Hapag-Lloyd Profit Swells Despite Shrinking Volumes

Hapag-Lloyd maintains that despite doused volumes in the second quarter, it has the liquidity and strong earnings to stay well above water.

"After the year got off to a decent start, transport volumes significantly declined in the second quarter as a result of the COVID-19 pandemic. We benefited from the sudden drop in bunker prices, adjusted capacity to lower demand, and took additional cost-cutting measures as part of our performance safeguarding program," CEO Rolf Habben Jansen said in Hapag-Lloyd's earnings release Friday. "On the whole, we have a good first half-year behind us despite the coronavirus crisis." 

Hapag-Lloyd reported earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first half of 2020 of $1.29 billion, up from $1.08 billion during the same period in 2019. The EBITDA margin improved year-over-year from 15.3% to 18.4%.

Earnings before interest and taxes (EBIT) were $563 million, up from $440 million reported in the first six months of 2019. The EBIT margin improved year-over-year from 6.2% to 8%.

Group profit jumped year-over-year to $314 million from $165 million, and Hapag-Lloyd said its free cash flow "was once again very positive" at $1.2 billion. 

The liquidity reserve, which totaled about $1.9 billion at the end of June, "was significantly increased in the first half of the year as active measures were taken to further strengthen the liquidity position as part of the performance safeguarding program," the company said. 

Revenue was down slightly, less than 1% from the prior-year level, coming in at approximately $7 billion. Hapag-Lloyd attributed the decline to a transport volume decrease for the combined first and second quarters of about 4% to roughly 5.75 million twenty-foot equivalent units (TEUs).

The world's fifth-largest container carrier, Germany-headquartered Hapag-Lloyd has a fleet of 239 container ships and a capacity of about 2.6 million TEUs.

"While transport volumes were still slightly increased in the first quarter, the second quarter saw a decline of roughly 11% compared to the prior-year period as a result of the pandemic," Hapag-Lloyd said. 

Hapag-Lloyd said the freight rate during the first half of the year "slightly improved" to an average of $1,104 per TEU from $1,071 in 2019. 

Transportation expenses were down about 4% from the first six months of 2019.

"An average bunker price of $448 per tonne, which is approximately 4% higher than it was in the prior-year period owing to the introduction of the IMO 2020 fuel regulation, was offset by positive effects from a volume-related decline in transport expenses and active cost management resulting from the [performance safeguarding program] measures. In addition, the sharply declining bunker prices in the second quarter had a positive impact on Hapag-Lloyd's earnings," it said.

In his analysis of the earnings report, Frode Morkedal, the managing director of equity research for Clarksons Platou Securities, said, "Part of the beat is lower costs, which are probably nonrecurring, such as transport expenses for pending voyages and bunker prices being around [$142 million] lower than expected.

"Some of these positive drivers will likely reverse in 3Q, as higher bunker prices add directly to transport expenses at the same time as bunker surcharges … come down," Morkedal said. "That is probably partly why they have reiterated the full-year guidance despite the 2Q outperformance."

Hapag-Lloyd indeed is standing by its full-year forecast of 2020 EBITDA of $2 billion to $2.6 billion and EBIT of $581 million to $1.1 billion.

"Given the COVID-19 pandemic and the economic repercussions it has had in many parts of the world, the forecast will remain subject to considerable uncertainty," Hapag-Lloyd said in Friday's release. "In addition to the development of transport volumes, the development of freight rates and a further potential increase in bunker prices in particular should have a significant impact on Hapag-Lloyd's results in the second half of the 2020 financial year."

Morkedal agreed with Hapag-Lloyd's assessment. "The company does note that the full-year guidance is based on the premise of a gradual recovery of the global economy in the second half, which we think is reasonable despite a resurgence of COVID-19," he said. 

"Overall we are encouraged by the recent trend in the container ship market with freight rates held high despite liner companies taking back more ship capacity from the idle pool, an indication that trade is recovering," Morkedal said. 

Despite signs of an economic recovery, Hapag-Lloyd's performance safeguarding program will remain in place.

"Thanks to the wide range of measures we have introduced in recent months, we are still on track," Jansen said. "Our focus will remain on the safety and health of our employees, but naturally also on safeguarding the supply chains of our customers worldwide.

"We will continue to advance our performance safeguarding program and to implement our Strategy 2023. While doing so, we will keep a close eye on the future course of the COVID-19 pandemic and flexibly react to market changes," he said. "On the whole, the pandemic is and will remain a major source of uncertainty for the entire logistics industry." 

Cost-cutting measures taken earlier this year are helping Hapag-Lloyd's bottom line as well. 

Jansen announced in early May that the company was slashing costs by a "middle-three-digit million-dollar number" in reaction to the economic harm caused by the COVID-19 pandemic.

Jansen said then that in addition to blank sailings, "we're also restructuring services to mitigate costs and taking a whole variety of other measures as well. One of the ones that's been most public is, for example, trying to avoid the Suez Canal in some cases."

Hapag-Lloyd also this year launched a series of "quality promises," including fast booking response, timely and correct bills of lading, and accurate invoicing. In July, it rolled out its "loaded as booked" promise.

Hapag-Lloyd promising cargo loaded as booked

Higher costs hurt Hapag-Lloyd more than coronavirus in Q1

Hapag-Lloyd cutting costs while riding out pandemic

Click for more American Shipper/FreightWaves stories by Senior Editor Kim Link-Wills.

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