Hamburger Hafen und Logistik Aktiengesellschaft (HHFA) Earnings Call Transcript & Summary

Ladies and gentlemen. Thank you for standing by. Welcome to HHLA's Conference Call on the Interim Financial Results 2021. All comments will refer to a set of charts available since this morning in the IR section of HHLA's website. [Operator Instructions] HHLA is represented today by Dr. Roland Lappin, CFO. I would now like to turn the conference over to Dr. Roland Lappin, CFO. Please go ahead, sir.

Thank you. Good afternoon, ladies and gentlemen. I would like to welcome you to our conference call presenting our financial results for the first half of 2021. Unfortunately, Angela can't participate in today's call. If we take a look at the most recently published forecast, for example, the assessment of the IMF GDP growth in the first quarter of 2021, developed surprisingly positive overall. Nevertheless, the upswing in industrial production and global trade was dampened by bottlenecks in supply and logistical problems. We here in Europe also had to cope with high infection rates and measures taken to contain them. For the second quarter, however, experts expect the recovery to accelerate, especially in economies where infections are better controlled and destination progress is allowing pandemic-related restrictions to be eased. Even if all signs point to economic recovery, and that is good news, the fast pace comes with a heavy burden for logistic change and especially for terminal operators. The upturn in global container throughput in 2021 is expected to be much more dynamic than assumed in March. Never before have the ports had to cope with such a large increase in volumes within 1 year. Although we have benefited from the ongoing disruptions, the global supply chains, mainly reflected in a strong rise in storage fees, continuing massive shipping delays have required great efforts by our employees to fulfill our responsibility to reliable supply customers and businesses in Germany and Europe. But before I go into detail, I would like to give you a rough overview of the key figures of the Port Logistics subgroup for the first half of 2021. Both in container handling and especially in container transport, we showed improved results compared to the previous year, which was, however, strongly influenced by the coronavirus pandemic. With regard to revenue, we achieved EUR 695 million and were thus able to return to pre-pandemic level. EBIT even grew by more than 70% to EUR 83.8 million, both developments were driven by temporarily higher storage fees, as I already mentioned as well as a strong momentum in container transport. Return on capital employed reached 8.7% on an annualized basis and was in line with our medium-term target. Based on the development of the first half, we partly raised our forecast for the full year with regard to the development of container transport and revenue for the Port Logistics subgroup and the group for 2021. However, EBIT guidance remain unchanged. That's the overall development in a nutshell. Let us now turn to the segment reporting. Starting with container throughput, we were able to return to positive growth numbers again. While we recorded a decline of 6.6% in Q1, container volumes recovered considerably by 9.2% in the second quarter of the year. All in all, this led to slight growth in the reporting period of 0.7%, with the international terminals recovering a little bit faster than the facilities in the Port of Hamburg. Growth was mainly driven by cargo volumes for Far East services, which more than offset the pandemic-related shortfalls in the previous year and the loss of a far east service in May 2020. However, the slight increase in volume was exceeded by the increase in revenue quality. Average revenue per container handled at the key side rose by 10.6% compared to the previous year. There were 2 main reasons for this: Firstly, an advantageous modal split with a high proportion of hinterland volume. Secondly, a temporary increase in storage fees due to longer dwell times as a result of the pandemic-related delays in ship departures and the blockade of the Suez Canal in March. Furthermore, the revenue from our Italian container terminal was taken into account for the first time, and we made a corresponding contribution to the positive development. EBIT costs increased moderately by 4.6% in the reporting period compared to the previous year. Increased personnel deployment as well as a higher material costs were the result of highly utilized yards. Additional provisions for the announced restructuring measures and union staff rise also had a negative impact against the weak prior year comparison basis caused by the pandemic. EBIT increased by 72% to EUR 63.4 million. This was mainly due to the temporary increase in storage fees. The EBIT margin recovered by 5.5 percentage points to a more normal level of 15.6%. Let's now turn to the Intermodal segment, which gives us plenty of reason for to rejoice. Container transport grew overall by 16% to 832,000 TEU. Even if the pandemic year 2020 is disregarded, and we compare the first half of 2021 with the same period in 2019, the volume would still have grown by 6.4%. Rail transport benefited more than the road transport from the recovery in cargo volumes that already began in the second half of 2020. The volume growth achieved in the first half of the year was broadly diversified. While the North German Seaports grew significantly in the first quarter of 2021, they were able to report a strong increase in volumes in the second quarter. Revenue increased significantly by 13.3 percentage points to 200 or to approximately EUR 253 million. However, the development lagged a bit behind volume growth because of lower average revenue per TEU due to changes in the structure of the cargo flows. In light of the positive trend in volumes and revenue, EBIT climbed by more than 33% to EUR 46 million and led to an EBIT margin of 18.3%. Let's continue with our small container segment, the Logistics segment, where we have pooled vehicle logistics consolidated activities, digital projects and participations. In the first half of 2021, revenue of the consolidated companies totaled EUR 35.4 million and thus exceeded the previous year by approximately 37%, contributed to the positive development where, in particular, the iSAM Corporation, a specialist for automation technology that was consolidated for the first time as well as vehicle logistics, which showed a strong increase in revenue. However, the operating results showed a loss of EUR 1.7 million. The main reason for this was the star losses of all new activities. Logistics, on the other hand, was able to strongly improve its results. And equity earnings were up strongly in the first half of 2021. The result rose by EUR 1.1 million. While bulk handling was able to strongly improve its result, the value adjustment of an investment had the opposite effect. Coming back to the Port Logistics subgroup as a whole, let's have a closer look at our cash flow development. Cash flow from operating activities decreased by EUR 7.6 to EUR 142.4 million as of June 30, 2021. This was due to the higher increase in trade receivables and other assets compared to the same period last year as well as higher tax payments. This was counteracted by the higher EBIT and the stronger increase in trade payables and other liabilities. Investing activities resulted in a cash outflow of approximately EUR 75 million. This development resulted primarily from lower payments for investments in property, plant and equipment and short-term deposits. Increased payments for the acquisition of shares and consolidated companies had an opposing effect. Accordingly, free cash flow decreased by EUR 10.6 million to EUR 67.2 million compared to the prior year figure. Cash flow from financing activities totaled to EUR 25.5 million, the decrease of EUR 6.5 million compared to last year's figure was mainly due to the financial loans. Higher payments for the redemption of financial loans had an opposing effect. Overall, our available liquidity as of 30th of June was sufficient at EUR 238.4 million. Ladies and gentlemen, there was light and shade in the first half of this year. HHLA's economic development in the first 6 months of 2021 was largely in line with expectations. While container transport volumes and revenue of the Port Logistics subgroup in the first half of 2021 were above our expectations, EBIT development was positively and negatively influenced by different factors, which I have already explained. In view of these developments, we have partly raised our full year's guidance. Specifically, this means for the Port Logistics subgroup, we still expect a moderate increase in container throughput, but a significant increase in container transport, formerly moderate increase. Against the backdrop of the positive development in the first half of 2021, revenue of the Port Logistics subgroup is now expected to increase significantly compared to the previous year. However, we are still in a pandemic situation with a high degree of uncertainty and have to cope with poor adherence of shipping schedules, requiring a high degree of operational flexibility on our side, whilst ongoing extended dwell times of cargo at our yard support profitability, the required operational flexibility comes with higher operational costs. Moreover, the latest union wage rises, which have an additional impact on personnel expenses going forward. We have, therefore, kept our EBIT guidance unchanged and still expect EBIT for the Port Logistics subgroup in a range of EUR 140 million to EUR 165 million for the current financial year. In order to further increase productivity in the container and intermodal segments, capital expenditure at subgroup level is still expected to be in the range of EUR 220 million to EUR 250 million. The main focus will be on implementation of restructuring efficiency program and the container segment -- in the container segment and on the renewal and expansion of the group's own transport and handling capacities in the Intermodal segment. With this outlook, I would like to close the explanations of the interim results and look forward to answering your questions.

[Operator Instructions] The first question comes from the line of Nikolas Mauder with Kepler Cheuvreux.

First one would be on -- can you tell us what like-for-like growth in container throughput would have been excluding the lost size service? Second question, how should we think about the increase in holding costs in the second quarter? I think it increased by some EUR 4 million from EUR 10 million to EUR 14 million on higher consulting fees. Is this something that should stay with us? And if yes, for how long? And I'll restrict myself to 3 questions for now. Why does your sort of maintained EBIT guidance range suggests a weaker H2, is it purely on the anticipated decline in storage fees or also on the wage increases from the union negotiations you mentioned, and were they higher -- was the result there higher than what you had baked into your guidance before that?

Thank you, Mr. Mauder. Starting with your last question. Yes, of course, we expect the dwell time to normalize in the next months to come. And as a consequence, lower storage fees and normalization as an assumption for the income per box. So this is one of the main drivers. And of course, it's -- certainty and transparency on that is limited. But this is the way we access this. And the other question was with regard to wage increase. Of course, the -- today's outcome of the negotiations ended up with approximately 3%, and this is clearly above our internal assumption this year, but it has been tough negotiations, and this was the outcome. So we have to bear the increasing personnel costs as a consequence of this result. The other 2 questions, starting with the second one, increase of holding costs. Yes, as you outlined, it's mainly driven by consultancy costs. Whether they will stay? And in short term, I think it's not for the current year because what's the substance of the increase of the consulting we prepare for, and we have teamed up with external resources to speed up with the restructuring. And our internal resources are not sufficient to do the job. This is one of the reasons why they have grown, and it's not a onetime effect for Q2 only. Of course, we -- in the next years to come, we will try to fade out as much as possible of these costs, but I will leave a more concrete orientation for you when we guide you for the next year. But short term, we have to live with a slightly higher level compared to previous year. The first question was with regard to like-for-like comparison with regard to the growth development. I guess I mentioned it when I commented on the Q2 development on segmental level already. And as outlined before, the -- if you look at Q2, you see an increase of 9.2%, reflecting the recovery, whereas the 6.6% decline in Q1 had to be adjusted for the loss of the Far East. And going forward, I would expect it to normalize as the comparison basis will no longer -- from May 2020 onwards, no longer be influenced by the lost Far East trade. So going forward, you will see a more normalized developing catching up with the market development and being reflected in the segmental results.

[Operator Instructions] The next question comes from the line of Marc Zeck with Stifel.

More terminal questions, maybe. Could you comment on some thoughts from Hapag-Lloyd that they might move some services from Hamburg to Wilhelmshaven. Do you -- how many containers would be affected if this really happens in 2 or 3 years' time? And does this put your 2025 EBIT guidance into jeopardy? Second question would be on the negotiations with Eurogate. So currently, I guess, today, there was an article in the joint press saying that the negotiations will conclude soon. Could you comment on the time line? And also on what kind of collaboration is expected? I guess the press article mentioned a merger. I believe that is not what you told us last time? And then third question would be on the Costco involvement in [indiscernible]. I guess Costco was quite successful in reducing costs at the Port of Piraeus in Greece. Is this something that we can expect to happen with [indiscernible] as well? So if any chance that Costco cost-cutting efforts will come through with [indiscernible] as well?

Okay. 3 questions. Starting with the last one. Of course, if you join forces with a liner on terminal side, you can optimize things, I think, this is evident. So going forward, I think it is clear that we will jointly try to boost efficiency and productivity on the terminal. But I can't quantify and won't quantify the effects in the current status. With regard to the transaction, I think, we are working on that and keep you informed if signing is done. With regard to Eurogate time line, I think this was outlined by Mrs. Titzrath repeatedly, end of the year, the way of structuring it is subject to joint decisions. So -- and we talk -- the only thing I would release to you and repeat is that we are focusing on the terminals at the German North Sea and North Coast line. This is what reflects the dimension of possible cooperations. Your first question was regarding Hapag-Lloyd and the impact on, I can't -- to be frank, I can't precisely answer your question because there is no official information on hand so far. To my best knowledge, I think, Hapag-Lloyd is analyzing the possibility of a minority share holding that is, for the time being, held by Maersk in Wilhelmshaven and all the possible impacts on that would be pure speculation from today's point of view.

Next question comes from the line of Christian Cohrs with Warburg Research.

Just a quick one for me. You mentioned in your presentation talking about the Container division provisions for restructuring measures. Can you quantify maybe the provisions and also whether that took place in Q1 and Q2? The background of the question is actually looking at the sequential performance of the Container division. I mean, top line is Q2 whereas Q1 is up EUR 8 million. EBIT is down EUR 2 million quarter-on-quarter. So I wonder actually whether the provision is the main cause for this -- yes, for the differential performance or if there is any other on top? I'm happy to hear about it.

With regard to the provision, I think, we released the details when we reported the full year report for 2020, and it accounts for approximately EUR 43 million. This was the initial amount by end of last year. And as you might know, over time, as we talk about early retirement programs, you have to adjust it quarter-by-quarter because there's a certain portion, of course, that you can't -- yes, you can't really provision for as long as you haven't specified it more, and this is an ongoing process. So the provision, as such, has been slightly adjusted, but not to the extent you mentioned before. This is mainly driven, if you look at the cost development by the high degree of flexibility on one hand that we delivered, whereas on the other side, we had to cope with poor schedule liability. And on top of extreme high utilization of our storage facilities as a consequence of the poor schedule reliability. And this has impacted operational costs in the second quarter. One more remark because I just cross checked the data. I'm not in line with the negative development. If you look at a quarterly basis on the container results in Q1, we posted EUR 32.7 million, where it was in Q3 EUR 33.5 million. So I'm not in line with your calculation that this is EUR 2 million down. But maybe you have a closer look at the figures that we posted this morning.

The next question comes from the line of Nikolas Mauder with Kepler Cheuvreux.

Just 1 quick follow-up. Coming back to the normalization of storage fees anticipated for the second half of the year. Combined with what you just said about additional costs coming in due to the unreliability of shipping schedules and whatnot. Sort of what sort of -- can you give us a feeling or do you have a feeling for what the net effect of the whole unreliability of the shipping schedule has actually been because we benefited from storage fees on the one hand, and on the other hand, you had to increase costs for maintaining flexibility and everything else? So what's going to be -- sort of once things have calmed down, whenever that might be, what's the net effect on EBIT that we should anticipate coming from a normalization?

The net -- if I take for granted that overall, the impact of temporarily higher storage fees on one hand and incremental operational costs that we -- and results that we had to deploy remains positive, I think, the challenge if you expect declining storage fees is to offset the effect to the highest degree possible.

Yes. So what I want to take with me from that answer is that sort of the overall effect has obviously been positive, but that we should calculate with some costs leaving the structure at the same time once normalization comes in?

Once again, sorry, I missed one word. Could you repeat your query?

I'm just saying that from what you said is that, yes, there will be a negative effect from normalization of storage fees from EBIT, but it will be, let's say, less pronounced than the impact that we have seen coming purely on revenue because costs will leave the structure at the same time?

Definitely substantially lower, of course. And this is what I mentioned, we have to offset it. On the other hand, from an operational point of view, you have to deal with this situation. You have to deliver and supply solutions for your client, and this is what we do. And if the situation normalizes, of course, as we have a clear efficient program in place, we will do our utmost to offset costs that are due to these extreme situation on the terminal side caused by these poor schedule reliability. And as a consequence, this extreme high utilization on the yard side.

Next question is a follow-up from the line of Marc Zeck with Stifel.

Just a follow-up. Just on the normalization outlook for the remainder of the year, when talking to Hapag-Lloyd and Maersk, who most recently reported their results, they don't really expect the normalization for this year, rather, they see things improving at the earliest when Chinese year approaches in the first quarter of 2022. What might be the reason that you are just more, let's say, cautious or expect faster normalization? Is this due to the Far East services being -- facing different dynamics than the Trans-Pacific, which is probably the most disrupted? Or are you just more, let's say, more cautious in general or more, I don't know, if it's more cautious if things normalize, but you get the point here. You're just approaching things differently for the remainder of the year.

I think this is our assessment, and we will see for the remaining of the year, whether we have to adjust it or not. But this is our today's view that we expect normalization. If it doesn't happen, we might adjust our outlook. This would be the consequence on the other side. But I don't -- to be frank, from today's point of view, I don't think so. But well, let's see how the development will go in the next months to come.

Yes. Okay. And then maybe another question. As you may know, only Deutsche Bahn is on a strike in Germany, is this affecting your operations to some extent because maybe tracks are not that much available. I've read reports in the press that some Deutsche Bahn, let's say, members or train drivers have parked, so to say, their freight trains at some tracks, locked the track access? Is this something that is affecting your operations currently?

No, not yet. I think we had in the past, I think, 3 years ago, a comparable situation, where we have seen strong and tough strikes in the cargo sector of Deutsche Bahn. But as we complete the independent run of our trains, we might be affected at some points in the grid of the network, but there's -- typically, there's always an alternative. Maybe you have to cope with slightly longer distances, but this does not mean that it negatively affects your operation. And we are experienced in this regard. Of course, our clients might be affected if they rely on services of Deutsche Bahn in this regard. But we will be happy to offer an alternative and grow our business due to these strike situation in Deutsche Bahn if client requests us to handle this cargo.

So it would be a fair assumption, the longer the strike continues the better actually for the intermodal business?

I wouldn't -- well, I wouldn't say better as we are highly utilized, and you have seen that we posted double-digit growth already. And this is due to the asset utilization. I think it's not an easy game, but we will be in a situation to deliver solutions for our clients. We are a service-orientated company. And if such a situation occurs that someone is looking for an alternative, we will be happy to offer a solution.

[Operator Instructions] There are no further questions at this time. So I hand back to Dr. Roland Lappin for closing comments.

Yes. Ladies and gentlemen, thank you very much for your interest and your ongoing support for HHLA. At the end of the call, I would like to take the opportunity to let you know that we are holding this year's Capital Markets Day on November 30. I would be pleased if you could already save the date in your calendar. My executive Board colleagues and I would be more than happy to welcome you to this event, either in person or virtually, depending on the prevailing pandemic situation. The IR team will contact you shortly with further information on this event. Please stay healthy, and take care. Goodbye.

Ladies and gentlemen, this concludes the conference call on the interim financial results 2021. Thank you for joining, and have a pleasant day. Goodbye.