, of course, and we expect that CapEx will progressively going up over the years to something around depreciation if we want to replace our asset base and keep our advantage of a very young and efficient fleet. But as we have a high ownership and our fleet still keeps that advantage, we don't have any hurry on that.
Okay. Listen, thank you very much for your time.
Thank you.
The next question comes from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead.
Yes. Thank you. This is Johan. Just a question ahead of the IMO 2020. I know we have discussed this many times, but could you just give us an update on sort of how much of your capacity will be running on the low sulfur fuel as we enter 2020? Or the other way around, how much will be LNG or scrubbed? Thank you.
I mean, the vast majority will run on low sulfur fuel. I mean, if you look industry-wide, I think the estimate is that it's between 95% and 97% of the ships that in the end will run on low sulfur fuel. You know, we will not deviate materially from that.
Okay. It seems like your larger competitor in Denmark were more cautious on this year's earnings development if you adjust for them having some cost benefits from their more recent merger. They seem to be very cautious around Q2 and the Asia-Europe development with the capacity coming here, risking a repeat of last year again. You seem more confident. What's your view now on how weak Q2 can be?
I mean, as I said before in response to one of the earlier questions, Q2 is probably always the quarter where you have the highest uncertainty in terms of what is going to happen, because you always see, logically, because we get into slack season, spot rates slide, yeah, after Chinese New Year. The question is always how long will that take and how strong will the rebound be? Normally, it's very difficult to judge that until May or June. I mean, whether our assessment there is a little bit more optimistic than most, I don't know, yeah. I mean, yeah. I mean, not that much more to say to that. What we see today is we see good load factors, yeah. We see volume being in line with our expectation.
Yes, we see spot rates sliding, but this is very normal for this time of year. We have no reason to believe that the outlook that we have given right now, you know, is more risky than normal. Yeah.
Okay. Final. It seems like several of the players are introducing some slow steaming here, I think to network. I think THE Alliance is also doing that. This is already ahead of the low sulfur ban next year. Is this related to taking out some capacity needed for some of these ships to be installing scrubbers in the second half of the year? Or why do we see this sort of slow steaming already now and not next year?
To be honest, I don't think it's so much a slow steaming. I believe all of us are very well aware that schedule reliability in 2018 was not great. There's only so much you can do by speeding up vessels. One of the things you can do if you see that you are not hitting the reliability levels that you're looking for is add, in some cases, a ship to the loop. That's also what we have done, which essentially builds a little bit more buffer in the service. The clear objective of that is to get up schedule reliability.
I think we're all encouraged by what we have seen between Asia and Europe there, in the course of 2018, where schedule reliability has really gone up to a
Fairly good level. Now we see similar measures being taken in other trades, be it the Atlantic or Asia Med or the Trans-Pacific. I actually don't think it has so much to do with capacity, it has more to do with schedule reliability, where I think we all feel that is not where it should be.
Okay, great. Thank you very much.
Next question comes from the line of Neil Glynn of Credit Suisse. Please go ahead.
Oh, good morning. If I could ask two questions, please. First of all, just on your own capacity in the second half of the year as you install scrubbers. I appreciate it's not gonna be a very significant proportion of your capacity, but can you give us a bit of a feel for the step down in capacity if there should be one in the second half of the year? Also tied to that, do you have any views in terms of how charter rates develop in the second half of the year, if there is a reasonable amount of in-service capacity that's taken out of the market for scrubbers? I guess those are mainly gonna be very large vessels, so perhaps it doesn't impact the charter market too much, but do you have a view on that?
To take your second one first, I don't expect to see a major impact on the charter market, yeah. Because as you rightfully say, you know, it's gonna be mainly bigger vessels that people will try to equip with scrubbers, and the charter market is not so liquid in many of those segments. I do not expect to see a major impact. In terms of what it means for our capacity that's deployed, I mean, that impact is going to be limited. I mean, if you want to install a scrubber, our estimate is that that means that the ship is out of service maybe 30 days, yeah.
Even if hypothetically you would do two every month, which is more than we will actually do, you would be talking about an impact which is, you know, between one and a half%, so it shouldn't be more than that.
Thank you. Just to follow on from that, 'cause part of the reason for that question was just trying to understand to what extent your guidance might rely on some comfort that modest capacity growth in the second half of the year is good for rates. Is it possible to comment on that? To what extent do you feel reliant on a very good second half of the year per your rate guidance for the year?
No. I mean, I think, you know, we need to ensure that, if you look at last year, then the first half was relatively weak and the second half was pretty okay, yeah. If you just look at it, take a step back, I mean, we definitely need to ensure that we improve also in the first half of the year, yeah. Because to just lock in the improvement in the second half of the year, that would be very opportunistic.
Understood. Many thanks.
Next question comes from the line of Joel Spungin of Berenberg. Please go ahead.
Yeah. Good afternoon, gents. I've just got one question for Nicolás. I was just wondering if you could just run me through on the cash flow, what the disinvestments and the EUR 40 million dividend relate to, again, 'cause I didn't quite catch what you said. I noticed obviously most of the disinvestment fell into the fourth quarter. If you could just clarify that, it'd be helpful.
Yeah. The investments are pretty much-
The-
I mean, the CapEx is. You say the investment cash flow, right?
Yeah, the disinvestment, the 225, I think it was.
The 225 basically composed of 152 coming from the contract with UASC, in which the former owners and current shareholders of Hapag-Lloyd, which is PIF and QIA, committed to pay the book value of a subsidiary called UACC, which is a tanker business. That money came in December, $152 million. Then we had around $15 million. We commented to you that we sold our stake in intra. And finally, we had $40 million of divestitures of containers and vessels. $40 million of divestiture of containers and $18 million of sales of vessels.
When we merged with UASC, we decided to get rid of the old ladies that they had, and we divested most of the Panamax that they had. Some of them were not sold in 2017, and we had to sell them in January and February. That is $18 million. The remaining part is $40 million of sales of containers, which were sold in positions and places where we had a deficit. Sorry, surplus. That's a way to save money in the empty repositioning logistics. That's basically a composition of the disinvestment.
On the dividend receipt, it's basically composed of CBA and some other minor subsidiaries that are basically giving us regular dividends. CBA is the most important component of the 40.
Okay, that's helpful. Thank you. Just thinking about that going forward, so basically, would you expect any more container sales in 2019, or would it be at a lower level?
I think we should maintain that level, perhaps a little bit lower or a little bit higher. If we are basically actively doing that, as we can and as we get a good price for those containers in those locations. That's the way we continuously evaluate. I mean, this year we got some opportunities to do it. That's the reason why we sold $40 million of containers, and we have to see whether those opportunities are coming in 2019.
Okay. Thank you. Thanks, Nicolás. Next question comes from the line of Maggie Gosnear of Barclays. Please go ahead.
Hi. Just on the IMO point, how have the discussions with your clients been going about the pass-through mechanisms, and what's your expectation for the amount that you'll be able to pass through?
I mean, so far, as I tried to indicate earlier, I mean, we've been very successful in getting those clauses accepted by customers or negotiate alternative formulas proposed by the customers which have more or less the same effect. I expect that for the contracted volume, that the recovery will be, I mean, very close to 100%.
In terms of the LNG pilot for the retrofit, when does that start? When will you take the decision on when to roll it out to the rest of the fleet if you decide to? That can be?
The pilot or the retrofit will start I think in Q1 2020, and that means that after that we'll first gather some experience with that. I do not expect us to take the decision before the second half of 2020 or maybe even a little bit later.
Perfect. Thanks.
Sorry. The next question comes from the line of Edward Stanford of HSBC. Please go ahead.
Good afternoon, everybody. Just one question from me as well. You talked in the presentation about the introduction of some express services, and I think if I recall correctly, you talked a little bit about that in the capital markets day. Do you have enough experience yet to determine whether customers are prepared to pay for the faster service? And then, what is your experience about perhaps rolling that out even further? Thank you.
I mean, in some of those cases where we've done it, our experience is positive. Main one we did this year so far was the Cherry Express between South America and Hong Kong. There we have clearly seen that for the days that we are able to take out of the normal rotation, people are willing to pay more than the extra cost to us. Whether we'll do more of that will always remain a case-by-case decision. I don't think that's ever gonna be a huge chunk of our overall business.
Thank you.
Next question comes from the line of Richard Fallon of Deutsche Bank. Please go ahead.
Yes, good morning. A few questions. Firstly, of the 95 owned vessels at year-end, roughly how many are unencumbered, and what would you estimate the market value of the unencumbered fleet is? I'm asking-
Would you-
You know, in part because especially compared to the previous year, there's, you know, an apparent shift towards more chartering in the fleet portfolio overall.
I think you can see the asset value that our containers and vessels have in the annexes of this presentation. I believe that the book value of the vessels today is a good representation of the value in use of those assets. Particularly, Hapag-Lloyd has a very big component of its vessels that are marked to market in the context of the mergers with CSAV and with UASC. As you know, we have to perform a PPA, and in that PPA, we have to basically mark to market the vessels that we have received from these mergers.
When you compare to the industry, I think Hapag-Lloyd has the relatively lower valuation for its vessels because of that for those two subsequent mergers that we have done in the last two to three years.
If you had to look at that's clear in terms of the book value representing a good approximation for market. But what would be sort of the unencumbered pool of that?
Okay.
Yep.
Usually we have a small fraction of those vessels that could be leveraged up because the debt associated to them is way below the loan to value that is required for those vessel financing loans, right? We could do that. The majority of the vessels are financed. We have a fraction of our debt that is related to vessel financing, which is a majority of the debt component, along with, of course, containers. The majority of the vessels are encumbered.
The majority of the 95. Okay.
The majority.
Yep.
It doesn't mean that we cannot leverage them up in the case it is needed, because in a big fraction of them, the value of the debt is significantly lower than the value or the market value of the vessel.
I understand, but it would just involve some restructuring of the existing-
Exactly.
Financing arrangements, right.
Exactly.
Okay. Secondly, just to kinda come back to the leverage targets, with IFRS 16 and the impact. Four point six was the year-end net debt to EBITDA, but the IFRS implementation based on the changes you've provided helpfully here is actually a four point two pro forma. When you talk about 3.5 times as a target in the course of 2019 or less than 3 times by 2023, that's from a starting point of 4.2, right?
Exactly. I mean, those numbers were released to or informed to you in the context of the previous IFRS norm, not IFRS 16. We have to translate that into IFRS 16, and we will do that in the course, during the course of the year.
Okay. Just to reconfirm the point, the bond redemption that was completed subsequent to the balance sheet closure, the EUR 170 million, the long-term receivable from UASC that was received before the balance sheet closed, right?
Exactly.
In December. The cash was already, so there's no change in receivables or anything, subsequent.
Exactly. That money was received in December, and we paid in February.
Understood. Sorry, one last question if I might. There was a question earlier in terms of CapEx guidance. You spent roughly EUR 329 million in 2018, but significantly more in 2017. You seem to be indicating that 2019 at 50% of depreciation would be closer to 2018 or maybe closer to. I guess the question is would it be really expected closer to the 2017 level of.
I expect closer to 50% depreciation.
Okay. That's clear. Thank you.
Welcome.
Next question comes from the line of Christian Koch of BB Biotech. Please go ahead.
Yes. Good morning, and thanks for taking my question. First, on the P&L, the interest expense has gone up in the fourth quarter. Maybe you can shed some more light on that. Secondly, there are currently discussions about extending the Consortia Block Exemption Regulation, and there are quite opposing opinions out there in the market. What is your opinion on this issue, and what is the downside? Lastly, given the strong decline in bunker prices towards year-end or in the course of the fourth quarter, is it fair to assume that you will book actually quite a nice windfall profit in the first quarter of 2019 due to the temporary bunker decline? Thank you.
Regarding the first question, in Q4 we had a deterioration in the trading of our bonds, and that generated a loss in the value of the call options of the bonds. So it's a technical valuation effect that we had in Q4 that actually was, or will be, or I expect that will be recovered during the first quarter because we were upgraded by one of the rating agencies, as Rolf commented. Therefore, I think that is already more or less fixed in terms of the value of the options.
Okay.
Yeah.
The second one, your second question on block exemption, you know, we hope that the block exemption will be extended, because it simply saves red tape. It won't change our modus operandi if it will not be extended, but it will cause more administrative burden for any VSA that has been closed. I think the last question was on the bunker writedown, which we did towards the end of the year. Yes, we did a bunker writedown at the end of the year, and of course, some of that then has a one-off positive in January, February, because that's when it basically comes back.
Okay. Excellent. Thank you very much.
Next question comes from the line of Adrian Pehl of Commerzbank. Please go ahead.
Yes. Hi, everybody. Good afternoon. Actually, two questions left from my side. First of all, just recently, obviously there was an announcement that COSCO is developing or thinking about 25,000 TEU vessels. I was just wondering whether we should see some kind of new race for bigger ship sizes and how that could affect the market. The second question is linked to the dividend that is obviously significantly lower than the last year. I was just asking myself whether it was an easy run for you to, in your discussions with the supervisory board, to reduce that or if there have been different opinions on that, but looks like finally they support the route to deleveraging. Maybe you could comment on that as good as you can. Thank you.
Yeah. Maybe the first one first. I mean, COSCO, yes, I read that too. Frankly speaking, the incremental benefits of building ever bigger vessels are declining quite rapidly. A 25,000 TEU vessel is not that much more efficient than a 20,000. Also shouldn't forget that in reality, if you declare it 25, you probably load 22. And we loaded 19 on one of our biggest ones not too long ago. The difference is maybe 10%-15% in terms of scale. I don't see that as the start of a new race. I mean, the effect of going from 4 to 8 to 15 was huge. Going from 15 to 20 or maybe 25 is not that big. You can't deploy those ships in too many places.
Also, when you look at, you know, delivering quality and reliable service, it takes forever to unload and load a ship of 25,000 TEUs, so it doesn't always result in a much better customer experience. We see the trade-off there between cost and quality and service different than they maybe do. I don't see that as the start of a new race. In terms of dividend, as we said last year, that was. Last year was, I think quite extraordinary and, you know, kind of a big thank you to our shareholders for all the support that they've given us over an extended period when it was very difficult in this industry. I think now we come back a little bit more to normality.
To your question on whether that was a difficult discussion in the supervisory board, I think you know I think everybody sees the logic of what we have proposed here. I would actually say that was a very smooth process.
All right. Thank you.
Next question comes from the line of Lars Heindorff of SEB. Please go ahead.
Yes, thank you very much. A question regarding your capacity plans going forward. If you look into what goes on right now, we can see that your charter capacities are up very, very significantly, whereas your own capacity is close to flat. In Q4 last year, you had an increase of your aggregated fleet of around about 4%, plus 7% increase in volumes. Do you expect to see or continue this kind of capacity to increase going into Q2 and Q3 into the peak season? That's the first part. Further to that, do you expect to continue to increase your utilization in the first and the second quarter?
Yeah, I think our utilization has been quite good throughout 2018, and we will always keep a very close eye on that. Yes, you're right, our charter capacity has gone up because as we said, I mean, also on a pro forma basis, we grew about 6%, and you just can't add that up on all the existing ships. Having said that, you know, chartered capacity doesn't always tell you the entire story because chartered ships are typically also for, you know, somewhat you do it on a temporary basis or because you put ships into maintenance and those type of things. I don't expect the growth of capacity to continue at a very rapid pace. We had to do something to adjust to the additional volumes that we were getting post the merger.
I don't think you're gonna see a massive growth of capacity from us throughout this year. I also don't think we have massive room to improve utilization, but there's always something you can do.
Okay, thank you very much.
Next question comes from the line of Danielle Ward of JP Morgan. Please go ahead.
Hi, thank you. I just have a couple of follow-ups, remaining. Could you tell me how much of your business now is contracted? I think the updated number that would be helpful. How much of your business now has fuel pass-through clauses, and how much hedging do you have in place on the fuel? Thank you.
Okay. Maybe let me take the first two. I mean, the contract percentage, it doesn't change materially over time. I think it's still 35%-40% if you look at on a global basis. I mean, the vast majority of those contracts has mechanisms included to recover fuel. I mean, we talk about high nineties in terms of percentage points. In terms of hedging, Nicholas can probably give us a later-
In the terms of hedging, we have a policy to hedge between 25%-35% of the total volumes. Rolling call options in a period of 12 months going forward at a strike price that is basically between 8%-15% higher than the spot price when we contract the call options. It's basically an insurance, a kind of an insurance against the very extreme events in which the budget cannot be accomplished, but we are not taking positions on the commodity.
Thank you. I guess my question on the fuel pass-through was after the emergency surcharges that were implemented, would there be a number more broadly across your portfolio aside from just contracted that you would kinda consider to have pass-through? Or should we just assume it's still that 35%-40% type?
I mean, 35%-40% is contracted volume for longer term. You have, of course, also fuel included in many of the other rates. I mean, when we talk about a spot rate that's valid only for 30 days, it becomes a little bit artificial whether you assume that fuel is included, yes or no. For the 90-day rates and/or longer than 90-day rates, we are now charging it separately. One could argue that there we have it included.
This was the last question today. Please direct any further questions to the investor relations team. I hand the conference call back to Rolf Habben Jansen for closing remarks.
Okay. Well, not much to close. Thank you very much for joining, and hope it was informative for you, and hope to speak to you again soon. Thank you very much. Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.