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 results for the financial year 2021 and the outlook for 2022. HHLA can be relied on even in difficult times. Therefore, we were able to conclude our second year under the challenging conditions of the coronavirus pandemic with excellent financial results. Revenue and operating results are not only significantly above the previous year. They have exceeded our annual expectations, which were last adjusted in October 2021. The positive revenue and earnings development is particularly supported by 2 factors: on the one hand, by storage fees due to the ongoing disruptions in global supply chains and the resulting shipping delays; and, on the other hand, the strong increase in container transport volumes at our rail subsidiary, Metrans, that added positively to the overall development. Moreover, we continuously pursue our strategy of strengthening our business even in the difficult environment. Therefore, we were also expanding our intermodal network and started to build another hub terminal for our rail subsidiary, Metrans, in the Hungarian city of Zalaegerszeg. I'm sure I mispronounced it, so I'm sorry for that, the Hungarian City in the Balatoni. Another example of this is our agreement with Cosco Shipping Ports Limited regarding a noncontrolling interest in the HHLA Container Terminal Tollerort. The CTT will become a preferred hub in Europe for Cosco. In addition, HHLA's Italian multipurpose terminal in Trieste is developing well and handled its first container vessel shortly before the end of the year. All these achievements has contributed to strengthening our competitive position in Europe in the past financial year. These are the results achieved by HHLA as of the balance sheet date 31 December 2021. At that time, none of us saw the events coming that we are facing today. Exactly 4 weeks ago, 24th of February, Russia's attack began in violation of international law. In the last 4 weeks, thousands of people died, including many civilians, houses, roads, bridges, and logistic infrastructure in Ukraine were destroyed. The longer this war lasts, the more serious humanitarian consequences are for the Ukraine. HHLA is directly affected by the war in Ukraine. With the start of the invasion, we had to close our terminal in the Port of Odessa on the orders of the authorities. When the Russian troops were already advancing into Ukrainian territory, our employees in the Port of Odessa still handled 2 ships, those that could depart in time, reliable for our customer. We sent our 480 workers home. We are continuing to pay their wages and salaries for the time being. We are thus fulfilling our social responsibility towards our employees. At the moment, only limited activities are taking place at the terminal. Among others, containers with food are being prepared for further transport. As already clarified in our press release on 4th of March, we do not expect any significant impact from the temporary disclosure of CTO. The CTO's share of the Logistics subgroup's throughput revenue and result was in the low mid-single-digit percentage range in 2021. A substantial part of our investment of $170 million had already been amortized by the end of 2020. Furthermore, we also ensured the CTO against political risk by taking out federal guarantees for direct investments abroad. These cover a significant portion of the CTO's balance sheet assets in the event of war or expropriation as well as in the event of a breach of legally binding commitments by government or government-controlled entities. Conditions permitting, our goal is to get the terminal back into operation as soon as possible. One word to our intermodal business activities in the Ukraine, they are negligible. Our Ukrainian intermodal company was just founded in 2020 and, therefore, still in ramp-up phase. It operated without owned assets, important to understand, it operated without owned assets as a service provider for block trains and single-wagon transports our subsidiary. Metrans has no activity in the Ukraine. Let us now take a broader look into the ramifications of the war. In order to enforce the sanctions imposed by the EU against Russia, corresponding measures have also taken effect in the Port of Hamburg. In the meantime, HHLA's terminals has stopped pending containers coming from Russia or destinated to Russia or for Russia. This also applies to the cargo transported by rail or truck. HHLA does follow the example of terminal operators in other European ports. By now, HHLA has resumed handling containers bound for Russia at the terminals in Hamburg. The prerequisite for this is that the onboard transport of the container is secured and the contents do not fall under the sanctions imposed on Russia following the attack on Ukraine. Please bear in mind that HHLA has only limited information about the content of the containers, therefore, clearance of the cargo lies exclusively with the German customs and the Federal Office for Economic Affairs and Export Control. HHLA's rail subsidiary, Metrans, has also stopped accepting and transporting consignments destinated or originating from Russia in accordance with EU sanctions. The transit of non-sanctioned goods to Russia and Belarus is being maintained in close cooperation with customs. The impact on Metrans' business activities is currently minor. Transport via the continental Silk Road accounts for less than 1% of Metrans' total transport volume. Russia-related volumes of total container transport were below 1% in 2021. It is currently impossible to estimate what challenges and restrictions the situation in Ukraine will cause for international freight transport in the longer run. As logistics specialists, we are used to dealing with exceptional challenges. Over the past 2 years, it has been the pandemic situation that has been such a huge challenge for all of us. But even before Russia invaded Ukraine and the coronavirus pandemic turned the world upside down, the resilience of HHLA's business model has been proven several times. I would like to remind you, for example, of the consequences of the financial crisis in 2008, 2009 where HHLA lost more than 30% of its handling volume or in China's slowing growth together with the first sanctions against Russia hit us hard in 2015. In all these adverse times, HHLA has always generated positive EBIT and a free cash flow and has always paid dividend to its shareholders. Moreover, we have shown that we are able to scale our investments to future economic developments in order to safeguard the financial stability of the group. With this in mind, I now hand over to my colleague, Roland, who will guide you through the financial results of 2021 financial year.

Yes. Good afternoon from me, and thank you, Angela. Let me start first of all with the development in the Container segment. Despite the strains resulting from the disruption of logistics chains, which Angela has already mentioned, the growth in container handling has continued. All in all, HHLA container terminals recorded an increase of 2.5% to approximately 7 million TEU of container throughput in the reporting period. The positive development of cargo volumes was largely due to the Far East and North and South America shipping regions. This more than offset the pandemic-related volume shortfalls in the previous year and the loss of the Far East service in May 2020. The feeder quota of waterside handling in the period under review remained on a 20% level where the throughput volume of 615,000 TEU of our international container terminals in Odessa and Tallinn exceeded the pre-pandemic level of 2019 by 0.4 percentage points. However, the overall slight increase in volume was exceeded by the increase in revenue quality. Average revenue per container handled at the quayside rose by 11.4% compared to the previous year. This was mainly driven by a temporary increase of 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 multi-purpose terminal was taken into account for the first time and made a corresponding contribution. EBIT (sic) [ OpEx ] costs increased by 2.2 percentage points in the reporting period compared to reported figures of the previous year. However, please bear in mind that the previous year's financial results were burdened by a provision of EUR 43 million for the efficiency program. That said, the increase was driven by expected high project expenses for the efficiency program as well as additional expenses primarily attributable to the higher storage load, resulting in increased use of both personnel and materials. Furthermore, additional provisions for the restructuring measures already implemented, increases in union wage rates, rising energy prices and start-up costs related to the launch of container terminal operations in Trieste had an impact on operating expenses. Against the backdrop of a rise in average revenue due to the spike in storage fees and the pandemic-related low comparative base of the previous year, and in spite of the above-mentioned increase in expenses, EBIT more than doubled to EUR 150.3 million (sic) [ EUR 155.3 million ]. The EBIT margin rose by 9.5 percentage points to a sound level of 18.4 percentage points. So let's move on the next slide, the Intermodal segment. Despite a highly competitive environment, our intermodal companies recorded a significant increase of 10 percentage points in transport volumes. Rail continued to benefit more than road from the recovery in freight volumes that began in the second half of 2020 and grew strongly by 12.8 percentage points. Total volume growth achieved over the year was driven by traffic with the North European ports and the strong increase in continental transport volumes. In a consistently challenging market environment, road transport volumes of 312,000 TEU were on par with the previous year. Revenue increased by 8.9% to EUR 519.4 million. However, its development lagged a bit behind volume growth because of lower average revenue per TEU due to adverse changes in the structure of cargo flows. EBIT development was supported by a positive trend in volumes and revenue as well as higher subsidy from routes, prices granted retrospectively in Q3 with an effect of EUR 11 million. As a result, EBIT climbed by 18.2% to EUR 104.3 million and led to an outstanding EBIT margin of 20.1%. Let's turn briefly to our smaller segment, the Logistics segment, where we have pooled the vehicle logistics and consultancy divisions as well as business activities with which HHLA aims to tap new growth fields. iSAM AG, an automation technology specialist, was included in the group of consolidated companies in the first quarter of 2021. The consolidated companies reported total revenue of EUR 71.3 million in 2021, largely due to the newly consolidated iSAM AG and strong revenue growth in vehicle logistics. However, there was an EBIT loss of EUR 3 million, mainly due to start-up losses of our new activities. Vehicle logistics, on the other hand, were able to strongly improve its results. At-equity earnings were up strongly in the reporting period. The result rose to close to EUR 4 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 EUR 27.6 million to EUR 299 million as of December 31, 2021. This was mainly due to the year-on-year increase in EBIT and the stronger rise in trade payables and other receivables. An increase in the income tax paid, a year-on-year decrease in provisions and the rise in trade receivables and other assets had an opposing effect. Investing activities resulted in a net cash outflow of EUR 203.9 million, very much in line with the guidance released to the market. This development resulted primarily from short-term deposits and higher payments for the acquisition of shares in consolidated companies. I mentioned the acquisition of iSAM before. Accordingly, free cash flow decreased from EUR 16.3 million to EUR 95.2 million compared to the prior year figure. Cash flow from financing activities totaled EUR 92.3 million. The decrease of EUR 42.9 million compared to last year's figure was mainly due to the new financial loans and lower dividend payments. Overall, an available liquidity as of 31st of December increased to approximately EUR 230 million. And let me add 2 other KPIs financially that demonstrate our solidness very strongly: our equity on a subgroup level rose by approximately EUR 130 million in 2021, and we are back to an equity ratio in the range of 25% as of December 2021. Now to a closer look to the dividend proposal. Our shareholders will also benefit from the results of the 2021 results. Subject to the approval of the Annual General Meeting on June 16, 2022, we proposed to distribute a dividend of EUR 0.75 per A class share, meaning a total dividend payout of approximately EUR 54.4 million. After offering a scrip dividend for the last 2 years, this year, we are returning to a cash flow dividend only. Since its IPO in 2007, HHLA has been committed to its profit-oriented dividend policy, which aims to distribute between 50% and 70% of annual net profit after minority interest. For a review of our ESG performance and an outlook for the 2022 financial year, let me hand over to Angela again.

Thank you, Roland. As you all know, we have also published our sustainability report today, together with the annual report. I would therefore like to point out a few highlights. Many of you will be primarily interested to the extent to which HHLA's business activities comply with the EU taxonomy regulation. We have always said HHLA has a sustainable business model, and I'm pleased that we are making our potential visible through the high degree of taxonomy eligibility of our business activities by these audit KPIs. It reveals that HHLA's business activities can make a major contribution to climate change mitigation. We have also done a lot of this in the 2021 financial year. HHLA continued to invest in climate-friendly handling equipment, especially at our Hamburg terminals CTT and CTD. All our measures contributes to our target of operating climate neutral by 2040. In 2021, we recorded 27% fewer CO2 emissions compared to 2018, which was set as a baseline year. Innovation and technical excellence are the keys for us to develop sustainable solutions that enable us to protect the environment while achieving business success. Our commitment has also been recognized by independent bodies. In late 2021, the international CDP initiatives, formerly known as Carbon Disclosure Project, awarded our activities the second-highest ranking B in its climate rating. With that in mind, we are also turning our attention to the topic of hydrogen. The use of hydrogen as an energy source can make a key contribution to the decarbonization of our company in the future, which is why we launched the HHLA Hydrogen Network project. As our network extends from various ports into the European interland, we are ideally placed to exploit the opportunities offered by hydrogen import and transportation. Ladies and gentlemen, 2021 was an eventful and challenging year for HHLA and for the global economy as well. The past year was subject to many uncertainties. The situation has been severed by Russia's invasion of Ukraine. I have already given you some information on the direct impact on our container terminal in Odessa. Future developments cannot be foreseen as they depend on the overall situation in the region. We can also expect that the Russia-Ukraine conflict will have unforeseeable consequences for the economy in Europe and beyond, particularly as a result of the sanctions announced and possible retaliatory measures. Therefore, it is currently not possible to issue a reliable forecast. But we can give you this on hand: the anticipated volume and revenue trends are based on the currently foreseeable macroeconomic environment. We expect storage fees in the Container segment to normalize gradually over the course of the second half of the year. For the Port Logistics subgroup, a moderate increase is expected for both container throughput and container transport compared to the previous year. All in all, a moderate year-on-year increase in revenue is expected. In order to further increase productivity and expand capacity in the Container Intermodal segment, capital expenditure in the Port Logistics subgroup will account for EUR 270 million to EUR 320 million of this amount. The main focus in the Container segment will be on the efficient use of existing terminal space at the Port of Hamburg and the expansion of foreign terminals. In the Intermodal segment, investments will focus on the expansion of the group's own transport and handling capacities. And of course, the forecast for capital expenditure is subject to the condition that there are no unexpected delays in addition to assets due to material shortages or long-term disruption to supply chains. No need to say that HHLA continues to consider the scalability of its capital expenditure and will adjust it, where necessary, to future economic developments in order to safeguard the financial stability of the group. With this outlook, I would like to close the explanations on our financial results 2021. Last, but not least, I would like to inform you that Roland, our Chief Financial Officer, will leave the company at his own request by end of January 2023. Roland has been available member of the HHLA Executive Board since 2003. And during this long period, he had not only made important decisions as Chief Financial Officer but also contributed to the development of the historical warehouse district in its responsibility for the Real Estate segment. I will say further words of gratitude and appreciation for his work for a later date as there is still some time to go before Roland leaves. Together, we still have a lot to do in the coming months. The question regarding the successor will be answered in due course. Just this much, the Supervisory Board is already looking closely at the personnel issue and will make a good decision for HHLA's future, and I'm quite sure of that. Ladies and gentlemen, we now look forward to your questions.

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

Three questions, if I may. First one is on the moderate growth outlook you've given. I appreciate comments on not being able to make a reliable forecast. However, you said you assume Odessa business to cease for the time being. Can you please share your thoughts on 2 other areas of throughput? So first of all, what are your assumptions around Russian volumes or Russian feeder volumes for the remainder of the year and sort of your assumptions for everything else for the rest of the year? That is the first set of questions. The second one, you touched upon scalability of CapEx plans. To what extent are these plans discretionary? In the past, we discussed measures at, for instance, CTB, as necessary, to become "competitive" again there. Are you forced to do these investments or not? And then third question, I don't know to what extent you're answering here as well, your negotiations for the port alliance that has been in the press this morning again. Is it impacted by the decline in your share price?

Could you maybe rephrase the last question because we didn't clearly understand what you were aiming for?

Yes. So you have quite a sizable authorized capital. And sort of the negotiations go between cooperation and outright merger probably of the 8 container terminals. So to what extent has the decline in your share price affected the negotiations for the alliance. Is that clearer?

Not really.

Not really.

Okay. Then skip it.

Okay. You're welcome to rephrase that, that we get your point. Because the share price drop, let me comment maybe on this one, was mainly caused by a misinterpretation of colleagues of you in March 4, which has prompted us to state openly what would be the impact of the CTO's total loss and what is our financial basis for that. And I think there was just a misunderstanding by some colleagues of you which has led us to this clarification. On the scalable invest of CTB, you were asking whether we are forced to do that, nobody can force anybody, in particular not management. But maybe the reason or the rationale for the idea behind this is that we are aiming for efficiency linked to sustainability. So if you take it from this angle, if you want to be a sustainable company, then you need to look for alternative fuel invasions basically for electricity. And you need, as a base, an automatization and digitalization of your premises before you can then basically electrify this. So the premises for becoming not only green but really zero emission is the automatization. Maybe this answers some of your question.

Yes, let me add and link it to the presentation during the Capital Markets Day. We are working hard on cost control and efficiency gains, becoming P&L effective in terms of unit cost degression. And the next phase of automation -- and I know you are aware of the situation in CTB, and hopefully the others that follow our call are as well, if not, please feel free to address the question. We started with the transition by introducing automated storage facilities. And we have now achieved a crucial number of storage blocks that is a prerequisite to continue with the next component of automation that in parallel helps us to meet our sustainability goals. And this is the automated horizontal transport. And this will, for the first time, have a positive impact on the cost efficiency cost. So far, we were bearing the cost of introducing a new system, running the terminal mainly as a hybrid. And with the next component operational, we will see, for the first time, substantial impact on the cost efficiency. And this is what we are aiming at despite the fact that we would be happy if we could utilize the terminal as high as possible. And this is a little bit background on the principal question of would we start with the scalability in case the crisis might hurt further business, in the first instance, with the CTB development. And my answer would be very clear, I do not think that we would, in the first instance, cut the components that help us to introduce the horizontal, fully automated transport in CTB. To the opposite, it would make us even more robust in a financial way because it reduces our cost base.

Then you were asking with regard to the throughput from Russia feeder. Always please take into consideration that with the Crimea invasion already in 2014, there was a significant drop in those volumes so that, from our perspective, the volume is negligible from the HHLA Hamburg side.

Next question is from the line of Christian Cohrs from Warburg Research.

Maybe first of all, before raising my questions, I'd like to express my respect to your organization and to your employees for the support and shelter you're providing to the refugee families of your colleagues in Odessa. Coming to my questions, 2 actually, first is intermodal. You are guiding for profit improvement. Now looking at H2 2021 and stripping out the EUR 11 million onetime effect, earnings were lower despite higher top line. So what is the background here? And what are your measures that you have positive operating leverage then prospectively again in 2022? And second is related to logistics. If I'm not mistaken, in the annual report, you have faced a EUR 5 million impairment, I assume it was in the fourth quarter, maybe you can shed some light on that.

Yes. With regard to our expectation to get operational leverage P&L effective going forward in the Intermodal segment, I guess the first thing you should bear in mind is that we reported on the second year being impacted by the pandemic. This is reflected in the data. And of course, we assume, and this is very much in line with the guidance for the full year, a sequential decrease of the storage fees and revenue. This means step-by-step normalize of things. On the other hand, if you look into the railway business, please don't forget we have been impacted, starting partly in Q2, partly in Q3, by very bad weather conditions in the south of Germany that harms our business. And despite all these obstacles, we delivered for the full year a margin, as I stated before, outstanding, achieving in such an environment, again, 20%. And Cohrs, if you look a little bit optimistic on the intermodal side, in the current year, I think there is no reason why we shouldn't continue on this successful path with regard to earnings. So this is the underlying thing we bear in mind as a prerequisite for the full year's guidance.

And Mr. Cohrs, thank you for the respect for our employees. We will hand this over, obviously, to them. We have more than 480 people working for the HHLA group in Odessa. And we have provided home and shelter for their relatives as, obviously, under the Law of Moore, the male employees cannot leave the company and don't want to leave the company. We do our utmost to support them in Ukraine and to give them relief that their relatives are in good hands. And it's a sign of ESG, a sign of corporate social responsibility, that this is all privately organized. And our employees opened their homes for the relatives of our employees in Odessa.

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

A couple of questions from my side. On current trading, if you can give us a bit of feeling what's currently going on in terms of trade flows into Europe for the port business. Looking at freight rates from China to Europe, these are currently softening a bit. Is this something that you see also in terms of volumes? And can you give us an update what container dwell times are currently doing at your container ports? Are these increasing again due to longer customs checks? Or are these actually decreasing because operations run more smoothly and goods arrive on time? That's the first question.

I'll start with the dwell times. Dwell times are still very, very high. Only very limited amount of containers are sitting here, which are not cleared with the Russian destination. But this is a very, very small number. The majority of dwell time changes is coming still from the delays which has not changed so far. We are cautiously observing, in particular on the Asian trade, what is happening. As you may know already, some big cities are under quarantine due to the zero COVID policy in China. And we are observing not only ports but, obviously, the trade needs to flow into the ports, that's why the truckers are so important, in particular in China, that they are not blocked in any of those COVID measurements. And that's something where we look very carefully, which can potentially create further delays coming in Asia trade.

Yes, but let me add one thing. If you try to challenge a little bit our moderate growth with regard to short-term developments, if I carefully follow the adjustments of the outlook given by very respected institutes, I think I've not read even one forecast that expects a flattish development for the current year. More to the opposite, they continue to forecast growth. The magnitude of growth has been adjusted, yes, but it is still growth and it's very much in line with the moderate growth expectation we have released to you this morning.

My second question, if you could remind me on this, the rebate for the track access charges that you booked this year, was this rebate only for 2020? Or does it already include some rebates for 2021? And if not, would you expect another track access rebate in 2022?

Sorry, your voice was garbled a little bit. Could you repeat your question?

Sure. So on the rebate on the track access charges that you booked this year, was the rebate only for track access charges that you paid in 2020? Or did the 2021 rebate already include those track access charges that you paid in 2021 as well? And if not, do you expect that in 2022, you will get another rebate for track access charges that you paid in 2021?

So to answer your question twofold, first, it's always a decision of politic to continue these subsidies. And the decision was taken for 2022 that they are continuing to do so. So this might have an effect in the period then.

Okay. But it's not implicit in your guidance.

It's factored in.

Okay. Perfect. Then on the current discussions that my colleague already touched upon on the Eurogate merger or corporation, can you again give us a bit of feeling why there's so little, let's say, obvious progress in these discussions? What are the main stumbling blocks that are still not cleared?

Before Angela answers your question, let me add to my previous answer. Please bear in mind that we always guide you in a conservative way. Maybe we have underestimated the impact, but according to the information we got when we prepared the outlook, we have factored it in to the extent we feel comfortable with in a conservative way.

In particular, being in an environment which is very volatile. So we are known for positive surprisings, not for negative surprisings. But the environment is very volatile, that's why we are extremely, extremely cautious. And second part of your question is with regard to the cooperation with BLG, Eurokai and Eurogate, the discussions are still ongoing. And therefore, please bear with us that we cannot comment on the status of the talks. We will inform you on the results as soon as possible.

I'm afraid I got one more question on Odessa. If I look at the disclosed numbers, if Odessa is fully operational, that's probably EUR 20 million in terms of costs. Could you give us a feeling for what costs of Odessa might be in the current case where it's just not operational but probably there is still some costs that you would have to bear?

Well, it depends on the assumptions for the full year. And as the transparency on that is limited, we are not in a position to disclose it in detail. And I refer you to the statements we included, qualitatively and quantitatively, in our current guidance for the full year.

We have a follow-up question from the line of Nikolas Mauder from Kepler Cheuvreux.

Regarding the closing of the deal with Cosco for CTO, can you update us on the status of the closing process? You've written that it's with the federal authorities now. Against the backdrop that Western China's relationship have certainly not improved on the back of Russia's invasion of Ukraine, is there a risk that this closing becomes a political topic now that we see in newspapers China buys critical infrastructure in Germany?

Well, I think we should not participate to choose whether we to do global trade with Americans over Chinese. So that's why I'm always very reluctant to comment on this. But as a prudent management here, obviously, there are clear legal rules that we are following and that everybody else is following, participating in evaluating the decision and the approval. And I really would like to caution here a little bit because this is a very normal process which takes a very normal time, in between 1 to 1.5 years, for all the questions to be answered because as well the authorities in Germany needs to consult all the authorities of the European community. The antitrust is consulting everybody involved that includes, for example, as well the Ukraine. And you can imagine that the antitrust in Ukraine right now has other topics to answer than maybe a request coming from authorities of the European community. So this is just an example to be extremely cautious and not to over-interpret political discussions and to distinguish between cautiously prudent-made investments and participations from political discussions.

[Operator Instructions] There are no further questions at this time. And I would like to hand back to Angela Titzrath for any closing comments. Please go ahead.

Thank you so much. Ladies and gentlemen, thank you very much for your interest and your ongoing support again for HHLA. The impact of both the war in Ukraine and the pandemic will continue to challenge us in the 2022 financial year. And despite this, we can assure you, our shareholders as well as our customers, consumers and companies, that HHLA can be relied on even in difficult times. And please stay healthy and take care. Goodbye, and hope to talk to you soon.