Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thanks for joining the Hapag-Lloyd Analysts and Investors Conference Call on the report on the first half year 2018. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a Q&A session. If you'd like to ask a question, you may do so by pressing star followed by one on your touch-tone telephone. Please press the * key followed by zero for operator assistance. I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead, sir.
Good morning. Thank you very much, and welcome everybody. Thank you for taking the time to listen to us on the results presentation. If we directly dive into that, I would start with a couple of opening remarks. I think when we look at the highlights of the first half year, it's a positive EBIT of $107 million in definitely not an easy market environment. We're on track in capturing the synergies. If you look at the sector, I think it's been a tough first half year for the sector, even if demand has been fairly strong. We certainly don't see a big volume problem in the market.
Of course, not only for us, but I think for the sector, the first half has been somewhat disappointing, even if, when you look at the fundamentals, which we'll do in a minute, those in the medium term still look fairly favorable, so a recovery should come. When we look at our financials, EBITDA slightly over $ 0.5 billion in the first half. If you compare that with the first half of 2017, that's of course positive versus the external numbers, roughly flat, if you compare it to the pro forma. Definitely good operating cash flow. Yeah, almost 100% cash conversion.
If we look ahead, focus will remain on synergies and try to work on profitability and of course, also further deleveraging, and we also intend to finalize our strategy towards 2023 in the latter part of this year. Looking at the numbers in a bit more depth on page 3, transport volume on a pro forma basis up about 4%. If you look at the freight rate on a pro forma basis, up about 3%. EBITDA already mentioned and all the other figures indicated. I think we are largely doing what we planned. We continue to work on transport expenses. Our equity base is healthy, liquidity reserve solid, and net debt did come down in the first half year, more or less as planned.
On page 4, looking at the synergies, there we are on track to get to up to 90% of the full run rate in 2018. Unfortunately, some of the visibility of some of the synergies in the P&L of the first half is somewhat limited because there are clearly a number of counter effects in other items, which is of course bunker, but it is also about charter rates, and it's also about additional costs that we've seen in intermodal, particularly in the U.S. Looking at the sector on page 5, we still believe that container shipping remains a growth industry.
As we've said before, if you look here at the IHS figures from June, yeah, and the IMF figures looking at April and July, we still see people predicting a growth for 2018 of around 5%. As we've said before, we believe that that's on the upper end of how we see the market. We've seen a growth ourselves of about 4% in the first half year. We think that that's roughly in line with market. From everything we can see right now, the second half looks to be a little bit stronger, yeah, year-on-year.
Overall, I think these figures indicate still a growth industry, but it will always be some peaks and troughs and, maybe we're gonna end up this year a little bit below this number. We've always said we plan with 3%-5%. From that perspective, I think we are okay. There are, however, certainly a number of geopolitical risks. If you look today at the situation and compare it with, say, half a year or a year ago, then it is clear that there is more geopolitical uncertainty today than there probably was six or twelve months ago. If you look at the main areas of concern, of course, the trade on the Atlantic, where we are pretty big and where we have a significant exposure.
I think there we see some positive signs as the U.S. and Europe have now indicated that they will not do anything more there, but jointly will try to come to an amicable solution. We would see that as very positive. We think the risk there is certainly down compared to some months ago. Between U.S. and China, we have unfortunately not reached that yet. Hopefully we'll see some good developments there in the upcoming couple of months. So far, all these things have not had any major impact on volume. Of course, if these tensions remain or if the conflicts further escalate, that could certainly have an effect in 2019 and beyond.
Looking a little bit more at the sector and looking at supply, we continue to see the order book coming down. If you look at where we are now, we have an order book of around 11%, which historically is probably one of the lowest that we have ever had, yeah. If you look at orders placed, some have been placed this year, but again, orders placed are very low. Idle fleet has been coming up a bit. But all in all, an order book of 11% with a growth of 4% and an order book that covers 2.5 years, I mean, that order book is really on the low side of what we actually need midterm.
As such, we remain cautiously optimistic that we will see a further improvement in the supply/demand balance over the upcoming years. Also, because the planned deliveries for the upcoming years are just not that high. If we look at that on page 8, we see that in 2018, we're probably, in the end, gonna see a net capacity growth that's gonna be around about 5%, which is more or less in line with what demand growth is predicted to be as well. If we look at 2019, we clearly expect demand growth to be stronger than supply growth.
If we look at 2020, you actually see here on the right-hand side of the slide number 8, you see a bar which indicates an outlook that indicates that there's gonna be 1.5 million of new capacity in 2020. We know that that's the experts outlook. We actually doubt that a bit because that would mean that about 1 million of capacity would still need to be ordered in the remainder of this year, which we think is definitely on the high side of what one would expect. All in all, small order book, not too many orders being placed, idle fleet, very low, yeah. All of this continues to indicate that we're gonna see a better balance between supply and demand in the upcoming couple of years.
From that perspective, we remain, if you want, cautiously optimistic. Last point from my side on operational costs. Already mentioned. This chart, number 9, illustrates the environment that we have been in. Freight rates have been rather flat. I think if you look at the year-on-year development in the Q2 , then our freight rate is a little bit down, which is, I think, in line with what we've so far seen from competitors that have published. Bunker price is clearly up quite a lot. The other piece that, of course, bites us is the charter rates, which have come up a lot year-on-year, even if in the last number of weeks, that market seems to ease a little bit.
With that, we'll go into the numbers, and I'll hand it over to Nicolás.
Thank you. Good morning, everybody. In page 10, you have the main KPIs and the result of the quarter and also Q2. When you look at the semester, so the first half of the year, we have, as Rolf commented in the beginning, a significant increase in volume of 39%, mainly explained by UASC. When you compare with the pro forma, then the increase is 3.9%, aligned with the market, but not so steep as the growth on a standalone basis. The freight rate is down 4% compared to last year. When you compare with the pro forma, it is increasing 3%, and the reason behind...
This is basically the reason behind the increase in revenue that you see there of around $1.7 billion, which is representing around 34% increase in revenue. The bunker is basically the main problem of the industry and of Hapag-Lloyd in the semester, 23% up. The operational result, as a consequence of that, in terms of on a per-TEU basis, deteriorated compared to last year. It is on an absolute perspective, better $7 million. But in dollars per TEU, we have a deterioration of around $6 per TEU. The reason behind this is basically cost inflation, especially the fuel related items, that not only bunker, but also some other items that are related to fuel, that increased significantly compared to last year.
In the next slide, you have some operational KPIs. Here are the volumes in greater detail. You can see there the growth. Very good growth in Latin America-related trades. Mexico and the Far East is also strong. In the Middle East trades, you see a little bit the opposite, I mean, a little bit overcapacity and a lot of competition in those trades led a little bit weaker growth in those trades. When you look at the freight rate in the next slide, number 12, and you see basically the evolution of the main freight rate, you see there the minus 4.2%, on a nominal basis.
When you compare with the pro forma, it's actually an increase of 3%, as you see from 999 to 1,020. On the bottom of this graph, you also see the bunker going up significantly by 23.4% from 312 - 385, as I just commented. On a unitary cost perspective, as you see in page 13, we continue improving when you compare to last year, but you have to consider that last year we are comparing with Hapag-Lloyd standalone. Basically, despite the fact that the bunker went up $19 per TEU, we managed to improve around $21 per TEU. So that's a good news overall.
You have to consider that this is a comparison with Hapag-Lloyd standalone. In the next slide you see the cash flows. Very good generation of cash flow in the first semester. It's around 97% cash conversion against EBITDA, so we're happy with that. In terms of investment cash flow, it's -$55 million overall, driven by investment in vessels and containers of around $125 million, and partially compensated by dividends and the sales of old vessels that we have decided to divest in the beginning of the year. The financing cash flow is, as you see, -$525 million. Again, it denotes a significant effort to deleverage the company.
We have basically repaid around, as you see there on a net perspective, $379 million. The $577 million ± $198 million of new uptakes. With that, we arrived to a cash balance of around $640 million as you see there. Along with the availability of cash in credit lines, we had a significant and very strong liquidity reserve at the end of second semester of around $1.616 billion. Let's look a little bit at the balance, a little bit more on the balance sheet. We see an equity of around $7.15 billion, which represents 41% equity ratio, very stable compared to the last quarter.
Net debt is $6.5 billion, which is basically a reduction of $400 million compared to the beginning of the year. We still continuing that path of leverage, deleveraging the company, and that is evident in the numbers. A very, very strong liquidity reserve, as you see, of around $1.16 billion. With that, I would like to hand over back to Rolf to the outlook and the closing remarks.
Thank you, Nicolás. That brings us to page 16, which is our outlook. I mean, we basically here reiterate the outlook that we have given when we adjusted that in the month of June, which means that, in terms of volume, we expect that to increase clearly, in 2018. We expect the average freight rate to land round about the same level as we saw last year. Average bunker price, very increasing clearly, and the range that we've given for EBITDA remains valid for EBIT and EBITDA. If we look at page 17, what are our objectives for the second half of 2018.
First and foremost, we must continue to deliver on synergies and also find other further improvements on the cost side, and we should continue to deleverage the company, as we have stated many times before. We'll focus more and more on all kinds of digitalized solutions, not only internally, but likely also some things that we'll be able to offer to the customer. We'll need to deal with the regulatory changes that are coming up, most important one being the IMO regulations that are gonna kick in as from the beginning of 2020. We'll need to make sure that we continue to do everything we can to be properly prepared for that.
As you know, we have been working on our strategy towards 2023, and we are in the process of wrapping that up, and we'll certainly do that towards the end of the Q3 , beginning of the Q4 . With that, we would wrap it up. Thank you very much so far for listening. We're happy to take any questions that you may have.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you 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 Alexia Dogani from J.P. Morgan. Please go ahead.
Hi. A couple of questions from me. First, can you discuss a little bit the trends that you've been seeing in Q3, and is it sort of in line with your expectations? My next question would relate to what's been driving the lower scrapping, and is that the reason why supply is now again bigger than demand for 2018? Finally, on IMO 2020, given the challenges of passing on higher bunker costs this year, can you update us a bit on your thoughts on how you're going to be coping with that in 2020, and also update plans on scrubbers and LNG conversions?
Okay. Thank you. Well, let me try and take them one by one. I mean, if we look at Q3, I would say that Q3 currently develops the way that we have been anticipating since a few months. That means that volume is strong, yeah? It also means that we see somewhat of a recovery of the freight rates. If you look at, you asked about scrapping. Well, I think you are right. I mean, scrapping this year has been unexpectedly low, yeah? If you look 18 or 24 months ahead, it's very likely that will accelerate, yeah?
If anything, because we are getting those new regulations that you are also referring to, which will make old ships even less attractive. It's very likely that scrapping will increase. When exactly and at which phase is, of course, difficult to predict. In terms of the preparation for the new regulation, I mean, in terms of LNG and scrubbers, we have decided to do a pilot with scrubbers, which will start in the beginning of 2019. Dependent on the results of that, we may do more of that. On LNG, we are looking at the possibility to convert at least one of the LNG-ready ships that were bought by UASC in the past.
Dependent on the outcome of that, we may look at converting also the other 16. Then finally, as you said, you know, what does it mean towards the customers? Of course, it means that the way that we charge, that we pass on fuel surcharge to our customers needs to be adjusted going into the latter part of 2019 and the beginning of 2020.
Have you started having those discussions already with your customers, and are they receptive to taking on the higher cost?
I think in the end, everybody understands that this is a regulation that is being enforced upon the industry from the outside. I believe most people are interested in trying to get a fair formula and, you know, a fair and transparent mechanism. As long as there's a fair and transparent mechanism, I think we stand a very good chance of coming to an agreement on that. I do think, though, that means that there's still some work to be done to develop that mechanism, and that's something that we are working on and certainly also talk to our customers about.
Great. Thanks.
Next question comes from the line of David Kerstens from Jefferies. Please go ahead.
Good morning, gentlemen. Two questions, please. First of all, regarding your pro forma freight rate development. I was wondering if you could reconcile that, the 3% increase that you report with the 4% decline for the CCFI. Is that just driven by different geographical exposure or any other factors that you think are behind that strong development in the freight rate? Secondly, thank you very much for the comprehensive analysis of the impact of the tariffs. I was wondering if you have any worst case scenarios available based on the latest proposals that you highlight on the slide. What would be the impact on the number of 2% that you mentioned there if the tariffs would increase to $200 billion in Chinese imports?
Well, the first one, I mean, to reconcile our pro forma with the CCFI, to be honest, we have not done that. I would say also, though, that you know, there are so many factors that influence this mix that it's very difficult to make a one-on-one comparison. We've tried to do that many times, but we were never really successful. Also, if you compare various companies, it's difficult because they may have other, you know, slightly different ways of recognizing revenue. It's very difficult to draw that comparison. I think what you see, what's the most important is that we have seen freight rates bottoming out in the beginning of the Q2 , and then we have seen some initial recovery in the month of June.
We see that trend continuing in July, August, and September. As far as the tariffs are concerned, it's very difficult to put a worst-case scenario out there. There are so many things always happening on the geopolitical front that the best thing to do is just to watch what is happening and then make adjustments as they come. Today, most of the threat seems to be on the trade between Asia and North America. That's a trade where we have a relatively low exposure. But having said that, it's still quite a lot of boxes that we are moving around there. We certainly watch that carefully.
We don't have any scenarios in the cupboard which say, "Okay, if this much more tariffs are coming, then we will do exactly A, B, C.
Okay, that's clear. Thank you very much.
Next question comes from the line of Michael Kohl with Nordea. Please go ahead.
Hi. I wanted to ask around the fuel surcharge. At the time it went in in late June, one of your competitors commented that there'd been a reasonable pushback on the surcharge. I just wondered sort of where it stands, if you are recovering some of the increased bunker through the surcharge now, or whether freight rates have effectively dropped to mean that, you know, you're back to square one, essentially.
Yeah. I think when you look at the surcharges that we also published in June and July, whether it's the PSS for some of the trades or whether it was the OCR, the operational cost recovery, I think we've been fairly successful in pushing that through. Yeah. Of course, there are always some differences between the trades, but on balance, we've seen a pretty good recovery from that charge. We also see that the average freight rate going into the Q3 is better than what it was coming out of the Q2 . That's another illustration that some of those additional costs are now increasingly being passed on to the customers.
Okay. Can you remind me what you will spend on capital expenditure this year?
The capital expenditure will be around 50% depreciation. That means basically $450 million. 70% of that is around vessels and containers.
Okay.
Sorry, 30% of that is containers and the rest is basically maintenance of vessels and others.
Okay. Thank you very much.
The next question comes from the line of Robert Joynson with Exane BNP Paribas. Please go ahead.
Good morning, everybody. I've got three questions, if I may. First of all, on service reliability and general on time performance, I noticed that Hapag's service reliability was very low during Q2 based on the Sea-Intelligence data. Could you just maybe just provide some color on the reasons behind that? Then I'll give the second question, then leave the third question for later. Just the second question on the pro forma volume growth, I noticed that it was actually slightly better in Q2 than Q1, which is obviously kind of the opposite of the general market development.
Just looking at the trade lane mix, I can see that what drove that was the Transpacific and Intra-Asia, where Hapag's volume growth was actually negative in the high single digits in Q1, but then mid-single digits positive in Q2. Could you just provide some explanation for the drivers behind that? In particular, I'm thinking, was that driven by the operational problems suffered by your Japanese partners during Q2? Thank you.
Okay. Maybe the first one, I think you rightfully point out that the service reliability, you know, has been unsatisfactory in the first half of 2018. What we did in order to counter that is that we made quite a lot of changes to the schedule and to the pro formas as from April. That still means that the reliability in April, especially in April, was not great. We have actually seen quite a significant improvement in service reliability in the last couple of months. We're actually quite confident that that will look quite a lot better when you look at Q3 and Q4. Your second question was around the pro forma, where you asked around the TP and Intra-Asia in particular. I'd say that the...
If you look at the TP there, the year-on-year looks actually better in the Q2 than in the Q1 , because last year, in 2017, we significantly reduced our exposure to especially the California market as from Q2. Which means that the year-on-year, because of that, now looks better than it did last year. It has actually very little to do with you know the cooperation with our partners. When it's around Intra-Asia, that trade is always a little bit more volatile than many of the others. Yes, it was a bit better in the Q2 than in the Q1 . There's no specific reason that really stands out there on why that is the case.
Okay. Thank you. The third question is just on some of the pro forma financials. If I look at the pro forma freight rate, it's up by $30 H1 this year versus H1 last year. The fuel cost per container is also up by around $30. On an ex-fuel basis, the pro forma freight rate is roughly flat. I know that you don't provide pro forma EBIT numbers, but just trying to kind of back that out from the financials that were provided from UASC in for the Q1 of last year. I mean, it looks to me like the operating cost per TEU, excluding fuel, is actually up slightly year-over-year.
I'm just struggling to reconcile that with the kind of circa $200 million of synergies that have been achieved year on year. Maybe if you could provide some color on that, please. Thank you.
I mean, I think it's always difficult to reconcile that exactly 1-to-1, as you rightfully point out. I think what you see in the first half of this year is that, yes, if you look at the freight rate purely ex bunker, yeah, then that's indeed roughly flat. There's a lot more factors that influence that. I mean, we also see, for example, that there's also fuel, that some other fuel related costs which come in through trucking and rail actually normally should also have come back. That's a fairly significant $double-digit million figure. Yeah. Then we have, of course, seen an increase in charter rates, which certainly has an effect also when you look at it year-on-year.
We've also seen that in our case, that the share of the door-to-door business, for example, has gone up, yeah, from 2017 to 2018. It's rather difficult to make that reconciliation that you were talking about. I'd say though that what you see is that we track the synergies in a very detailed manner, yeah. Those synergies are definitely there. It's also true that there have been some areas, as we also pointed out earlier, where costs have increased, yeah. Most notably around charter and some of the things that are related to intermodal. I'd also add that the intermodal share that we have has actually also gone up. So that certainly has an effect as well.
Great. Thank you. Maybe just getting back to the second question. I noticed that Hapag's capacity has gone up quite significantly since the first couple of months of this year. Just kind of linking back to what you were saying on the reliability. Was it maybe the case that you were operating with kind of too little capacity to provide the service reliability that you need to provide, and now the capacity is back to a more sustainable level? Or are there any other nuances there?
Right. I think that's not entirely unfair. If you look at the measures that we have taken in April, yeah, that together with our partners certainly meant that in a number of services, we have added an additional vessel into the rotation, yeah, to improve the service reliability. I think that's a fair observation.
Okay. That's great. Thank you, guys.
Next question comes from line of Charles Sprenger with Berenberg. Please go ahead.
Yeah. Hi, good morning. I've got three questions actually. If I can just start, maybe by just going back on your sort of views on the macro, which you gave on page 8 in terms of supply and demand. I just wanted to check when you look at the 2020, obviously you talked about how you're dubious about the 1.5 million forecast for 2020. If we look at the supply and demand balance chart that you show there for 2020, is that based on 0.5 or 1.5 of capacity, that 4.8 supply growth that you have in 2020? I just wanted to understand how those numbers correlate.
Maybe we start there, I'll come back on the second question in a minute.
1.5.
Okay. It's based on the $1.5 million.
Okay. Right. Okay, that's fine.
Then just moving on, you mentioned that you're doing some pilot work on scrubbers. I'm just curious to understand what is it exactly that you're hoping to get out of those pilot schemes? I mean, what is it that you need to learn?
Well, I think it's mainly learning how it works technically. I mean, there's today only very few very large container vessels that have actually where scrubbers have been installed. Because of that, we would like to try it out on a couple of vessels to then see how does it work. After that, you know, possibly roll it out to two more ships.
Okay. Thank you. Finally, just following up on Rob's question just a minute ago about capacity. I may have got this wrong, but my understanding in the wake of the profit warning in June was that you would actually be looking to reduce capacity through the Q3 . Is that still the case?
I mean, what we said at that point in time is that we critically look at some of these things, and we also, I mean, we have suspended the PSAs, yeah. For example, on the Transpacific, a number of blank sailings have been announced. Yes, we are taking some measures here and there to try and trim capacity in services, where we are losing too much money, which we cannot afford.
Okay. Thank you. That's clear. Thank you.
Next question comes from the line of Dan Togo Jensen with Carnegie. Please go ahead.
Yes. Hello, and thank you for taking my questions. Three questions, if I may. Regarding your volumes, you speak of stronger volumes here going into Q3. I'm just trying to, you know, combine that with the comments we get from forwarders where we can see from their numbers and also reportedly a weakness out of Q2 going into Q3. Where exactly is it you're different? Is that because of your route exposure? So that's the first question. Secondly, on your time charter cost and the rates there, we've seen it go up quite significantly. Is this the peak? What is your prediction for time charter rates? Can they go further up? Do we need to see more utilization in order for, so to say, rates to come down?
Because not much new capacity is coming on here. Finally, just a strategic question. We've seen Maersk, you know, taking in Damco. We've seen CMA buying into CEVA. Have you considered this freight forwarding step at some point? Why do you step away from taking that decision? Any particular reasons here, or have you considered it at all? Thank you.
Let me try and take them one by one. I mean, first of all, when you look at volumes, and I think everybody has to speak for themselves. When we look at what we take in as bookings and the volume that we are carrying on our ships, we went into Q3 with strong volume, which we still see up until today. From that perspective, that's why we are saying, looking at the data that we have, we can only see that volume going into Q3 is pretty strong. I cannot speak for anyone else. In terms of time charter-
Sorry to interrupt. Can you maybe granularly that? Are there any markets in particular that are stronger than others, so to say?
To be honest, we see fairly strong volume across the board, yeah. There's not a lot of markets that are particularly weak at this point in time. I mean, we look at, Pacific first is strong. You know, Asia, Europe at the moment is strong, yeah. Atlantic looks good. Yeah, the trades in and out of Latin America, as Nicolás mentioned earlier, are strong, yeah. All in all, there's all kinds of challenges that we see in the market, but volume is, at the moment for us, not a major concern. The second question you asked around time charter, it's always difficult to predict when that will peak.
I think short term also because idle capacity is coming up and is predicted to come up a bit more, I would expect the time charter market to ease a bit, yeah. If you look ahead a little bit further, also keeping in mind that the supply demand balance will get closer together. If you look a couple of years out, I think the outlook for the charter market is not all that bad. Your third question, around are we considering to do something in logistics, I think the answer to that is no. Yeah. We've never really considered that and are also not looking at that at this point in time. I think that's where everybody has, you know, you have different views on that.
We think that the synergies between logistics and a line of business are not that significant. We also see that on the one hand, we have the direct channel where we sell directly to the end shipper. But for us, the forwarder channel has always been a very important channel as well. We think that's gonna remain an indirect channel also in the future.
Over to you. Thank you.
Next question comes from the line of Adrian Pehl with Commerzbank. Please go ahead.
Yes. Good morning, everybody. Three questions from my side. First of all, I saw that actually the consumption per TEU with respect to bunker was down quite substantially in the Q2 . There was a sequential drop, which I found quite surprising. My question here is actually, could you elaborate a little bit on the background? Did you alter your steaming patterns, and how should we think of that going forward? Are there further substantial reductions possible, or what is the development here? Secondly, on the maintenance costs, those are pretty low also in Q2. I was just wondering whether they are coming back then actually in the next couple of quarters. A little bit on the background would be helpful.
Last but not least, it's probably a difficult question for management, but I dare to ask, is, in fact, that now the CSAV has increased its stake and now the free float in the stock is down to 10.6%, making it probably a little bit unattractive for one or the other investor. It's just wondering whether you could share your view on that. Basically, do you discuss that in the supervisory board? Is that a topic for you or not at all? Thank you.
Well, maybe let me try and take first numbers one and three, and then I think Heiko or Nicolás will take briefly the one on maintenance. I mean, in terms of consumption, yes, we've seen an improvement there. It relates a little bit back to the point we also discussed earlier, is that I think we're becoming more stable again in our network. Whereas in the Q1 or the first four months of this year, we definitely had some issues with the schedule reliability. That also typically means that you have a lot of speed ups and that you burn quite a lot of additional fuel. We believe that that's now going back to normal, so that's why you saw the drop in consumption. We think there's still
We can still get better on that front, but that will go very gradually, and you should not expect any big jumps there. In terms of free float, well, I mean, this is a little bit of a double-edged sword. On the one hand, it's great that our core shareholders have a, you know, vote of confidence and want to invest more into the company, so that's good. Yeah. On the other hand, we of course, you know, would like to see over time a higher free float than we see today. Yeah. And that is something that we need to work on and that we are also discussing with the, you know, with the relevant people.
On maintenance, in terms of the big important decrease in maintenance in this quarter, we also have the bucket of others in that item. The exchange rates or the impact of exchange rates also played a significant role this quarter compared to the previous quarter. That's the main reason why it was kind of the number is an outlier compared to previous quarters.
All right. There's no change in activity you're saying basically, right?
No. Exactly. It's how I want it.
Okay. Understood. Thank you.
Welcome.
Next question comes from line of Dominic Edye with UBS. Please go ahead.
Hi there. Three questions from myself. Firstly, I know you made comments about volumes being quite strong. I mean, obviously if you look at the market data, then particularly Far East Europe was pretty weak in the first half of the year. Can you just sort of maybe say, you know, it sounds like that is not the experience that you had. Could you just maybe say what you think could be some of the causes of that? Or you just think it's a little bit of an outlier in H1. Secondly, on the North South routes, I know there you're largely exposed to Latin America. Can you maybe just talk a little bit about some of the dynamics there?
Because obviously off the mainline East-West, it does feel as though there's still quite a lot of weakness in terms of freight rates there. Maybe if you could just discuss that. Lastly, just on charter costs and charter rates going up, you obviously have quite a large number of sort of getting slightly elderly vessels, particularly on the transatlantic, the mid-sized vessels. Can you just discuss how you think about the renewal process there? You know, obviously charter rates going up, does that tend to shift things more into you thinking about buying new ships as opposed to chartering ships? Thank you very much.
Okay. Maybe first on, you asked a question on volume. As we said before, I think we've seen volume developing quite well also on Asia-Europe. We are up, yeah. We see fairly strong demand there also at this point in time. Not much more that I can say to that. It's always difficult to point out what are the specific causes to that, potentially yes or no. When you look at the Latin American trades, we've seen very healthy growth pretty much on all the trades between Asia and Latin America, but also between Europe and Latin America and also on the intra-Americas trades. I think we probably did a bit better there than the market, also because our teams have just been doing a really good job there.
I think that then typically gets reflected in some additional volume growth. Not much more that I can say about that, to be honest. I mean, I cannot look into the business of our colleagues there around the globe. In terms of charter, I mean, as you know, our percentage of charter fleet is relatively low, yeah. We don't have any vessels that we need to replace immediately or very short term, so that question doesn't come around the corner just yet. I do think that we do believe that having a fairly high share of ownership on the vessels in the long run, yeah, is better than having a very high exposure to the charter market.
Thanks. Just maybe just one quick follow-up on Latin America. Given obviously you're talking about strong volume growth there, has really been the volatility in freight rates just been driven by I know there's been a lot of changes going on given the corporate consolidations that have gone on in that market. Do you feel that's been the biggest driver of the volatility and weakness in freight rates, i.e., there's just been more capacity has come into the market there?
Well, I think it's always difficult to read. I mean, these, those markets have traditionally been quite volatile, yeah. Also because the market as such is not huge, and that means that if you have, you know, either supply or demand going a little bit out of whack, you tend to see quite a strong reaction in the market. I think that's why this year is really not an exception, yeah. The good news is, though, that I think generally volumes in and out of Latin America have developed well, yeah. Not only with us, but also in the market, and also the outlook for the upcoming year or two years is quite positive. If that happens, then over time, that is good news for the trade.
Okay. Thank you very much.
The next question comes from the line of Finn Petersen with Danske Bank. Please go ahead.
Yes, good morning. Just a few questions concerning bunker. You have been out, previously having a quite strong stand of you don't need scrubbers, and you go for the clean fuel. Now you seem to be changing that strategy. Could you elaborate a little bit about why you're changing? Secondly, you have been struggling and then I suppose still struggling to cover the current recent bunker increases. Why do you think that it would be different in 2020, and what should it take to cover the additional bunker cost in 2020?
Okay. Well, maybe the first one first. I think in terms of what do we do to cope with those regulations, I think we've always said there are three possible ways of dealing with that. One is use 0.5% fuel, yeah. The second one is go to LNG, and the third one is go to scrubbers. We've always said it's probably gonna be a mixture of all, where we've said that the vast majority of the ships in 2020 will most likely run on compliant fuel, and we stick to that. Also because it's technically simply not possible to do modifications to all of the fleet. What we are doing now is that we are testing a bit, okay, what is actually the effect if you would put a scrubber on?
That's why we commissioned two pilots that will run in the beginning of next year. Based on what comes out of that, we may then decide to go either left or right. I think, you know, we may still decide to do a bit more because it looks like it could be an investment that's economically attractive. In terms of passing on the increases, you are right that this usually happens with some kind of delay. It usually also goes very gradual, yeah. The big difference from what happens in 2020 compared to what happened in many cases in the past is that there's gonna be a huge jump, yeah, in the fuel price, and everybody will know it already a year up front.
The jump is actually so big that nobody can even afford to absorb it, yeah, because the additional cost of having to pay $200 or $250 a ton extra is simply so big that nobody can afford to get into that situation. I also believe that because it is something that's been coming for a long time, people can adjust for it and people can plan for it, which is something very different from looking at the oil price, which can actually fluctuate from one week to another, yeah, quite significantly. I think there are some clear differences between what happens in 2020 and the normal fluctuation of bunker. One of it is that the jump is so big, nobody can afford not to pass it on, yeah.
The second one is we know it a couple of years in advance, so everybody can actually prepare for it, yeah, and understand the rationale. We'll have plenty of time to talk to our customers about that too.
Could I just have a follow-up question? That's, of course, related to your slide 8. That's looking at 2020, because it's probably a question about the market balance, whether you can cover the cost or not. That's probably also what we're seeing at the moment. It's taking our capacity that increases rates. You are giving an estimate there for 2020. You already say it's not reflecting in the current order book of 2.3 billion. But as far as I understand for the Alphaliner, it's 2.8, the current order book, not 2.3. That's one thing. The other thing is that you're saying you have to order now if you want vessels in 2020.
Could you just give a little bit of detail on that, why it should be now, why you can't get vessels in 2020 ordered in 2019?
I think, you know, I mean, we have our source, but maybe Heiko can be more specific about that. We have a very consistent source in terms of what the order book is, and sometimes there are some slight deviations in what people report. In itself, I think the 11%-12% is a fair proxy of where we are. That also means that in reality, you will have to order within the next few months if you want to have vessels in the first half of 2020, yeah. I mean, a normal lead time is definitely one and a half years or something like that, even in a situation like today.
Okay. Thank you very much.
Thank you.
Next question comes from the line of Parash Jain with HSBC. Please go ahead. Mr. Jain, your line is open. Please go ahead.
I have two questions. First, on sticking with IMO 2020. If you can help us understand, some of your competitors have come out and said that some of their largest vessels will be scrubber-ready come 2020. Do you see a situation where there will be a two-tier cost structure, particularly in the Asia-Europe route? And in that case, will it put additional cost pressure on the shipping lines who would be burning clean fuel? And on the same line, let's assume that you get a successful result from your pilot project. Based on your conversation with scrubber manufacturers, what sort of lead time are you taking into consideration should you decide to, let's say, order in the Q1 of 2019?
Would that should be retrofitted in 9 months time, or the lead time is slightly longer than that? My second question is talking about peak season of this year, how has the backhaul trade been, particularly to China, given the ban on the import of scrap or scrap-related material into China, for the last few quarters? The last question is more on the chartering expense. While on the one hand we have seen chartering rates firming up, your effective chartering related cost per TEU has come down by $16, which is very, very impressive. If you can help me clarify what am I missing in that? That will be my three questions. Thank you.
Okay. Let me try and take them one by one. I mean, the first one was on whether we expect to see a two-class society on Asia-Europe when it is around scrubbers on vessels. I don't expect that, to be honest, yeah. What we see is that you know, some scrubbers are being ordered, yeah, by some people, but the vast majority of the vessels in the beginning of 2019 and also 2020 will still run without scrubbers. The default scenario will anyway be to run on compliant fuel. This has to do, as you also rightfully point out, with the lead time of scrubbers and other things, which we are currently also negotiating with the supplier, so it's a bit difficult to say something about that now.
I think in sum, you know, I think we're gonna see a quite long transition period, where people will try to find the right balance between compliant fuel, scrubbers and LNG. Where over time, I think you'll see, especially on the new builds, that people will go more and more to LNG. The older vessels will definitely run on compliant fuel. You have the newer vessels that currently run on traditional bunker, which over time may be converted. A little bit dependent also on what's gonna happen with regulation, as we still think that, you know, scrubbers is not a technology that's gonna last for the next 20 or 25 years, but very likely something else will come in five years or so.
In terms of your second question around the peak season, and the backhaul.
Yes.
We've actually seen fairly good volume on the backhaul, yeah. If we look at our volume growth there, we have grown at least as much on the backhaul as we have grown on the headhaul. We don't see any weakness there. In terms of chartering expense, that mainly is what you see there is the synergies, because compared to last year, we today have two fleets that we actually brought together. By doing that, you are able to take out some charters. That's why you see the charter expense per TEU if you look at it, from an overall perspective, actually comes down.
Perfect. That's very, very helpful. Just on my first question around the scrubber, there has been some apprehension about what's the likelihood of IMO 2020 being implemented and enforced, given the fact that so close to ballast water treatment systems enforcement in September 2017, it has been postponed again by 2 years. Do you see any scenario of this being postponed too? What are your thoughts or how do you see that?
I don't know. I mean, we don't. I mean, from everything we see at this moment, I don't think it's yeah likely that it will be postponed. Of course, you know, one never knows. We don't anticipate that at this point in time.
Okay. Thank you. Thank you so much.
Next question comes from the line of Christian Korth with Warburg Research. Please go ahead.
Yes, good morning. Hello. Couple of questions first, maybe on the cost improvements. You've mentioned in the press release today that you want to optimize your terminal contracts. Can you maybe shed some light? What is the average duration of your terminal contracts? Or to put it a different way, how long does it take until potential cost savings from renegotiations with the operators can materialize? Secondly, I stick to the terminal issue. Your French rival recently stated interest to take a share here in the Port of Hamburg, and also recently acquired a share in Zeebrugge. First, what is your view on CMA CGM having an eye on your home turf?
Secondly, is the strategy of an increasing number of terminal participations also something you have in mind? I have read some media reports which suggest that you have an eye on a new build in Tangier. Lastly, I just want to switch to the topic of the alliance. I think in one of the last calls you said that you eye further efficiency gains now in the second year of the new alliance. Now with the peak season in place, I'm curious to hear your update.
Maybe the first one first. I mean, terminal contracts, I mean, the logic there is that our overall spend on terminals is $several billion. Yeah. That means that there are always some contracts that need to be renegotiated and where you have options to structure the network in a different way. We will continue to look at some of those, and we know that we have a couple of bigger contracts that are up for renewal over the upcoming quarters. As such, we are looking intensively at what we can do to optimize that, and that should give us some cost savings out of those projects. Hopefully still within this year, but certainly going into 2019.
In terms of your question on participation on terminals, I think it's quite common, yeah, that liner companies look in some places at whether it makes sense to participate in a terminal. That is, you know, we do that too, like pretty much anyone else. As far as CMA's interest in the Port of Hamburg, I mean, I can understand that from CMA's perspective, yeah, as they would like to secure capacity here. For us, of course, it's important that we also secure sufficient capacity, and that's really our focus in the discussions with our terminal operators here in Hamburg. Yes, we have a share in CTA, but we also have a number of services that need to be handled at CTB, 'cause the ships cannot go under the bridge.
No matter what kind of agreement they will want to make, we want to make sure that we have sufficient access to that capacity. As long as that is the case, yeah, we are okay.
Okay. The last questions regarding efficiency gains in year two-
Yeah.
of the new alliance structure.
I mean, as I said earlier in the call, we've made a number of changes to the schedules, as from April. Of course, we did that on the one hand to address the issue of schedule reliability, but certainly also to further improve our cost position. I think we will start seeing some of that in the second half of this year, but certainly going into 2019.
Okay. Thank you very much.
Final question comes from the line of Herman Hildan with Clarksons. Please go ahead.
Good morning, thank you very much for taking my questions. You know, going on the IMO regulations, you mentioned three responses, LNG scrubbers and compliant fuel. Obviously at this point in time being the first two alternatives is not ready for January 1, 2020. So my first question is, at what stage do you start to refill your tanks with compliant fuel? Or said differently, I guess we'll start to see the effects of higher bunker cost in the second half of 2019. Have you made any preparations for that?
Yes. I mean, as you rightfully point out, I mean, by as of January 1, 2020, you need to have compliant fuel in the tanks, which means that we will gradually start shifting to a low sulfur fuel as in the course of Q4 of 2019.
Thank you. The other question I have is obviously the step change in bunker prices. I guess one natural response would be to slow steam. We've also seen MSC talk about that. Have you made any thoughts around whether you would change the speed of your fleet as a response to the new regulations?
I mean, to be honest, I think everybody is today sailing more or less at the same speed. As I mentioned in response to one of the earlier questions, we have also added some vessels, yeah, to some of the services to make them more reliable, and that usually also means that you slow down the ships a bit. It will be that balancing act. Of course, if the cost of fuel goes up, yeah, then the benefits of going slower will also go up, yeah. As such, you may see a very slow movement, yeah, in that direction. I don't expect a landslide shift there.
If you can take the current future prices for compliant fuel in 2020, is it possible to give a number on how much you expect to slow down assuming that prices remain where they are today?
Yeah. I mean, if you
In money.
I don't think, you know, the main reaction to this will not be slowing down because that's only going to have a marginal effect. Yes, that may help, may help you to bring down a bunker consumption per TEU with 5% or 10%, but that's not going to be enough, yeah, to recover.
Mm.
The cost. In the end, you know, you will need to charge additional money for the increase in fuel costs, yeah.
Mm.
I mean, that's a fact. You'll have to find the right balance between the three measures that we discussed earlier. I mean, the additional cost is significant because if you assume a spread of, say, 200-250 between traditional bunker and low sulfur fuel, okay, that does mean that you talk about $100 a TEU, which is not an insignificant amount.
Do you have any other cost overnight responses that you could take other than slow steaming? Do you have any other levers to pull in order to kinda lower your cost in total?
No, no. We recover. I mean.
That's all from me. Thank you very much. Yeah, all right.
It's logical. We have to recover the cost. Yeah?
Yeah.
in parallel, we look at what we can do technology-wise to mitigate that. The basic approach is recover the cost, which is about $100 a TEU.
Yeah. Thank you very much.
Ladies and gentlemen, this was the last question today. Please direct any further questions to the Investor Relations team. I would now like to hand the conference call back to Rolf Habben Jansen for closing remarks.
Yeah. Well, not a lot to be said except, thank you for your attention and for all your questions. That was nice and lively, so we appreciate your time and look forward to speaking again to you 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.