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Edited Transcript of HHFA.DE earnings conference call or presentation 14-Aug-19 1:00pm GMT

Q2 2019 Hamburger Hafen und Logistik AG Earnings Call

Hamburg Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Hamburger Hafen und Logistik AG earnings conference call or presentation Wednesday, August 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angela Titzrath

Hamburger Hafen und Logistik Aktiengesellschaft - Chairwoman of the Executive Board

* Roland Lappin

Hamburger Hafen und Logistik Aktiengesellschaft - CFO & Member of Executive Board

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Conference Call Participants

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* Adrian Pehl

Commerzbank AG, Research Division - Head of TMT and Consumer

* Zaki Hasan

Drewry Financial Research Services Limited - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to HHLA's analyst conference call on the first half 2019 results. All comments will refer to a set of charts available since this morning in the IR section of HHLA's website. (Operator Instructions)

HHLA is represented by Angela Titzrath, CEO; Dr. Roland Lappin, CFO; and Stefanie Steiner, Head of Investor Relations. I would now like to turn the conference over to Angela Titzrath, CEO. Please go ahead, madam.

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Angela Titzrath, Hamburger Hafen und Logistik Aktiengesellschaft - Chairwoman of the Executive Board [2]

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Thank you. Ladies and gentlemen, since we last spoke in May, times have become more turbulent. Growing geopolitical and economic tensions caused rising uncertainty in the economy and among customers. The purchasing manager indices for both the eurozone and Germany are declining. Consumer confidence in Germany has also been declining since March, despite the fact that economists still expect economic growth. In such unstable environment, it is crucial to stay focused on our goals, short term and long term.

With regards to the short-term goals, HHLA is on track to achieve its 2019 financial targets. After a successful start to the year, we continued to grow revenues and EBIT throughout the first half year. Against this backdrop, we reiterate our guidance of a stable business trend and a significant increase in the operating results. To achieve our long-term targets and secure future viability, we continue to invest in equipment and technology. To give you an example, we started to dismantle 3 gantry cranes at the Container Terminal Burchardkai in order to replace them with gantry cranes of the latest generation. This will allow us to serve mega-carriers at an additional berth.

We have repeatedly stated that we assume responsibility for the environment. Following the certification of our terminal Altenwerder as climate-neutral company in March, we are now going on one step further. We will soon be offering a product that can guarantee the carbon-neutral handling of our customers' goods and also their carbon-neutral on board transport of our [real] subsidiary, Metrans. As the gateway to the future, we want to combine economic success and ecological responsibility.

Let us now focus on the economic side. On the business environment first. In light of the ongoing trade disputes between the USA and China, the global economy remained subdued in the first half of 2019, especially the global trade reflected the tensions on the market and grew more slowly. This weaker growth was particularly evident in the emerging Asian markets. As a consequence, the sector is growing more slowly than in 2018. As anticipated by the market research institute Drewry, growth in global containers throughput weakened markedly in the first half of 2019. However, Drewry expects that the first quarter will be the worst in 2019, and the forecast is moderate increase in global container throughput for the second quarter. Compared to the first quarter, however, the outlook has brightened slightly, and we are still talking about growth in the industry.

As the sectors of uncertainty are becoming more numerous, apart from the trade conflict, I'm also thinking of the never-ending Brexit story or the rising tensions in the Middle East. It is particularly important to stay focused. We will not lose sight of our aims but follow our strategic path and adjust our strategy where necessary. In the first half of 2019, this paid off and HHLA achieved encouraging key figures. My colleague, Dr. Roland Lappin, will lead you through the details in a second just 1 or 2 remarks before from my side.

All segments, Container, Intermodal and Logistics, contributed to the strong revenue growth of almost 10%. The EBIT increase was even more pronounced. Even if we disregard the effect from the new accounting standard IFRS 16, our results were pleasing for us as a management and for you as a CFO, Roland. Am I right?

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Roland Lappin, Hamburger Hafen und Logistik Aktiengesellschaft - CFO & Member of Executive Board [3]

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Yes. You are, Angela. And this is due to the fact that our operating units did a very good job. Container throughput grew at least in our international operations. In Hamburg, we are seeing the effects of changes in liner services structures, which were overall slightly positive. Even though Asian traffic was virtually on par with the previous year, a steady state after the reshuffling of the shipping alliances in 2017 has not been reached yet. Container transport is continuing at full speed. Both rail and road transportation contributed to the strong increase.

From boxes to euros now, starting with the Container segment. Increase in throughput volume combined with an improvement in average revenue per TEU led to a marked rise in revenue in the first 6 months of 2019. This was caused by contractual rate adjustments and an increase in the rail share. OpEx were impacted by 3 main effects: our terminal in Tallinn has been consolidated since the second half of 2018; then we temporarily increased personnel deployment as a result of the launch of the new terminal software; and finally, the conversion of the company pension scheme. The initial application of IFRS 16 led to a slight improvement, though. EBIT increased by EUR 3.6 million year-on-year to EUR 71.8 million. EUR 5.2 million of this development is attributable to the application of IFRS 16. We have to control costs more strictly and stay focused on the OpEx development.

In the Intermodal segment, volumes are growing and costs are well under control. Revenue development outpaced transport volume growth. Besides the consistently high rail share and rising volumes, price adjustments and longer transport distances led to this strong increase. OpEx rose at a slower pace with virtually no effect from IFRS 16. At EBIT level, higher volumes, better average revenue and higher utilization of the train systems contributed positively. The IFRS 16 effect is negligible. So we achieved an outstanding EBIT margin of more than 20% again. We will work hard to maintain this performance level.

Our Logistics segment continued the good development of the first quarter. Revenue increased significantly, mainly driven by vehicle logistics and our consulting activities. Thanks to strict costs control, EBIT exceeded the prior year figure by far. IFRS played a negligible role here. At-equity earnings fell to EUR 2.1 million. This was largely due to the burden of earnings from bulk materials handling resulting from the initial application of IFRS 16.

Coming back to the Port Logistics subgroup as a whole. In our earnings bridge, the main changes were seen in net financial expenses and taxes. Taxes increased due to the higher profits, while the tax rate was slightly above previous year's level and in line with expectations. With regards to net financial expenses, IFRS 16 was the driver. As the impact from the interest expense related to lease liabilities is front-loaded, the impact should reduce over time.

In total, net profit for our shareholders rose by more than 5%, leading to an EPS of 71% -- EUR 0.71 for the first half of 2019.

Last but not least, we briefly come to the cash flows. It's no surprise that the positive EBIT development fueled our operating cash flow. This was due to the comparatively low increase in trade receivables and current financial assets as well as to the higher increase in trade liabilities. Our investing activities were characterized by an ongoing CapEx program. In addition, we deposited some liquidity short term. Financing cash flow last year was denominated by the payment for the remaining stake in Metrans. This year, we recorded higher payments for the necessary redemption of lease liabilities due to IFRS 16.

In total, our financial funds stood at a comfortable EUR 119 million as of the reporting date.

And with that, I would like to hand back to you, Angela.

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Angela Titzrath, Hamburger Hafen und Logistik Aktiengesellschaft - Chairwoman of the Executive Board [4]

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Thank you, Roland. Ladies and gentlemen, the expectations for the macro side have changed little since we spoke in mid-May. In its July outlook for 2019, the IMF largely stood by the GDP forecast it made at the beginning of the year. But as a result of further escalations and the trade conflict between the USA and China, the exports lowered their 2019 outlook for global trade growth by 0.9 percentage points to 2.5%. In April, the panel had already downgraded its outlook by 0.6 percentage points.

For the sector, Drewry has made noticeable adjustments to its sector outlook for certain shipping regions compared to the beginning of the year. While they downgraded forecast for global containers throughput, the outlook for throughput in the European shipping region, however, has brightened. Based on this assessment of the environment and the good results achieved in the first half of this year, we confirm our guidance. We expect further slight increases in container throughput as well as in container transport. This should lead to a slight increase in revenue, too. We expect our EBIT to rise significantly again, mainly triggered by the IFRS changes. Our segments are expected to develop differently. We anticipate stable EBIT in the Container segment and the continuation of the growth path in our Intermodal segment. We will pursue our investment program and expect to spend around EUR 200 million on the investments in 2019, mainly in the Container and Intermodal segment.

I would like to thank you for your attention, and we look forward to your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Adrian Pehl from Commerzbank.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [2]

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2, 3 question from my side. Well, first of all starting again with the outlook for the second half. I mean, although, I may be running a risk asking the same question from Q1 again, it's a little bit wide. [Haven't you been] a bit more concrete on the outlook, given that H1 has been very solid, in fact providing probably some cushion for the rest of the year? And more concrete or linked to this, what do you see going into the Q3 peak season in terms of volume development? And how good is your visibility then, obviously, beyond this?

The second question is linked to the margin you exhibited in Container in the second quarter, which you're referring to higher personnel expenses, partly due to some shipping delays, as I saw it in the summary. I was just wondering whether you could be a little bit more elaborating on this effect because I'm trying to figure out how much of it is sticky and should stay within the second half of 2019, and how much of it might drop off? And the last question from my side is a bit of housekeeping question on IFRS 16. As I was just wondering whether the CapEx outlook that you gave, however, obviously unchanged, nevertheless contained some CapEx we should take into account for rights of use under IFRS 16?

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Roland Lappin, Hamburger Hafen und Logistik Aktiengesellschaft - CFO & Member of Executive Board [3]

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Starting with your first question, I give you some guidance how to read or confirm CapEx. Of course, you might treat it a little bit cautious, but given the limited visibility on the development going forward, I think it's worthwhile to outline that we stick to our guidance given for the full year from today's point of view, and we do not see any reason why to adjust it. And we'll leave it for you to assess it, realistic, cautious or whatever that this is a management [command] on how to read the guidance given for the full year.

The second question was with regard to whether we foresee any peak season ahead of us. To be frank, for the time being, we command only the H1 development, and to be frank, the peak season has just started so it's even too early to comment on the development going forward. But it's factored into our full year's guidance satisfactorily. And the third question was with regard to some background on the personnel cost development. I think there are 3 main aspects that impacted the personnel cost development in the first half. One aspect is a technical thing. For the first time, we consolidated the personnel expenses of our acquisition in Tallinn. The second aspect is with regard to personnel cost development in the Intermodal segment, given the strong volume increase and, of course, the personnel costs follow this development. And not to forget that the personnel costs as such in the CEE corridor have started to catch up with the development and the level we have in more western-located areas, especially with regard to the qualified people so dynamics are, in principle, a bit higher. But as we kept the margin above 20%, I think it's nothing to be concerned about, but just to give you some background on the total cost development in terms of personnel costs. And the third aspect I mentioned with regard to the Container segment. As we are in a phase of transition by replacing the terminal system, of course we had to deploy more and more headcount for the time being just to complete this transition, and we have started with that in the second half. So temporarily our personnel headcount in the Container segment will be affected by this transition. So if you add up all the 3 things, and I might address a fourth one as well to -- to a certain extent, the service cost of the pension scheme are affected by the changes by the extreme low interest cost development as well. So this is a little bit background on the personnel cost, but nothing to worry about.

The last question was with regard to the CapEx development that included right of use. According to IFRS 16, since 2019, and if I understood your question right, you asked whether we have factored in these aspects when we guided for the full year, and the answer would be yes.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [4]

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Can I follow up on these elements in terms of quantification? So how much of that is baked into your CapEx guidance, firstly? And secondly, coming back on the personnel expenses that you mentioned, could you also provide a figure for the pension service cost, on one hand, that affected? And secondly on -- and in particular, on this transition you mentioned in terms of upgrading the cables, i.e., the cranes, how much is that?

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Roland Lappin, Hamburger Hafen und Logistik Aktiengesellschaft - CFO & Member of Executive Board [5]

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Okay. Starting with the first question. I think it's recorded in the interim report, the right-of-use accounts for approximately EUR 40 million, just to give you an idea -- in that range because the underlying business was a tender that was not decided at the time when we guided you for the full year. So we had certain assumptions, but I won't disclose this detail -- just to give you an idea where we are.

With regard to breakdown of the personnel cost development as a rough split, I would say, assume 20% to 25% of the initial consolidation of TK and Tallinn. And the remaining 75% to 80%, I guess, the bigger portion is Container-related, the smaller one is Intermodal-related. And the impact on the pension scheme with regard to service costs, assume it in the range of 10% of the total cost development year-on-year.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [6]

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But you were referring to the increase, right?

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Roland Lappin, Hamburger Hafen und Logistik Aktiengesellschaft - CFO & Member of Executive Board [7]

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Yes. I'm referring to the incremental increase, yes, [selected] for the development, not for the total cost.

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Angela Titzrath, Hamburger Hafen und Logistik Aktiengesellschaft - Chairwoman of the Executive Board [8]

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But in a nutshell, if the company grows, the personnel cost grows as well.

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Operator [9]

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(Operator Instructions) Next question is from the line of Zaki Hasan from Drewry.

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Zaki Hasan, Drewry Financial Research Services Limited - Analyst [10]

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Just a couple of questions. First one is obviously around Hamburg volumes. My question will be your view on the guidance for 2019 full year and the second half. We have around, what, 2% of growth from 2018 level. Would that be a fair estimate? And just want to get some sense of breakdown of transshipment versus gateway volume. Do you see transshipment incidents increasing at Hamburg, and how do you foresee that business -- side of business in Hamburg, Odessa and Tallinn as well? Third question will be around the guidance on income tax -- income tax rates, and how do see that panning out in 2019?

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Roland Lappin, Hamburger Hafen und Logistik Aktiengesellschaft - CFO & Member of Executive Board [11]

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Well, I would start with your last question. I mean, we guided the market to expect it between 25% and 27% in the current environment, given the current earning -- pretax earnings split in our portfolio, and I think this is still in place.

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Angela Titzrath, Hamburger Hafen und Logistik Aktiengesellschaft - Chairwoman of the Executive Board [12]

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Well, on the growth in Hamburg, I cannot comment because the numbers will be public tomorrow. So you might listen to the publication then tomorrow. But I can comment, obviously, first year -- first half year, Hamburg volumes did grow around 1%. And regarding the question with regards to transshipments, that is obviously -- we have the Elbe dredging itself, which we officially launched just 2 weeks ago with the political minister's support. So this is [a proposal which is just] starting right now.

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Zaki Hasan, Drewry Financial Research Services Limited - Analyst [13]

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Okay. And if I may follow up with just one quick question on the update of the Elbe dredging. And would that be a potential catalyst going forward in the future?

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Angela Titzrath, Hamburger Hafen und Logistik Aktiengesellschaft - Chairwoman of the Executive Board [14]

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Potentially, yes.

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Operator [15]

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There are no further questions at this time, and I would like to hand back to Angela Titzrath for closing comments. Please go ahead.

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Angela Titzrath, Hamburger Hafen und Logistik Aktiengesellschaft - Chairwoman of the Executive Board [16]

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Thank you. Ladies and gentleman, thank you very much for your questions and sustained interest from -- in HHLA. Before you disconnect your lines, I would like to take the opportunity to invite you all to our Capital Markets Day on November 19 in Hamburg. We will send out a save-the-date soon. We look forward to seeing you there personally. One week before, we will be presenting our 9-month figures on November 13. Please do join us on that occasion, too. From now, there is not much more to say then. Enjoy the day and the late summer. Goodbye.

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Operator [17]

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Ladies and gentlemen, this concludes the conference call on the first half 2019 results. Thank you for joining and have a pleasant day. Goodbye.