Earnings Call: Q3 2024

Nov 18, 2024

Summary

Q3 results were supported by higher volumes and freight rates, while rerouting drove up costs. Hapag-Lloyd forecast FY EBIT of $2.4bn–$2.8bn; CSAV reported $194.6m nine-month profit and held €487m in German tax recoverables.

Good morning, everyone. We will now begin with the investors' call to give the results of this third quarter of 2024. I have Roberto Larraín with me, CFO, and Óscar Hasbún, CEO of CSAV. I am María Elena. I am representing this meeting. This will be done in Spanish and English, so those of you that need to change the language, you can click at the bottom of the screen, you will see an icon of a globe. Please click that icon and choose your language. Thank you very much. I leave you with Óscar Hasbún. Thank you very much, María Elena. Hello, everyone, and welcome to the investment call of the third quarter. We will now begin projecting the presentation. At the end of the presentation, you will have the possibility of asking questions that will be done openly. We will allow you to speak from here. Well, we had a very solid third quarter with the results explained by the result of our Hapag-Lloyd in Germany. This quarter was marked by very high volumes with higher tariffs than the previous years, and also by costs that went up due to logistical problems. What we see in nine months of accumulation is a very high demand, growing around 7% on a global level. Group utilidades in Hapag of $43 million around the third quarter. In nine months, $1,833 million. We have a terminals and infrastructure new business segment that we have been working on for the last three, four years with an EBITDA of $114 million in nine months. Hapag-Lloyd changed their market outlook on October 24, with an EBIT that we will be looking at the end between $2.8 billion and $2.4 billion, and that is the range that we are projecting for. We confirmed the order of 24 new container ships, around $24 million of investment. These ships will be built in China, and we will have them available starting 2027, 2024, for our new fleet of boats. We will be going more into detail later. Regarding CSAV, we had a third quarter with $325 million in utilidades. That is explained by having this result of $1.043 billion. With a positive effect due to the exchange rate between dollars and euro, we got a higher result, and this has a very positive effect for us as a company. We have around €500 million accounts payable to the German Treasury, and since they are in euro, the dollar to euro conversion means it is a positive gain for us. We have a positive result there. We have an accumulation in nine months. We had a negative result at six months at the beginning of this year, and we are now at a positive result of $3194.6 million, which is negatively impacted by the payment of a $343 million payment that is still due. This is due to dividends received from abroad that is generally paid between April and May in Chile. When you take a look at the profit before taxes, we are talking about $537.7 million of nine accumulated months. A very important piece of news is that we were able to extend the shareholders' agreement with the HLAG, which is the subsidiary of Kühne Holding, with Klaus-Michael Kühne, who is investing in Hapag-Lloyd. When you take a look at the evolution of the demand, you see a growth of around 7% in the first months of the year compared to the previous years. The third trimester quarter, we had a smaller growth, regarding the rest of the year, because the first 9 months of the year, the first half of the year, is positively affected by higher transit times generated by the Suez Canal issues. We had a lot more inventory on water than what we had at the beginning of the first quarter. The third quarter reflects the true situation around growth for the company. When you look at the fleet that is inactive, we see a very, very low inactive fleet. We are getting these ships out. They are undergoing repairs. It is only 0.7% of the idle ship. Almost all of the fleet is being used. We see an increase in the amount of ships that went into the global traffic. We have increased our fleet, increasing Transpacific transit that will now go through the Cape of Good Hope instead of the Suez Canal. This is a very important change for this fleet. This has required us to use all available ships in the market. Here we can see that starting from July, we see a normalization towards a decrease in tariffs. These tariffs, these rates, saw a small increase since October. On November 15th, this was last Thursday. These rates are a bit lower currently from last Thursday. They are still above what we saw in 2023 and above what we saw at the beginning of this year as well. There is still a very good growth in rates, and we will see what happens ahead, what the future has in store for us. When you take a look at the cost of oil, fuel cost, we see a slightly higher fuel cost than previous year per ton. As we will see, fuel cost on a level of Hapag-Lloyd is increased as well for any shipping company because consumption has increased due to the increase in mileage due to having to go all the way around the Cape of Good Hope and also having a bigger flow due to restrictions in the canal and the effects that we can clearly see now, and the offset that we will have to do regarding CO2 emissions due to all traffic related to Europe. We see the current state of the order book around 25%. To this date, we have seen a 7.7% of increase of the global fleet. Very low scrapping because we have less idle fleet and scrapping is related to idle fleet. Although it might be expensive to operate this, we have a very little incentive to continue with scrapping. Scrapping, I mean. I apologize. We want to show a deeper analysis of this index because it is always important to have this in context to understand the structural supply and demand. When you take a look at the global order book as a whole, we have that today the order book is around 7.8 million of allocation. We have around 30 million TEU. This is around 36% of the order book. Now, when you take a look at the ships themselves and how they will be coming in, we know that the orders that will be incorporated currently will not affect the supply up to 2028. Until 2027, we are really certain of the size of the fleet, and the biggest increase in the fleet, in raw terms, happened in 2024. You can see here 3.2 million TEU, and this is what has been absorbed by the crisis that we went through. Next year, we expect an increase of 1.9 million TEU. When you take a look at the upper right chart looking towards 2027 because in 2028, we could increase the amount of ships. That will be increasing towards the future with the 7.8 million TEU that we are currently building. That is the full bar towards 2027. We will have 2.2 million TEU of ships that will be more than 25 years of age, meaning that all that you can see there is potential for scrapping. Meaning around 30% of this TEU could be ship replacement for ships that are older than 35 years of age. If we see that in 3 more years, this number will increase twice. That is the potential scrapping that we are accumulating, which is very important because the fleet has been growing older, and after the pandemic, we saw a high demand for ships. All scrapping has been kind of delayed towards the future. We see this in the graph at the bottom right, where basically since 2018, there is almost no scrapping. This is some very relevant data because if you calculate that ships last around 25 years for scrapping, we should see around 4% of the fleet here. But on the level that we currently have for TEUs, these numbers should be closer to 1 million or 1,200,000. But we are not seeing this currently, so this raises a few alarms and at some point in time, this will generate a very high demand of shipyards for scrapping. When we see the balance of supply and demand, we see that the fleet in 2025 was around 5.2 towards 2024, increase in 11.2%, and we see how it is moving around 3%-3.5%. It is important to understand that this 11.2% is the net increase of the fleet. When we consider the increase in mileage, which is in blue. The blue line is increased in 18%, meaning this 11% meant an 18% of increase in miles. That is why we have not seen an increase in the demand of over-demand because the demand went up 5.5%. Now they need to travel more with more mileage. When we look towards the future, we do not really see an element that will throw us off regarding the amounts of ships coming in in 2025. Of course, all of this is directly related to what is going on with the development of the crisis in the Red Sea. As the crisis in the Red Sea continues towards next year and ships continue to go with the rerouting that they are currently going with, we will probably maintain a situation of the current balance of supply and demand that we are seeing right now in this image. If this were to change, of course, this could generate more availability of an additional fleet that could impact the balance conditions of supply and demand. When we take a look at the results of the quarter, we see an increase in revenue of around 18%. In the accumulated, we see the same revenue, although it is a higher volume, because the average rate is lower from what we had last year. This is what happened in the accumulated. For the quarter, the rates are higher this quarter. This means that the EBITDA grew $1.6 million and the accumulated EBITDA is lower after nine months. If you remember last year, we had higher results, and we went down towards the end of the year. We lost money the last quarter of last year. This year, the trend has been the other way around. We started off a little weaker, and now we are seeing better results. We can see this in the accumulated figures here. The EBIT, we basically have $1,061,000, which is higher than last quarter. In accumulated, we still have a decrease of 35% compared with last year. We have lost $1 billion in comparison with the accumulation of last year. Regarding profit, the profit of the quarter is $1,043,000,043. We see a decrease of 46% due to the impacts that we have had this year in comparison with last year. When we make this bridge to understand what changed in comparison of the nine years of the previous year in compare with the EBIT of this year, we see an effect of a positive volume growth of around 5%, which generates 684 additional millions of dollars for this line in contributions. With a rate that is $113 lower, this will, of course, have an impact going from $926 million. That will decrease, as we can see there in the last line. Regarding costs, we have an increase in costs of $29 per TEU. This is mainly explained because of increased expenses in fuel and increased handling and haulage, all related to the issues in the Suez Canal. All of this has been partially compensated with higher volume and higher rates regarding what we saw in the fourth quarter. When you take a look at the cost per transport TEU, we saw that last year for the quarter was 1,269. When we take a look, it was 1,232, and now we have 1,298. We have an increase of 6% in the cost per TEU. It is once again explained. You can see here the components of emissions and fuel, which is mainly the effect that has increased, as well as handling and haulage. The rest of the cost looks stable with a few increase in vessel and voyage because of issues in the Suez Canal. When you take a look separately at the liner shipping business and terminal business, it is still very relevant when it comes to the use of the liner shipping business of the total of the group. We have only $22 million coming from the terminal business, and then we have in the liner shipping, $1 billion 38. We have $96 million in the terminal infrastructure and $1,884 from the liner shipping. This is also related to what we have been doing in India and some other synergies that might come up in other places of the world. That is why this segment will surely be showing better figures in the future. Today, the main job of the company is focused around the launch of this new alliance with Maersk that started last year. We are selling the booking for next year. This will be feasible starting two weeks from now. In 10 more weeks, meaning the first of February, the full operation. The go live will be operational. Of course, all of this has relevant costs that will probably impact the beginning of next year, particularly the first quarter and second quarters. But in the midterm, we expect that this will generate more adhesion from our clients, because what we expect is to be sure that we have a much better transit time, that we have better schedule reliability, and that eventually we'll have a few savings in the network operation. This project is now considered, assuming that the situation in the Red Sea will not be resolved. Of course, there is a backup plan because we have a network that's prepared in case it is resolved. But the base scenario for next year, especially at the beginning of this alliance, we will continue going through the Cape of Good Hope and not going towards the Red Sea because we see a very important risk for our operations. Here we have the new orders that we have. There's a very relevant order, the most relevant one that Hapag-Lloyd has made in its history. It's around $4 billion investment. We'll be financing $3 billion with a financial commitment, and the ships have newer characteristics. The order is of around 312 TEU. We have a 3.2, so it's a very important increase in our capability. There's a very organic growth where we'll also be replacing the old fleet. We will consider the new workhorses in the industry that have a 16,000.8 TEU. They will be built with the potential of being used either with petrol or LNG. The LNG engines can also be used with biomethane, which is a fuel that generates around 90% fewer CO2 emissions. This biofuel also generates 75%, 80% less greenhouse gases than oil. That will be ready to use with ammonia if it is feasible to develop this in a stronger way for the development of the industry. We're also creating ships that will have the same technical characteristics and features, but they are smaller in size, and will have a 9.2 thousand TEU. We see there the delivery is aimed towards the second quarter of. Well, it started getting in the fourth quarter of 2027 up to the fourth quarter of 2029. That's our growth plan, but also our commitment with lowering our emissions. Now, when you take a look at the new outlook the company created towards October 24, if we look at the most relevant part, the last part here, we see what I said just before, that the new EBIT growth is between $2.4 billion and $2.8 billion. For now, these are the results of Hapag-Lloyd. Now, I will continue with the results of CSAV. When you compare the nine months of this year with those of last year, a bit of what Oscar was saying, Hapag-Lloyd results are around halfway of what we had last year. This is what explains lower result in our operational level of CSAV, because when it comes to administrative expenses, we are pretty much aligned with what we should. There's a lower expense on the part of directors. When we take a look at the financial result, we have a positive result of $13 million. Quite a bit higher than last year. This happened because you have to remember that towards the end of last year, we had to pay the financial debt at CSAV, and today, CSAV has no debts. We have this result considered as income concerning what we had to pay last year. Also, exchange rate difference because we have an account with assets in euros. It is negative this quarter, but much more positive if we consider the nine-month accumulation of last year. What is also mainly driving this result is a big chunk of taxes to be paid. Although it is very big, it is half of what we had to pay last year. We have to remember that this happens because as we continue receiving dividends from foreign countries, from Germany, we have to recognize these tax expenses. This year, we have shared $1.1 billion to our shareholders against last year that we shared $2.2 billion. With this in mind, we have this result of nine months with $195 million, $62 million less than last year's. When we take a look at the graph of these results, how we went from $257 million at the nine months previous year towards 194.6 of this year. The two main accounts that drive this change have had fewer results, from Hapag-Lloyd, compensated by lower tax expenses on a CSAV level. These two are generally offset by other things, and the result can be seen as a very similar thing, but with completely different explanations. The current tax assets in our balance sheet is very similar to what we saw towards June. The retentions to be paid abroad have remained the same. There has been no new news from here. We have a total of EUR 487 million to recover from Germany, and we have credit to be used for taxes paid from Chile towards the foreign countries. Regarding assets. Assets went down from $8.2 billion to $7.3 billion. The main movement is lower cash flow. This happened mainly due to dividends that were paid in May for our shareholders of $1 billion, just above $1 billion. This is offset by the flow that we got from Germany and Hapag-Lloyd and retentions that we gained in March. So the asset account of assets to be recovered with the withholdings is increased in March, and the Hapag-Lloyd account is aligned with this because although results are positive, we have an increase in $541 million. In Hapag, we got a dividend of $525 million. So the net increase has a $15 million increase. Liabilities, when you compare December 2023 with September 2024, they are very aligned, $180 million against 183. The main variables of the account are lower commercial accounts of liabilities payable, especially due to the lower operational expense and also additional tax expenses for foreign investors. On the other hand, we also paid corporate taxes in Germany, and this account has a balance of zero in September. Regarding liabilities payable for the long term, except for current, this account goes up due to the dividends that we have brought to Chile, and this is a deferred tax payment, and also the result that we see, the result of this period is lower than what we had in December of 2023. It has a lower provision of payment of a minimum tax payment of 30% that is still to be paid. Equity decreases in around $900 million. This is due to the payment of taxes. Oh, of dividends, I mean, for investors, offset by the positive payment that we had to this date. Cash flow. We closed our cash flow in September with $93 million, and we had started the year with $278 million. The main changes are lower payments for operational activities, relevant payments in taxes of, tax recognition of 375, which is in part offset by withholdings received and dividends received from Hapag-Lloyd towards CSAV. Positive account, for interest received for deposits and cash flow, cash flow investments, and payments towards our investors of $1,154 million. Exchange rate is lower, thus the cash flow is positive. As we mentioned, we have a zero negative balance for other accounts. We continue working, committed with port cities. On this front, we'll be communicating more things related to what we had in this year towards the end of the year. We're working with the San Antonio City Port. With this, we will now open the floor for any questions. The questions will be done raising your hand with the icon that you can press here at the bottom. Please, I ask you that you make them orally, that you please speak up. When you ask your question, you identify who you are. You introduce yourself so we know who's talking. Manuel Ramos, go ahead. Yes, good morning. My question is, if there are any projects, would it be possible to work with the port of Chancay in Peru that will begin working in January? The Chancay port will be a port that naval companies will generally use, and we will certainly be using at some point in the short term. We are seeing the operational part, but it truly is a port that will help decongest what we see in Callao currently. Fernán González, go ahead. I don't know if you could please say where you're coming from and introduce yourself. Hello. Good morning, Fernán González from BTG Pactual. I want to ask about the chartered, because there's still more than half of the fleet of Hapag-Lloyd. Will you continue with this kind of contracts or agreements for a longer time of what we expected before? Or will we see a decrease in the dependency of these kinds of ships in the following years? Along the same line, after the agreement with Gemini, after it goes into full force, how do you compare the current capability of Hapag-Lloyd with this agreement, especially considering the kind of ship that will be required? Could there be an excess in capability for some kinds of ships? Fernán, first of all, just to clear things up, currently, Hapag-Lloyd owns 60% of their capability. So we have more property than the average in the industry. It's the other way around of what you said. Now, renting boats, our target is to move between 55% and 65% of property of our ships. We do not want to achieve 100% of property of our ships. We understand that this flexibility allows us to eventually shrink a bit or to have a bigger availability for technologies. So this desirable number of ownership is not 100%. Our goal is around 55% and 65%, and this is what we have maintained during the last 7 or 8 years. The orders that we have are aligned of around 800,000 TEU, and it's increasing in that direction as well. We are growing organically in our fleet. We have to understand that today, due to the reasons of operational restrictions, we need more ships as an industry to do the same. If you take a look at 10 years back, around 2% of the fleet of the world every year has been lost due to inefficiency. In the accumulated, there are many ships that are not helping towards growth. They're just aiding towards an operational part. Gemini, what we estimate is that with the fleet that we currently have, we still have a very short ways to go regarding what we need to launch the operation. The launch will be in February, so we don't have much time to make any changes, but this should generate some degree of efficiency when it comes to the creation of more space for us at a considerably lower price, because they will be more efficient than the current fleet. With the fleet that we currently have, we have the potential of growth that is very important for the next 2 years. I would say that generally, without considerably increasing our total allocation, that is, as I said, 2.2 million TEUs. Our objective is to keep growing in allocation because this is a growing industry where size is very important to keep the relative size for competition. We do not see at any moment now that we will have an excess of ships in any segment, really. I don't know if this answers your question. It's perfect. Just a second question here. You mentioned that around 30% of the order book will be candidate for scrapping at some point in the upcoming years, and that you're accumulating a lot of capacity. Is there a global capacity of scrapping for the amounts that you expect for the future in the upcoming years? Or could this be a relevant limitation that will make this process a lot slower than what we expect? I think there are two limitations here. The first limitation here would be that these ships, many of them have contracts for more than 5 months. Generally, 20-year-old ships, in normal circumstances in the industry, they're rented for shorter periods. These contracts for these ships, currently, during the pandemic, they were extended, and now during the Suez Canal crisis, they were extended once again. They're not contracts that are expiring in the next 6 months. Here we have a new restriction for scrapping. Even if the Suez Canal crisis is resolved, we have a very accelerated path forward. The second one that you mentioned, effectively, the capability of the world for ecological scrapping, quote-unquote, ecological, is much more limited than what we had before, where scrapping was basically any kind, ecological and not so much. This could also be a limitation. Now, we have to understand that if the rate scenario is such that it generates losses and costs cannot be covered, we'll get to a point where it's a lot more economical to just stop the ship. This could mean that the idle fleet goes up. It's just 0.7%. If you take out all the boats and all ships that we have in shipyards, this is what could happen. In complex situations, it has reached 10%, 12%. It could start happening that the economical equation means that older ships, due to higher emissions, higher fuel costs that they have, and higher costs of docking that older ships have, it could mean that economically it would be much more viable and profitable to hold them instead of continue operating, even if we do not have scrapping due to the current situation. Sebastian Silva, go ahead. Hello. How is everyone doing? Good morning. I have two questions. Well, three questions, really. I apologize, Sebastian. I have three questions. How do you consider that freight demands will be next year? Will it be similar to this? I know this depends on the Red Sea situation. My other question is, if the Red Sea issue was resolved today, let us say, how long will it take the world to come back to reality? My other question is about tax withholding. When do you expect to receive this? Those are my questions. Regarding demand, we estimate that the GDP of next year will be the main driver of freight rates. This will be around that 3%. We would demand that demand will go up between 3% and 4%. That is our estimation for next year. That is a bit less than the growth that we will see this year. It is important to understand that the effect of the Red Sea in demand per volume on this first half of the year, well, there are important increases in demand, but part of this growth is related to a higher availability of inventory at water. We see we have 20% more traffic of ships going around. This means that in this particular traffic, trans-Pacific traffic, you have a 20% increase of shipments on sea, and at some point you have to consider this. It appears as volume growth, and it is important to look at consumption figures. When you take a look at the figures of consumption in the North American economy, they are not growing 50%. They are growing at a level of 4%, 5%, 6%. Physically speaking, regarding money or dollars, I saw that a few months ago, it was growing 3% in its consumption rates in North America. You could believe that as interest rates start going down, then we could see a better growth in global consumption that will look at the other growth that we have seen. That is why we have an investment of around 3% or 4%. Regarding money, do you have the chart there? Please show it to me. We have to make a distinction here. We have €486 million yet to be recovered. Of this €487 million, I have 486.5, so 87, I would say. The only figure where we have reasonable estimation is regarding this withholding on refund, where it says refund entity, it says €129 million. We have recovered twice this first refund. We should be getting it before June of next year. Last year, this money was refunded in March. The previous year at the end of May or August. This year, we estimate that for next year, we will have it in our hands. We have to understand that these €129 million that we have there, when we get them in Germany, we have to bring it to Chile. They have another reduction due to exchange rate. Regarding all other resources that you see there, where it says that the refund entity is CSAV Chile, these are the second withholdings that we've gone through. This adds the difference between the 129 and the 485. We have those millions of euros there. We do not have any clear date for these. The German authority, as an average, has taken 20 months in refunding these resources. Volatility is very high. There are people that have been awaiting this refund for four years, so we have to look at the reality. When you take a look at the date when these resources were paid, and you take a look at the first payment, the oldest payment was done in May of 2023. 20 months should have gone by already this year, more or less. Thus, one could think that we could get there. If it takes longer, we'll get it on the second half of next year. We use between 20 or 30 months as estimation for us, but it's an estimation based on the experience of saying the general delay in this refund. It's not in our particular case, because this is an authority that holds no meetings. You cannot visit them, so it's very anomalous as a situation, right? It's pretty cheap financing for the German Treasury. I believe they don't have much interest in hurrying up with this process. That's what I can say for this. Francisco Vera, go ahead. Francisco? I believe you have your mic muted. I don't know if anyone else has any questions. All right. Those were all the questions. Thank you very much for participating in this call, and we'll be seeing each other when we publish the year-end result, as we usually do. We'll do this in person, so keep an eye out for our invitation. Have a nice day, and thank you very much.