Ladies and gentlemen, thank you for standing by. My name is Yasmin, your current call operator. Welcome, and thank you for joining the Hapag-Lloyd Analysts and Investors Conference Call on the Annual Report for year 2017. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.
Thank you very much, and welcome everybody, and thanks for taking the time to join us for this presentation on the 2017 results. If we're gonna take you through, maybe if we start with page 3, we'll take you through between me and Nicolás, and then, of course, in the end, we'll take questions and answers. In terms of opening remarks, if we look at what we needed to deliver in 2017, I think we largely did that. We wanted to close the deal with UASC, complete the integration, and then improve also our capital structure, and make sure that we continue watching the costs.
In the end, that helped us to achieve an operating result of EUR 466 million EBIT in 2017, which is a little more than triple what we had in 2016. If you look at the sector, despite some orders that we've seen over the last six months, we believe that the outlook still remains favorable. If you look at our financials, EBITDA EUR 1.2 billion, and also a positive result after tax. Because of that, we also propose a first time dividend of EUR 0.67.
If we look ahead, our target is still to improve profitability, and to deleverage the company all the time, make sure that we capture those synergies out of the merger and for the time being, maximize our free cash flow to accelerate the deleveraging. When you look at the big events in 2017 on page four, quite a lot of things have happened in 2017. We refinanced our bonds in two steps, one in January, February, and one in July. The first one at an average cost of 6.5%. The second one at a cost of 5.1%. We closed the deal with UASC in May. We started off the alliance in April.
We did the cash capital increase in October, and we completed the integration in November. As such, I think it's been quite an interesting year, but also a year where Hapag-Lloyd at the end made quite good progress, which you will also see from the key figures. Transportation volume on the back of the merger up almost 30%. Freight rate up 1% compared to the Hapag-Lloyd standalone. We'll come back to that a little bit later on. From a pro forma base, the increase was actually higher than that. It was a little bit over 9%. Transport expenses flat. EBIT and EBITDA I already mentioned. Group profit of $35 million.
Healthy equity base and a liquidity reserve of EUR 1.3 billion and net debt meantime down to slightly under EUR 7 billion. If you take another look at Hapag and say, "Where are we today?" You compare that with a year ago, and today we have five instead of four regions. We certainly have a better trade portfolio compared to what we had, as we have a materially better position in the trades in and out of the Middle East, on Asia, Europe, and also on the Pacific. Over 200 ships, 12,500 people, close to 400 offices. When you look at the assets that we deploy, 1.6 million TEU of capacity.
We have on average the youngest fleet in the industry, and on average also the bigger ships, which should definitely help us to be competitive, as you will also see from some of the numbers. On page 7, you'll see once more the synergies. I think the thing to say to that is that based on what we can see now, we can again reconfirm that we believe those synergies are real, and we will get them. This year, probably 85%-90%. In 2019, all of it. Will there be upside? That remains to be seen. We've always said we'll start assessing that somewhere after the second quarter. After working together for two full quarters, so somewhere in the second or first quarter. So too early to say something about that.
If we look at our equity base, the things that we did on the capital markets, we certainly enhanced our equity base from $5.3 billion-$7.3 billion a year ago, which of course makes the company more stable. There also the bond issuance has helped, not only because the coupons have come down from close to 8% to a little bit over 5 % and 6 .5% or 6.75%, but also because the maturity is significantly extended to 2022 and 2024. If we then make a quick step onto the sector, if we look at supply and demand, we still think that the demand growth is quite healthy.
If we look at the outlooks that we have here, then that's a prediction of a growth of a little bit north of 5% every year. You know, probably that's on the high end of what we are taking into account when looking at our business. I think we've said quite consistently over the last couple of years, anything between 3%-5% is what we would expect. I don't see any sign at this point in time that it's going to be any lower than that. Even if there has been some debate about additional import duties and things like that between the U.S. and China.
If we look at the supply side of things, I'd say the situation there is quite healthy, despite the fact that we have seen a number of new orders in the last six months. Let's not forget that if we have 4% demand growth every year, then we also need some new ships in order to carry the cargo. Today, the order book is 13%. If you take into account that it covers about two and a half years, you anyway need 10% to accommodate the growth. If you take into account 2.5 or 3% scrapping each year, then you also need 7% or 8% to compensate the scrapping. In itself, an order book between 15%-20% would be normal.
I think right now it is a little bit on the low side, also because over time, one would expect the scrapping to come up as ships are used between 20 and 25 years, so 4%-5% should be the normalized level. When you look at the idle fleet, that is today at a very, very low level. With less than 1% being idle. Taking into account that we are in the slack season at this point in time, I think that clearly illustrates that the balance between supply and demand is getting closer and closer together, and it's not unrealistic to assume that as that balance tightens, as those two get closer together going forward, that will help the market.
If we look at page 11, we have another picture on supply and demand, which illustrates that in 2016, 2017, demand grew faster than supply. This year, it's gonna be roughly the same, but we expect in 2019 and 2020, based on the order book as we can see it today, that demand growth will again be higher than supply growth. From that perspective, looking at the next 18-24 months, I believe there is reason to be cautiously optimistic.
Yes, some deliveries have been done in the last couple of months, and that certainly now in the second quarter put some pressure on the rate, but also because of the low idle fleet, one should expect that in the course of the year, as we enter into the peak season, we see a recovery in the market. When looking at the sector and looking at the various players out there, the consolidation is still ongoing. I think the point that we would like to make here is that whilst many of all of the deals have been announced, yeah, not all of them are really effective at this point in time. Hapag and UASC, I'd say that's completed, and we definitely act as one in the market.
If you look at Hamburg Süd and the rest, they got together in December, and I think they're also aligning their businesses more and more. The three separate is only gonna go live next week. That means that as of today, you have three or maybe even four sales forces out there, and three of them will disappear. If you look at COSCO and OOCL, that merger has also not yet been completed. As such, you don't see the full effect of the consolidation in the market just yet. That's another reason or another factor which we would take into account when looking forward. We look at Hapag's performance, also over an extended period of time. We try to give you an overview here of what we carry EBIT margins from 14, 15, 16, and 17.
I think you see the Hapag-Lloyd performance has improved markedly from 2014 to 2015 on the back of the merger. In 2016, we made another step in relative performance. If you look at 2017, I think we are again in a good place, taking into account that not everybody is in this picture just yet. Also once we complete the picture with those, you'll see that we still are very much on the top end of the performance in that year, which makes us, you know, fairly happy because, after all, it was a year of integration.
Too, in that year, still post a very decent financial performance, despite all the one-off effects, is something that I think our teams can be proud of. With that, I will hand it over to Nicolás, who will take us through some of the financials.
Thanks, Rolf. Good afternoon, everybody. In general, we posted a good result in Q4 compared to the years. When you look at the EBIT of an EBIT margin of 5% and EBITDA margin of 11%. When you look at the full year results and explain it part by part, the revenue went up 32% on the back of the increasing volume of 29% of what we're paying and also the slight increase in rate. The EBITDA reached approximately $1.2 billion, almost double what we have done last year. The EBIT reached $466 million, $326 million more than last year, which is mainly explained, of course, by the new volume and the integration of UASC.
The same first trade is coming up in the second half of the year in the context of the integration of the same company. In this way, we posted a result at EAT of +EUR 35 million, which was affected by a significant one-off that we will explain in the next two slides. In the next slide, you can see the operational one-off. That are mostly related, as you see on the left-hand side, to the integration. 86 million out of the total are related to that in 2017. Transaction and integration costs, which are compensated by some items. The first one is the badwill that we've also done during, in the context of the elaboration of the PPA.
The first consolidation of the Turkey subsidiary as we gain control of it during the fourth quarter. That's the reason that the final net one-off that we have during the total year was $34 million. When you look at the distribution of the transaction and integration costs throughout the period, we have a little bit of 16 because we prepared the merger during that year. We have the 18 that I just explained during 2017, and we expect to have additional 10 that are not provisioned yet during 2018. Our new total estimation is a total of $115 million.
When you see also the interest one-off, you see basically the difference in the restructuring of the bonds. We restructure our bonds significantly during 2017. That meant the re-recognition of the value of the call options of the bonds. We also re-recognized the activated costs that the bonds were having in the balance sheet. As well as the activated cost of some vessel financing that we also revalued or refinanced during the year. That's basically what you see on the left-hand side are the one-offs during the fourth quarter. What you see on the right-hand side are the one-offs that you see overall during the total year.
When we look at the KPIs of volumes, Rolf, some of this was anticipated by him. We grew 43% in the fourth quarter. Significant growth just because of the effect of the volume of UASC. When you look at the pro forma and we compare apple with apple, the growth is basically flat. Full year is 29% as I commented. When you compare apple with apple with the pro forma is 4.8% in line with the global growth. In the next page, you have the rates. Slight increase of 1.4% year-on-year. Reason of that is that structurally, the rates of UASC were lower because of two reasons. Less or fewer hinterlands and the Intra-Asia trade where they were present.
That's the reason that you see a slight increase only in 2017 compared to 2016. When you look at the pro forma comparison, when you sum them up in a pro forma in 2016 and you make the full year comparison, then the increase in freight rate is very in line with the market with a 9.4%. A little bit of ton-mile on container, it increased 41% year-over-year. The best way to respond to this big increase is by improving a little bit more the consumption effectiveness or the consumption efficiency.
As you see in 2017, it went down a little bit to 0.40 tons per TEU moved compared to 0.41 during 2016, which is a new improvement. That was reflected in the unit cost, even though it is fairly flat in 2017 compared to 2016. When you compare the full cost, including the bunker, when you exclude the bunker, then we have a noticeable improvement of $40 per TEU. That's the reflection of the first savings coming in the second half of the year. That's basically the ground and the reason for the improvement. Importantly, also the cash flow.
We have done a good job on generating and converting the cash flow from EBITDA, 85%. There is a little difference because we invested in some working capital and because we have some adjustments in terms of the dividends that we received from subsidiaries that are classified in a different cash flow in investing cash flow as opposed to operating cash flow. It was a very good year in terms of the cash generation. We have the investing cash flow that was $28 million positive. Reason of that is that despite the fact we had some investments in containers and vessels, we received the cash flow for the first time from UASC.
We consolidated for the first time Turkey, which meant a little bit of more cash also. That's the reason it is positive during 2017. In terms of the financing cash flow, it was a hectic year with a capital increase. We used that money, of course, to repay debt. You're seeing the minus 2.8. We also issued two bonds of EUR 450 million each. As you see, as a fraction of the 1.8. We issue also some tiny leasing in order to refinance some vessel financings and fix the interest rate. Therefore, you see a net repayment of debt of around EUR 1 billion.
A big effort on deleveraging, as Rolf explained in the beginning, that is leading us to a significant good, I would say a strong liquidity reserve at the end of the year of EUR 1.27 billion. In terms of the balance sheet, stronger equity, simply because of the capital increase in kind from UASC, plus the cash capital increase that we did in October last year, and the profit that we posted as well. On the right-hand side, you have the net debt. Increased, compared to last year, of course, because of addition of the new debt from UASC, but significant deleverage effort from the moment of the merger, from May.
We are happy with the development of the second half of the year, when you look at the debt that we adopted from UASC. Here you have a little bit the comparison of liquid reserve, but that's basically coming from some additional trade lines that we negotiated during the year and higher, of course, cash balance compared to last year. With that, I will hand it over to Rolf, who will continue with the outlook and some other additional slides.
Okay, thank you very much. I think that gives you a good overview of the numbers. If we look ahead into 2018, our usual outlook, looking at transportation volume, we expect that to increase clearly. Of course, that's also because you compare it with the reported numbers, but in both terms, our intention is to grow more or less with the market. In terms of the average freight rate, we expect that to be close to last year's level. When looking at the number, please keep in mind that again, this is compared to the reported level. If you would compare it to the pro forma figures, it would actually be a slight increase.
We expect the average bunker price to increase clearly compared to what we have seen in 2017. We expect also EBITDA and EBIT to go up, see clearly. When you look at our financial policy, very much unchanged in terms of profitability. We will continue to focus on further improving profitability, which is also supported by our high fleet ownership structure, but also of course, by the synergies of which we intend to capture more in 2018, in 2017. We have no planned investments in new vessels in the foreseeable future. Our objective remains to maximize free cash flow to accelerate the deleveraging.
I think it's good to repeat there what we've said several times that our objective remains to get to net debt over here, about EUR 3.5 billion within two years after the merger, so that is mid-2019. Then in terms of liquidity, we want to maintain adequate liquidity reserves for the company, which we consider to be EUR 1.1 billion-EUR 1.2 billion. Then finally, before we open it up to questions for you may just have seen that we issued a press release on some changes in the organizational structure that we are going to make.
We discussed that extensively between board and supervisory board, and we feel that given the stage where we are at this point in time, it is important to have a stronger focus on the one hand, procurement, but also on processes and people. That's why we created the position of CPO, which will be taken up by Joachim Schlotfeldt. That also means that the responsibility for the sales activities and digitization will go to Anthony J. Firmin, and it unfortunately also means that Thorsten Haeser will no longer be with us after the first quarter. That is all that we had as an introduction. With that, we would happily hand it over to you for any questions that you may have.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please press the hashtag before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from the line of Neil Glynn of Credit Suisse. Please go ahead.
Good afternoon, everybody. If I could ask three questions, please. The first one with respect to your outlook guidance, I just wanted to understand, you're talking about freight rates flat, and that's obviously despite clear increases in the bunker price. Just interested, is that in part a take on your market share ambitions and a willingness to invest synergies, or is the market simply too weak to pass on higher bunker fuel costs? Second question, interested in your take on development of inflationary pressure in the industry. For example, ports, canal costs, what is the level of inflation you're experiencing there before we think about synergy potential? Then the third question, obviously, the dividend is a major step forward.
How do you think about building a track record here, but also demonstrating sustainability of that dividend by getting towards covering your cost of capital?
Maybe. Let me try and take those one by one. First of all, if you look at freight rate, I think it is important to note that if we say it's gonna remain stable, that is compared to the published number. If you compare it to the pro forma, we actually expect the freight rate to go up. We do expect to see recovery of volume, even if you always have a little bit of delay in recovering that, because spot load typically takes one or two quarters. Your second question is around inflationary pressure. I mean, we see that in some areas. We've also foreseen a little bit of a movement in the exchange rate between Euro and U.S. dollar, which also impacts that.
It's a little bit too early to say, well, how big that impact will really be. Of course, particularly for example, in the trucking in the U.S., we definitely see some upward pressure on prices, yeah. That remains to be seen. That's clear. In terms of dividends, you know, I think we were happy that this is the first time we can pay a dividend since a very long time at Hapag. For us, it's mainly also a sign of appreciation towards all the shareholders who between them have, you know, shown a tremendous commitment to the company by investing EUR 1.2 billion of cash into the company over the last three years.
We expect that by, you know, showing that hopefully will also encourage them to be there for us if we seek them at any point in time in the future. In terms of your point about building a track record, of course, it is our ambition to, you know, to get ourselves to a position where we on a regular basis can pay a dividend also going forward.
Thank you.
The next question comes from the line of Danielle Ward of JP Morgan. Please go ahead.
Hi. Thank you very much for taking my questions. My first one, I wanted to just go back to your freight rate expectations for the full year. As you said, you're expecting on a like-for-like basis, actually a higher freight rate for the full year. I wonder if you could just elaborate a little bit on what gives you confidence in that expectation, beyond the comments you've made on supply, demand, et cetera, in the industry. We've seen a bit of weakness in the spot rates recently. Does this affect your confidence level at all or any further color around what we've been seeing in the past few weeks? And then secondly, could you provide an update on your contract negotiations on the Asia-Europe route, given that we're now at the end of March? Thank you.
Taking the first one. If we look at the freight rates, I mean, we are certainly going into 2018 with all our pro forma rates is a better rate level than what we had a year ago, yeah. So that certainly gives us some confidence. When you look into the future, everybody knows that the freight rate is probably the single most difficult thing that one can to predict in this industry. We also know that when you ask people that question in March or April, everybody is usually in a depression, yeah? Because we are in slack season right after Chinese New Year, when freight rates are under pressure. We will not know for sure what is going to happen until we enter the peak season at the end of the second quarter, beginning of the third quarter.
Right now, there is no reason for us to not to assume that what we have planned will also roughly occur. In terms of the contract rates, Asia-Europe, on average, those are somewhat better than they were last year.
Thank you.
The next question comes from the line of Joel Spungin of Berenberg. Please go ahead.
Yeah. Hi, good afternoon. I've just got three. Can I start by asking, I think you said in the pro forma fourth quarter, your volumes were flat. I was just wondering why you think that was the case. I expect the market probably grew sort of 4-ish% in the fourth quarter. What explains that divergence versus the first nine months of 2017? My second question is just a clarification with regards to CapEx. Obviously, you're not buying any vessels this year. Can you just give us a rough steer, given it's predominantly gonna be maintenance CapEx and containers and things like that this year? What the CapEx number is likely to be?
And then as a final question, I'm interested to hear what your thinking is at the moment in regards to planning for the introduction of the new low-sulfur regulations in 2020. Where you think the industry is and what your specific plans are. It still feels like something where everyone is saying it's just gonna be passed on to customers. There are obviously some fairly significant structural challenges in terms of availability of fuel and so on. Just an update on that would also be useful.
Okay, maybe I'll take the one on volume and LNG, and then I'll ask Nicolás to comment on the CapEx question. I mean, in terms of volume, yes, you are right. In the fourth quarter in isolation, volume was a little bit weaker. In fairness, we were also comparing to an exceptionally strong fourth quarter in 2016. Overall we see that the trend remains okay. I mean, we do see growth also in the first quarter, roughly in line with plan. I'm not particularly concerned about that. When you look at the new fuel regulations, I mean, in principle, there are three solutions to that. It's either go to LNG, use scrubbers, or accept that you have to burn more expensive fuel.
You know, our stance so far is that we study LNG, yeah. I'm not taking a decision on that just yet. Scrubbers is not our preferred solution. We know that we will have the alternative to go for more expensive fuel. The challenge on this topic is that there's a lot of uncertainty around it. Our stance on that may still change. We are trying to get to a final position on what to do within the next 3-6 months. Nicolás, if you could comment on the CapEx thing.
Okay. On the CapEx side, I mean, the CapEx that we have had during 2013 is a good indication. That's basically what we have said is 50% of depreciation. We have a good fleet, and we don't have the necessity to place a significant order or to acquire a significant number of vessels going forward. The CapEx will be focused in the future more on containers to basically replace the containers that are getting to final age and to maintain the fleet and the containers. Those are basically the main items of CapEx that we have in the future.
Of course, these environmental issues should also demand some CapEx, but that's something to be defined and communicated in the forthcoming months. How that will affect the CapEx in the future. For the moment being, we expect a CapEx around 50% of depreciation for the forthcoming years.
Okay, thank you. Can I just ask one quick follow-up on the IMO regulations? Just to help me understand, I mean, hypothetically, if you went for the scrubber option in the final decision, you know, would that place you at advantage against those players who perhaps didn't have the balance sheet to be able to afford to upgrade their vessels?
Well, I mean, that's a good question, but that, of course, in the end, completely depends on what is your assumption on what is going to be the spread between the current high sulfur fuel and low sulfur fuel going forward. We think that's too easy an answer. We don't think that just spending money on CapEx will immediately give you a huge advantage. Certainly not when it's about scrubbers, as it's quite questionable whether the scrubbers are gonna be a long-term solution.
Okay, thank you.
The next question comes from the line of Andy Chu of Deutsche Bank. Please go ahead.
Yes, good afternoon. A few questions from me, please. Just in terms of the guidance and looking at a pro forma basis, I haven't run through the numbers, but in terms of freight rates on a pro forma basis, what's the sort of magnitude of actual high freight rates that you're kind of thinking as you get to sort of flat? Also on that point, in terms of the increasingly clear guidance on volumes, if you again pro forma that for the sort of May timing of integrating and merging UASC, would be on a pro forma basis, do you think you would still have volumes sort of increasing, clearly on a like for like basis, or would it be sort of more moderate than that?
Just maybe a comment, please, on scrapping. Scrapping has been in recent months at quite low levels. I mean, the sort of industry is looking at sort of probably guidance as you're showing on slide 11 of sort of 1.5%. Do you think that probably looks too low? Then just coming back to some trade volumes, which certainly from an Maersk sea market point of view, people are sort of fearing trade wars, et cetera. Maybe a little bit more color, please. I know you made some comments, Rolf, as to. It seemed to be an issue, but maybe you could just elaborate a little bit more on that point. Thank you very much.
I mean, if you look at the, maybe taking them one by one. If you look at it in terms of guidance, in terms of freight rate, we've said roughly flat compared to the published figures. As you will see from the investor presentation, the published figure is $1,050, round about. If you look at the pro forma figure, that's $1,015, yeah. So you can then deduce yourself what kind of increase we are looking at, bearing in mind that roughly the same still implies a certain bandwidth. Then volumes, we expect that our business on a like-for-like basis will grow roughly in line with the market, yeah. In terms of scrapping, I agree with you that scrapping of 1.5% is very low, yeah.
You may see that for one or two quarters, but looking ahead, I think that number will go up, yeah. We can debate about how quickly it will get to 4% or 5%, which is going to be the long-term average, but it's gonna take a little bit of time. Your question on volumes. Market wise, I mean, everything we see at this point in time indicates that volume is still developing fairly well. We've all heard and read the news over the last weeks in terms of potential trade wars, etc. I mean, we don't know anything more than you do on that.
We tend to look at what is happening to our business and to our bookings and when talking to our customers, and from that perspective, we do not see a major impact at this point in time.
Can I maybe just ask one follow-up? In terms of the freight rate environment, which seems to be pretty good at the beginning of the year into Chinese New Year, obviously that has come down as is the normal seasonal pattern in sort of versus recent years in terms of the post Chinese New Year freight rate season. Has that been sort of in line with previous years? Has it been better just in terms of feeling of the post Chinese New Year sort of freight rate environment? Obviously, we can see some of the short-term data, but that's obviously not always that accurate.
No. I think, I mean, it's very, it's always this time of year, as I said in the presentation, where it's the most difficult to judge that development. So there's certainly a fair amount of uncertainty around that. Right now we do not see anything which is beyond the normal, but that does certainly not give us any guarantees going into the future.
Thanks very much.
The next question comes from the line of Adrian Pehl of Commerzbank. Please go ahead.
Yes. Hi, everybody. Good afternoon. Actually, three, four questions from my side. First of all, correct me if I'm wrong, but I didn't see the net debt to EBITDA target you mentioned before. Is that still your plan to come down to 3.5x? Question sort of linked to that on the dividend payout you made obviously ahead of consensus quite substantially. Does that alter the target number one? Number two on this is how should we think of the dividend projection going forward? Should we think of it rather linked to the EBITDA development, or which is the, let's say, indicator which suits us best here? The third question is adding to one that has been asked on LNG obviously.
I was just wondering at the current state, given that you might consider doing more on LNG in the short term, is the infrastructure in the ports already sufficiently that you could do much more or is it really on a relatively limited scope at the very moment? Last but not least, on new technologies, I know these are all buzzwords, and given that obviously nevertheless Maersk does something on blockchain with IBM, is there anything comparable you have in the making to improve your processes here? Will be helpful to hear some words on that.
I mean, I think, taking them one by one, I mentioned in the presentation that our objective to get to a net debt over EBITDA of 3.5 remains unchanged. Yeah. Of course, giving has a little bit of an impact on that, but that does not affect the rate there. I mean, the 100 million over total net debt of close to EUR 7 billion is not a tremendous amount. In terms of the projection of the dividend, our dividend policy for the time being remains unchanged. Of course, we are talking to our shareholders on that on a regular basis. You asked a question about LNG.
Well, we are studying that and to see what that might or might not mean, but it's still way too early to determine what kind of an impact that could have on investments. As it's about digital, we certainly also invest in digitization in our business. We currently do not have a project like IBM and Maersk on blockchain. Though we are talking to many people that do these types of projects to see where it potentially makes sense to go.
Just a quick follow-up on LNG. Sorry, maybe I expressed myself not very clearly. I was just wondering, assuming that you would like to make more on LNG on the very short run, let's say next couple of quarters or even one to two years probably, is that really feasible in terms of the port infrastructure out there? Or would you say, well, it's not sufficient enough and so we have to run on low sulfur most likely for the short to medium term?
Yeah. Again, actually, I missed that angle of your question. Apologies for that. We don't think I mean, there will be some ports where the infrastructure is gonna be there, but in the majority of the ports that's not gonna be the case. We also believe that you can do it with a ship-to-ship transfer. In and of itself, I don't think that the supply will prevent shipping lines from going to LNG post 2020.
All right. That's helpful. Thank you.
The next question comes from the line of Cristian Nedelcu of Berenberg. Please go ahead.
Yes. Good afternoon. Thanks for taking my questions. Maybe first on slide 7, you mentioned the synergies. But unfortunately, you did not provide the numbers. Could you actually do that? So what's the amount of synergies you realized last year, and how much is left for 2018? And can you also maybe elaborate if that amount, how much is supposed to come from network overhead and the other items? Secondly, I was actually surprised about the cost trends in the fourth quarter. I wonder whether you faced any positive one-offs in your cost items. I've seen in your report the charter costs in the fourth quarter came down massively. Is that a sustainable figure?
Could you maybe also elaborate what you mentioned there with being an overprovider or an underprovider within the alliance framework? Lastly, recently you launched a premium product. Is this just a test balloon or is this something which we should keep an eye on going forward? Thank you.
Okay. Let me take one and three and then Nicolás will comment on the cost side of things. On the synergies, we said I think we realized roughly 30% of that in 2017, and we expect to reach 85%-90% in 2018. In terms of how is the split between the various categories, I believe that the size of the bars very clearly indicates how that split roughly is, which means that more than half of it actually comes from network.
Then you have also a fairly significant chunk coming from overhead and then the third category is mentioned there as well. In terms of a premium product, I think that was communicated to the press because we believe that there is some merit in doing some of that. We should, however, not overvalue that, because even if you will hear probably more about it from us, that is not going to be 50% of our business or something like that. If we do it well, it's one of those examples or things that might actually help us to gradually, step-by-step, make our business better.
Okay. On the cost side, you're right, the factoring item in the transportation cost was significantly improved in Q4. This is due to a technical effect because we made a net off of the pool revenue in the vessel sharing agreement at the end of the year for the total year. Therefore, the charter line was significantly improved because of that adjustment or that net off that we had at the end of the year. That's the reason why it is improved.
Apart from that, I mean, you see a cost that is slightly improving in the second half of the year because of the charter optimization and the fleet optimization in general that we have with the UASC integration, of course. The biggest effect that you see, which is basically explaining the improvement in unitary cost is because of that net technical netting effect that we have to do at the end of the year. This effect is particularly high in this year because of the integration of the UASC and the incorporation of UASC into the alliance. Going forward, you will see that effect being netted off every quarter. Therefore the comparison will be apples with apples going forward.
Okay. Understood. Thank you.
The next question comes from the line of Frans Høyer of Jyske Bank. Please go ahead.
Thanks very much. Just to clarify your language on contract rates on Asia-Europe going up in 2018. Is it up enough, just enough to cover higher bunker prices, or is it more than enough to cover these higher costs, please?
I mean, it is at least enough to cover the higher bunker costs.
Okay. You talk about effects of carrier consolidation. It is too early yet, you know, you mentioned. Could you talk about the type of benefits that you foresee, the scale, the timing? I'm thinking especially on the Latin America trades and the Japanese market.
I mean, I don't look at any specific market. I'm just saying that, you know, the effects of the consolidation will be that you see larger companies that should be able to produce at lower costs for the final shipper, yeah? And hopefully also get the market to an equilibrium where also the companies can start to make some money. I don't think that's gonna have any effect on any particular market. Yeah. Even if one could think that if, you know, three Japanese lines go into one, then it may have a certain effect on the Japanese market. I personally don't see any relationship with the Latin American markets, to be honest. Yeah. I assume that that's because you refer to Maersk and Hapag-Lloyd. Well, they will continue to operate as two brands. Yeah.
I'm not sure whether that will give a massive change in the market.
All right. Thanks very much.
Next question comes from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead.
Yes, this is Johan. Thank you for taking my question. I was just wondering, talking about the rates again. We saw your Danish competitor being a bit aggressive in the fourth quarter to regain some volumes lost. How would you say it looks like right now? Is it sort of normal behavior or are there some players out there still being quite aggressive on volumes for the time being? The second thing, you mentioned you managed to hike the Asia-Europe contract rates despite the spots during the negotiation period being down year-over-year. How does it look like now when you are going into the Transpacific negotiations? It looks like the rates, at least in the spot, is down year-over-year.
Are you still confident that you can see some improvements also on the Transpacific rates? Finally, just out of curiosity, it seems like no one wants to invest in LNG or scrubbers ahead of 2020. Have you made some agreements to make sure that you have some low sulfur fuel availability by then? Thank you.
Okay. I mean, first of all, in terms of the, I think your first question was on rates. Yeah. You know, where does that go, and what does that mean for the TP? I mean, I don't know what's gonna happen on the TP in negotiations. I would still hope that we're gonna be able to secure some slightly better rates there than last time. Yeah. In terms of who's out there, I mean, this is a very competitive market, so every now and then you'll find somebody that's very aggressive. That's just the nature of the business. We have that also today. But that is nothing extraordinary, and there's nobody that stands out in particular.
In terms of LNG and scrubbers, no, we have not made any forward hedging on 0.5% fuel or something like that. We are studying what's the best way to do it. Is it LNG? Do we just buy more expensive fuel? Right now, we're not leaning very much towards scrubbers. We make them up with a mixture of measures in the end anyway.
Okay. Thank you very much.
The next question comes from the line of Neil Glynn of Credit Suisse. Please go ahead.
Thank you for the follow-up. I just wanted to drill down on your new role or your expanded role, I should say, Rolf. Just interested in how much time are you spending with customers post-merger. I presume pre-merger, you were probably otherwise occupied to a large extent. What are your main objectives by taking more control of commercials? Do you expect to boost share of shipper wallet, boost rates, or how do you think about success from this move?
Well, I think the discussion on structure is a little bit broader than just that. I think if you look at where we have been, and also if you look at what happened to the industry, I think we've seen a phase in which we consolidate and where you see a number of bigger players emerging. That also means that when you then look forward, there's different ways of being successful in an industry like ours. Making sure that we have streamlined processes and that we are very focused on procurement is certainly an important element there. We felt that that needed to be strengthened.
As a consequence of that, and also because we did not want to add another position to the Executive Board, we have reassigned a number of responsibilities, and that means that commercial came to me, which is also consistent with the type of strategy which we are pursuing, which means that apart from making sure that we are competitive and try to get the best possible cargo on board, we also will need to find ways going forward to differentiate stronger between the various shipping lines. I think that in reality is the, you know, main background on why we made that change. Yeah.
That's helpful. Thank you.
The next question comes from the line of David Kerstens of Jefferies. Please go ahead.
Hi, good afternoon. Just a quick question on your bunker strategy. Can you give an indication of what the cost would be, on a comparable basis of a sailing using LNG compared to heavy bunker fuel, I mean, light bunker fuel? The light bunker fuel clearly being more than 50% more expensive than the heavy fuel. What would it look like if you were to use LNG? I understand that some of your vessels currently already have engines suitable for LNG, except for the fuel tank. What proportion is that, roughly? And then secondly, on your fleet, you're saying you are happy with your current fleet composition, and there will not be any new vessel ordering in the near term.
What about on the other end of the fleet in terms of scrapping, where you highlight for the industry, the scrapping rate to go up to around 4%-5%. Is that something you also expect to do yourself? Thank you very much.
I mean, on the first one, that's probably a $64,000 question, is what is going to be the operational benefits from running on LNG versus either the current fuel or low sulfur fuel. This depends very much on what kind of scenario do you assume in terms of what's the spread between Brent and LNG and what is the premium of 0.5% over the current HFO. It's a little bit too early to say something about that, and it also requires quite a bit of judgment to do that. We hope to come to a landing on that over the next 3 to 6 months.
I don't wanna say anything about it because the input we get from the experts on how those prices will develop still vary so widely that anything I would say would, by definition, be wrong. Yeah. The second point was on how much of your fleet could potentially be converted into LNG. Well, this is predominantly. I mean, the best candidates for that are the 17 ships that have been built by UASC, who in total represent about 300,000 TEU of capacity, of an own fleet of about 1 million. Finally, on scrapping, I mean, we are just completing a program where we take out 10 ships that used to belong to UASC, yeah. Which were 4,000 and a little bit vessels.
We actually have taken out over the last six months about 40,000-45,000 TEUs of capacity, which actually is remarkably in line with the long-term annual figure that we think should be realistic of 4%-5%. Overall view.
Okay, that's great. Thank you very much.
The next question comes from the line of Falk Frey of M&G. Please go ahead.
Good afternoon. Thanks for taking my question. I just have one question left on the order book, which is down to zero in line with your previous commitments, so no surprise there. My question is, what is the trigger point for Hapag-Lloyd to, you know, go back and start reordering new vessels? If you could share with us how you think about this point.
I mean, right now, as we've said, it's really not so much into the cards. If we would want to grow capacity, we could also still charter some ships because our ownership ratio is very, very high. I don't think you should expect any orders from us anytime soon. Is there a specific trigger point? No, probably not. If you think a little bit further out, then at some point in time, once we've taken a decision how to deal with the new types of fuel and those new regulations and a bit more clarity on that, then one cannot rule out that we then may reconsider whether we need something new, yes or no. Right now, in the foreseeable future, you should not expect anything from us.
Just as a follow-up, do you have a sort of a market share target or floor under which you're not willing to go, and that might be potentially that sort of trigger point?
I mean, we've said that we want to grow with the market. Yeah. That means that we want to retain our market share roughly at the level where it is today. We think that we can do, still do that with the assets as we have them right now because we can still sweat those assets a bit better. At some point in time, we may still have to look at whether we need to charter some vessels or at some point need to buy some new ones as well. Right now, we are not even close to that point.
Okay. Maybe if I'm allowed a last follow-up, assuming, I don't know, 3% market growth in the next years, when do you think that you would have to go back to the sort of, you know, ordering key vessels in order to grow with market share? As you want to grow with the market.
I mean, that's unfortunately a little bit of a difficult question to answer because it depends very much on, you know, which market will grow how fast and how will we then be able to deal with that? Because on the one hand, it's utilization of existing assets. For some markets, you can also just charter ships from the market, be it short or long term, and in some cases you may have to decide to invest, but it's way too early to speculate about that.
Okay. Thanks very much.
This was the last question today. Please direct any further questions to the investor relations team. I hand back this, the conference call, to Rolf Habben Jansen for closing remarks.
Yeah. Not so much left from our side. Thank you very much for taking the time to join, and thank you for many questions, and we'll hope to see and hear many of you again quite 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.