Ladies and gentlemen, thank you for standing by. I'm Mia, your Chorus Call operator. Welcome, and thank you for joining the Hapag-Lloyd Analyst and Investor Conference Call Quarterly Financial Report, nine months 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 also on behalf of Hapag-Lloyd, thank you very much everybody for joining at this rather early hour. We would like to take you through our nine-month results and especially what's happened over the last couple of quarters. If we look at it and look at page three of the presentation, maybe a couple of things to start with. First of all, I believe that the integration with UASC is very well on track. In addition to that, we made a couple of good steps ahead on our financial structure that we took in the third quarter. Of course, our operating results also improved quite a bit, and not only compared to the second quarter, but certainly also compared to 2016.
We'll talk a bit more about the integration afterwards, which we believe has been done quite smoothly and also quickly. We'll talk a bit about the sector because there certainly has been a lot of speculation around that, and we'd like to share with you our perspective. Then Nicolás will take you through the numbers, and then we'll talk briefly about the way forward, where you'll not find a lot of surprises, and then we'd be happy to take your questions. Looking at page four of the presentation, I think two main things happened actually in the third quarter. On the left-hand side of the chart, you can see the UASC integration. Of course, we've been working on that for a long time.
The deal closed in February and now it has been completed, and we believe we're very well on track and talk a bit more about that on the subsequent pages. In terms of our financial position and balance sheet, we issued $ 450 million of bonds with a maturity of seven years and a coupon of slightly over 5% to repay two bonds which were due in 2018 and 2019 with a substantially higher coupon. In addition to that, as you will have read, we completed our capital increase of slightly over $ 400 million by issuing almost 12 million new shares a few weeks ago. In addition to that, I think worthwhile here to reiterate once more that currently we do not have any plans for investments in new vessels.
Looking at the numbers on page five, transport volume up a lot, of course, because you compare it to the Hapag numbers. On a like-for-like basis, it's more like 7% up. Freight rate up slightly, a bit more if you compare it to the pro forma. Transport expenses more or less flat, a little bit down on the one hand, lower cost, on the other hand, higher bunker. A healthy EBIT, I think, in the third quarter. EBITDA significantly higher than what it was, approaching now 10% and well over that in the third quarter.
A small profit if you look at the first nine months, a healthy equity base, solid liquidity reserve, of course, a bit higher at the end of the third quarter because we were due to repay a couple of our bonds, and net debt $ 7.3 billion. Going to the UASC integration, on page six, you can see the various steps that have been taken, and I think it nicely illustrates that these type of deals typically take a lot of time to come to fruition. We started talking at the end of 2015. We signed the contract in the summer of 2016, then we had a lot of closing preparations, refinancing, et cetera.
We signed the deal on the 24th, or then the closing was on the 24th of May of this year. After that, things have actually gone very rapidly 'cause we started migrating the entire business to one platform in the third quarter, have trained the new colleagues and have essentially completed that process, which also means that the overall integration will be done before the end of the year. To give you a little bit of a flavor of what that all means, you can look at page seven, which gives you a bit of a flavor of what the magnitude actually is of the tasks that needed to be done. First of all, we only took three months to migrate all the UASC bookings to Hapag-Lloyd. That's what we call the commercial cutover.
Of course, it helped that we had already moved UASC into THE Alliance as of April 1, 'cause that meant that the services were already largely harmonized. We created a fifth region based in Dubai. We replaced 17 third-party agents by our own entities after the consolidation of both companies. We created two new areas. We closed about 70 offices. We are in the process of integrating over 90 local legal entities. We did more than 400 training events to get all the new colleagues up to speed. Now what that needs to bring is, of course, $ 435 million global synergies of which we will capture some already this year, but we should make a big step ahead there in 2018. We have new jobs for about 2,000 people.
If you look at the overall integration tasks that we identified, around about 10,000 tasks, they are at the moment over 90% complete. One question or a little bit more on synergies, because that question still gets asked a lot on, you know, what drives now these synergies of $ 435 million. I think the biggest category, and we've outlined that many times, is actually around the network. There, in reality, there are two big effects that are reasonably easy to explain.
One of them is around fleet, and the other one is around the network. If you look at page eight, you can see on the left-hand side that one of the big effects is that if you look at the two companies at the end of March 2017, the average vessel size was about 5,900 TEUs. If you look at it on the 30th of September, right after the integration, then we are up to an average of 7,300, and that, of course, helps us to materially reduce unit costs. Then on the right-hand side, you see the network, whereas we still carry the same volume as we did before the merger. Before the merger, both companies together had about 163 services, and now post-merger, we only have 125 services.
What you see, you can essentially offer from both companies' perspective, more services because the Hapag-Lloyd customer now can use 125 services instead of 118 services. A former UASC customer can look at 125 services versus 48 services. Yet you can operate that entire network with significantly bigger vessels. If you take those two effects together, that actually helps us a lot, yeah, to drive cost out of the system and also to simplify the organization, which of course then in turn allows us also to reduce SG&A. If you look at the trade portfolio, page nine, also there, another illustration that you have seen before, probably about how complementary both companies are.
If you look in the left-hand side, you saw the former coverage of Hapag-Lloyd, already a fairly balanced trade portfolio, but two of the bigger trades globally, where we were definitely underrepresented, being the Far East and the Middle East, that those gaps, if you want, or white spots, are now being filled post-merger with UASC. As a consequence, you can see on the right-hand side that the combined entity over the first nine months of 2017 has a very healthy spread between the various trades, which again, in our view, should help us to be more predictable and less volatile in terms of earnings. That should also hopefully be good for those of you that are invested in us. A bit more on synergies. Where are we on that?
If we look at it on page 10, network is already very advanced. There, of course, it helped that we brought UASC into the alliance as from April. We expect to see some synergies from that already in 2017 and more in 2018. Overhead is a process that's of course ongoing. That's where things like taking out the terminals and replacing them by own offices and moving the teams together and closing down offices are the most important things. Not a lot of effects there visible already in 2017 because you typically can start winding down organizations only after you have put the businesses together. The first effects will come there realistically more in 2018, with the full effect in 2019.
We have a whole bunch of other effects which are around contracts that have been renegotiated, the procurement effects, et cetera. Some of that will be visible soon. Some of it will still come afterwards. All in all, we reconfirm that we are very confident that we will deliver the $ 435 million synergies, and we will also deliver the vast majority of that already in 2018. That brings me to the sector. I think on the sector, there's been a lot of news around that over the last couple of weeks. If we look at demand, I think that remains fairly strong. Yeah.
If we look at the global container trade growth, we're still looking for 2017 as well as for 2018, at estimates that are close to 5% growth, which we think is a very healthy number. As you may recall, we've said before that long term, we are looking at a growth that we expect to be between 3%-5% each year. At the moment, we're clearly in a period where the growth is a little bit higher. The outlook for GDP growth is also at the moment, quite healthy. When you look at rates, we've certainly seen rates coming a little bit under pressure towards the end of the third quarter and the beginning of the fourth quarter.
I think that's pretty normal and seasonal, even if one could argue that it started maybe two or three weeks earlier than one would normally expect. I think on the other hand, we see a stabilization of the rates right now and, as we start to move towards the end of the year and getting close to Chinese New Year, we are cautiously optimistic that we'll see a bit of a recovery in those rates going forward, simply because there is not a lot of excess capacity, even if a couple of new ships are being delivered. If we look at supply on page 12, the biggest debate probably always in the industry, what is the order book? I mean, if we look at the order book right now, it is round about 14%.
There have been a couple of new orders from CMA and MSC, and there's certainly a few more rumors out there about people that may or may not order. I think our view is that the order book is actually at a quite healthy percentage because we shouldn't forget that if you take into account that the order book covers about three years, because the orders that are being placed right now are for 2020, so you have 2018, 2019 and 2020. You have a growth every year of 4% or 4.5%, then you already need an order book of, say, 12%-14% to just cover the growth.
We also shouldn't forget that the scrapping we see every year is also between 2.5% and 3%. If you add up 3 x 3 and 3 x 4, you end up with an order book that, in reality, should be fairly close to 20%. We would argue that if you look at the order book today, that it's still pretty healthy and at least nowhere near as unhealthy as it was, 8 years, 9 years or 10 years ago. Even if a few more orders come in, that should still allow us to have a reasonable balance between supply and demand, in the foreseeable couple of years.
I also think that in that context, it's encouraging to see that a number of the larger carriers, including ourselves, and I heard similar things from Maersk and the Japanese do not have any plans anytime soon to put in new orders. That brings us to the numbers of the third quarter in comparison with last year and over a nine-month period. I hand it over to Nicolás, who will take us through that.
Thank you. Thank you, Rolf. Good morning, everybody. In terms of the results, when you compare the first nine months of 2017 with the same period of last year, the volumes grew 24%. The freight rates went up 2%. That seems a little bit shy, but it's because of the annual effect of the comparison, because in the comparison you compare with Hapag-Lloyd standalone, we had structurally higher rates than UASC, because of the different markets and also different percentage of hinterlands compared to what we had. Bunker price went up 47% this year compared to last year, and the revenue therefore went up around 28%.
The operational result of the first nine months is significantly improved compared to the last year, from $29 million last year to $ 299 million during the first nine months of 2017. The result is driven basically by the good result of Q3, in which we achieved an EBIT, as you see in the table, of $ 202 million and an EAT of $56 million. This result, of course, is driven by the recovery of the rates and the good development of the volumes during Q3, as you may have realized in the same table. You also have to consider in the next slide the one-off effects. I think it's important to highlight that.
In the cumulative nine months of the year, we have a -$30 million net effect. That is composed of -$82 million of one-off related to a transaction, and $52 million positive related to a PPA. We have a badwill in the moment we consolidated for the first time UASC, and that means that the net effect of the first nine months is -$30 million. If you correct for that, then the result is a little bit better, right? In terms of the total one-off effects, on the right-hand side of the same slide, you can see we reaffirm our estimation of $130 million. We have $30 million more to go that are not provisioned in our financial statements.
In terms of the volumes, in the next slide, on page 15, you see, as I mentioned, it's a 24% increase year-on-year, driven basically by UASC. When you see the Q3 volumes, the growth is even higher, it's 44%. The strongest growth, of course, is in the Far East and the Near East because of the integration of UASC. If you look at the individual trades, we also grew very nicely in the Atlantic and the Transpacific when you look at the year-on-year growth in Q3. In the next slide, you see the bunker has gone significantly up during the year with a 47% increase compared to the same period last year.
The trend is also upwards in the last weeks as you see. We may have a kind of a consequence in the Q4 because of the bunker to the extent we cannot necessarily transfer that onto the clients in a very rapid way. In this environment, it's really important to continue watching at our efficiency in terms of the consumption. As you see, we have improved a little bit. From 0.42 metric tons per TEU moved, now we are at 0.40 metric tons per TEU, also driven by the efficiency of the new fleet, the new vessels coming from UASC.
In terms of the unit cost, you see in the next slide, I think, we maintain ourselves focused on what we can control, which is exactly this. We still improve in some other items that are compensating the bunker. We have a deterioration of the unit cost because of the bunker, $41. It's also important to say that, I mean, that number would have been even higher if we had not improved in efficiency. That efficiency that I just commented is around $6-$7 per TEU, and that's the reason why it's $41 and not even more. We're able to compensate that $41 by improving in chartering leases and container rentals and also in container transport costs.
With that improvement, we compensated the deterioration on the bunker side, and therefore we slightly improved in the unit cost in 2017 compared to 2016, despite the bunker increase. In terms of the cash flow, I think this is very important for you. We had a good operating cash flow in 2017, the first nine months, $ 751 million. A good cash conversion. I mean, we have a little bit of an investment in working capital, as you see in the graph.
The investment capital is influenced by the first incorporation of UASC because we got their balance of cash, but we also invested in some vessels and containers that you see in the chart, at $317 million, mainly vessels, a little bit of containers. I mean, those are the 10,000 TEUs and the 15,000 TEUs from UASC. In the financing capital, it's - $46, but very intense during the year. We have raised a lot of capital during the first part of the year, especially the first semester, $ 1.8 billion, and we have repaid around $1.6 billion .
With that, we arrived at a significant liquidity reserve of $ 1.9 billion, with a cash of $ 1.4 billion at the end of the quarter. Admittedly higher than usual because we have the money we are basically holding the money of the last issuance in July to repay that was repaid in October. You don't see that. We already repaid those bonds, the 2017 and 2018 bonds. Sorry, 2019 and 2018, as Rolf explained, but you don't see that in the balance sheet, of course, because that was in October.
In terms of the balance sheet, you see the company remains with a strong equity rate, 6.8%, on the back of the integration and the consolidation with the balance sheet of UASC. Liquidity is strong at $1.9 billion, as I just commented. The reason of that is basically these bonds that were repaid in October. In terms of the net debt improving a little bit up because of the bonds, but the net debt remains stable.
We continue doing an effort in order to reduce the debt and deleveraging process, as we do. We already did our capital increase, and we reduced some debt using those proceeds, as you may have read in the press. In terms of the outlook, the figures are in page 21. We don't change any of our guidance in that respect. When you compare to fiscal year 2016, we continue thinking that the volumes are increasing clearly. The bunker price, of course, is increasing clearly. The freight rates will remain unchanged, and we believe that that continues more or less the same.
EBITDA will clearly increase and EBIT the same prognosis. In terms of our priorities, we remain very focused on increasing profitability, execute the synergies as soon as possible and deleverage, minimize the investments and the CapEx of the company, given the fact that we have a high percentage of ownership and we don't need vessels in the future, in the forthcoming years. We will be able to generate a significant percentage of significant cash flow, and therefore deleverage the company in a faster fashion compared to the average of the industry. That's the reason why we maintain our liquidity reserve in a very high weight position.
We reaffirm that amount is between $1.1 billion - $ 1.2 billion. That's basically what I have to say on the finance section. Thank you very much for your attention. We'll be here for some questions in the case you have some to ask.
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 touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift your handset before making your selections. Anyone who has a question may press star followed by one at this time. The first question is from the line of Johan Eliason with Kepler Cheuvreux. Please go ahead.
Good morning. This is Johan Eliason. Thank you for taking my question. I was wondering a little bit about the integration effect of UASC. We obviously saw a dilutive effect on the freight rates on a sequential basis, because they obviously have a lower average rate than Hapag-Lloyd used to have. I don't think it was exactly the same development on the unit costs. I mean, we added almost half a million extra UASC volumes in Q3 versus Q2, which probably comes at a unit cost well below the average of 931 you reported for Q2. I would have expected the unit cost mix to have fallen a little bit further i n Q3, especially since the bunker costs were actually slightly down sequentially. Were there anything particular I need to consider when looking at the unit costs for UASC in the quarter?
No, not really. I would also say that, you know, it's still a little bit early to say something meaningful around that. I mean, we started putting the companies together in the third quarter, which means that you have quite a lot of effects that have to do with the fact that you start putting stuff together. I would also say that the unit cost trend is probably not 100% stable just yet, yeah. You also shouldn't forget that in the second quarter, the company has already started operating together in the alliance. I would also still certainly expect some further improvement, yeah, on the unit cost front in the quarters to come, especially going into 2018.
Okay, good. Just looking ahead, you were hopeful on the spot rates to improve ahead of Chinese New Year. How do you see the contract negotiations for the Asia- Europe trade developing?
Well, that's a good question. I think it's still early days. I think the first tenders are out as we speak. I think our expectation is that we will close the contract rates at a higher level than what we have seen last year. In fairness, quite a lot of that still needs to be concluded. That contracting season, as you know, still runs well into Q1. Still a little bit early to say. I think the first signs are encouraging. Too early to say how much improvement we will see in 2018 versus 2017.
Now, the consolidation we all have seen on paper, so to say, but actually, how many competitors do you have in this year's contract negotiations versus the number of competitors out there on the trades last year? I mean, the Japanese are only operating as of April, and Hamburg Süd and OOCL are obviously not yet concluded. Are they also there tendering today, or how does it look like?
Of course. I mean, today, those companies are still operating independently, yeah. I think, as I've said before, that's why I believe that the effect of the consolidation is something that you will only start seeing gradually moving forward as the deals get completed. Because only then the companies will start acting as one, and that's when the number of, you know, people that are bidding for the same business is probably gonna come somewhat down. The effect of the consolidation, both in terms of becoming more efficient as an industry and on the other hand seeing fewer players, but still allowing decent choice for all of the customers, those effects will only be visible in the course of 2018 and fully in 2019.
Excellent. Many thanks.
The next question is from the line of Andy Chu with Deutsche Bank. Please go ahead.
Yes, sir. Good morning. Two questions from me, please. You mentioned in your comments around synergies coming from vessels and services. In terms of your vessels at $215 million and your services at $125 million, can you hit your $435 million annualized run rates without any adjustment to those figures? Actually, what are your plans in the next two years for vessels and services? Where do those numbers go? In terms of the synergies phasing, are you able to be more precise as to sort of give us some numbers as to the sort of significant or the vast majority you mentioned of synergies in 2018, what will they be?
Just switching to numbers, just in terms of pro forma Q4 from last year, 2016. Maybe I've missed this in the material, but in terms of maybe just revenues, EBITDA and EBIT, what was the pro forma Q4 2016, please? Thank you very much.
Let me try and take the first two, and then I'll hand over to Heiko and Nicolás for the pro forma figures, although I'm not 100% sure that we have those at hand. I mean, your first question was around vessels and services. If we bring those down to $125 million and the average to 7.3%, is that enough to hit the synergy target? I think the answer to that is a clear yes. Yeah. Your second question was around synergies and whether I could be a little bit more specific in terms of what would be the vast majority of the synergies that should be realized in 2018.
Well, I would say that if we would not achieve something in the order of magnitude of 85% or 90% of the run rate of $435, then I would be disappointed. That gives you a good idea of where our objective lies. In terms of the pro forma for 2016 fourth quarter, I hand it over to Nicolás and to Heiko, although I'm not 100% sure that we have those numbers at hand, but we'd be happy. I'll leave that question to them.
In terms of the pro forma, I mean, we have a couple of pro forma numbers in the presentation on page 15 and page 16. On page 16, you have the pro forma for volumes. And then you have also the pro forma for rates, even separated per quarter. So you have that information in there. In terms of the EBITDA and EBIT, unfortunately, we don't have available the quarterly information per quarter. So
You can make your estimation in 2016, but we don't have the information at this point of time. We have published some of that in the prospectus, but only full year effects.
Okay, thanks. Then just in terms of comments on the LATAM trade lane, where rates seem to be a little bit firmer there. Maybe some comments on the outlook, please. Thanks very much.
Well, I mean, on the LATAM trade, as you've said, I mean, rates have been fairly firm and reasonably stable throughout the year. You know, the short-term outlook is probably that it's gonna remain like that. Midterm outlook is always a little bit difficult because we're gonna see some service changes, because of the commitments that Maersk and Hamburg Süd have had to make to the various regulatory people. For now, we do not see any signs that there's gonna be a material change in that trade, as that is one of those that at the moment seems rather stable, but we all know that these things can change fairly soon. Right now, no signs that that's gonna happen anytime soon.
Great. Thanks very much.
Next question is from the line of Neil Glynn with Credit Suisse. Please go ahead.
Oh, good morning. If I could ask three questions, please. The first one, following on from Andy's question with respect to LATAM. Maersk Line and Hamburg Süd was obviously mentioned. Just interested simply, do you feel that deal is good for your LATAM top line performance, given the markets consolidating, or potentially bad given that it produces a stronger competitor on LATAM trades? The second question, just interested if you can give us some insight in terms of UASC's performance on Asia-Europe, and its approach to Asia-Europe in the third quarter with as part of a stronger group. Was UASC focused on higher utilization in the quarter? That would be helpful. The third point, Rolf, you obviously mentioned some encouraging very early signs for Asia-Europe contract negotiations.
Just interested in terms of your approach to capacity management and charter specifically, should those contract renegotiations ultimately prove more challenging than at first glance? Thank you.
Okay, let me take them one by one. I think first of all, the effect of Maersk and Hamburg Süd joining forces. I mean, we know ourselves from the merger that we did with between Hapag and CSAV, that it's always a little bit difficult to retain your market share if you go through a merger, yeah. We would also expect that applies to them, and as such, we would probably see, you know, some opportunities for us here or there to try and grow a little bit faster. In terms of UASC, Asia-Europe, third quarter, I mean, the main focus. First of all, there was no really separate business anymore because we aligned all the pricing between the companies as from the beginning of the third quarter.
If you look at what our focus was in the third quarter, then that was clearly to retain all the volumes, building on what I just said in response to your first question. And of course, we also want to drive up utilization. I think we've seen a little bit of a blip in a couple of weeks throughout the integration, but actually that was very, very minimal. So overall, we're very pleased with that. And then I think your last question was on Asia-Europe. What will you do if dependent on how the contract negotiations go? I mean, we will just do whatever, as we always do.
I mean, dependent on the cost exposure that we have and on the outlook that we have on profitability, we may or may not decide to adjust our capacity. Because sometimes if you can't make money, then you have to cut your losses and, yeah, and reduce costs. Having said that, I'd say that the product for 2018 in the various alliances is pretty much set. You should not expect any major adjustments to capacity.
Understood. Thank you. If I could just come back on the second part of the question on the third quarter's Asia-Europe experience. Obviously very, very rational to focus on retaining volumes and driving up the utilization. Just interested, can you confirm, were you perhaps using price as more of a tool than you were earlier in the year to satisfy those objectives?
Well, I think we have seen that also, if you look at it on a pro forma basis, that in the first quarter, we were lagging a little bit behind in terms of recovery on rates. The second quarter was better, and in the third quarter, if you look at it on a like-for-like basis, we saw a healthy increase on the freight rates. In all honesty, if you go through a merger, if you try to put everything together within three months, then your first priority is typically to hang on to the volume, yeah. This thing about doing yield management and optimizing cargo mix is something that you will only start doing later. The effects of that, if any, one would only see in 2018.
That's very helpful. Thank you.
Next question is from the line of Robert Joynson with Exane BNP Paribas. Please go ahead.
Oh, good morning, gents. Three questions if I may. First of all, on the freight rate, you mentioned that rates have softened a bit going into Q4, I think as we've all seen from the market data. Could you just maybe comment on the difference between the freight rate that you saw at the beginning of Q3 versus the end of Q3, just to give us a n idea of the trend within the quarter. So that's question one. Second question, just on the idle fleet. It's obviously now started to increase again. Could you give us your thoughts on how you expect idle capacity to develop during the months ahead? The final question, just on the financial expenses, the net interest was a little bit higher than I was expecting. Were there any non-recurring items in there? Thank you.
Okay. Let me take the first two, and then Nicolás will take number three. In terms of rates, I think we have seen, as I said, some softening towards the end of the third quarter. If you look at the trend of the rates, it was still going up throughout the third quarter. The effect of, you know, rates coming down a little bit is something you would typically see in the fourth quarter and we expect to see that as well, which is the normal seasonality in our business. In terms of idle fleet, I believe we spoke about that last time as well, when the idle fleet was very low. I believe I then said that I expect idle fleet to go up again in the course of the fourth quarter. That's exactly what you see.
That's a normal slack season pattern. I would not expect that idle fleet to go down anytime soon. The reason why the idle fleet came down a lot in the beginning of the year also had to do a lot with the reshuffling of the alliances. That is something that for everybody is now pretty much done. That's another reason why you see this coming back to those slightly higher levels than we have seen some years ago. Having said that, by historical standards, and looking at it as a percentage of the global fleet, I still believe that the idle fleet is at a relatively low level. With that, on the question on interest earnings in Q3, I think Nicolás is in a better position to answer that.
Sure. We have, if you look at the cash flow, we have a significant financing restructuring during the year. We have issued bonds, we have refinanced and repaid bonds, we have also issued some other debt to refinance that financing. The total one-off that you see in the first nine months are around $30 million. Those are related to basically derecognition of capitalized costs of the debt that we have repaid. It is related to premiums, call premiums related to the bonds that we repaid, and also related to derecognition of the value of the options, the embedded options of those bonds that are basically valued continuously in the financial result of the company.
That's the effect of the first nine months. We expect further effects in the fourth quarter as we, because we repaid a fraction of the bonds also in October. We have a little bit more of those one-off in the fourth quarter of the year.
Just off the $30 million, could you say specifically how much of that was in Q3?
Actually, in Q3, it was even higher than $30 million. It was $40 million. It's around $15 million more, so it's $45 million because of the simple reason we have in Q3, we lost the value of the options. We gained some of those values during the first six months. If you look at the effect of Q3, it was even higher. It was $45 million.
Got it. Okay. Just final question, just to clarify on the freight rate. If you take the guidance literally of 1036, I mean, it kind of implies about what, 970 for Q4? I assume I shouldn't be taking that literally. Is that fair?
That is fair. I mean, I think the challenge with this guidance is that you have to give it compared to the Hapag-Lloyd standalone number of last year. I believe that when looking at that, left more or less unchanged means ± 2% or something like that. Yeah. With that, you know, that's roughly what one should expect, but the number you are quoting is not the number you should expect for Q4.
Great. Thank you.
The next question is from the line of David Kerstens with Jefferies. Please go ahead.
Good morning, gentlemen. Also a follow-up, please, on the freight rate assumption for 2017. You leave the guidance unchanged compared to previous quarter, whereas we've seen spot rates come down, as you mentioned, towards the end or during the third quarter. Does that mean that you have already covered a large part of your exposure for the fourth quarter on the fixed price contracts that is mitigating the recent pressure on spot rates? Or has the mix between the Hapag-Lloyd UASC turned out more favorable with, for example, a smaller share of UASC in the mix? Secondly, regarding the synergies, you expect the majority of synergies to have been realized by the end of 2018, 85%-90%.
I think you had previously indicated around 1/3 in 2017 when the merger was expected to close earlier. What do you now anticipate to be realizing in the fourth quarter in order to mitigate any potential freight rate weakness in Q4? Thanks very much.
I think when you look at the freight rate, we traditionally have a fair share of fixed contracts, so we are definitely not 100% dependent on the spot rate. I think that's the answer to your first question. That doesn't mean that it's entirely hedged, but it is to some extent mitigated. We said earlier that we would expect to see roughly one third of the synergies realized in 2017, and we stick to that. The 85%-90% stands as well.
If we look into the fourth quarter, I would say that the biggest, you know, risk factor we have is probably around the bunker price, which has gone up quite a bit, yeah, significantly, and you typically face a little bit of delay in passing that on to the customer. Whilst that is not a long-term issue, that is certainly something that, you know, could have an effect in the fourth quarter as such.
Great, thank you. Could you maybe give an indication what your contract exposure is, currently for the coming year or so?
I mean, we get that question a lot and it's very difficult to answer that because the exposure varies a lot between the various trades and also now as we are going through a big reshuffle in our book of business, it's very difficult to just put a percentage on that. I mean, the average duration, if you want, of our contracts is probably realistically between 3 months and 6 months. If you look at the various trades, then you see that you have a reasonable share of fixed contracts on Asia-Europe, anywhere between 25% and 35%, probably that's what you have as fixed. On Transpacific, it's typically higher. Tends to be 50% or even a bit more than that. On the Atlantic, you typically have 6 months contract.
It really varies, and it's very tough to put one number on that. I'll also not do that because that would give you some artificial comfort that in reality is not there.
Great. Thank you very much.
The next question is with the line of Frans Højer of Jyske Bank. Please go ahead.
Thank you very much. I noticed that your volumes on Latin America are up nicely in the quarter, possibly thanks to the difficulties Maersk has experienced regarding in relation to the cyberattack, and I was wondering how that is, how you see that organic growth trend on Latin America in Q4. I also noticed your comments about merger loss of volumes and your own experience with UASC. Would you put a number on roughly how much the merger loss might be as a percentage of the volume of the target acquired?
I mean, maybe two quick comments to that. First of all, we have seen good volume on the trade to Latin America. I don't think that has anything to do with what happened at Maersk, to be honest. If anything, that effect is probably negligible. As far as the, you know, the exposure one can have when you merge in terms of between two companies, I mean, there is always a little bit of pressure. If you want to have an assessment of what the impact could be on Maersk or someone else, you have to ask them. I can only speak for us. We have seen some merger related losses in the third quarter during a short period of time. I would also say that if you look at the longer term trend, that the impact of that is not material.
Would you venture I mean, how much would the merger volume loss be as a percentage of UASC's volumes at the outset? Just a ballpark figure would do.
I mean, a very, very small single-digit percentage.
Okay, thanks.
Next question is from the line of José Arrobas with Bestinver. Please go ahead.
Good morning, gentlemen, and congratulations on the fast integration and very good set of results. I have a couple of questions. The first one is on the potential for additional synergies over and above the $435 million you have quantified. It's clear to me that all of these synergies are cost driven, and looking at the slide 16 of today's presentation, I was wondering if Hapag can also extract revenue synergies from UASC as you keep on readjusting the network. Their freight rates, which have been historically lower, converge towards those of Hapag. I was wondering if this is possible in a pragmatic world, and if you can put a number on this potential.
My second question is on slide 27 of the presentation in the backup section, where you show your view of demand and supply going into 2018, where you show demand exceeding supply. This seems to be a more optimistic view of the world than other forecasters have been showing recently. I was wondering what your assumptions with regard to potential order slippages next year would be. Thank you.
Okay, thank you. First question, synergies, will there be more than $435 million ? I mean, we've always said that we first need to go through the integration, need to put measures in place that we have planned, and then we'll make an assessment of that somewhere in the first half of 2018. Is it possible that there's more than $435 million? It's always possible, but it's too early to confirm that. On the revenue side, revenue synergies are always very difficult to track, and as such, that's also why we have not declared them. One does need to recognize that a big chunk of the difference between rates in that we saw at Hapag and at UASC is simply, as Nicolás mentioned earlier, because of a different structure of a different trade mix.
Will there be any revenue synergies? Would be nice. Will it be possible to put a specific number on that? Probably not. In terms of the forecast on supply and demand on your page 27, is our number somewhat more optimistic than the others? Maybe, yeah. I would also say that when you look at net supply growth, yeah, and you look at what we have predicted in 2015 for 2016 and in 2016 for 2017, then we were also always a little bit at the lower end of what one could find in the press, yeah. Actually both effective supply growth in 2016 and effective supply growth in 2017 ended up slightly below what we estimated, yeah, for those two years, or roughly around that number.
I think that one will find that also the number for 2017 is not gonna be materially off. Could it be 0.5 percentage points higher or 0.5 percentage points lower? Yeah, probably that could happen, yeah. I think my main takeaway for 2018 is that there's not gonna be a material shift in the balance between supply and demand. Could it be that supply grows a little bit faster in the beginning of the year than demand? Yes. That could happen. Yeah. If you look at it over the full 12 months period, I think the assumption that it's gonna be roughly balanced, because that's what this says. I think this type of things are not science. Yeah.
I think that's probably not that far off. Will there be some slippage? There's always some slippage. I also wouldn't be surprised, especially if the bunker price stays at the level where it is today, that scrapping is gonna be a little bit higher than is anticipated in some of the forecasts that you see right now.
Thank you.
The next question is from the line of Neil Glynn with Credit Suisse. Please go ahead. Mr. Glynn?
Oh, sorry, I was on mute. Thanks for granting me the follow-up. I just wanted to check on fuel hedging. You have hedged fuel in the past, although I don't think you have anything in place at the moment. I'm just interested in your view as to the potential rationale for as you integrate UASC, there's obviously volatility or potential volatility there. You're clearly focused on delevering the balance sheet. I wonder as to whether even hedging on a three-month view as you wait for freight rates to catch up with fuel price movements, would that give you more stability, and predictability of your earnings at the moment?
I mean, I'll leave it also to Nicolás to talk a bit more about that. I mean, hedging in general is taking an insurance, yeah, for something. The challenge with insurance is that they always cost money.
Yeah.
While they may help you to flatten out some of the results over time, we see it more as an insurance against the catastrophic event. That's why we hedge well above the spot rate rather than an instrument to stabilize our earnings. Those that are exposed to this industry are also by nature exposed to the fluctuation in the oil price. I don't know, Nicolás, happy for you maybe to say a few more words on that.
I think. Thank you. Traditionally, if you look at the correlation between bunker and rates, are pretty much moving in tandem. Theoretically, you don't have the necessity to hedge. It is also true that we have some delays to pass it on to our customers. That's the reason why we have some in the contract. The fixed part of our portfolio have they have a bunker adjustment clauses. We have done it in the past quickly or quicker than a couple of years ago, and we should become also quicker in the future. That's the way that we have to hedge. That said, we—o ur policy or our way to hedge is basically buying call options on a rolling period of 12 months for a fraction of the volume, not for the full volume. Today, we are between 35% - 48% of the volume with a strike price above the, as Rolf Habben Jansen commented, above the spot just to secure the budget and the possibility that we delay too much in this transfer of bunker increases to the market.
That's great. Thank you both.
We have a follow-up question from Johan Eliason with Kepler Cheuvreux. Please go ahead.
Yes. Thank you for taking a new question here. I was just thinking about the backlog for new ships. You mentioned 14% was probably realistic if we were supposing that the market should be growing a little bit going forward over the coming three years. Now, you say obviously that you don't plan to buy any new ships. Will there be a time charter market fluid enough for you to be able to follow in the potential market growth going forward? Or is part of the cost synergies basically that you will improve your utilization of your existing ship over this period? Or how is your thinking about your market shares going forward vis-à-vis the anticipated market growth and the capacity coming in? Thank you.
Yeah. I mean, we anticipate to grow roughly with the market. As was pointed out earlier, we have a very high percentage of our fleet today as owned tonnage. As such, we would aim to grow somewhat by using either charters or sweating our assets a little bit more. We think that that's possible, and I actually, in all honesty, don't see any major problem in doing that for the next couple of years. That is very clearly our plan. It will be a combination of sweating the assets, driving up utilization, and if and where needed, we'll go to the charter market, which is still more than big enough.
Good. On the demand side by 2020. Is it still to use the more expensive marine distillate or low sulfur fuel oils, or will you now consider investing in the scrubbers to be sort of on a cost level on par with the new ships coming? Thank you.
I mean, I think that there's still a lot of debate going on around all of that. Maybe two things to it. One is we certainly have a number of ships in our fleet that are LNG ready, and we are also studying whether there's any possibility at some point to go and switch to LNG, but no decision has been taken on that just yet. In terms of the new regulations, we believe that scrubbers is really a very inefficient and not very effective solution to that. We believe that it would be best if a different distillate is being made available by the refineries. That will also ensure that everybody's on a level playing field, and that we really do something good for the environment as well. That is currently our assumption.
We follow that very closely, and we'll have to decide within the next 6 months-9 months which route we exactly go. Right now, we are not looking at going with scrubbers.
Okay, thank you.
We have a question from Guy Kelly with Allianz Global Investors. Please go ahead.
Morning. I just have a quick question about scrapping again. Looking at the chart on slide 27, we've seen scrapping ages sort of coming down towards 20 years, and you're talking about scrapping next year and maybe beyond being quite high. Presumably, that means staying around the 20-year age. Does that mean that we're in a sort of a structural transition where vessels realistically have a 20-year lifespan instead of maybe the more like 25 years, 30 years that was in the past? Thanks.
I think that I personally don't think so. Yeah. What you see right now is that because there has been so much technological development in this industry for the last 10 or 15 years, that you just end up with vessels of 20 years old and a bit older that are no longer economical. We believe that technological change will still continue going forward, but it will go at a materially slower pace. While I expect that number to remain around to 2021 for a couple of years, I personally also expect it to go up again after that.
Okay. After a couple of years, scrapping will fall a lot, presumably, in order to get that average back to towards 25 years.
Well, not really, because if you look at scrapping these days, scrapping these days is at about 3% of the global fleet. Yeah?
Mm-hmm.
If you would assume that ships are being used on average 25 years, one would expect to see a long-term average of around 4%. I don't think it's gonna come down materially. There's a fair chance that you'll still see a bit of a spike in 2019 and 2020, as the new sulfur regulations that were just quoted are going to kick in because it will be quite expensive to adjust or operate some of the 20-year-old vessels at a different type of fuel for a few years.
I expect that after that, we will see it going back to 25 years, which may mean somewhat lower scrapping for a couple of years, but at some stage, it will creep up to the long-term average of 4%.
Okay. Thanks very much.
Thanks very much.
This was our last question today. Please direct any further questions to the investor relations team. I hand over to Rolf Habben Jansen for closing comments.
Okay, well, not much to add from my side. Thank you all very much for joining. Thank you also all very much for the questions. That made it quite lively. We appreciate that, and looking forward to speak to many of you again soon.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining. Have a pleasant day. Goodbye.