Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the Hapag-Lloyd Analysts and Investors Conference Call on the Nine Month Results 2018. Throughout today's recorded presentation, all participants are in a listen-only mode. The presentation will be followed by a question-and-answer session. If you'd 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 Rolf Habben Jansen, the CEO. Please go ahead, Sir.
Thank you very much, and thanks everybody on the call for joining and taking the time to listen to us. I think we'll take you through the presentation as we do usually, and then afterwards, of course, happy to take your questions. Maybe if we start on page two. Couple of opening remarks. As you will have seen from our press release, we posted a positive EBIT of $359 million in nine months, in and of itself remains a challenging market environment, even if that improved in the course of Q3. Another highlight I'd say is that we did introduce a Marine Fuel Recovery mechanism in the course of the third quarter, which will, of course, not...
None of that will kick in now, but I do believe it's important to start that discussion with shippers well ahead of the IMO 2020 rules kicking in. In terms of sector, demand has been pretty stable, but there are certainly some geopolitical risks, as we also see. Looking at the sector fundamentals, we believe that those remain favorable in the midterm, even if we have seen one large order coming in over the last couple of months, but that one has been in the making for a long time. Our financials that Nicolás will talk about in more detail afterwards, an EBITDA of close to EUR 1 billion in the first nine months, and definitely also a good operating cash flow of close to EUR 900 million.
Looking ahead, our focus will remain to deliver on the synergies, make sure that we further improve profitability and continue to deleverage, and we will also present our strategy going forward towards 2023 on our upcoming Capital Markets Day on the November 21st . Looking at financial highlights, transportation volume up 5.5% on a pro forma basis in the first nine months. Certainly, very good growth in the third quarter of around about 9% or so. Freight rates year to date up 1.4% on a pro forma basis, which is not enough to recover the rising fuel costs, so that definitely remains a concern. EBIT, EBITDA and group net profits you will have seen. Equity remains stable.
Liquidity reserve very healthy at $1.2 billion. Net debt a little bit further down at $6.5 billion. Looking at synergies on page four, we reconfirm that we are delivering the $435 million synergies that we have announced from 2019 onwards. We should also be able to achieve the 85%-90% run rate in the course of 2018. All of that is well on track. Of course, when you look at overall costs, some of that the visibility of that is somewhat limited, as we have seen also significant upward pressure on costs, for example, in charter but also in some other indirectly fuel-related items such as rail cost and trucking.
Another highlight I'd say, which we didn't put on the front page, but I do think it's worthwhile saying that we publicly launched our new web channel, which we call Quick Quotes, and we opened it up to the public in the month of August, which gives people 24 hours a day access to the tools and the ability to get quotes on almost all lanes, both port to port and door to door, every time you want it. It also allows people to book. We'll add more features to that as we go. We have seen a steady growth in that channel, and we believe it still has significant further upside.
If you look at where we are today, that today is between 5%-6% of our overall business, which is certainly better than we expected in the beginning of the year. Very optimistic about that. When looking at page six, there we talked about the Marine Fuel Recovery mechanism. As we all know, rules are changing as from the beginning of 2020. That means we have to start bunkering more expensive fuels as from the fourth quarter of 2019, and we have tried to come up with a formula there that is both cost-neutral, transparent, and also easy to understand.
To be clear, this is really something to explain to everybody in the market where those costs really are, and also what the costs are that should be incorporated in the rates, or maybe at some point in time need to be seen separate, as we also see it, for instance, in the air freight industry, where you typically pay a rate per kilo, and then it is plus plus, because everybody accepts that there is additional costs related to fuel, and in that case, also security. Ideally, we probably should migrate towards such a structure also in the shipping industry.
Looking at the sector itself on page number seven, today the outlook for the upcoming couple of years is still quite optimistic with, you know, close to 5% growth in 2019 and 2020. We are probably a little bit more cautious than that. We would anticipate a growth between 3% and 4%, and that's also underlying all of our planning going into the future, as we do think, and we've seen some of that also over the last couple of months, that some of these estimates are sorry, probably gonna come down a little bit. When looking at the order book, it continues to come down. Today, we have an order book of around 11%, despite the fact that there have been a few orders placed this year.
Still, when you look at the orders that have been placed over the last three years on the right-hand side, and in total, the orders that have been placed since 2016 are about 10% of the global fleet, which is clearly less than what is even needed to keep up with the growth that we have seen. Idle fleet's still at a fairly low percentage, which means that when looking ahead on page nine, we still think that both in 2019, but also in 2020, it is very likely that demand growth will outstrip supply growth.
As you can see, in the upper half of the graph, the outlook according to Drewry is that in 2020, we will see 1.7 million TEUs being delivered. We would, however, point out that we think that that's highly questionable, as when you look at the order book as we know it today, yeah, it would mean that still 700,000-800,000 TEUs of orders would have to be placed within the next, in reality, one or two months, yeah, because otherwise those ships cannot even be delivered anymore in 2020. Most likely that number for 2020 will end materially lower.
We also think that scrapping will go up, also, as we approach 2020 and more expensive fuel needs to be used, that will very negatively impact the economics of some of the smaller ships. That scrapping rate will go up. We also shouldn't forget that scrapping has been on very low levels already for quite a long time, 'cause the long-term trend has to be towards 4% or 4.5% as we use ships on average between 20 and 25 years. We know that we've seen a lot of new builds over the last 10 years, but we also start approaching 20-year age for a significant number of ships that have been built around 2000.
After that as an introduction, I'll hand it over to Nicolás, who will give us a bit more flavor on the numbers.
Thank you, Rolf. Good morning, everybody. Very good performance in Q3. Compared to Q3 2017, you see a volume increase of 9% year. Despite freight rates down 2% and our bunker up 45%, we improved $52 million in EBIT, which is more or less $12 per TEU more than last year. In terms of the first nine months, volumes are up 27% due to the merger, but comparing to the pro forma, the increase in volume was around 5.5%. Freight rates down 3% compared to last year, but when you compared to the pro forma is an increase of 1.4%.
Reason for this, or this basically caused a revenue increase of $1.9 billion, which is a 23% increase. While the bunker is going up 31% this first nine months compared to last year, which has been the problem basically, and explanation why we cannot deliver a result that is materially better than last year. When you go to the operational results of the first nine months, it improved compared to last year by $49 million. On a per TEU basis, it's a similar amount, which is basically explained by a lower, like bunker rate, so the increase in bunker and cost inflation, especially in those items that are fuel-related. This is compensated, of course, by synergies and improvement on volumes and utilization.
When you look at the one-off, the only one that we have is one in Q3 of $15 million, which is basically coming from a remeasurement of an investment that we have. If you correct for that, the EBIT would have been $344 million. When you look at volumes in the next slide, a very positive development, as you see. We can see on the bottom bridge, which describes the volume development on a pro forma basis. A very good development in LATAM, in the Far East, and also in the Atlantic market. We have also improved significantly recently in Africa. The next slide, you see the terms, the rates development.
We observe a decrease of 3.4% in the nominal rate year-on-year, but a slight improvement of 1.5% when you look at the pro forma basis, which is the dotted line that you see on the upper side of the graph. The bunker price going up significantly 30%. Let's go to unit cost in the next slide. 1% down, despite the $26 per TEU increase due to bunker. When you look at the other items, we basically improved $38 per TEU compared to the last year. Which is admittedly not the same base comparison because you have four months of Hapag-Lloyd standalone.
When you look at the cash flow, which is one of the highlights of the year, we have a very good operational cash flow with a cash conversion of around 90%. In terms of investment cash flow is -$221 million, mainly composed of investments of vessels and containers. Another which is basically compensated by sales of assets and dividends received. Then we have financing cash flow of $682 million, which denotes a big effort to continuing deleverage in the company. Therefore, the net effort in terms of repayment of debt is $288 million. We also have paid $295 million of interest.
Paid a dividend of $136 million in July. That gives you the $682 million approximately, and therefore, a cash balance of $694 million and a liquidity reserve of $116 million. A little bit of a comment on the balance sheet before I hand over to Rolf again. An equity of $7.2 billion. The equity ratio remains at 41%. The change compared to December 2017 is mainly explained by the dividends.
A net debt, as I just commented, $6.5 billion compared to a gross debt of $7.27 billion with a reduction of total debt of $323 million since the beginning of 2018. That leads us to a gearing of 91%. Again, finally, a very strong liquidity reserve, a very good $1.7 billion, which is a weight for the size of the company that we have today. With that, I hand it over to Rolf to go through the outlook and some final remarks.
Okay, Nicolás, thank you very much. I think on the outlook, we can be reasonably short. I think we remain. We reconfirm the outlook. Transport volume will increase. Clearly, we expect the average freight rate to be round about previous year's level. Bunker prices, we have all seen in the market, is increasing clearly. We gave you a range for EBITDA and EBIT in the month of June. Looking at what we have been able to achieve in the third quarter and what we can see at this point in time around the fourth quarter, we can reconfirm that range.
We'd also say that we should rather be in the upper part of the ranges to which we have guided as Q3 was probably or has certainly been a bit stronger than we could have anticipated some months ago. That leaves us with the major objectives for the rest of the year. We need to make sure we continue to deliver on synergies. We also will continue to focus on deleveraging the company over time. We'll continue to work on better and more digitalized solutions for our customers, but also internally to further achieve efficiencies in-house. We need to successfully implement the Marine Fuel Recovery mechanism. That discussion starts now with many of our customers as we intend to incorporate that already as from the first of January 2019.
Also worth highlighting is that we will present our new strategy for the next five years at the Capital Markets Day, which is scheduled for the November 21st. With that, we would wrap up the introduction from our side and would happily open it up for questions if you have any.
Ladies and gentlemen, if you would like to ask a question, you may press star followed by one on your touchtone telephone. If you wish to move yourself from the question queue. You may press star followed by two. If you are using speaker equipment today. Please lift the handset before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. First question comes from the line of Johan Eliason with Kepler Cheuvreux. Please go ahead.
Yes, good morning, and thank you for taking my questions. I was wondering a little bit about the very strong volume number you reported, almost 9%, and I saw it was a lot on the East-West trades. How much of that do you think is sort of temporary gains, because of the teething problems with your Japanese alliance partner?
Okay. Well, I think not so much actually. If you compare last year with this year, one should also not forget that in 2017, we were in the midst of the integration of UASC, which means that we had somewhat lower than usual growth in the third quarter of 2017. I think you see a little bit of a catch-up effect there now. I think that's one of the reasons why that's the main reason why the year-on-year looks probably a little bit stronger than market growth.
Is that valid for LATAM as well, which also performed very well? Or do you think there is more of an issue that you've taken market share as Maersk and Hamburg Süd have sort of consolidated?
I think our teams in Latin America have done a really good job over the last actually throughout this entire year. We've seen generally very good utilization of the ships that we've had in and out of Latin America. I think it's fair to say that we've probably gained a little bit of market share there, here and there. That has not been our main objective, though. Our main objective has always been to make sure that we utilize the assets that we deploy as good as we can. You always see that in some markets that works exceptionally well, and in some others, maybe less well.
On the whole, I think we've seen very good asset utilization over the last couple of months, which is, of course, also one of the drivers of in itself, I think, a pretty satisfactory result.
You have a debt reduction target. Obviously, cash flow was pretty decent in this quarter. Do you think you can still reach this sort of 3.5 x mid-2019 that you were talking about before, net debt to EBITDA?
Yes. I think, I mean, the target continues to be that one, and we expect to reach the 3.5 x in the debt to EBITDA by 2019. If you look at the position that we had at the moment of the merger was around 7.7x-8 x. Today, if you count the last 12 months, we are below five. So we have had significant progress in the last two years, and we expect to continue the same path through 2019 in order to achieve the target.
Finally, potential scrubber CapEx wouldn't derail that target in your view?
No.
Okay. Thank you very much.
Next question comes from the line of David Kerstens from Jefferies. Please go ahead.
Hi, good morning, gentlemen. First of all, a question on your new marine fuel recovery mechanism, please. To what extent do you think that will be more successful than the more recent bunker surcharges that were implemented back in June, and particularly in a potentially slowing market environment next year? What is different, and why do you think that those price increases will, you know, more likely stick? Now secondly, regarding the potential fuel mix on the IMO 2020, can you give an update on how you expect the mix will look like in terms of breakdown versus high and low sulfur fuel and potentially LNG?
I was also wondering if you could already share maybe some more background on the economics of LNG shipping versus the use of traditional fuel. Thank you very much.
Thank you. Well, first of all, when you look at the MFR, in fairness, when you look today at the situation around the bunker formulas, the vast majority of our long-term contracts actually contains a bunker formula. It's not that today we do not have that. When we look ahead, we believe that we've developed a mechanism that is actually, as we said, it's causal. It's transparent and fair. We also shouldn't forget that in the end, because of the extra costs that are coming towards us, those costs will have to be passed on because they are simply too much for anyone to absorb.
If we take our base case scenario, where fuel will be about $250 a ton more expensive than it is today, that for us is an additional bill of about $1 billion, yeah? Which means that if you look at some of our larger competitors, these numbers are even significantly bigger, yeah. Those costs will have to be passed on. The question is, how will that be done? I don't share your view that the market environment over the upcoming couple of years will necessarily be weaker. If you look at the fundamentals of supply and demand, you'll see that it's quite likely that over the upcoming couple of years, demand growth will actually outstrip supply growth, which should help a little bit there.
As far as the fuel mix, your second question, we expect that the vast majority of the ships, say 95% of them, will use low sulfur fuel. That is also the default that we calculate. There will only be a very small number of ships that will have installed scrubbers. As far as LNG, unfortunately, there's very little that can be said about the economics of that, as there's still a lot of uncertainty around the supply, as well as around some of the technology. We will convert one ship into LNG in the beginning of 2020.
By that time, we should also then have a better view on what is LNG actually going to cost, including the cost of supply and what is also going to be actual consumption and actual cost of running a ship on LNG. If that looks good, then we will certainly consider to convert also the remaining 16 vessels that we could convert, based on the technical specifications they have.
Okay, very good. Can I ask one additional question regarding scrapping expectations? You highlighted an expected increase for the industry. What do you think will be driving that in 2019, and what are your plans in that respect?
I mean, first of all, if you look at what we have been doing over the last years, then you may have seen that as we merged with CSAV, we took out 16 ships. When we merged with UASC last year, we took out 10. We actually took out 26, which is a fairly significant chunk of our fleet over the last couple of years.
I expect it to go up because when you look at a fairly large class of vessels that we still have today that are between 15 and 20 years old and that are size-wise below what makes economic sense and that also have engines that consume quite a lot of fuel, the economics of those vessels will deteriorate so rapidly going into 2020 when fuel becomes, say, $250 a ton more expensive, that the likelihood that quite a lot of them will be scrapped is high also because doing an investment in scrubbers for those ships simply doesn't make economic sense given the age of the vessels. I mean, if you look also at scrapping this year, it's been very low and almost nothing in the first nine months.
You actually see over the last eight to 10 weeks also a pickup already of the number of ships that's being scrapped, and I will not be surprised if that's being further accelerated throughout 2019.
Great. Thank you very much.
Next question comes from the line of Neil Glynn with Credit Suisse. Please go ahead.
Oh, good morning. If I could ask two questions, please. The first one, I guess, a bigger picture question on as we go into 2019, I guess, Rolf, you've been clear that you expect demand to outstrip supply, and obviously we'll be educated on that as the time ticks by. In the scenario where 2019 is a good year, certainly I would be concerned that the sector as a whole will kind of use that, and that may well influence whether it's scrapping, whether it's idling capacity and discipline in terms of passing on bunker fuel prices into 2020. I'm just interested in your view on that.
It seemed to me where we've had bouts of optimism in the past, it has shaken discipline, albeit maybe with a lower level of capacity growth that makes 2020 a bit different. Just a more precise shorter-term question for Nicolás. Could you help us in terms of your bunker fuel bill expectations for 2018? I'm just conscious that the timing of your procurement of fuel and the timing of vessel commencement or voyage commencement can have an influence there. The fuel price is obviously volatile now, so it would be nice to get that nailed down. Thank you.
Okay, let me take the first one. I mean, your bigger picture question on 2019. For me, the biggest unknown for 2019 is probably demand growth. If we see demand growth next year of between 3% and 4%, then the likelihood that we will see a better balance between supply and demand is high. And I think that, you know, gives us some reason to be cautiously optimistic, not only about 2019, but also about that ability to indeed pass on the higher fuel costs. Having said that, these higher fuel costs will have to be passed on anyway, simply because the cost, as I mentioned earlier, are so high that nobody can afford to absorb that, even if the market would slightly improve.
I'll hand it over to Nicolás on the bunker.
It's difficult to anticipate prices, but we see, I mean, of course, a price increase during the year witnessing a 30% increase. In the third quarter, we had a bunker of $446 per ton. In terms of the remaining part of the year, we see some improvements in bunker, some decreases in bunker price, due to the fact that the impact on the Iran embargo is not necessarily the one that the market expected a couple of weeks ago. We'll see that development. I mean, we cannot, I cannot anticipate how much the bunker will continue decreasing or basically maintaining at the same level.
That's why I think it's too early to say how we see the year ending in terms of unit price for bunker.
Okay, thank you.
Next question comes from line of Robert Joynson with Exane BNP Paribas. Please go ahead.
Good morning, everybody. A couple of questions from me, please. First of all, if I look at the balance sheet, the net debt has declined slightly versus 2017, but obviously not to the extent that we would have hoped for. Given that de-gearing the balance sheet is quite an important part of the Hapag-Lloyd investment case, and obviously that appears unlikely to happen in any significant way during 2018. Could you just comment on whether that has any implications in terms of the timing of ordering new vessels? And then the second question on sailing speeds. Obviously, you've talked about fuel costs increasing quite a lot over the next year or so ahead of IMO 2020. Could you just explain how that influences Hapag-Lloyd's thinking with respect to sailing speeds going forward?
Do you have any plans to reduce sailing speeds, materially because of the higher fuel bill? Thank you.
In terms of the first question, I mean, the pace at which we are decreasing the debt or the net debt is pretty much within the expectations we had. We could have done a little bit more this year because of the bunker increase, of course, and the inflation, of course, related to fuel. Perhaps we have a little bit of a delay compared to the expectation we had two years ago, but the pace is pretty much within the range of expectation. When I commented a couple of minutes ago that we had between 7.5x and 7.8x net debt to EBITDA the moment we merged. Today, we are below five. The progress is pretty visible.
We expect to continue continuing the same path. If you look at the improvement in Q3 in EBITDA, so you will see that we can make it in 2019 in terms of the value that we have of EUR 3.5. Of course, I mean, the development of the market, it will be considered at any moment of time when we have to invest in new vessels. That's something to be seen. We, as we have said, persistently, we don't have the necessity at this moment to order vessels. We are basically reassessing that situation all the time, analyzing when that necessity will come.
We still have the ability to increase capacity with time charters and lease a few vessels here and there, because our ownership is basically 2/3, significantly higher than the average of the industry. We still have some buffer there that we can use before we order vessels. That's basically my view. I believe that the deleveraging process is pretty much on track, and we are optimistic that the target will be fulfilled.
Maybe one comment to that. I mean, if you look at our financial debt at the time of the merger, and you look at it where we are now, also towards the end of the year, you will still see that our financial debt has decreased with $1.5 billion or $1.6 billion.
Yeah.
Which I think is, you know, pretty much as Nicolás said, in line with what we anticipated. Your question on speed-
Yeah.
Fuel. I mean, we do not have any plans right now to materially change the speed of our vessels. We have in the course of this year, but that also had to do with schedule reliability. We have added a number of vessels in a couple of the services that we have, notably on the Atlantic, but also on a couple of other trades, which will allow us to sail a little bit slower in some of the services, but we do not have a general plan to reduce speed across the network.
Thank you. Maybe just one final question. On the Q2 conference call, you mentioned that some discussions were taking place with regards to potentially increasing the size of the free floats. Could you maybe just comment on whether there's been any developments in that respect over the past few months? Thank you.
I mean, I think the free float today is low.
Yeah.
I think we said in Q2 that it is our intention to over time, work on increasing the free float, but there is nothing material to report on that right now.
Okay, thank you.
Next question comes from the line of Tom Gibney with Bank of America Merrill Lynch. Please go ahead.
Good morning. Some of the adjusted EBITDA increase was down to lower maintenance costs, or maintenance, repair and other. Could you just give a bit of color around why that fell, and whether that's kind of a phasing thing and we should expect a catch up later? To what extent have you concluded any longer term contracts for next year? If you have, how do the rates compare? Lastly, with respect to the 2020 fuel mix, do you expect to be able to use blends to get to a 0.5% sulfur content?
Do you think that you may end up opting for just MDO for the majority of your fuel consumption to start with at least?
With respect to the first question, in maintenance, we have an item that is called others, and that others is valuation effect from FX. The main improvement that you see or the majority of the improvement that you see, we also have some, a little bit of an improvement on maintenance itself. The main improvement is coming from FX valuation effects.
Okay. To the second and third question. For long-term contracts going into 2019, it's too early. I mean, first negotiations are starting, but there's nothing material that has been concluded at this point in time. As far as IMO 2020 and fuel to be used, we anticipate that there will be sufficient fuel with 0.5% sulfur available. Some of that will come straight from the refineries, some of it will be blends. We do not anticipate that we have to use MDO in all cases.
Okay, thank you. Just on that, sorry, that valuation effects from FX. Do you think that there'll be a similar movement in the fourth quarter, or was that primarily concentrated in the third quarter?
No, that is the valuation effect primarily recently in the third quarter. I don't know. I cannot respond to you what the future will come, but the spot. You have to see at the FX, U.S. dollar-euro, which is the main effect there.
Okay. Thank you.
Next question comes from the line of Danielle Ward with JP Morgan. Please go ahead.
Hi. Thanks very much. My first question is on your guidance. Just simplistically looking at what to imply for Q4, it looks like you're anticipating EBITDA to be flat to down year-over-year, even taking the top end of the range of EBITDA. Just wondered if you could expand a bit on whether that's correct and what the drivers would be behind that, just given the Q3 improvements. Secondly, there's been a lot of talk in the sector away from you about expanding into logistics. So, I just wondered if you could provide some thoughts on that. Finally, I know the Transpacific route is not huge for you guys, but I'd just be interested in any commentary on the tariff environment, any trade pull forward, competition as well.
It's been touched upon already on the market share gains, possibly there. Just your general thoughts on how tariffs are taking effect on that route. Thank you.
Okay. I mean, first of all, I think in terms of guidance, there's not much more to say than what we already said. I think we've seen a Q3 that was certainly on the upper end of our expectations. As a consequence of that, we also expect to end at the upper end of the guidance that we have given earlier. Not much more to be said to that at this point in time. In terms of your question on logistics, I mean, I think it's quite interesting to see that there are different strategies with the different carriers.
We see that people like Maersk and CMA are going in different ways, actually also investing in logistics as Maersk integrates part of their formerly separate logistics business. Then CMA takes a share or controlling share probably at some point in time in CEVA but does not intend to merge the companies. You see others like us, but also a few of the other carriers remaining very much focused on our core ocean business and trying to make the most out of that and develop maybe some additional services around them. We have no intention to buy ourselves into the logistics space.
As far as the TP is concerned, as you rightfully point out, I mean, for us, we are relatively small on that trade. That trade has been quite good the last couple of months. Volumes remain strong at this point in time. Of course, there is a big uncertainty looking into 2019, depending on what comes out of the talks between China and the U.S. I do believe that some volume will potentially be pulled forward into 2018. We certainly anticipate somewhat slower growth in the first half of 2019. What happens beyond that is going to be very much dependent on what comes out of the talks between China and the U.S.
Thank you.
Mm-hmm.
Next question comes from the line of Dominic Edye with UBS. Please go ahead.
Yeah. Hi there. Two from me, please. Firstly, just on your capacity plans, obviously, as you alluded to earlier, you've been scrapping some of the older owned vessels that you've had, but you've been growing your charter fleet quite aggressively. Can you just say, and I know that you've also been going into various new markets like East Africa, for instance. Can you just maybe talk about where you see yourself, whether you see yourself sort of growing organically, taking share that way, over the midterm, and where you see the value in chartering versus owning at the moment, just beyond, you know, the sort of, you know, where your balance sheet issues, but just on the pure economics of it. Then the second question is, I know you talked about demand growth versus supply growth for the industry.
Isn't one of the big issues this year having been that Asia-Europe's been so weak or relatively weak, that that's really not had a great impact due to the number of very large vessels coming in, which are, you know, predominantly on that trade route. How much do you think for 2019 onwards, your predictions of a better market are predicated on a recovering or good growth on Asia-Europe? Thanks so much.
Well, first of all, in terms of capacity, you know, I think you can expect us to grow roughly in line with the market, yeah, over the upcoming year or two or three. We do not have any intention to go aggressively out there to try and take market share. We've seen good volume growth this year, but that's also because we've had very good asset utilization, and also because the comps compared to the quarter in which we integrated last year look, you know, probably a little bit better than they would be on a going concern basis. If you look at what we will do going forward, we'll likely over the upcoming years still grow through chartering, but only at a slow pace.
In terms of demand supply, you are right that growth in Asia Europe has been disappointing this year. We all knew that quite a lot of big ships were gonna come into that trade as of the beginning of this year. Frankly speaking, I'm not that surprised that it's been a tougher year for that market. There's certainly also. I mean, it's not if you listen to people in the market, then it's not entirely unlikely that especially China today focuses a lot on the U.S. to make sure that they get as many goods as they can into the U.S. before potentially further tariffs kick in. That capacity is not available to ship it into other markets.
One can also not rule out that there will be a little bit of a shift to other trades if the Pacific would be weaker in the first half of next year. I think the demand supply in the end is not dependent only on one trade, as there is always a lot of cascading from vessels from one trade to another. I still believe that if we see the 3%-4% growth that we indicated earlier on, with a slower net growth of the global fleet with relatively low idle capacity at this point in time, that there is certainly the fundamentals in the midterm remain favorable.
One can never predict whether that means that the rates go up in Q4, Q1 or Q2, because those market dynamics are just rather volatile.
Sure. Can I just ask one follow-up on that? Just on the economics of both, well, particularly Asia Europe for yourself, but also the Transpacific. How much of a headwind has the weaker backhaul volumes, particularly obviously given the scrap, you know, the scrapping ban and, you know, the ban on scrap metal, et cetera, and plastic into China, how much has that impacted the economics of the entire route?
Well, to be honest, not that much because the rates for those commodities are typically so ridiculously low.
Yeah.
that you don't make any money on it anyway. Whether you move the container empty or whether you move it with waste paper or scrap, unfortunately, in many cases, does not make a huge difference.
Okay. Thank you very much.
Next question comes from the line of Sathish Sivakumar with Citigroup. Please go ahead.
Morning. I have a couple of questions. One is on the Quick Quotes. What has been the adoption rate so far? I know you launched it in August. It's been only a few months, but I just want to understand the adoption rate.
The adoption rate of what?
Quick Quotes.
Quick Quotes, okay.
Yeah. What has been your typical customer mix for Quick Quotes? The second one is on the IMO 2020 and also scrubber. In Q2 results, you said that you're doing some pilot testing for scrubbers. Do you have any update on where you are on testing scrubbers in your larger vessels, and are the results been favorable so far, or is there something that surprises you that might change your view towards IMO 2020 fuel mix?
Okay. Well, yeah, let me try and take them both. I think, well, first of all, around Quick Quotes, I think we've actually been very, positively surprised about the uptick that we have seen. If you look at where we are today, after only a few months, we have. I think we issue between 80,000 and 100,000 quotes every week. Yeah. We have several thousand customers booking on it every week. Yeah. And we have, I think on average, between 10,000 and 15 ,000 customers on the platform, every week. So that's actually quite a good achievement if you take into account that we're only a few months into it. In terms of the customer mix, probably a little bit too early to say too much about.
The early indications are that it's actually quite an interesting mix of both smaller and medium-sized customers, but we also see a significant number of both larger and smaller NVOs on the platform. It's actually a fairly good reflection of the overall book of business that we have. As far as your question on scrubbers, I mean, we don't have too much to report there. I mean, we're gonna do the first pilots in the beginning of 2019, and as such, we are planning those as we speak. As soon as we have some first results of that, I mean that in reality will be in Q2 2019.
Oh, okay. Yeah. Thank you. Just to follow up on the Quick Quotes thing. So you mentioned that, yeah, it's too early to say about the customer mix, but is there any data on which region has seen more uptake in terms of customer mix?
I mean, it varies a little bit by country. It's a little bit too early to draw conclusions from that. I mean, we have, for example, seen, you know, very good response in and around the Middle East. Yeah. In some other markets, it takes a little bit longer. I think we probably need another couple of quarters of experience to understand where it is working best and where do we still need to do more.
Okay. Yeah. Thank you.
Next question comes from the line of Parash Jain with HSBC. Please go ahead.
Yeah. Hi. Thanks. I have two questions, and excuse me for being repetitive. First, on trade war and second on IMO 2020. With respect to trade war, as you mentioned during your discussion that there could be potential front-loading of volume going into the remainder of 2018. At the same time, when we look at U.S. retail sales to inventory data, it doesn't give any sign of restocking. While your hard data says that, probably the underlying conviction is very strong, and we may not have a surge in restocking ahead of January 2019. To your commentary, like, do you see it's more of a fear than a reality that we are seeing front-loading?
On second question with respect to IMO 2020, I mean, rightly or wrongly, some of your competitors are ahead and have adopted scrubbers in their larger vessels, perhaps would be impacting Asia, Europe. Going into 2020, given the fact that the vessels with the scrubber perhaps will have 7%-10% cost advantage purely on the, on the fuel spread, do you think it would emerge a two-tiering pricing market, or you would think that one would be able to gravitate the others in the sense that a scrubber. The ships with the scrubber perhaps will make tons of money at the expense of ships burning clean fuel. Thank you.
Well, the first question on the trade war and I mean, we've seen those data also on U.S. retail sales and that seem to indicate that there's no massive restocking. I still think there is a little bit of that, but that's admittedly more anecdotal. From talking to a number of large U.S. customers, you don't really see that in those ratios, but I think there is still a little bit of that going on. I also do not believe that the trade will fall off a cliff, yeah, no matter what happens. In the end, many of the goods that are being manufactured in Asia will continue to be manufactured there. Maybe they then don't come all from China, but more of it will come from Southeast Asia and India.
I believe that's a shift that we will anyway see. I still think there's a possibility that we see somewhat of an effect over the first six months. In terms of IMO 2020, I don't see the point you are making also because no matter how long you look at it, in the end, there will be no more than 5% of the global fleet that will be installed with scrubbers, as we approach the January first, 2020. That means 95% of the vessels basically has to carry the more expensive fuel. We also don't know what the spread will be between that, and we don't know how long that will last. I personally don't really see that.
I also don't agree with you that, you know, we are in your words sort of behind. I think in the end, you will also see that we will also be pretty close to that 5% of capacity or 7% of capacity that will be using scrubbers by the time we get to first of January 2020. We will be pretty much in the market there, I think. Because it's only such a small percentage, it will not have a detrimental effect on relative earnings.
No, I hear you. What I wanted to get to is that even if you take 5%, for instance, that would mean that if that 5% goes to effectively large vessels going into Asia, Europe, that probably will be material. Let's say 25%, or I don't know, maybe a third of the ships will have a scrubber. Would that not impact that particular trade lane?
I mean, you can of course, you know, make all kinds of theories around that, but I don't, I personally don't see that. If we talk a lot about it, and there's all kinds of numbers flying around, but should just look at the actual number of ships that today has scrubbers, it's very, very small, yeah. I don't see that.
To give you the same answer with a mathematical calculation. If you assume $200 gap between low and high sulfur, and only 5% of the capacity has an advantage. You have basically $200 multiplied by 5%. You have only $10. Then you need in total, right, on average.
Okay.
You need only 0.4 tons of bunker to move one TEU on average.
Yeah.
That means that the total is $4 per TEU.
Okay. Fair enough. Thank you.
Next question comes from the line of Johan Eliason with Kepler Cheuvreux. Please go ahead.
Yes, I was just coming back with some detailed question here on your low sulfur fuel consumption. It looks like between the quarters, you shift quite a lot between MDO and the sort of low sulfur MFOs blends. What's the reason behind that? How do you think that mix then will eventually look like come 2020?
I mean, there may be a little bit of a shift. There is no structural shift between the various blends. If you look at the way that we account for all of this is all based on when do, we end certain voyages. I mean, if I saw it correctly, if you compare last year with this year, I mean, we still have between low sulfur and MDO, 13% of the total. It's just that, 7% and 6% are now 6% and 7%. I don't think that's a material shift to be honest.
Yeah. Okay. Just another question. We have obviously seen the Korean shipyards getting this big order from HMM recently financed by the Korea Development Bank. And we have heard comments from the European Commission and the Japanese government on fair subsidies. What do you think could be the outcome of this? Will there be subsidies to European, Japanese liners ordering ships as well? Or what do you think will be the impact of this apart from, obviously, this, was it 20 new ships coming for HMM by 2020? Thank you.
Well, I think we share the concern. I mean, we've always said that it. We think it's very important that we have a level playing field.
Yeah.
As such, you know, we are not in favor of government subsidies in the form that it's being done in that case. Then I think there's one or two other examples as well. In the end, I think it's also up to the regulators to properly follow up on this. Of course, it is not a good situation when you have a company that is not generating any cash or any money and is posting significantly negative results, then is being incentivized to spend a lot of money on new ships in a situation where nobody else could do that. I mean, we could not do something like that. I don't think and I don't hope that the Japanese and Europeans will then start giving subsidies to us and others.
We would rather have that other governments do not give any subsidies to others as well. We're all on the same page.
Are there any discussions now in the world of trade wars that subsidized companies would have some extra levies on the deliveries into Europe or other Europe?
I don't know. I'm not the right person to ask that question, I think.
Okay.
You can ask that to the E.U. Yeah.
Yep. Fine. Thank you.
Next question comes from the line of Lars Heindorff with SEB. Please go ahead.
This morning, thank you also. Rolf, couple questions from my part. Firstly, regarding the low sulfur. I perfectly understand where you're coming from in terms of your view that you need to pass on this increase in the fuel bill. Maybe if you could give us a little bit of insight to how customers have been receiving your new low sulfur surcharge here, if you have been in any discussions or negotiations with those customers. That's the first one. Thank you.
Well, I think generally we have received quite good feedback on the mechanism that we have proposed, because most people can understand where we're coming from, and you can also check it, and based on external source, you can also see that it's actually a fair proposition. Now we're in the process of putting that into the contracts for next year. We have seen somewhere that has gone well. There's others that are still under discussion. Overall, I would say that the initial feedback has actually been quite positive also because most of the shippers also understand that this additional cost is so significant that in the end, everybody will need to carry it.
We shouldn't forget that for most shippers, it's not only, or it's not mainly important that they get a low rate as ocean shipping is anyway quite cost efficient. The most important thing is that they pay the same as their competitors. Yeah. If in the end, the overall rate in the market would be because of this change in regulation, $100 per TEU or so more expensive, well, that will not dramatically change the economics of most of the people that source abroad.
Okay. Secondly, a follow-up on earlier questions regarding capacity. You've been increasing your capacity by, I think it's 8% or 9% roughly, and as was mentioned earlier also that you've been ramping up in terms of charter in, that will probably lead to a continued quite significant rise, at least in Q4 and probably also in Q1 and Q2. I think you mentioned in your answer that you expect to grow in line with the market. Will that happen already here from early in 2019 or when do you expect to do that, given the recent ramp up you've seen in charter in capacity?
Yeah. Bear in mind, we shouldn't get too much carried away by charter-in capacity because in the end, it is all about what is the number of slots that we have available to carry the goods. The slots that we have available to carry the goods are not increasing by the percentage you indicate, but actually by a significantly smaller percentage. Based on the increase in allocation that we will see in 2019, we should grow roughly with the market but will not be able to grow much faster than that.
Okay. Last one regarding Latin America. The rates were only marginally up. As far as I understand, there's been a marked difference between South America East and West Coast, following the introduction of new capacity from COSCO and Double O. Could you give us any flavor of how you see that rate development playing out here going into the fourth quarter?
It is very difficult to look ahead into that. We know that the rates in and out of South America traditionally fluctuate quite a lot.
Yeah.
They do that also this year. It's too early to say something meaningful on that. I mean, it's almost a flavor of the week or the flavor of the month. One month you think that the East Coast is strong, then you think the West Coast is strong, then both are strong or both are weak. I mean, it's a rather volatile trade, and that's, I believe why having a longer term perspective on that trade is actually quite important.
Yeah.
We believe that it's a market that's gonna continue to develop well.
Yeah.
We've done well there over the last year or so in terms of growth and hopefully it will continue like that, but to do a rate prediction for the next three months is unfortunately very difficult.
Okay. All right. Thank you very much.
Next question comes from the line of Tom Gibney with Bank of America Merrill Lynch. Please go ahead. Mr. Gibney, your line is open. Please go ahead.
To what extent have you brought forward low-sulfur fuel for 2020? Is it still pretty much negligible?
That's correct.
Thank you.
There are no further questions at this time. I would like to hand back to Rolf Habben Jansen for closing remarks.
Okay. Well, thank you all very much for taking the time and for joining. Hopefully, that was informative and, hope to hear or speak to you again soon. Thank you very much.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.