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

Good afternoon, ladies and gentlemen. I would like to welcome you to our conference call presenting our financial results for the first 9 months of 2021. Like everywhere else in the world, operations in the Port of Hamburg are also affected by the consequences of disrupted supply chains. Almost all arriving ships are delayed and not just for a few days, but sometimes for several weeks. We work at our facilities around the clock, 7 days a week under heavy load in terms of technology and personnel, in order to fulfill the role that the Port of Hamburg plays as an important logistics hub, especially on the route between Europe and Asia. In particular, the share of goods related to China continues to increase, and it is now at around 37% of the total volume at our Hamburg terminals. In view of this development, it is logical for us to take a strategic cooperation with one of the world's largest players in the logistics industry, the Chinese company, COSCO, to a new level, subject to approval by the relevant authorities, COSCO Shipping Ports Limited will acquire a minority share of 35% in HHLA Container Terminal Tollerort. We signed a corresponding agreement with CSPL in September. After almost 40 years of doing business together, we are delighted to be strengthening the relationship with one of our most important customers in this way. This step is necessary in view of the massive changes that logistics value chains are undergoing today. Ports around the world are confronted with ever larger ships, price pressure, increased efficiency, requirements and growing regional and superregional competition. Stable customer relationships are, therefore, more important than ever before. Through the agreement with CSPL, CTT will become a so-called preferred hub in Europe. A preferred COSCO transshipment point where cargo flows are concentrated. Capacity utilization and employment are thus secured at Tollerort. HHLA's successful performance in the current financial year is not only due to the continued growth in [indiscernible] from China, the ongoing disruptions to global supply chains with massive ship delays have also led to a temporary spike in storage fees income in the second half of 2021 as a result of longer container dwell times at HHLA’s Hamburg terminals. Moreover, container transport volumes developed strongly in the first 9 months of the year. Against this backdrop, we have raised our revenue and earnings expectations for the current financial year. For more details on HHLA's financial performance in the reporting period and development at segment level, I would like to hand over to my colleague, Roland. Roland, please?

Yes. Good afternoon also from me. And thank you, Angela. Moving directly to segment reporting, I would like to start with the development of our container segment. Despite the strains resulting from the disruption of logistic chains, which Angela has already mentioned, the growth in container handling has continued. All in all, HHLA container terminals recorded an increase of 1.6% to approximately 5.2 million TEU of container throughput in the reported period, especially volumes with the Far East shipping regions as well as with North and South America contributed to the positive development of the container terminals in Hamburg. The acquisition of a further feeder service for the Baltic region also helped feeder traffic volumes return to growth again. At 20%, the feeder quota of waterside handling in the period under review was on a par with the previous year. With a throughput volume of 453,000 TEU, our international container terminals in Odessa and Tallinn are back to the pre-pandemic level of 2019. However, the slight increase in volume was exceeded by the increase in revenue quality. Average revenue per container handled at the quayside rose by 12% compared to the previous year. This was mainly driven by a temporary increase in storage fees due to the longer dwell times as a result of 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 made a corresponding contribution to the positive development. EBIT cost increased by 6.7% 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. In addition, further provisions for the announced restructuring measures, union wage rate rise and start-up costs in connection with the container terminal in Trieste had a negative impact. Compared to the weak prior year basis caused by the pandemic, EBIT increased by 57.2% to EUR 107.9 million. This development was mainly due to the temporary increase in storage fees, as mentioned before. The EBIT margin rose by 4.9 percentage points to a good level of 17.4%. Let me now turn to the Intermodal segment, which successfully continued its strong growth trend. Container transport grew overall double-digit by 11.1% to 1.3 million TEU approximately. Growth was mainly driven by rail transport, which grew by 14% outstanding. With regard to the less pronounced growth in Q3 stand-alone, please bear in mind that volume recovery had already started in the same quarter last year. So the comparison basis if you look at quarter-on-quarter, [ comparison ] was quite strong with regard to previous year. Overall, road transport volumes were on par with the previous year in a persistently difficult market environment. Revenue increased significantly by approximately 10% to EUR 383.2 million. However, its development lagged a bit behind volume growth because of lower average revenue per TEU due to the changes in the structure of cargo flows. EBIT development was supported by positive trend in volumes and revenue as well as a retroactively granted higher subsidy for routes prices in Q3 with an effect of approximately EUR 11 million. As a result, EBIT climbed by 27.5% to approximately EUR 80 million and led to a favorable EBIT margin of 28 -- 20.8%, sorry. Let's turn briefly now to our small segment, the logistics segment, which we have pooled -- where we have pooled, sorry, vehicle logistics consulting activities, digital projects and participations. In the first 9 months of 2021, revenue of the consolidated companies totaled EUR 51.7 million and thus exceeded the previous year by 36.4%. Contributors to this positive development were, in particular, the iSAM corporation and its 3 subsidiaries, 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 2.4 million, mainly due to the start-up losses of our new activities. Vehicle logistics on the other hand, were able to strongly improve its result and equity earnings were up strongly in the reported period. The result rose to EUR 2.2 million. 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 increased by approximately EUR 55 million to EUR 242.4 million as of 30th of September 2021. This was mainly due to the year-on-year increase in EBIT and the stronger rise in trade payables and other liabilities. An increase in income tax paid and the rise in trade receivables and other assets had an opposing effect. Investing activities resulted in a net cash outflow of approximately EUR 116 million. This development resulted primarily from short-term deposits and higher payments for the acquisition of shares in consolidated companies. Lower payments for investments in property, plant and equipment compared to the same period of the previous year had an opposing effect. Accordingly, free cash flow increased by EUR 20 million to EUR 126.1 million compared to the prior year figure. Cash flow from financing activities totaled EUR 78.2 million, a decrease of EUR 31 million compared to last year's figures was mainly due to the new financial loans and lower dividend payments. Overall, our available liquidity as of 30th of September increased to approximately EUR 260 million. Now I hand back to Angela again.

Thanks, Roland. Ladies and gentlemen, as you might have noticed, we already raised our revenue and EBIT expectations for the current financial year on October 2021 based on the company's development in the first 9 months. The adjustment of the annual forecast is mainly due to extraordinary nonrecurring earnings effects in the Port Logistics subgroup, which Roland has already explained in detail. For the Port Logistics subgroup, we continue to expect a moderate increase in container throughput and a significant increase in container transport for the 2021 financial year. In terms of revenue development, we expect around EUR 1.41 million and the EBIT forecast for the Port Logistics subgroup has also been raised, and we now expect around EUR 190 million. For the real estate subgroup, we expect revenue and operating results to be on a par with the previous year's level. At group level, we expect a strong year-on-year increase in revenue to around EUR 1.45 billion. The forecast for group EBIT was raised accordingly to EUR 205 million. The ongoing disruptions in global supply chains are not only affecting our operating business, but will also have an effect on investments. Planned asset additions to boost productivity in the Container Intermodal segments will be delayed until 2022 as a result of the ongoing disruptions to global supply chains. For 2021, we now expect CapEx of EUR 200 million at group level, of which around EUR 170 million is attributable to the Port Logistics subgroup. With this outlook, I would like to close our explanations on our interim results. And obviously, I'm looking forward. We look forward to answer your questions.

[Operator Instructions] And the first question is from the line of Nikolas Mauder from Kepler Cheuvreux.

Three questions from my side, please. First one is, can you please provide a bit of color on the sequential development of Container segment profitability? I appreciate the fact that storage fees have been higher year-on-year, but the second quarter has already been characterized by this as well. And I'm a bit puzzled by the strong increase -- sequential increase in the EBIT margin here. Second question, your guidance for moderate growth in container handling implies a strong Q4. Can you provide a bit of color how much visibility you have on this? And the final question from my side would be, you lowered CapEx guidance for the full year to EUR 175 million for the Port Logistics subgroup, is this just a shift to the next year or a structural change in procurement decisions?

Thank you for your questions. I'll start with the last one. Actually, it's no structural. It's just a shift, linked, obviously, as well to availability of assets. The second one, container handling. Yes, we have now November 11. And as we see, and as you may notice that the overall turmoil in the supply chain on a global level has led to, let's say, volumes, which supposed to be handled already in summer and the subsequent months, which is delayed and is coming ready for Christmas still but coming a little bit later. At that point, I'm always saying Christmas, even this year is going to be happening even with [ gift ] and with the flow of goods coming with it, but maybe in time for Christmas, but 4 to 5 weeks delayed in the overall flow. And the first one, Roland?

Yes. I would comment in a second. And don't forget the comparison basis of previous year is still weak. So on one hand, things are delayed, on the other hand, if you refer to the moderate increase and throughput, we take for granted that we will meet it. And with the trend that you have seen clearly positive in Q3, this will continue against the background of a weaker comparison in Q4 compared to the first half. So this gives us a big headroom for the guidance. And now coming to your question regarding the EBIT margin, as we outlined repeatedly, revenue per TEU is impacted by higher storage fees. So this gives us headroom for margin progression. And well, I'll leave it for you how you assess it. On the other hand, with regard to OpEx, and this is outlined in our comments as well, please factor in the ramp-up in Trieste to get a better picture. And of course, step-by-step, we enter into the market. So this, again, is a temporary effect. And the other thing is with regard to the provision we built so far for restructuring, the reversible part accounts for approximately 70%, and this we built by end of 2020. So for the next 24 months in outstanding amount assume it in a range of EUR 8 million, EUR 9 million annually, then you have a clear picture, what I'm talking about. And if you adjust both components ramp-up in Trieste on one hand and these temporary effects with regard to the provision that is outstanding margin might have been even higher and to the opposite fading out the extraordinary income with regard to the dwell time component, it gives you orientation to determine with regard to the current station -- status of the operational excellence, a better understanding what margin should be on an underlying basis.

The next question is from the line of Marc Zeck from Stifel European Equity Research Transport and Logistics.

Two, if I may. One on the Intermodal segment. So I guess, cost per container were up quite significantly in the third quarter, if you strip out the EUR 11 million rebate. Could you elaborate a bit on why this [ has happened ] and if we may assume that this increase in cost may stick around? And second question would be on the current collaboration or cooperation talks with Eurogate. There were some press comments from your interview this morning that you expect some letter of intent or some new news to occur before years end. Could you elaborate a bit on what has changed recently that you're more positive on this? And what we can expect in terms of announcement until year's end for this collaboration?

Okay. I will start with your first question. First of all, to clarify what data are we talking about. I take for granted that you calculated EBIT cost per TEU, am I right? In the Intermodal segment? Okay. So data are as follows: EUR 229.7 per TEU in Q3. Quarter-on-quarter, Q2 was 250.5, if I am not wrong. And your question was regarding the trend in terms of costs adjusted for the onetime effect. I think it's in -- if you take it this way and bear in mind the challenging operational environment. And we already outlined, if you look at the weather situation along the banks of the river Elbe in Saxony, for instance, it was an extreme weather situation in Q3. And on the other hand, if you look at the growth path, as I mentioned, we have grown clearly double digit. So -- and you shouldn't expect everything imperative. On one hand, we gained market share, very successful in a highly competitive environment, but with a lot of poor performing competitors. And on the other hand, we make sure that service quality remains at a superior level. And bearing this in mind, I would say there is no substantial cost issue or even there is no cost issue with regard to unit cost development quarter-on-quarter. This is our comment more to the opposite, if you bear in mind the high utilization and the 12% increase on segment level and I outlined before that 14% was the rail bound growth dynamic and assume operation to normalize, then you might have an idea where we could end up in a less challenging environment going forward.

With regard to the question of the corporation, it's already in our annual meeting, in my speech. I can just reiterate that we are working on basically knowing by the end of this year, so this is basically in 6 weeks, whether we can basically sign MOU of understanding on cooperating an 8 terminal consisting cooperation. So if you talk about 8 terminals, please keep always in mind, we don't talk about any basically -- we don't talk about merging -- emerging companies, but we talk about taking the relevant terminals of HHLA and the relevant terminals of the 2 other participants, BLG and Eurokai holding basically these elements in Eurogate, not Eurogate in total, but only these terminals and linking these 8 terminals in the idea of cooperation together. So time line is still up and running. We have another 6 weeks to comply.

May I just follow-up on that. Could you elaborate what maybe -- then maybe be stumbling blocks until year-end that might cause the collaboration not to move forward.

Well, from our perspective, we don't see any stumbling blocks. And sometimes, the goal is the way where you get to know each other and where you get to understand each other. From an HHLA perspective, we are a recognized leader in innovation and sustainability. We believe we can offer a lot of knowledge and experience and automatization as well as in hinterland handling. And that's what is offered on the table, and we believe all parties involved that collaborating, learning from our customers means understanding how to scale knowledge and experience.

[Operator Instructions] There are no further questions at this time and I hand back to Angela Titzrath for closing comments.

All right. Thank you very much. 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 invite you to this year's Capital Markets Day on November 30, which will take place as a virtual event. We will provide more information on our efficiency program in the Container segment as well as on group financial planning. And in addition, my colleagues and I will provide further insights into individual process automation and port handling, as well as the prospects for our Intermodal business. The IR team will contact you shortly with further information on this event. And I would be happy to welcome you on our Capital Markets Day. So long, please stay healthy. Please take care and make sure that we all still living in a pandemic environment, therefore, stay healthy and goodbye.