Earnings Call: Q4 2023

Mar 22, 2024

Summary

2023 net income was $258m, with significant tax expense; excluding it, net income would have been $1bn. Hapag-Lloyd's EBIT fell to $2.7bn, while disruption-driven capacity constraints supported rate recovery and 2024 outlook remained uncertain.

Dear shareholders, thank you very much for joining us for this new earnings presentation. Today, we will review the 2023 results for Compañía Sud Americana de Vapores, referred to as CSAV, and Hapag-Lloyd's main milestones and figures. The topics we will address today are: the main milestones for the year, the shipping industry and its indicators, Hapag-Lloyd's results, and lastly, we will take a detailed look at CSAV's results. First, let's go over the year for Hapag-Lloyd. Even though earnings were lower in 2023 due to a high basis of comparison, it was the third-best year in the company's history, with a bottom line of $3.2 billion. This year, we also have a new segment that groups terminal and infrastructure assets. It already boasts EBITDA of $50 million, even though these assets have been consolidated for less than a full year. It includes the acquisitions of SAAM Terminals, JM Baxi, and the Spinelli Group. The end of the year was marked by disruptions from crises in the Red Sea and the Panama Canal, which are still underway in the first quarter and have altered routes and the availability of ships. Another major announcement was the new alliance that will replace THE Alliance as of February 2025, whereby Hapag-Lloyd will partner with Maersk under the name Gemini Cooperation. We believe it will have positive implications for operations. It will allow us to continue to improve service, transit times, and reliability and costs. This is key to the strategy of delivering added value. It will also simplify decision-making. In terms of dividends, Hapag-Lloyd will propose a dividend of €9.25 per share for a total of €1.6 billion. This equates to a 55% payout ratio, a little lower than what we had been approving, but this has been a more complex year, so it made sense to be a little more conservative. This is still a considerable dividend, even more so if we consider that competitor dividends are around 30%. Now, let's look at CSAV's performance. Our 2023 net income was $258 million, mainly due to a significant tax expense. This is something that will have effects throughout 2024 because, as you know, the dividends that we bring from Germany are subject to retentions, and there is also a tax effect in Chile. This is the same thing that will happen with the dividend that we just announced. A significant tax expense is to be expected since the dividends will be brought from abroad and already accounted for in Chile. Another relevant point in 2023 is that we paid off all of the company's financial debt. A few days ago, we shared some very good news for our shareholders. A dividend consisting of four different dividends, minimum mandatory, additional, and special, totaling $860 million, plus another special dividend of €265 million. In the table, you can see how they are distributed, the total amounts, the amount per share, payment dates, and ex-dividend dates. It is important to remember that our balance sheet is in dollars, so there is no exchange rate risk. Dividends in euros will be converted into dollars, and dividends denominated in dollars into Chilean pesos, as shown on this slide. In this presentation, we would like to share a brief analysis of the industry situation stemming from the conflict in the Red Sea and the restrictions in the Panama Canal. In the Red Sea, shipping companies have decided to divert ships to not expose their personnel to serious attacks. The route used today is the Cape of Good Hope. These disruptions have absorbed between 5% and 9% of ships and affect transit from Asia to the U.S. and Asia to Northern Europe. They account for about 30% of global traffic. The impact is longer voyages with about 20% extra sailing miles. People are our first concern, and unfortunately, this situation will continue until conditions are safe again for our crews. The forecast for this year projected overcapacity because more ships have been delivered. However, this situation, coupled with new emissions regulations, has slowed this overcapacity. In terms of freight rates, this situation has led to an upturn. While Hapag-Lloyd showed a negative result of just over $200 million US in the last quarter, in recent months, rates have recovered as a result of the adjustment of supply and demand. The Panama Canal situation has the same effect. Given the draft problems, ships have to cross with less cargo. In other words, more ships must pass through to reach the same volume. What we are seeing today, even with these disruptions, is fairly healthy demand. In 2023 and the beginning of 2024, demand has increased compared to prior years. There is stability. There's no major growth, but neither has there been a drop in demand for the time being. Due to the Red Sea crisis, deliveries are delayed, and inventories around the world have started to decline. This may lead to a period of restocking after the situation normalizes, which will continue to drive the industry with more volumes. Today, there is very little inactive fleet, about 0.8%, or 1.7% if we consider vessels under maintenance in shipyards. There are also no ships available for charter. Here we can see the effect on rates. Take a look at the light blue line which corresponds to the SCFI index, the Shanghai Index showing rates to the most important regions around the world. Now take a look at January 2022. We have a peak of $5,047 US per TEU, which is what led to net income of $18 billion US in 2021. That rate began to fluctuate, reaching $900 to $950 US per TEU at the lowest point, which is not a break-even rate. This explains the losses in the last quarter for the industry as a whole, and also for Hapag-Lloyd. Following the disruptions in the Red Sea, rates are once again on the rise. You can see how in January this index reached $2,200 US per TEU. Then it began to fall, and today it is around $1,770 US. This is a good rate for the industry. This backdrop produces another type of pressure. Some customers are waiting to see how the geopolitical situation evolves and have delayed signing contracts, especially for trans-Pacific routes, which are usually finalized between November and March. They are hoping that spot rates will come back down. In 2023, Hapag-Lloyd had lower fuel costs compared to 2022, although in recent months there has been a rise precisely because of logistical problems. Tankers also pass through the Suez and Panama canals, so restrictions also affect supply. Due to the nature of its fleet, 81% of Hapag-Lloyd's consumption is low sulfur fuel, and the rest is conventional bunker. Hapag-Lloyd is testing the use of biofuels on 24 ships and is making progress. In 2022, biofuel represented 0.1 million tons, and last year it increased to 0.2 million tons. Let's now look at the order book, where we have some positive news. Today, we are at 23%, while in October it had reached 30%. To give you some perspective, let's remember the historical peak in 2008, in excess of 60%. The industry is receiving new vessels at the required rate. Here again, there is a major constraint to consider, as there are many technologies available. Hapag-Lloyd has opted for dual-fuel engines that use bunker and LNG. Some other shipping companies are betting on methanol, even though methanol supplies are still below required needs. Estimates forecast 10% new fleet and 4% growth in container volume by 2024. This could change depending on the evolution of the Red Sea situation. This is because the industry will need more time to carry cargo and therefore more ships. We are facing an increase in supply of something like 5%-7%, with an increase in demand of around 4%. Therefore, we see quite an EBIT of balance. In terms of average speed, it dropped in 2023 and closed the year at around 13.72 knots. This is explained by emissions standards. Since last year, we've been paying taxes. We've had to buy carbon credits, so the more oil we consume, the more we pay. Also last year, ships were categorized by emissions in categories from A to E, where E are the least efficient and will have to make substantive modifications. The way to emit less is to slow down the ships, and that is why we see these variations. Disruptions in the Panama Canal and the Red Sea have forced ships to speed up again, as they have to travel longer routes around Cape Horn and Cape of Good Hope, for example, and they need to keep their itineraries. Let's now look at the age of the fleet. Today, the average is 14.2 years. In 2010, the average fleet was 10 years old. This also has to do with supply and demand balance. As there has been little availability of vessels, scrapping has been low. Today, the useful life of a vessel is estimated to be 20-25 years. Current consensus holds that useful lives are shorter as a result of technological changes in the industry. This should mean renewal of the global fleet on the order of 4% per year, so scrapping could increase in the next few years. Going forward, it may also be more efficient to build new ships and scrap rather than rebuild. Let's check out Hapag-Lloyd's results. Its results are directly linked to the evolution of freight rates, and we see that there is a high basis of comparison with an EBIT of $18.4 billion in 2022 and $2.7 billion in 2023. Costs recovered during 2023 as the pandemic not only generated a shortage of ships and boosted rates, but also raised costs, terminals, warehousing, trucking. Today, congestion has eased with respect to the pandemic, and cost reduction measures have also been taken. This slide shows EBITDA for the last quarter. The 2022 figure was a positive $3.3 billion, and in 2023, a loss of $234 million. As I explained, this is mainly due to freight rates, given the increased inflow of ships in the quarter, which drove prices to unsustainable levels. We would especially like to focus on the new alliance with Maersk, which will begin in February 2025. The joining of forces between Hapag-Lloyd and Maersk will allow it to improve customer service and make cargo delivery more reliable and faster. In addition, the proposed new network will have greater control over ports of call. Let's look here at the extent of this alliance with 26 liner services, 32 shuttle services, 290 ships, 85 ports, and a capacity of 3.4 million TEU. Given these numbers, this will be a really interesting alliance for the coming years. The outlook forecasts volume growth, subject, however, to market evolution and the geopolitical context, as we have seen, and we will have an average rate similar to or slightly below last year's. Oil prices should go down, but we are still affected by high volatility. The table shows projections for EBITDA and EBIT. They should be lower than in 2023, and with a wide range given the current context, cautiously approaching factors outside our control. In the box on the right, we see some of the factors that may affect results. Security in the Red Sea, the large number of ships that should enter the global fleet, new environmental requirements, and others. Now, let's turn to CSAV's results. Remember that 2022 was a truly exceptional year. We had net income of $5.563 billion, the best result in the company's history, but also the largest bottom line for any IPSA company. The dividend that Hapag-Lloyd distributed is also the largest ever paid in German history. During the year, we see a reduction in administrative expenses and improved financial results due to the cash we had at that time. We had less debt, and in the graph, we see an effect on tax expense of $927 million. What explains this? In 2022, we liquidated two companies with a positive tax effect of approximately $250 million. This is in addition to the tax expense of $677 million in 2023 due to the larger dividends received in Chile as a result of the high net income in 2022. Remember also that all tax loss carryforwards had already been used up in 2023. Without this large tax expense, we would have reported net income of $1 billion instead of $258 million. This year, something similar will happen to us due to retentions and the associated taxes. Let's review a summary of the situation at year-end 2023, with a total of EUR 1.11 billion in retentions. In the table, you can see the payment dates and retentions made on each. The EUR 876 million, marked with an asterisk, corresponds to the retention we recovered a few days ago from Germany. Then we have two others, CSAV Germany, that have a retention of 10.5%. So we have outstanding retentions of EUR 234 million for 2023 dividends. We do not have a clear date for their arrival in Chile because it depends on when the funds are released in Germany. Here is a summary of the dividend flow, including this year's dividends and the estimate for May 2024, when we will receive the dividend already declared by Hapag-Lloyd. In total, there will be retentions of EUR 487 million. Remember that there are tax effects because there is a second retention to bring the dividends to Chile. The amounts shown as CSAV Chile arrive directly. They are taxed at 27%. Since we have foreign credits, we expect these tax expenses to not involve cash flows. At the balance sheet level, as you can see, assets decreased by 19.7%. This is explained by a decrease in equity method investments because of the Hapag-Lloyd dividend payment. This is partly offset by an increase in accounts receivable for the amounts retained in Germany that we have already discussed. As for liabilities, financial debt disappears completely in December. In terms of cash flows, the year ended with cash of 278 million US, greater than the 97 million US at the beginning of the year. Beyond the company's own expenses and receiving dividends and paying dividends to shareholders during the year, a retention from Germany associated with a dividend charged to 2021 earnings was received for the first time during the year. The company used this retention to pay its remaining debt, which explains the higher cash balance at the end of the year. In closing, we would like to briefly show you what we're doing in terms of sustainability, given our responsibility as a major player in global trade. This wheel summarizes our strategy with our different stakeholders. Throughout 2023, we consolidated the work that we started about three years ago, focused on San Antonio and Valparaíso. We have placed special emphasis on educational communities and inaugurated a multipurpose court at a school with a large at-risk population. Then we used these new facilities for a summer school for 100 children, which had a huge impact and gave the children a fun, healthy summer break. This is another project that we're making progress on. We are rebuilding this gym, which was in very poor condition, particularly the beams. This work has taken place hand in hand with the community, which has actively participated because it knows that together, we can make an important difference in the children's quality of life. On our LinkedIn account, you can see how this project is developing and read about other milestones in 2023, like Global Trade Day celebrations, where we addressed the importance of resuming growth. In addition, we have joined forces with the National Maritime Museum in Valparaíso. This brings us to the end of our presentation. Thank you for joining us for this recap of 2023. Please email any questions to the address shown on the screen, investor@csav.com. We'll see you soon.