Hapag-Lloyd Aktiengesellschaft (HLAG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Hapag-Lloyd Analysts and Investors Full Year 2020 Results Conference Call. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO; Mark Frese, CFO; and Heiko Hoffmann, Head of Investor Relations. [Operator Instructions] And I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.

Thank you very much. And thanks, everybody, for making the time to listen to us today, and welcome at the investor presentation for the full year results. Maybe a couple of opening remarks. I think when you look at the market, I think all of us would agree that 2020 was a bit of a rollercoaster here, with a pretty strong start, then all of us were hit by the pandemic. And then towards the end of the year, demands came back a lot faster than everybody anticipated. And then, of course, we saw freight rates fairly stable throughout the year but with strong increases on the back -- at the end of the year on the back of strong demand. We've also seen some operational challenges, especially in Q4, which continued into Q1, mainly because nobody anticipated that surge in demand. And that made all the supply chains get under quite a lot of pressure. In terms of our strategy, we believe that we are on track there. In the meantime, we launched 5 of our quality promises. Number six is in the pipeline. We ordered a couple of ships or 6 ships at the end of last year, which will be dual fuel to also underline our commitment to reduce carbon emissions. And we believe that at time, these ships may also be able to sail on the different types of fuel. And then yesterday, we announced also that we will acquire now Dutch to further boost our presence in Africa. In terms of numbers, and Mark will talk more about that later on, EBITDA significantly improved to 3.1 billion, almost 50% more debt substantially reduced again on the back of strong free cash flow. Our net debt-to-EBITDA now below 2 with a healthy liquidity reserve. That's also why we believe that it's prudent and adequate to propose a dividend of EUR 3.50 per share. If we look ahead, market fundamentals remain favorable when we look at '21 and '22. The outlook for the first quarter and the full year is positive on the back of strong demand, especially the first half year, I would say, as there's still quite a fair bit of uncertainty on the second half. And, of course, we'll continue to watch the market closely. When you look at the operational challenges, I would say there's 3 specific quarters that are at the heart of that. The first one, I would say, by far, the most important one is the demand explosion in the second half of 2020, which is spilling over into the -- at least the first half of 2021. If you look at all the forecasts that there were in -- after the pandemic hit us in March 2020, nobody expected that the demand would come back to the level that it had in 2019. And global trade would definitely stay below that level. As you will see in the next page in a minute, that has certainly turned out very different. And then, of course, as, of course, bottleneck, not only on the boxes that were available, not only on the ships that were available, but especially also on terminals and inland transportation. And once that gets congested, it is not easy to get out of that. And if we move to the next page there, I think that illustrates it quite nicely when you look at transportation volume. On the left-hand side, you see 2 graphs, 1 showing the development of demand or transportation volume year-on-year on a month-by-month basis, where you see that in the first half, it was down quite a lot, starting, of course, in February when Asia was shut down, then carry -- becoming quite strong in April and May and then recovering slowly through the summer but then very strong towards the end of the year. And as you can see, look -- if you look at the amount of capacity that has been made available on the main trades, you also see that, that was cut in response to slower demand. And then, of course, it came also back in the second half year, where I think it's interesting to point out that the amount of additional capacity that was deployed was significantly more than the amount of volume that in the end was carried, which also illustrate that there certainly is an element of congestion in the global supply chain. Idle fleet, of course, as you would expect, it went up in Q2 and came down very rapidly again towards the end of last year. And weekly capacity, that illustrates more or less the picture also on the left-hand side. When talking about those trends, of course, led to significant operational challenges. A couple of them are basically mentioned here. When we look at container usage, in reality, we, today, need to -- it takes about 20% longer these days to get the containers back than it is in a normal situation. And of course, that means you need about 20% more containers to carry the same amount of volume as you did before. And it is simply not possible to increase the container fleet from 1 day to another with 20%, even if we have actually invested quite a lot in that. Then we see voyage delays, on average, up a couple of days. If you look in the first quarter, it's actually a little bit worse. When you look at the time charter index, 150% up. That means clearly also because duration goes up that the cost -- there is quite a lot of upward pressure on operational cost. Bunker price doesn't help either there because after being very low, as you can see on the graph on the left-hand bottom in Q2 last year, it has steadily been creeping up and is now again around about $500 a tonne, which, of course, is significantly above what we had the same time last year. Rates have been up, yes. Don't forget, that's mainly the short-term rate that we see. But of course, in the end, that also gets reflected in contract rates, which, in fairness, have also been very long for an extended period of time. So what do we try to do about that? On the one hand, we try to do everything to provide more flexibility to our customers, try to offer them alternative services, extra loaders, et cetera. We have offered also discounts. What we failed to mention is even if we don't like that because, in many cases, it means we get the boxes back later, which in the end is in nobody's interest. And then we've had a number of initiatives to also improve the quality of customer services. We have seen since the fourth quarter that our teams are receiving 50%, 60%, 70% more bookings than normal. And of course, that puts quite a lot of strain on our teams. In terms of fleet, all the ships we have are sailing. We invested already since the beginning of last year significantly in additional boxes because we felt that we would need them. And we added about 300,000 TEUs of new equipment onto our fleet and are actually continuing to do that also in the first quarter of this year. We also deployed many more extra loaders or empty loaders this year than we did -- do normally. Normally, that's a single-digit number. Right now, we talk about over 50. So that's in reality about a ship a week just doing nothing else than moving empty containers. And then in terms of our network, of course, we try to deploy the ships in those trades where there's the most demand. And we also try to bypass congested terminals, even if, in fairness, that's not very easy. Looking a little bit deeper at a couple of things that we've done this year. We already mentioned a number of times our quality promises. We meantime launched 5 of them. Number 6 will follow in the month of February, and we still hope to have all 10 of them out there before the end of this year or latest in the first quarter of 2021, which will make it much easier for both but also for our customers to look at what is actually the data-driven performance that we -- the problems that we deliver when looking at the data. And that gives us, of course, also the best handles to them improve things. Finally, next point, ships, already mentioned. We have not been at the yards for quite a long time. Last ships we ordered before this was in 2015. And at some point in time, we have to renew our fleet. And also because we are not that big in the ultra-large segment, we simply have to follow up there. I think that's been in the cards for quite some time. And we did that in December. In the end, we've chosen to go dual fuel after considering various options very carefully because we do believe that, that will help us to -- we do believe that economically, that's a good choice in the end, but it will especially help us also to bringing down CO2 emissions by up to 25%. And hopefully, at some point, we'll also be able to use those engines with fuels that have even lower emissions. On the back of that, we have also concluded the so-called green financings in an amount of $900 million. I think we are quite happy with that because it also underlines our strategy that we are serious about that and that we do want to do our part when it is about reducing emissions. In this case, we did a syndicated loan as well as a green lease, both for 3 vessels. And now, of course, we need to look ahead and say what more is that, that we can potentially do, whether there is more that we can do or rather sustainability-linked financing or something else. One step back and looking at overall our strategy beyond a couple of things that we just mentioned. We've committed to growing in attractive markets, and we have established, even in 2020, a number of new services mainly around India, the Middle East and Africa. We've opened up the terminal in [ Tangier ], where we took a 10% share and which will be an important hub for our network in the years to come. We opened up a couple of new offices, in our case, Ghana, Nigeria and recently also Kenya and a few more in the pipeline. We continue rolling out our quality service centers in Mauritius and are increasingly also in Europe. And we started the Knowledge Center in Gdansk, which is meantime fully up and running. And then yesterday, we announced that we signed the SPA with NileDutch, which we believe is a very good strategic fit to further strengthen our presence in Africa. We have, over the last year, built up a fairly solid presence on the, say, northwestern part of Africa, in South Africa and on the east side of Africa. In the southwestern part, which is when NileDutch is particularly strong, our presence is very small. And as such, the 2 companies, in our view, fit very well together. In the end, they carry about 200,000 of volume every year. They operate 10 services and are active in 16 own offices and a bunch of agents and have around 350 people that we would hope to welcome into our organization after closing, which will likely take place towards the end of the second or beginning of the third quarter. So with that, I'll hand it over to Mark to talk us through the numbers.

Yes. Thank you, Rolf. Also, from my side, welcome to everyone. So yes, it was really a remarkable year 2020, also for the industry, but also for Hapag-Lloyd. What we have seen is that in spite of COVID-19, we were able to improve profitability, strengthen our balance sheet and, for the first time in a decade, earned cost of capital. So it was a little bit to everybody's surprise that transport volumes were only marginally below the previous year level, while average freight rates even increased by 4% to USD 1,115 per TEU. Earnings increased sharply, we have to say, on the back of the freight rates, as that's the lower bunker and our cost discipline. You know that we have initiated right at the beginning of the crisis, safeguarding Performance Safeguarding Program, which delivered at the end over EUR 500 million of savings to the results. This earnings momentum we have used to strengthen our balance sheet, accelerate our debt repayments and to increase our liquidity reserve. And consequently, that led to a ratio of net debt to EBITDA of around 1.8, as Rolf already said, lowest level in a decade and maybe even in the industry, a quite positive development for us. I think it's important to say that not only Q4 contributed a lot but that we were able even to manage a positive performance development in a difficult and recessionary environment in Q2. And we were even able to improve our earnings here during the crisis. Taking a little bit closer look on to our P&L. We can see that despite marginally lower transport volumes, revenue increased by 3.3% to over EUR 14.6 billion, which is 4% on the basis, for sure, on 4% higher average freight rate. EBITDA increased by close to 40% to EUR 3.1 billion, and EBIT increased even by 65% to EUR 1.5 billion on the back of freight rates and the lower cost, as mentioned. The EBITDA, important to say, includes USD 155 million of expenses, which, in addition to the complete write-off of brands also incurred the write-down for vessel optimization program in the fourth quarter. Group profit overall doubles to USD 1.1 billion. And the return on invested capital, as said, was about 10%, a quite remarkable improvement. But not only last year, it was a constant approach over the last years to reach that for Hapag-Lloyd. Looking at our quarterly transport volume. Development was quite exceptional after good volumes in Q1 coming out of 2019, very difficult in the COVID situation, with transport volumes being down by roughly 11%. But then already in June, we have seen steady growing volumes, strong recovery, and in Q4, almost -- or strongly over even 2019 with 3.8%. So the volume growth has been much stronger. But unfortunately, as we have seen, as Rolf already indicated, seen some operational problems and congestions, which led to a number of delays in the schedule. On freight group level, all 3 big East-Western trades, Far East, Transpacific and Atlantic recorded lower transport volumes, while over the Middle East- and Latin America-related trades, saw visible lost. Until Q4, when we look at freight rates, it has been -- the freight rate has been more or less stable, which is over that cycle, quite remarkable. Q4 rates increased moderately on the back of strong ex-China demand. And we have to bear in mind that around 70% of our volumes are on long-term or midterm contracts. So that sharp increase is not seen in Q4. We will see more of that during '21 or already in Q1. So in spite of lower volumes, rising costs at the end of the year related to port congestion, unit costs remained flat year-on-year, which is a positive thing. This was made possible by our Performance Safeguarding Program and the lower bunker, for sure. The increase in D&A expense is partly related to the IFRS 16 accounting. We have renewed some of our short-term vessel charter agreements in summer with lower rates but longer duration. And consequently, cost of vessel avoids decreased due to a higher share of charter vessels considered as right-of-use with respective negative impact on depreciation. But a very positive program, part of our PSP, is that less for longer years, and they really pay off right now. In addition, G&A increased also due to our scrubber investments but also due to the write-offs I mentioned already also as part of our vessel optimization program, which was around USD 155 million. Overall, cash generation has been very strong driven by the strong earnings, modest investments, mostly in new containers to adjust the soft equipment shortages, which we have seen. We have used also the strong cash development to pay down debt and for sure to keep or increase our liquidity reserve, which was considerably above 2019 levels. So 2020, we have to say was a very exceptional year with excellent performance for the whole industry. I think it's important to say, and it can be seen here, that we have been on an upward trajectory for a couple of years already, quite a positive development over the last year. Since 2017, we have continuously improved our earnings and cash flows and that's why it was possible to really earn cost of capital, let's say, from now on. We have used the improved profitability also to -- due to lower replacement needs due to our young and efficient fleets to pay down financial debt by around about EUR 3 billion since 2019. And therefore, our net leverage ratio is now at 1.8 and far below our initial target of 3. And also, we have strengthened our equity base. Yes. Let me now just comment a little bit on our dividends based on the strong results in 2020 but also due to very positive outlook for 2021. We proposed a dividend of EUR 3.50 per share. This is higher than the year before. That is pretty clear. But at the same time, we remain cautious and are willing to maintain our very prudent financial policy to generate strategic leeway but also keeping the right and balance between shareholder participation, debt repayments and additional investments. And that's all on a basis on a good development of our rating, and we will follow up on that pretty sure. So looking at the challenges ahead of us, we remain focused on strong cash generation, liquidity and cost management. And having said that, I hand over back to Rolf. Thank you.

Thank you, Mark. I think when we look at the -- when we try to look ahead, it's always very difficult to look ahead only a couple of quarters only at the calendar year, but I believe it's important to always look also at the longer run. And that's where the order book is, of course, always a good indicator of what's going to happen as well as the supply-demand balance and scheduled deliveries that are -- vessel deliveries that are expected. When you look at those 3 graphs on this page, I think it's fair to say that at the moment, the order book is healthy. Yes, some orders have been added to the book, and I think that's also -- was also needed, as I've said many times. I still think we're going to see some more coming in, but that does not mean that we're then going to have an order book that's completely out of whack. When you look at supply-demand, still reasonably in balance as it has been actually for quite some time. And if you look back the last 4 or 5 years, then I don't think we've seen the disruptions and the disturbance that we have seen before that. And then scheduled deliveries, not that much in this year and in next year. Will probably be a little bit of a spike in '23 or '24. But at the moment, I don't see that as a major threat to the stability in the market. If we look specifically at 2021, I would say there that we expect that our transportation flow will go up a bit. We should keep in mind here that at the moment because of congestion, the production is actually not super easy. So I don't expect that the industry will grow very fast in the first quarter. Of course, Q2 and Q3 will see quite a bit of growth because those were the periods where it was significantly lower last year, but Q4 has also a very tough comp. So in the end, we think it's going to increase slightly. Bunker seems up, yes, and I don't see any signs that that's going to weaken at this point in time. Freight rates will also be clearly up as we have seen the upward trajectory towards the end of last year, and that is certainly going to hold for the first quarter and probably part of the second quarter as well. And then when we talk about EBITDA, we've said that's going to be significantly up. And we have given some more specific guidance for the first quarter both for EBITDA and EBIT. And I read this morning the outlook from CMA, who basically said that the outlook for the first half is going to be significantly better than the second half of 2020, yes. And I think we are playing in this -- and we are in the same playing field. So we shouldn't read our comments not much different than theirs. And that brings me to the last page, which is what is -- what are the priorities for us for 2021. First and foremost, continue to deliver all our strategy, make sure that we focus on the needs of our customers, which especially means focused on producing as much allocation as we can to meet the demand of our customers, prepare for a seamless integration of NileDutch. So once the transaction closes, we can do that hopefully before the end of this year. We'll continue to be prudent on the financial side, as Mark already mentioned. We'll continue working on our sustainability strategy and taking specific actions to demonstrate our commitment to improve the environmental footprint that we have. And of course, we will also consider some selected investment opportunities if and when those are there to make sure that we continue to take advantage of opportunities in the market or strengthen our position in certain segments of the market. And I think that brings us to the end of this presentation. And with that, we would happily hand it over to -- back over to the operator, and then we'll go to Q&A.

[Operator Instructions] And the first question is from the line of Andy Chu of Deutsche Bank.

Two questions, please. Firstly, on CapEx. I wonder if you could just help us on CapEx for the next few years in terms of the ship orders and how that CapEx will fall over the next 3 years and also what you plan to spend on containers. Secondly, just in terms of the contracts, it sounds like the industry is looking to sort of strike longer-term contracts. So I was just wondering if you could sort of talk about sort of how much longer these contracts are in terms of what's being talked about and any sort of flavor as to where these contracts have been struck in terms of the major trade lanes? And maybe just a small one. Are you able to say anything, just for modeling purposes in terms of the acquisition, what sort of consideration you've paid? Or is that still to be disclosed in the future?

Maybe let me start from top to bottom. I think on the acquisition, we've agreed not to disclose the consideration. So unfortunately, I cannot share that with you at this point in time. In terms of contract rates, I mean, yes, we see some -- I mean that market is also quite dynamic. We have seen significant increases in most of the contract rates, as one would also have expected. There we are talking from several hundred dollars to significantly more per container. When we look at CapEx, yes, I think we have said over the -- we've said -- we've been quite clear, I think, over the last years, that we do expect that our CapEx will start to approach depreciation again, yes. And I would not rule out that in a year like this, it might even be a little bit higher amongst others or mainly driven by containers, to be honest, because we have to invest more in containers these days simply to make sure we have sufficient boxes available. That's a temporary effect, though, because I do expect that once the market settle down, that the number of terms that containers make will return back to their historical level. So in a way, you could argue that we pull forward a little bit the investment on some of the containers. And then it will likely be, again, a bit lower in the years to come.

The next question is from Parash Jain of HSBC.

I have 2 questions. First, like, as you rightly mentioned, so first quarter clearly looks significantly better. And first half seems to be substantially better than second half of 2020. And can you help us understand, looking at the demand and supply, what could go wrong in the second half of 2021? Or why there is no visibility with respect to second half of 2021? Is it the fear of unwinding of condition coincide with the slowing demand could bring back the intensive competition that shipping industry had been used to in the past decade? Or you think that the kind of discipline that we saw in second quarter of last year would be the new norm? So if you can share some color on how second half of 2021 could shape. And my second question, if I can ask along, then you can answer both. When we -- when you mentioned about the volume outlook increasing slightly and -- like all the focus points towards that with the low base of 2020, probably with U.S. stimulus, global trade could be somewhere in the range of 5%. Does it mean that for Hapag-Lloyd, you may probably lag the underlying market? Or when you say slightly increase, you are hinting towards 5%?

Maybe to take the last one first. I think the outlook today is still fairly uncertain. I think what we see today is that if I compare it also with last year, we had a very good start last year in 2020, and we will not be growing a lot in the first quarter. I think at best, we're going to be on par with last year, which, in itself, is good because last year, we saw a very strong growth in the first quarter. But we do see these congestion issues limiting the ability to produce sufficient allocation. And as such, the big question is, how quickly will that go away? And that is, at the moment, I guess, pretty much anyone's guess. And I still think that in the end, we're going to grow roughly with the market. Whether the market in end will grow 3%, 4% or 5%, to be honest, I don't know. And if there's one thing that we have learned over the last 12 months is that the outlook tends to change about every 90 days, at the minimum. And that's also why...

Yes. No. That makes sense.

Sorry?

Yes. No, no. I think that now makes sense. Yes.

Yes. And the second -- your first point around what do we expect for Q1, Q2 and what your visibility into the remainder of the year. To be honest, our visibility is probably not much better than yours. What I've learned last year is that whatever people say, it's usually not true, yes. And the only thing you can really do is try to stay on top of the business and make sure that you adjust quickly and react whenever you see something because the market is probably going to go a little bit different than people think. I think it's quite fascinating to see that last year, everybody was predicting doom and gloom in the second quarter. And then now we have seen the market come back much quicker than everybody felt. And now everybody thinks that it's just going to continue like this. I think both perspectives are not so right. I would be quite surprised if we do not return to some kind of normalcy in the course of 2021. Will that mean that rates will go down to very low levels? No, probably not. I don't see that. But I do think that the second half is going to be much more normal than what we have seen in the last 2 quarters. And then we will also continue to guide you on that as we gain more insight ourselves. But I think we should learn from last year that it's very risky to pull out a forecast for the full year in the current uncertain environment and then with the pandemic still around.

Okay. And then if I may just quickly chip in one last question. On your charter fleet, can you help us understand what sort of duration -- average duration of those leases are? What percentage of fleet would be due for renewal this year?

I wouldn't know that off the top of my head, and I'm looking a little bit at Mark and Heiko. To the best of my knowledge, the duration that we have is round about 2 years at this point in time. Yes. I see Heiko nodding. So that should be roughly right. Yes. And it covers about 1/3 of the capacity that we have, and it's about 100 ships.

The next question is from Lars Heindorff of SEB.

So the first one is regarding electronic bookings. Some of us have been talking quite a lot about this on recent calls, also CMA CGM. And could you give us a status about this? And I also heard that you've been moving out of trade-ins and into [indiscernible] with respect to that and also what kind of visibility that will give you in terms of capacity planning if you have a higher share of electronic bookings. That's the first one.

Okay. I mean in terms of -- I assume that you mean the online channel because if we to how do we take through all the e-channels, that's almost all of our bookings. If you look at the online channel, that is now approaching about 20% of our overall demand or the overall volume that we carry. That has actually very little to do with trade length and TSBM. I mean we have -- when it's around these blockchain platforms, we've always said that we have a multi-platform strategy. And as such, we will not go only for tradelens or only for TSBM, may even have some others that we participate in, as we believe that in the end, there's not going to be one platform that's going to dominate everything, as you see in many places. I mean if you look at airline bookings, it's also not only going all through one platform. I mean there's a couple of industries where you see that one platform is very, very dominant, but then those tend to come very early on, which is not something which we have seen in our industry. So when it's around visibility platforms, we do not expect one to be dominant across the industry.

Okay. Then the second is regarding capacity plans. And I am pretty sure that if I ask you now how much capacity you've been adding, you would say that as much as possible because you're trying to help out your customers. But whenever things are returning to a more normal situation, probably sometime during summer or in the second half, probably at the latest, I don't know if you can give us any insight into what kind of capacity plans. I mean, are you expecting to grow in line with the market or maybe a little bit more or maybe a little bit less?

No. I mean I think when you look at our overall capacity, I think we'll probably grow organically more or less in line with the market. So if you would assume a growth of, say, 3%, 4%, 5%, yes, that is probably going to be the organic growth in capacity that you're going to see throughout the year. And then, I mean, the addition of NileDutch may add a few percentage points to that.

Okay. Very helpful. And then the last one is regarding the congestion. I know there's been a couple of questions about this. I mean what we see at the moment is that it's moving a little bit away maybe from the U.S. West Coast or has been pretty serious to the U.S. East Coast and other areas. And I'm curious to find out what that will do, in your view, to what goes on the Transatlantic, which is still a fairly significant part of what you do and also Lat Am, where we have seen some movement lately.

And I think congestion is still a big problem. I think everybody has been very much focused on L.A. Long Beach because there was the most visible and already since quite a long time. I think you are right that the number of vessels that's waiting there is coming down a bit. But let's not forget that we still have pretty much the same number of vessels at berth as we have at anchor. So we're certainly not out of the woods there yet. We've also seen congestion in a number of other places, partly that's also weather-related. And there are sometimes also other reasons for it. But the challenge we just have is that overall, we are not out of the woods yet. And we also have a lot of ships that are off schedule that also gives them difficulties when they get back to Asia or when they have to slot into their next voyage. So if you also look back at a similar situation that we have seen over the last 10 years, be it as a result of strikes or all kinds of other reasons, this type of congestion typically takes a little bit of time to get sorted out. And I think there were people that were quite optimistic that after Chinese New Year, everything would be fine. I think we've seen some improvement, which was also to be expected. But I think it's still going to take us until the end of the second quarter, beginning of the third quarter before, hopefully, things are running more or less as normal.

The next question is from Adrian Pehl of Commerzbank.

Actually, the first one is a little bit on a topic that sometimes was picked up in a press in the sense of, do you see any kind of government bodies or shipper organization to really have a practical influence in the market and on the rates anytime soon? Is there a way for them to mend the issue seen from their perspective? And the second one is, is there any change with respect to the discussion that you have with your non-30% shareholders in the sense of shift of focus somewhere towards general share price levels, the exceptional freight rate situation, the dividends in either way? Is there anything that has changed in the recent couple of weeks or month? And then lastly on your dividend policy. Would you consider to alter it to some degree that it becomes rather linked to your free cash flow generation, so as a percentage of FCF one day? Is that how we should potentially think of it going forward?

All right. Let me try and take the first 2 first, and I can think then about the third while I answer. In terms of government impact on rates, I mean, I don't see that. I think we've seen a lot of questions from regulators across the globe. I think that's also perfectly fine. I mean that is their job. And we, of course, work with them and provide them all the information that we can. If you look also at the data in this presentation, I think it's fairly clear that the demand came back much faster than everybody thought. And as a consequence of that, everyone was surprised. We deployed the capacity that was available. Yes, that was not enough to cope with the demand. And as such, you saw rates coming up. I mean we have also seen that in other industries. I mean if we look at air freight or other segments in the transportation market, once it gets tight, these things happen. In terms of discussion with the shareholders, I mean, there's actually not been any discussion about non-standard type of topics over the last months. I think they have been with us -- all of them have been with us quite closely over the last 12 months as we were going through the pandemic. And I think all of us have lived through this rollercoaster, where every 90 days, your outlook is completely different. And I think it's good that we stay close to them because by doing that, we guide people through this period. And as a consequence of that, you're going to have good and constructive discussions about what to do. And that builds tend to bridge to the dividend, I guess, where in the end, we decided, as Mark said, to issue a fairly high dividend, if you want, yes. We believe that in this industry that it is absolutely okay because this industry is cyclical, whether we like it or not. And I think right now, we are certainly in an up-cycle. And that means that in that time, you generate quite a lot of free cash. And then you also need to make sure that your shareholders then share appropriately in the profits that we generate. And that's why I think our policy of paying at least 30% of net profit still remains actually quite well. And one would expect that in times where it's good, it's probably somewhat higher. And in times where things are much more difficult, you would possibly go again somewhat down.

In a sense, it's very much, for sure, correlate to its free cash flow generation, for sure. Because the dividend policy is giving a range, so at least 30%. But from there, upwards, it's very much dependent on what we really generate, for sure.

All right. And your comment, Rolf, actually, on airfreight, brings me to the topic of M&A. I mean I presume you're probably not following the venture of CMA CGM going into airfreight. But nevertheless, having seen that you acquired a company yesterday brings me to the question if you have kind of rethought your approach to M&A transactions given that your balance sheet probably holds still -- holds already some excess cash or holding some excess cash in the future? Is there a change to how you would approach transactions going forward? And would you expand our business model via M&A, probably now a bit more into adjacent markets than before? Or is that not the case?

There's nothing -- there's not a lot of cooking at the moment. I think we've always said that we see M&A as something where we may do something opportunistically here or there. If the right opportunity comes by, we felt that NileDutch was a good addition to our network at a fair price, and that's why we did the transaction. Could something like that happen again? Yes, it could. Yes. But then just the right thing needs to come by. I don't think our strategy has materially changed there. What we've said is we don't think anymore that the big type of mergers make a lot of sense in today's environment. Because it would get us, on the one hand, into regulatory issues, most likely. But more importantly, the incremental benefit for the savings that you would get out of becoming or growing another 50% compared to where we are today are just not so big. I mean, if you look at the last 5 years and you look at EBITDA or EBIT margins of the top carriers that you can compare, say, a CMA or a Maersk or Hapag for that matter, you will find out that over the last 5 years after the last wave of consolidation that the difference or the correlation between size and profitability is not really there. I mean, last year, we were more or less all on the same level. The years before that, we were a bit ahead of most of them. We could also be 1 or 2 years a little bit behind, but we're all playing in the -- we're all in the same playing field, which I think illustrates as much more driven by things like trade mix and how good you are doing your job rather than pure scale, which certainly was a big differentiating factor if you go 7 or 8 years back.

The next question is from Sam Bland at JPMorgan.

I've got 2 questions, please. The first one is on these contracted rates. Can you just -- I think you said on the call, but I missed it, what proportion of your volume is now on contracted rates. And I think you also said that those contracts, in some cases, were moving up by several hundred dollars a TEU. Did I hear that right? And I guess some people in the market have been talking about maybe a 20% or 30% increase in contracted rates. That maybe points to a higher level of increase. Just -- are we right to think that? And then if I look at the order book -- yes, I can do them in turn.

No. You can go ahead.

Yes. All right. And the second question is, we've seen that increase in the order book. I appreciate those ships don't get delivered until 2023 generally. Does that sort of automatically mean that 2023 is a more difficult year in terms of profitability? Or are there levers and offsets that can be pulled to kind of smooth the impact of those ships getting delivered in '23?

First, on the contracted rates, I think about 35% of our portfolio is on the contract because that was your first question. Then I think in terms of what are the increases, I mean, I would say it's between several hundred dollars and even significantly more. So the percentage that you quoted are not necessarily off and also roughly in line with what we also see. In terms of the order book, the order book is going up right now. That could result in a little spike in ships being delivered somewhere in '23 or '24. We have to see how that in the end turns out because you typically still see a lot of things shipping. People may still decide to postpone or accelerate some deliveries. I think it's too early to say whether that will give some disruption in the market at some point in time. It depends also on how strong the market is at that point. For me, these type of things always like -- look at the bigger picture. The bigger picture is how big is the order book, also compared to shipments that need to be taken out because we have a lot of ships mean time that by the time we get to '23, '24, '25 are 25 years old. And that means that they also, slowly but steadily, need to be scrapped. So the scrapping rate will also go up. And we can argue about how quickly it will go up. But the scrapping rate will go up. So I mean, if you make a simple calculation, and you say that the order book covers about 2.5 years of growth, yes -- or sorry, 2.5 years of deliveries, and you assume 3% growth for a year, which is probably not unrealistic today, then you need already 7.5%. But you need to add to that what you're going to see us scrapping in those 2.5 years, which, on average, should be about 4%, yes? Maybe it's a little bit lower this year because we still have a reasonably young fleet, but that is also changing. And that would then be another 10%. So in the end, that's also why I've said in a couple of cases that, to me, an order book, that's in the end between, say, 14% and 17% or so is actually quite reasonable, yes? Because that assumes a scrapping of 4% and then a growth of 2% or 3% each year. So that's probably not that far off. And we shouldn't forget that at some stage, the number of ships that's going to be scrapped is also going to go up also because we need new propulsion types, we have stronger, stricter environmental rules, et cetera, et cetera. So I think we still have quite a lot of CapEx ahead of us. And at the moment, I don't see that -- I think 12% or sort of the order book is today, that is particularly worrying. Even if you may have a couple of months where you then have a few ships too many.

The next question is from Danielle Ward of JPMorgan.

And just a couple left from me. I wondered if you were sticking to your 3x net leverage target? Or would you be revising this given your current position, which is some way below that? And then further on the balance sheet, do you have any plans for either further bond issuance in light of the current market conditions or further redemption of the existing bonds? I know you've just redeemed some of that issue, and your liquidity position is obviously very healthy right now.

I mean maybe a fairly generic answer to it. I think our long-term leverage target throughout the cycle remains unchanged. Of course, we now see a big spike in the market, and that means that if you then look at net debt-to-EBITDA, that really goes down. We believe, though, that over time, a 2.5 to 3x target is still reasonable. And in terms of the bond market, there's probably no company that does not look at the bond market today if they have something out there. But if there is something that we would have to report on that, we would let you know.

The next question is from Frans Hoyer of Handelsbanken.

You've already specified the -- what you expect in terms of EBITDA for Q1 of the current year. And I was wondering if you might give us some idea of -- I mean, given that volumes and rates for the second quarter is, to some extent, to quite a large extent maybe, already locked in, whether you could give us a kind of a ballpark figure for the percentage range for the second quarter on the EBITDA line?

I would also wonder that if I were in your shoes, yes. So I mean we've seen -- I mean, there, we just need to be really cautious. We have seen that the outlook can change within 4 to 6 weeks quite dramatically. And as such, we prefer to give you guidance that we believe we can live up to. And that's why we made some comments on the full year but also told you something about the first half. Right now, I will not lean out of the window and give you guidance for the second quarter as a specific period. I mean, if you would talk to us again after our Q1 release, we'll probably be able to give you a little bit more color to that.

Okay. And when we talk about the second half, the uncertainty factors are certainly there. But where do you see the biggest uncertainty? Is it on the demand side? Or is it more on the supply side of the market?

Yes. I mean there's not a lot of uncertainty. I think on the supply side, we more or less know where we are, yes, because there's not going to be a lot of ships that are going to be built that we don't know between now and the rest of the year. So the supply side, I think, is pretty clear. I think there's 2 main uncertainties. One is, of course, demand. And demand has surprised us quite a few times over the last 12 months. So it would be naive to be fairly certain that that's not going to happen over -- not even once over the next 12 months. And the other one is cost. I mean we also see that there's a lot of upward pressure on -- in various cost categories that people don't look at all that much. But I mean I already mentioned bunker cost. I already mentioned charter rates. We do have to carry at the moment also significantly more containers. We do see tighter -- tight supply on the trucking side in many markets. So I think those are the things that make us remain very cautious when it is around the second half of the year. And that's also why -- and it's our responsibility to make sure that the company is going to be well positioned also in the second half year and also next year, both in a scenario where the market is very strong but also in a scenario where the market is less strong.

Okay. Final question: might you offer, I guess, how much capacity has been tied up by congestion or is currently tied up by congestion and will be released from congestion back into the market in the second half?

All right. It's a very good question. We were actually debating something similar here ourselves earlier today because it's actually something which is quite difficult to estimate. But we are certainly talking about a fair number of ships. And to give you a bit of a flavor, I mean, if we look at the Transpacific trades that we talked about a lot, if you want to offer a weekly service, as you normally do, then today, you, for every service, need 1 or 2 ships extra. So if you add that all up across the various alliances, you add up with a fair number of ships that should come available later on in the year.

The next question is from the line of Murtaza Jameel of CQS.

Congrats a very good year of results. My question is ESG-related. So you mentioned earlier in the call that you've spent significant amounts of cash on dual-fuel initiatives, which is fantastic. Are you looking at other sources as well? You had mentioned it but not really the details of the sources. So I was thinking along the lines of ammonia and methanol and then maybe hydrogen as well in terms of R&D there.

I mean, no. I mean, we, for the time being, have put most of our efforts on LNG, where I think you may know that we converted one ship that was formerly from UASC, which was called LNG-ready. That was a good attempt, but in the end, turned out to be very, very expensive. So it's good that we did a pilot before we commissioned anything more. We've been testing biofuels, as many others have been doing as well. And then, of course, we have commissioned newbuilds on LNG. We are not very actively looking into ammonia or hydrogen at this point in time because that's -- we are not the ones that need to develop that technology. And we are also too small to do it on our own. We follow it closely, but we think it's still several years out before that will be a viable alternative, especially for the bigger ships. I think it's going to be possible for smaller ships and feeder ships to go to different types of fuel earlier. And I think the number of options you have there will increase quite significantly over the upcoming couple of the upcoming years. For big ships, I think it's still further out.

That's helpful. And forgive me if you reported on this number already, but do you have a CapEx number in mind for what I would call maybe ESG initiatives along this line?

No. We don't have a specific number. But still to give you a little bit of a flavor on the conversion we did on the -- on one of the ships, in the end, cost us about $35 million. That was clearly too much, yes. So the ability to do something on that front in -- when it's around conversion is probably limited based on what we see right now. And that means that in the end, your investment will very much be around new propulsion types for both new -- newer, either charter or own ships. And that will be something that will come over the upcoming 5, 10, 15 years, but the extra cost that it will bring is impossible to estimate at this point in time.

And we have a follow-up question from Adrian Pehl of Commerzbank.

Sorry, I've got 3 actually, hopefully, some quick ones. So coming back a little bit on the topic, container availability versus vessel shortage, if you want. So isn't it the case that if you today would put a new vessel into the market, that would have not have a big effect because it's actually containers that are not available? And should we look at that as the most dominant factor for, let's say, whatever kind of freight rates, spot development going forward? And a question a little bit linked to that is, do you see actually shippers trying to de-containerize their goods to circumvent, let's say, the high freight rate environment? And to what extent is this possible? And then again, on the rates, I mean you've -- we've just discussed a little bit some congestion on the East Coast side of things. So in general, when you said that actually there are several hundreds of U.S. dollars contract rates going up, were you referring to, in particular, just the trades that are pretty hard at the moment? Or should we also factor in, let's say, much higher freight rates throughout the course of the year on the Atlantic side -- or with customers, I should probably say, on the Atlantic side and on Lat Am. I mean Lat Am is clearly reefers, but there's probably also some nonreefer portion in there. And then a fairly quick one on unit cost nonbunker. I mean, obviously, they have gone up. And I think it should be clear where it is coming from in Q4. Is actually the unit cost topic, is that deteriorating somewhat in Q1, H1, '21? And then you see also some easing, obviously, on that side when, let's say, the demand cools off a little bit.

Yes. Maybe taking them from top to bottom -- from bottom to top, sorry. Start with the unit cost. I think we will indeed see an increase in unit cost in the beginning of this year, yes. That's also a little bit seasonal to be fair because you normally see that going up anyway a bit around about Chinese New Year. But this year is a little bit unusual. I still expect it to go up a bit. That should be a single-digit percentage though, yes. When you look at rates, rates that I commented on are definitely up on the east -- on the main East-West trades, being the Transpacific and the Far East trade. You are right. It's significantly less, at least till now on the Atlantic, even if we see some traction rates there as well. On a number of the North-South trades, we have also seen increases but tend to be a little bit less. We've not seen a lot of people de-containerize things, probably a little bit here and there. We have seen some commodities that have been moving less because the rates are so high. And that's also why I believe that in the long run, it is important that containers -- that the cost for containerized transport remains competitive, yes? And right now, we see a big spike in the market, but that's also the reason why it needs to normalize because in the end, otherwise, it's going to have an impact on the total amount of boxes that is being transported. So I think that's in everybody's interest. And then container availability or ship availability, I think the container availability was a real issue in the fourth quarter. Containers are still tight. But the number of stock-outs that we see or the number of times that we cannot ship because we have no boxes available, it's very significantly down compared to 2 or 3 months ago. So I think we're getting ourselves out of that also because the factories are producing a lot of boxes and people are taking in boxes. So I don't think that's going to be a big issue anymore in a few months from today also because the congestion will ease. And that will also mean that we get more boxes back again. So I do think that it's the combination of things. It's the terminals, the boxes and the ships. But right now, I would not rate the boxes as the highest problem.

And this was the last question today. Please direct any further questions to the Investor Relations team. I hand the conference call back over to Rolf Habben Jansen for any closing comments.

Yes. Not much to add from our side. Let's say thank you for a lively and interactive session, yes. We spent a full hour, so that's good. And I hope it was informative for you. And then we'd say bye-bye. And yes, take care and stay healthy.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.