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

Good afternoon, ladies and gentlemen. Welcome, and thank you for joining our conference call on the financial year 2023 results. Before we take a deep dive into our financial performance in the past year, I would like to extend a special welcome to our new Chief Financial Officer, Annette Walter, who has been with us since the beginning of the year. The global economy faced major challenges in 2023. The ongoing war in Ukraine, the military escalation in the Middle East, rising geopolitical tensions, high inflation and interest rate hikes all impacted the economy and continue to impede the recovery from the pandemic. Over the course of the year, the economic situation became increasingly gloomy, particularly in Germany. This environment also impacted HHLA's business development. As an international logistics company, we are naturally dependent on the global economy. Economic weakness resulted in even lower throughput volumes than anticipated at the beginning of the year. In addition, inflation induced cost hikes for materials, maintenance and personnel took their toll in the group's revenues earnings. Before I hand over to Annette, who will present the financial figures in more detail, just a few words from me on the development of the business. I believe it's important to classify HHLA's volume performance because we are pretty much in line with our major competitors in the north range. They also suffered under weak global demand and lost volume compared to the previous year. Whilst HHLA's container throughput in Hamburg was down 6.3% in 2023. The port of Hamburg as a whole saw a 6.9% decline in container throughput. And the Port of Antwerp and Bergen recorded a 7.2% drop while Rotterdam suffered a decline of 7%. Obviously, we cannot be satisfied with the overall business figures for 2023, but we have already set the cost that will put us back on track for growth. We recognized early on that terminal investments by shipping companies make perfect sense for securing volumes. In 2023, for example, we successfully completed the investment by Costco in our Tollerort Container Terminal. This investment secures stable and long-term cargo volumes for the Port of Hamburg. Despite the various challenges of recent years, we continue to successfully drive forward our transformation even in the phase of resistance. Our goal remains to offer our customers sustainable, digitalized and network logistics solutions. We are, therefore, investing millions to ensure that we remain competitive in the long-term. Over the last 5 years, we have invested more than EUR 1 billion in our core business fields of the Port Logistics subgroup. Especially in Hamburg, we are consistently pressing ahead with the transformation program that we launched 4 years ago. Let me -- this will give you a bit more color on the progress we have achieved so far. Especially with regard to our container terminal operations, volatility and challenging market conditions are quite familiar to us. In 2020, when we started our transformation program, we were already confronted with the market power of our shipping customers that had grown steadily over the past years. As a consequence, the demands placed on the terminals in terms of price and performance had increased significantly. This happened along with growing ship sizes and increasing competition in the Benelux ports, but also with direct calls in the Baltic Sea region. We were able to maintain our throughput in this difficult market environment, but we wanted to regain market share. This is why we launched an efficiency program at our Hamburg terminals to secure the future readiness of our container business. We want to increase quality from the customers' point of view and thus also expand our competitiveness, and we have come a long way since then. At our biggest container terminal, the [ CTB ], we fundamentally changed the system during ongoing operations. At the case side, two berths of ultra large vessels are in place and the third is to come. On land, the rollout of the fully automated storage blocks at Burchardkai is almost complete. So far, we have 19 storage blocks in operation, 3 more are currently under construction and will take into operation by year-end or at least Q1 2025. A workshop on site for the maintenance of the automated guided vehicles is under construction and will be finished by the third quarter of 2025. In line with our plan to convert the horizontal transport between [indiscernible] and the storage blocks for manually operated [ van ] carrier to automated guided vehicles, the AGV testing area has been set. And first, AGV has already been delivered as used for testing purposes. This will make Germany's largest container terminal, significantly more automated and climate-friendly. And with this, I would like to hand over to Annette.

Thank you, Angela, and good afternoon, everyone, also from me. Let's jump directly to the reporting of our Container segment. Overall, container throughput HHLA terminals decreased by 7.5% to 5.9 million TEU to in '23 throughput at our terminals in Hamburg fell by 6.3% to 5 million TEU, yes. And have developed in line with our main competing North Range ports. This development was mainly driven by lower cargo volumes from the Far East shipping region and especially China. With regard to feeder services, we saw a sharp decline in Swedish and Polish traffic. What's more Russian volumes were completely absent due to sanctions. As a result, the feeder ratio of seaborne handling decreased by 1.2 percentage points to 18.6%. The development of our international container terminals varied. Our Odessa terminal is operational but still closed for seaborne container handling except for grain vessels covered by the Black Sea -- by the Black Sea grain initiative. The container terminal, TK Estonia, showed a favorable development, but was unable to match the strong prior year volume trend, which was driven by extra calls at the terminal as an alternative to Russian ports. We also recorded a positive volume development at our terminal in Trieste. However, it was unable to offset the overall decline in volumes. In total, the international terminals reported a decrease in throughput volume of 20.9%. Segment revenue decreased accordingly by 18% year-on-year to EUR 708.8 million. This was mainly due to the decline in volumes and the decrease in storage fees because of normalized 12x at the Hamburg container terminal. As you all know, in the same period last year, storage fees have increased significantly as a result of disrupted supply chains. In addition, the closure of CTO as well as a transfer of an intergroup company, HHL Personal Service GMBH from the pro forma holding other segment to the container segment also had a negative impact on revenue. EBIT costs fell by 6.4% compared to the previous year. This was primarily the result of a significant volume related decline in personnel expenses, mainly volume and energy price-related drop for in [ material ] expenses and the ongoing closure of CTO. In addition, other operating income rose by EUR 11 million due to the reversal of other liabilities for ship delays in 2022 as well as the reversal of expenses in connection with machinery breakdown insurance at the Hamburg Container Terminals. Expenses for external maintenance services as well as for consulting services and insurance were reduced significantly. Notable drivers for this trend were the measures to safeguard earnings implemented in March '23 at the Burchardkai and Tollerort Container Terminals. By contrast, EBIT cost at the Trieste terminal rose year-on-year due to additional cargo volumes. The integration of HHLA personal service GMBH into the container segment also had a negative impact on earnings. Against this backdrop, EBIT fell by 70% to EUR 47.2 million, while the EBIT margin dropped by 11.5 percentage points to 6.7%. So let's move on now to the Intermodal segment. The economic weakness of '23 also took its toll on the hinterland. As a result, container transport fell by 5.4% to 1,602,000 TEU compared to the previous year. With regard to rail transport, all major routes were affected by the decline, especially Polish traffic. In total, rail transfers decreased by 3.1% to 1,365 TEU. Road transport was impacted more severely and suffered a decline of almost 17%, with an increase of 4.2% to EUR 62.5 million, revenue growth contrasted [ probably ] with that of transport volumes. This was driven by an aggressive pricing level in the previous year as a consequence of increased cost for the purchase of services, particularly energy. However, EBIT fell by 23.6% to EUR 72.9 million, mainly due to lower transport volumes, inflation-related rate increases and the geographic expansion of operations in rail transport towards Southeast Europe also had an impact here. The EBIT margin was still in double figures at 11.7%. Let's turn briefly to the Logistics segment, where we have pulled the vehicle logistics and consultancy divisions as well as business activities with which HHLA aims to tap new growth fields. In the reporting period, the consolidated company reported revenue of EUR 78.2 million, up 0.8% on the prior year figure. This positive development was mainly driven by a leasing company for the intermodal sector, not yet included to the prior year period, which was able to more than offset lower revenue in the vehicle logistics, consultancy and digital services divisions. There was a positive operating result of EUR 0.6 million in the reporting period, while the previous year was burned in particular by an impairment of around EUR 4 million for new activities, the vehicle logistics division and the newly incorporated leasing company contributed to the improvement in earnings in the current reporting period. At equity earnings declined slightly by 2.2% to EUR 4.1 million in '23. Coming back to the Port Logistics subgroup as a whole. Let's have a closer look at our cash flow development. In the reporting period, cash flow from operating activities of almost EUR 200 million, many compromised earnings before interest and taxes, write-downs and write-offs -- write-off of nonfinancial assets and the decrease in trade receivables and other assets. The main item was an opposing effect were lower income tax payments. Investing activities resulted in a net cash outflow of EUR 235.4 million, which was noticeably above the prior year figure. This development was largely due to payments for investments in large-scale equipment at the Hamburg container terminal with regard to our efficiency program as well as the rolling stock for our rail business and lower payments for short-term deposits. As a result, free cash flow of the Port Logistics subgroup was a negative amount of minus EUR 36 million. Cash flow from financing activities totaled EUR 22.6 million, mainly due to the increase in new loans taken out compared to the same period last year as well as proceeds from the sale of minority shareholdings in CTT to Costco. In addition, there was an opposing effect from dividend payments and settlement obligations to shareholders of the parent company and noncontrolling shareholders as well as payments for the redemption of lease obligations. Overall, our available liquidity as of the end of December '23 remained at a robust level of EUR 174.6 million. So the next slide highlights the equity development of the Port Logistics subgroup. While equity received a significant tailwind from interest rate hikes and the resulting actual gains in '22. It decreased to EUR 738 million in '23. This was partly due to the distribution of dividends and the reclassification to financial liabilities of the potential obligation from a put option. The sale of noncontrolling interest in a fully consolidated company as well as the positive results for the reporting period has the opposite effect. In view of this development, the equity ratio stood at a solid level of 27%. Our dynamic gearing ratio increased to 5.5x net debt-to-EBITDA due to the previously mentioned new loans taken out during the year -- this year. Despite all the challenges we have faced over the past year, we are sticking to our dividend policy. Since the IPO in 2007, HHLA has been committed to its profit-orientated dividend policy, which aims to distribute between 50% to 70% of annual net profit after minority interest. Based on our financial performance in the '23 financial year, we will propose together with the Supervisory Board a dividend of EUR 0.08 per Class A share. Subject to the approval of the Annual General Meeting on June 13, '24, we will distribute a total dividend of EUR 5.8 million. This means a payout ratio of 67%. That concludes my remarks. For a review of our ESG performance, the status update of the strategic step to secure our core business and an outlook for the '24 financial year. Let me hand you back to Angela.

Thank you, Annette. In 2023, we drove several sustainability initiatives as part of our mission to become climate neutral. In our view, these are decisive competitive factors and key differentiators for the future. How sustainable our business activities already are is underlined by the high degree of alignment with the EU taxonomy, which we are reporting for the second time this year. EU taxonomy aligned revenue, capital expenditure and operating expenses were again at very high levels of nearly 80% or more. Our sustainability efforts made good progress. We now offer more European connections via our rail subsidiary, Metrans, to shift even more goods from the road to more eco-friendly railway transport. We completed the conversion of our AGV fleet at the CDA. And together with our partners, we began work to provide containerships in the Port of Hamburg with shoreside electricity. All decisive steps for our long-term aim, which is to achieve climate neutral production throughput, the HHLA group by 2040. Before we turn to the outlook for 2024, I would like to take this opportunity to talk about a topic that kept us busy to a large extent over the last month. The decision by our main shareholder, the City of Hamburg to enter into a strategic partnership with the shipping company, MSC, thus leading to a significant change in HHLA shareholder structure. MSC's shareholding has been initiated but has not yet been closed as some of the conditions precedent are still outstanding. As you may know, community meetings are currently being held in the parliament of the City of Hamburg. The members of the Parliament are expected to make their final decision on the transaction in late May. In addition, further antitrust approvals are pending at EU level. At year-end, around 7.5% of shares were still in free float, meaning that many thousands of shareholders are still shareholders of HHLA. The transaction is expected to be concluded in the second quarter of 2024. Further negotiations are currently taking place between HHLA, the City of Hamburg and MSC to finalize the former binding preliminary agreement between all parties. On the basis of some vital key commitments the Executive Board had agreed to the takeover bid in a recent statement. At the center of the business combination agreement was a capital increase for HHLA to give us more headroom on exclusion of redundancies for operational regions for 5 years and the guaranteed long-term neutrality of HHLA's business model which is the multi-user concept. The details of this agreement are currently being finalized. We are confident that the negotiations will be concluded in the near future. Ladies and gentlemen, we are also experiencing tough competition in the current financial year. Against the backdrop of ongoing geopolitical tensions, we expect the environment to remain volatile. On top of that, we expect effects from the announced shift in shipping company alliances, in particular the new formation by Hapag-Lloyd on Maersk with Gemini Alliance. In addition to this development, the expiry of the antitrust block extension regulation in April '24 means that different framework conditions will apply to Alliance in the future. At the same time, Hapag-Lloyd has already announced that it will withdraw cargo from Hamburg as part of the Gemini Alliance. This means that the entire industry faces fundamental change. The impact on HHLA as a whole and on container handling in Hamburg in particular, is not yet foreseeable. Against this backdrop, our forecast for '24 is subject to a high degree of uncertainty. However, we expect the Port Logistics subgroup to achieve significant year-on-year growth in container throughput and a moderate increase in container transport in '24. All in all, a moderate year-on-year increase in revenue is expected. A significant increase is assumed for the Container segment and a moderate increase for the Intermodal segment. Overall, an EBIT result in the range of EUR 70 million to EUR 100 million is considered possible for the Port Logistics subgroup for the '24 financial year. Within this range, a strong decrease is forecasted for the Container segment and a moderate increase for the Intermodal segment. To further increase efficiency and expand capacity in the Container and Intermodal segments, capital expenditure in the Port Logistics subgroup will be in the range of EUR 360 million to EUR 410 million in the Container segment. Investments will focus on the efficient use of existing terminals based in the Port of Hamburg and the expansion of foreign terminals and in the Intermodal segment on the expansion of the group's own transport and handling capacity. With this outlook, I would like to close my remarks on our financial results '23. Annette and myself, we are ready to take your questions now. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] It looks like we have no questions over the phone. I hand back over to Angela Titzrath for any closing remarks.

Thank you. Ladies and gentlemen, thank you very much for your interest and your ongoing support to HHLA. Please keep in mind, as challenging as these uncertain times may be, they also present us with a wealth of opportunities. Please stay healthy and take care. Goodbye.