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Edited Transcript of HLAG.DE earnings conference call or presentation 7-Aug-19 9:00am GMT

Half Year 2019 Hapag Lloyd AG Earnings Call

HAMBURG Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Hapag Lloyd AG earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nicolás Burr

Hapag-Lloyd Aktiengesellschaft - CFO & Member of Executive Board

* Rolf Habben Jansen

Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO

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Conference Call Participants

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* Adrian Pehl

Commerzbank AG, Research Division - Head of TMT and Consumer

* Christian Cohrs

Warburg Research GmbH - Analyst

* Clark McPherson;Pictet Asset Management;Analyst

* Dan Togo Jensen

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Danielle Ward

JP Morgan Chase & Co, Research Division - Analyst

* David Kerstens

Jefferies LLC, Research Division - Equity Analyst

* Frans Hoyer

Handelsbanken Capital Markets AB, Research Division - Analyst

* Parash Jain

HSBC, Research Division - Head of Transport Research, Asia-Pacific

* Robert John Joynson

Exane BNP Paribas, Research Division - Senior Transport Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I am Hailey, your Chorus Call operator. Welcome, and thank you for joining the Hapag-Lloyd analysts and investors conference call on the first half year results 2019.

Hapag-Lloyd is represented by Rolf Habben Jansen, CEO; and Nicolás Burr, CFO; Heiko Hoffmann, Head of Investor Relations; as well as Anna Neumark from the Investor Relations team. (Operator Instructions)

I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [2]

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Thank you very much, and thanks, everybody, for taking the time to join us on this call. We have prepared, as usual, an H1 presentation, which Nicolás and I will take you through. And then, of course, we'll be happy to take any questions you may have after that.

Maybe a couple of, first, opening remarks. I think when we look back on the first half year, I would say it has been a pretty good half year, where we have been able to significantly improve the results. We have also made some tangible further steps to implement our strategy towards 2023. Freight rates have been up around 5% and volume has been up about 2%. And we've been able to keep costs more or less stable.

If you look at the market, I would say there's clearly some clouds on the horizon, maybe a few more than what we saw some months back. But on the other hand, when we look at the data that are coming out, then the basic trends of volumes continuing to grow is still intact. Order book is at a record-low level with very few orders being placed in the first half of this year. And then, of course, everybody is preparing for IMO 2020.

If we look at the numbers as such, clearly better group profit with $165 million versus a loss last year, a good free cash flow. And I think also worthwhile mentioning that we did achieve the leverage target that we have set ourselves, which is net debt over EBITDA of 3.5. And then looking ahead, we will continue to focus on our strategy. And of course, we'll do whatever we can to further improve our results and prepare also towards IMO 2020.

Looking a little bit more into what's the substance of the things that we've done in the first half here apart from the numbers, we've continued the work with cost management. As you know, we announced that we are going to work on a program to take out another $350 million to $400 million until 2021. And that program is on track. We have a couple of new services that are going to help us to boost our presence in some of what we would call the attractive markets, looking at Southeast India and also some parts of Africa. To boost our presence in the reefer segment, we've announced another investment in those boxes, which is I think the biggest we've done so far. And to underline our commitment to reduce our debt, we have paid back one of our bonds early, the last part of it in June.

When you look at the cost management program, we already identified and presented to you the various boxes that we have there, some in the network, some around container steering, also around collaboration with our partners and terminal partnering and, of course, also on procurement. If you look at where we are, we have implemented what we had planned in 2019. For the first 6 months, we are roughly on track or maybe slightly ahead of what we had planned. And we do plan to see some more going into 2020 and also into 2021.

When we look at the financial numbers, and Nicolás will say quite a bit more about that in a minute. When we look at transport volume, that's up around 2%. If you look at a little bit deeper into that there, we see actually that in Intra-Asia, our volumes have been down. In the rest of the long-haul trades, we are up around 3.5% or a little bit more than that. Transport expenses, roughly flat. Certainly, if you correct it for bunker, freight rate up around 5%.

EBIT, $440 million compared to slightly over $100 million last year, so very clear improvement. Same goes for the group profit and also EBITDA is up significantly, although, of course, especially there, we have a bit of an impact of IFRS 16. Nicolás will share the numbers with you a bit later. Equity, stable; liquidity reserves, solid; net debt, down. Although net debt, down, if you would look at it on a like-for-like basis compared to 6 months ago, of course, if you take IFRS 16 into account, it's up somewhat.

If you look at the market, I would say there is definitely -- growth is slower this year than it was last year. We also see that in all of the forecasts that are being published that they tend to be taken down a little bit. Having said that, we don't see any signals that the market is really falling apart. I saw this morning that Alphaliner issued also a more or less unchanged outlook from their end for 2019. And I would also say that the trend is still intact. And what we will see in the second half year compared to last year remains to be seen. But right now, we see a market that is actually reasonably stable.

In that context, of course, the order book also remains important. Today, we have an order book of only 10%, which is one of the lowest we have seen both in absolute terms but also in relative terms for a very long time. Very few new orders being placed and an idle fleet being also at a very low level of somewhat around 2%, which on a historical basis is very low, certainly if you also take into account that some ships are being taken out at this point in time to install scrubbers and the like.

Then when we look at the other side of it, vessel deliveries, certainly some still scheduled this year and also next year. If we look at net capacity growth, we estimate it this year to be around about 3%, so more or less in line with what we see on the market growth. That's pretty much similar with what we also expect in the years to come. But of course, scrapping today is still at a very low level at -- below 2%, which is definitely a level which mid-term is not sustainable.

And therefore, I believe that the graph that you see on Page 8 on the right-hand bottom that the market will remain stable or market environment may even still improve a little bit in the years to come, that still -- I think that outlook still remains valid even if the outlook for global growth is somewhat subdued. But those things always need to be somehow seen in parallel. And as long as the order book remains slow, that gives us some protection through the downside.

That then brings us to our numbers. And for that, I will hand it over to Nicolás, who will take us through.

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Nicolás Burr, Hapag-Lloyd Aktiengesellschaft - CFO & Member of Executive Board [3]

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Thank you, Rolf, and good morning, everybody. So as Rolf commented, volume is up 2%. So freight rates going up 5% compared to last year. And that's the reason why you see our revenue going up or increasing $470 million, which is basically 7% up. Bunker is also up compared to last year at a level of 11% higher. But the ex bunker rate is still high due to the fact that the nominal rate also increased significantly.

In a nutshell, when you look at the EBIT of the company, which is basically slightly affected positively by IFRS 16 by an amount of $15 million, we have an important improvement of $330 million compared to last year, when you look at the first half. And this is explained mainly by a better ex bunker rate and better higher volumes. Basically, 2/3 or 1/3 is the explanation, respectively. When you look at the return on invested capital, also a significant and material improvement compared to last year, 5.9% or around 6% compared to only 1.3% last year and approaching rapidly to the WACC or the return in our cost of capital, which is something that we all seem to like.

When you look at the results of the company compared -- and what is the impact of IFRS 16, you see an improvement, an important improvement in EBITDA of $563 million as you see there. Out of that, $245 million is due to the first implementation of IFRS 16. So the real improvement is around $318 million, still over 60% improvement compared to last year. When you see the EBIT difference, as I just commented, $330 million. When you look at the difference or the positive impact of IFRS 16, you see $15 million improvement. So the real difference, apples with apples, it's $315 million, still very good.

And on the group profit, you see a difference of $287 million. But we have in this case a negative effect from IFRS 16. So in this case, we will have implemented that standard, then the result would have been $21 million higher. Along with that, we have some one-offs related to payments of the bonds that I will explain at the end or perhaps we can leave it for the questions, that will have an impact on the interest result that is also affecting the result of the first half of the year.

When you look at the next slide in the volumes, you see the 2% increase clearly stated there driven basically by Atlantic, Far East and EMAO. I think this is interesting to say here that when you isolate the decline in Intra-Asia, then you see a very nice growth even compared to the one that we had last year or the one that we see in the market. We have a drop basically in the Intra-Asia trade, which is not the focus of the company. But also we experienced a drop in the volumes in the Middle East trades.

When you look at the rates in the next slide, you see a 5% increase in the nominal rate, 11% increase in the bunker, so the ex bunker rate going up around 4% when you do the math. Still a slight improvement, but you will see a leverage of the result of the company when the rates are going slightly up from 1 year to the other.

Going to the unit costs, I think we said -- Rolf commented in the beginning that we had a stable unit cost, even though the bunker went up. Basically, the difference between last year half 1, $1,013 and $1,021 of this year, is explained basically by bunker in a nutshell. As I explained in the first quarter result, we now compare with depreciation in order to basically compare in the same basis after the implementation of IFRS 16.

When you go to the details, $12 per TEU higher on the bunker aside. Handling and haulage improved by $18 per TEU, mainly due to FX but also because we ran less inland due to the fact that we are trying to basically focus on the most profitable movements. And then the idea is to continue improving that percentage in the context of our Strategy 2023 as you know.

Equipment and repositioning is affected by IFRS 16. And therefore, you have to consider the depreciation. The depreciation, a fraction of the gross, related to heightening is around $18 per TEU. Then we have to explain basically compared to last year an increasing cost of around $6 per TEU. And this is basically because of more imbalances that we have had in the United States or North America in general and in Europe.

Vessel and the voyage. When you are correct by IFRS 16, so you basically pick the fraction of the depreciation that corresponds to this item. The cost increased by $13 per TEU. But you don't have to consider the whole amount because we have also an increase in the slotcharter revenue by $9 per TEU. So the real increase is around $4 per TEU. And this is explained mainly because of the higher time charter rate in 2019 compared to 2018. And the increase in the depreciation, of course, is caused by the new standard. So this is the last year in which we compare 2 different standards. And that generates a little bit of a complication, but I think hopefully I could -- I was able to explain it to you or clarify it.

When we go to cash flows, we see here an operating cash flow of around $1 billion, so very good when you look at the cash conversion of 92%. So we are satisfied with that development, a little bit of investment in working capital and some other reclassifications. But that's pretty much normal in an environment in which the rates and the volumes are going up. The investment cash flows is minus $133 million, which is -- and this is composed of fixed assets, $187 million. $146 million out of that is containers and the remaining part is basically vessels and others, maintenance CapEx. And this is compensated by dividends and disposals of assets.

And when you look at the financing cash flow, this is a little bit more active in terms of the movements, $1.1 billion negative due to repayments of debt. So $1.5 billion of repayments compensated by intakes of around $700 million. So we are actively trying to optimize the financial base -- financial liabilities and tried to optimize the interest burden. And that's the reason why we have -- and on top of that, of course, repaying debt in the context of our objective of deleveraging the company.

In the next slide, you see a little bit more of our balance sheet. Fixed assets going up to $15.5 billion. And the explanation is basically right of use in the implementation of IFRS 16. The equity base is basically up because of the profit. But it's compensated by the OCI effects. And pension liabilities and hedge accounting is compensating negatively the profits plus the dividends that we paid during the year, of course.

And the financial debt reflecting the announced deleveraging effort, which is also explained in the next slide, when you see the evolution of our net debt-to-EBITDA. So we are very pleased to announce that we have accomplished our objective of 3.5x, considering the last 12 months. So we are basically on the target. And we expect to continue trying to improve these as we improve our profitability and we accomplish our objectives of Strategy 2023.

With that, I hand it over to Rolf, who will start with the outlook.

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [4]

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Thanks, Nicolás. I think when you look at our outlook, I mean the outlook is essentially unchanged. When we look at our transportation volume, we do expect that to increase slightly. When looking at the full year, we expect the freight rate to also end up somewhat above last year, same goes for the bunker price. And when we look at the ranges that we indicated for EBITDA and EBIT, there, our guidance also remains unchanged. And when looking at the impact that we see from IFRS 16, we still think that remains valid as well.

Maybe a few more words before we open it up for questions. I think one of the things that you will have read is that going forward, HMM will join THE Alliance as a full member as from April 1, 2020. That will certainly help to strengthen THE Alliance competitiveness, especially on the Far East and the TP, which remains -- where they will be joining. I think also worthwhile mentioning here that, that cooperation, the intention is to sign a new agreement that will last for 10 years, which underlines also the commitment that there is from the various partners. And of course, with the order book that HMM has, that will also allow THE Alliance to become even more competitive on those trades.

And that's what we also tried to illustrate it to you here, okay, what is actually the market share that THE Alliance has on the various trades, where you see that Atlantic, we're roughly 1/3 and Transpacific a little bit less than that and 1/4 on the Far East, which shows that the balance between the 3 alliances is actually quite good, which then leads us to my last slide, which is around the targets that we have set ourselves for 2019 and beyond.

Not much change there compared to what we have communicated earlier. Our focus remains to continue to increase profitability and to further deleverage the company. We do want to earn back our weighted average cost of capital. We still have a gap of about 2 percentage points there, so still some work to go. We have IMO 2020 coming towards us rapidly, good progress in the first half year in getting the bunker formulas accepted by our customers as everybody, I think, recognizes that changing the type of fuels we use is the right thing to do, even if that may come with some additional costs. And apart from that, we will continue to implement our Strategy 2023. And in that context, we will also continue to work on developing more and better digitalized solutions for our customers.

I think that sums it up from our end. Hopefully, that gave you a good overview of the first half and a little bit more detail on some of the points that you may want to get some more clarity on. And with that, I will hand it back over to the operator to then take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Robert Joynson of Exane BNP Paribas.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [2]

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A few questions from me. First of all, just in terms of our orders for new vessels. There's been some stories in the trade press recently suggesting that Hapag is considering ordering 6 23,000 TEU vessels, which I guess would make sense, given that there's only currently 6 vessels of that type of size in THE Alliance. So just maybe if you can just kind of talk about various reports in terms of whether they're accurate or otherwise. And then on the leverage, the net debt-to-EBITDA target of 3.5x has now been achieved. So how should we think about gearing looking forward? For example, would you allow the net debt-to-EBITDA to rise above 3.5x again going forward? Or is the plan now to keep it below that level?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [3]

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Okay. Well, thanks. I mean we have read those reports as well. And I think it's also fair to say that it's not, of course -- it's not that Hapag will never order any vessels anymore. But I mean there is no plan right now to order any vessels shortly. So you should certainly not expect any orders from us in 2019. As far as net debt over EBITDA, I think we've always said we first want to achieve this 3.5. I think we're happy that we achieved that. And previously, we've also said that mid-term, we believe that something between 2.5 and 3 would be a good level. That's probably not cast in stone, but I think that's still the direction that you should assume.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [4]

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And if I think about that then, I mean obviously there's no plans to order vessels this year. But maybe that could happen next year. I mean to kind of to keep the net debt-to-EBITDA going forward, could an equity issue be a possibility if you do order new ships maybe next year?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [5]

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That's definitely not likely, no. That's not planned.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [6]

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And just a follow-up question from that, I mean in terms of the free float is down to less than 8% now. I think you mentioned a year or so ago that you're looking at plans to raise the free floats. Could you maybe just comment on that?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [7]

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I mean, to be honest, that is largely outside of our own control. We, of course, would like the free float to be little bit higher than where it is today. And that remains our objective. But to be honest, we don't control that. And as I said, not much more to say to that.

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Operator [8]

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The next question comes from the line of Frans Hoyer of Handelsbanken.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [9]

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I have 2 questions. One, regarding the mt repositioning costs that you show in your Slide 13. I think it was a headwind of $12 million year-on-year in the first half after being a headwind in the first quarter of $15 million. That suggests to me that this headwind has died down in the second quarter. Would that be right?

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Nicolás Burr, Hapag-Lloyd Aktiengesellschaft - CFO & Member of Executive Board [10]

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I think -- I mean the -- so the way to look at is basically considering the costs of -- related to that mt repositioning, I think that's in the depreciation. So that's important to consider. I think that the extra costs that we have had in the first half is pretty similar in Q1 and Q2. There is no difference. We expect to improve and to get a little bit more balance this situation in the second half of the year. We're working actively to achieve that. But there is no difference -- material difference between Q1 and Q2 on that.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [11]

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Understood. Secondly, you talk about scrapping and the low levels of scrapping are unsustainable. And I'm thinking about -- I mean normally scrapping is not such fantastic news because it is dependent on rates being poor. That is what normally persuades owners to scrap their vessels. But in the context of IMO 2020, are you seeing IMO 2020 and the sharply higher fuel costs affecting perhaps more of the older vessels? And how do you see that play out?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [12]

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Yes. I think, first of all, when you look at scrapping, the normal percentage of scrapping, if you assume that people use ships, on average, for about 25 years, then the normal average, long-term percentage you could see should be around about 4%. So that's why I'm also saying if we're sub-2%, then that's very, very low. And as far as IMO 2020 is concerned, I think you are right is that the older vessels that are getting to 20, 20-plus years, on the one hand, they will face significantly higher operating costs as they tend to be rather fuel inefficient anyway.

So it would not be illogical to see more of those ships being sent to the scrapyards over the upcoming couple of years. Whether all of that will happen in 2020 or whether that will come to '21 or '22, I mean that remains to be seen. But it's quite clear to us that, that percentage is going to come up. And that's also why I believe that the balance between order book and demand is actually right now fairly healthy because certainly, the estimates on scrapping are very much on the low end and also going to see idle fleet is very, very low these days.

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Operator [13]

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The next question is from the line of David Kerstens of Jefferies.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [14]

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Question on the volume development. I appreciate the comment about the weakness in Intra-Asia. Maybe a quick question, can you explain why that was so weak in the second quarter? And do you see that you're actually benefiting on other trade lanes from the trade restrictions on the Transpacific? I think Alphaliner said that container imports in the U.S. hasn't really changed and that exports from China were compensated by trade lanes elsewhere. Is that an effect that you're also seeing, implying that you're actually a beneficiary from the trade restrictions at the moment?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [15]

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No, I mean, first of all, about Intra-Asia, I think the fact that we are down in our Intra-Asia traffic is not necessarily an indication that the overall trade is down. I mean we have just reduced our exposure to some markets where we could not make money. And as such, you see lower volumes there. If you look at the other trades then, as Nicolás already mentioned, I think we on average see fairly healthy trends with, I don't know, 3.5%-plus or so on average. You can look at the details up in the investor report. So all in all, most of the long haul seemed to be okay. Intra-Asia has been down, but that's mainly because of a decision that we took ourselves to reduce our exposure to some loss-keeping business. So I don't think you should read too much into that.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [16]

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How large was the effect on Intra-Asia? How much was deliberately reduced?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [17]

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I mean I think if you look at the numbers we showed, I believe about 85,000 TEUs or something like that, that we are down. And I mean that is pretty much 100% deliberate because we simply reduced the amount of capacity that we deployed on the number of trades where we could not make money.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [18]

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And what about the exceptionally strong performance on Asia, Europe and the Transatlantic? It's much better than what we've seen in recent years. What's driving that in your view?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [19]

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You should not overvalue this also because we still talk about single-digit numbers that we have been growing. I think we've -- on the Atlantic -- especially from the U.S. to Europe, we have seen a very good development. And I'd say that if you look at Asia, Europe, that's a good development. But that's also on the back of a relatively weak 2018, where we did not see very good development. So I think the challenge with all these numbers is that -- and I understand that also that everybody tries to draw a lot of conclusions on this when you look at it on a quarter-by-quarter or month-by-month basis.

But you have to look at this longer term. I mean if you just look at some of the uncertainty that there is right now in the -- because of geopolitical things, I mean you can be sure that some people will be somewhat reluctant to put their orders out now. That does not mean that global trades will go down a lot. But that may still mean that you have 1 or 2 months where things are a little bit sluggish. And then afterwards, people need to build up inventory again and then you'll see a rebound. So we tend to look more at 12- or 24-month trends. And those are really not -- certainly not falling off a cliff by any stretch of the imagination.

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Operator [20]

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The next question is from Adrian Pehl of Commerzbank.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [21]

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Just 3 questions from my side. First of all, sorry to bother again on the route mix. However, nevertheless, it really seems like that you were able to, let's say, increase your exposure obviously to routes that are more attractive on freight rates. And I was just wondering, I mean clearly, it is easier to take away some capacity on markets you don't want to be. But on the other hand, you need to be sure that you can fill that freed-up capacity in other markets. And that worked well in Q1 and Q2. I was just wondering whether you could continue with that. And how long maybe does it take you or support you going forward?

And the second question is a little bit linked to -- a little bit different view on your cost items. I recognize that obviously on the personnel side of things, you still have some nice, in U.S. dollar terms, year-on-year declines that seems to fade out a little bit, but nevertheless, that picture is continuing on other operating expenses, which is roughly in the ballpark of $80 million. That's coming down nicely again. And also here, a little bit the question, what should we think of these positions going forward, given that you should have realized most of the UASC synergies already? And the last question is probably a little bit more general going into the peak season. Maybe you could share your view that you have currently on how the peak season should evolve for you in terms both of volumes and rates.

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [22]

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Okay. Maybe, I mean, as far as it's around route mix, I don't think actually we made that many changes there. I think the main change we made was reduce our exposure to some of the loss-keeping Intra-Asia markets. Apart from that, we've not done any major redeployment of capacity. And I would say that whether something grows at 3% or 5% or 6% on a 6-month basis, that's not such a material difference. In terms of costs, as we said, we'll continue to work on costs. We have our programs to take more costs out until 2021. That will always remain a focus, not much more specific to be said to that.

Then as far as the peak season is concerned, we certainly do expect a peak season. Last year, we saw a very steep increase in rates from the beginning of late July, beginning of August, I think that, that's a little bit slower this year. If you look at the indices, I still expect a peak season though. But it's always a little bit difficult to judge when it will exactly start and when it will exactly stop. If we look at our bookings that we see at this point in time, there is no reason to be extraordinarily concerned about that.

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Operator [23]

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The next question is from the line of Christian Cohrs of Warburg Research.

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Christian Cohrs, Warburg Research GmbH - Analyst [24]

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First, coming back to the first question, which was related to the potential order of 23,000 vessels, the European port association has just recently issued a paper opposing a further rise in vessel size. So what is your view on that? And do you think also that such a move could be successful? Secondly, regarding potential pulling-forward effects. We have seen that last year when the first round of new customs and tariffs were installed between the U.S. and China. Now more tariffs will kick in. And additionally, we also have cost increase or rate increase due to IMO 2020. Do you expect to see pulling-forward effects also in H2 2019? And lastly, just a housekeeping item, your interest result in Q2 was above the Q1 level. I assume that this is Q2, the early debt redemption. Could you maybe quantify the impact of the special items, including your financial result in Q2?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [25]

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I mean as far maybe first as when it is around the 23,000 TEU vessels, we've always said that going much beyond the size that we see these days to us makes limited sense because the incremental economical benefits of that are very limited. So we don't see a lot of logic on going much beyond the 400 meters that we see these days. Whether in the end what will happen in the political arena, that is not for us, I think, to comment. I would say that because of those declining economical benefits, one would not expect much bigger ships anyway. And of course, there are fewer and fewer ports that could handle ships that would be even bigger.

As far as the pull-forward effects, I don't really see that to be honest. I mean if anything, one would expect that with the psychology around some of the geopolitical issues, there would be either a pushback effect rather than a pull-forward effect. I personally don't see that. But of course, we don't have a crystal ball on that either. And I think probably Nicolás is in the best position to clarify your question on the interest.

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Nicolás Burr, Hapag-Lloyd Aktiengesellschaft - CFO & Member of Executive Board [26]

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Yes, sure. So we repaid the bond due in 2022 in 2 installments: one in January and the other one in June. The one in January was 40% or around 40%. And there, when you look at the call premium space and the recognitions of transaction costs plus value of the embedded options that, that bond had, were in total, net-net, $6 million of one-off in Q1. The same item in Q2 was $18 million simply because the derecognition of the embedded options was significantly higher. So that's the difference that you see. On the other hand, when you look at the value of embedded options of the bond that is due in 2022 -- sorry 2024, we gain value of around $10 million in Q1 and we gain only $4 million in Q2. So that's another effect that makes uneven in the 2 quarters.

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Operator [27]

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The next question is from the line of Danielle Ward of JPMorgan.

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Danielle Ward, JP Morgan Chase & Co, Research Division - Analyst [28]

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My first question is a follow-up on your comments on volume growth. And you mentioned that you've underperformed a little bit on the Intra-Asia routes. For the second half, do you expect to grow more in line with the market, therefore? And are you still comfortable with that 3%-plus market growth rate to expectations that there's some variety in expectations across the market? So I'd be interested to hear your broader market thoughts on the volume side. And then could you provide an update on your IMO 2020 discussions with your customers and how you see the industry preparedness stepping up or not as we approach the end of the year?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [29]

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Maybe first on volume, I mean I think we have largely actually grown more or less in line with the market on most of the routes with the exception of Intra-Asia, where we have reduced our exposure because, as said, we simply could not make money there. So that will not be reversed unless we can make money there going forward. So I don't think you should expect a material recovery there in the upcoming quarters. Unless the market improves, then we may still do that. As far as IMO is concerned, we've seen good progress and good acceptance of our bunker formula with most of our customers with whom we have agreed contracts for the -- with whom we have agreed long-term contracts. The deals for -- the 3-month deals and the spot rates will only be agreed in Q4.

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Operator [30]

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The next question is from the line of [Giuliano Torre] of [Rhodia Asset Management].

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Unidentified Analyst, [31]

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I just wanted to follow up again on the volume growth. If you could perhaps provide a better picture of the volume growth that you had per region and compare it to the general market growth in each region, so I can have a better picture of where you outperformed and where you underperformed.

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [32]

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I mean we shared the details on a by-market basis in the investor report and also the graph that we showed on one of the pages gives you a good indication of where we are growing and where we are not, which was Page 11. So I think that should give you a good flavor. I mean if you look at the investor report, then you can see, for example, that on the Atlantic, we are plus 7%; Pacific, plus 1%; Far East, plus 6%; and Intra-Asia, minus 16%; and Latin America, we are plus 3%. I don't think you will see, except for Intra-Asia, as I said, where we reduced our exposure to this market, that any of the others is a huge deviation from what you see in the market, knowing also that there are varying, different numbers out there dependent a little bit on which source you look at.

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Unidentified Analyst, [33]

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Okay. Just again on Intra-Asia, why are you less able to make money in Intra-Asia than your competitors?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [34]

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Right. I don't know how many -- how much money they are making on Intra-Asia because nobody discloses that. I'm just saying that for us, it is a market, where compared to other markets, we are not in every stretch able to make money. And as such, we take an approach where we focus on those markets and those lanes where we, with our setup, can make money. If and how others to do better, you'll have to ask them.

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Operator [35]

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The next question is from the line of Clark McPherson of Pictet.

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Clark McPherson;Pictet Asset Management;Analyst, [36]

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I just had a question regarding the financing of the business. You've taken out the shorter-dated euro bond, you have one euro bond outstanding, which is trading well above the call level, which will be called next year. I'm just wondering what your strategy is going to be regarding financing going forward and just to get some idea of the cost differential between what you show on the Slide 24 as vessel financings and the level of where you think you could possibly refinance that bond in the capital markets.

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Nicolás Burr, Hapag-Lloyd Aktiengesellschaft - CFO & Member of Executive Board [37]

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We closely monitor that -- our financing position. And of course, we see the possibility to refinance and optimize the interest burden of the company all the time. Currently, we don't see a possibility to refinance that particular one because, as you mentioned, we cannot do it until the first call window. And we as a company, we are a functional -- our functional currency is U.S. dollars, so we always prefer or benefit issuances in dollars. And we have to monitor and compare what is the interest or the coupon of -- or maturity of a euro bond compared to our U.S. dollar bond and what are the hedging costs. So the hedging costs have increased recently due to the delta interest rates between euro and dollar. And we monitor that situation going forward to see whether we refinance or not. But we want and we commit our preference in the capital market in order to, of course, have these sorts of financing, which I think are very important.

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Clark McPherson;Pictet Asset Management;Analyst, [38]

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Would you have a preference for refinancing the bond in the market next year? Or would you also consider using some form of bank debt if the interest rate differential makes sense?

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Nicolás Burr, Hapag-Lloyd Aktiengesellschaft - CFO & Member of Executive Board [39]

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I think that might be or should be evaluated at that moment. (inaudible) at this moment to give you a clear response to that. I believe that we have to continuously evaluate. We have kind of the logic and the common sense that we should try to avoid liabilities or non-hedged liabilities in currencies that are not dollars. So in the case we're issuing a different currency, we should take care of the hedging costs. And those are today important. If we issue today, that hedging cost is big. And we have to analyze that at that moment we really can go to the market and refinance that bond.

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Operator [40]

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The next question is from (inaudible) of [M&G].

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Unidentified Analyst, [41]

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I just have one on your FY '19 guidance. You have maintained this range of between EUR 1.6 billion and EUR 2 billion, including IFRS 16. If my numbers are correct, you're basically already there on an LTM basis. I have pretty much EUR 1.9 billion, as I said if my numbers are roughly in the ballpark. So my question is, given that you're already pretty much close to the upper end of the guidance, so is it fair to expect a weaker H2 embedded in this guidance? Or just wondering if it's just kind of a cautionary move not to raise your guidance in line of the LTM performance.

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [42]

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I mean I think in general, we reiterated the guidance. We had a very strong second half year last year compared to the first half. And in that context, I mean there's not much more to be said. We reiterate the guidance and we still believe that we're going to land somewhere in that ballpark. If you look last year, we changed our guidance around about at this time. And we took it down. And I think we were positively surprised to some extent in the second half about how quickly markets can change and that turned to our favor. And of course, that means that whenever you believe that this is still the guidance, that you should just stick to that.

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Unidentified Analyst, [43]

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Okay. But basically, if I take the lower end of that guidance, that would imply kind of a very challenging H2. Is that something that is one of the scenarios, pretty much would be almost a 50% down, the lower end of the guidance. Wondering whether why that's still there in the guidance.

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [44]

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I mean you can have a difference of view there. I mean we do not -- as you could take from all the comments we have made so far, we do not expect that in the second half year, things will fall off a cliff. Having said that, we also don't see any reason right now to change our formal guidance to the market.

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Operator [45]

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The next question is from the line of Parash Jain of HSBC.

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Parash Jain, HSBC, Research Division - Head of Transport Research, Asia-Pacific [46]

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So my question is more around the preparedness of the industry as a whole with respect to securing the compliant fuel in multiple ports. So if you can share some color about what are your discussions with your supplier with respect to securing the compliant fuel in certain key hubs, where most of your ships will transit through. And on that, if you can remind me and update on how many number of ships you intend to install scrubber as a pilot project? And will they be ready by 2020 or not?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [47]

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I mean, first of all, around the availability of compliant fuel, we bunker a lot of our fuel in the big bunker ports, like Rotterdam and Singapore, and we do not expect to see an issue there with the availability of compliant fuel. Of course, that will still -- as it's still 6 months away, there is still a certain amount of uncertainty around that. But I believe that our teams are working diligently to make sure that we will have the fuel available.

As far as the scrubbers are concerned, we have a program to install scrubbers on our 10 Hamburg Express vessels. Some of them will be done before the end of this year. I don't know the exact number, to be honest, that will be available. But I would assume that it's roughly half if you take that as guidance. And then we have a couple of charter ships which will also have scrubbers, but that's a very small number.

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Parash Jain, HSBC, Research Division - Head of Transport Research, Asia-Pacific [48]

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Yes, fair enough. And then just a follow-up in terms of the use of compliant fuel, is it fair to assume that when you say there will be enough complaint fuel available, are you referring to 0.5% sulfur or in the first few months, the industry may have to rely on 0.1% sulfur in absence of -- unavailability of 0.5% sulfur?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [49]

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We assume 0.5% sulfur.

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Operator [50]

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The next question is from Dan Togo of Carnegie.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [51]

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I was wondering whether you can provide a bit of flavor on your investment into reefer containers. First of all, how big is the investment? In which routes do you expect to sort of say to put in this capacity? And also maybe some color on the market for reefers. How has rates gone so far this year? And is this a market where you see actually returns being a bit higher than on the dry side?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [52]

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I think the investment has been -- I mean we've done investment into 13,000 units. I think we're trying to...

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Nicolás Burr, Hapag-Lloyd Aktiengesellschaft - CFO & Member of Executive Board [53]

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(inaudible)

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [54]

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Yes, I think it's a little bit $150 million or a little bit north of that. As far as the routes, I mean those are the traditional routes where we see most of the reefers. We do that to boost our -- to continue to defend and further approve our position into the trades with Latin America predominantly because that's where most of those boxes move. Of course, we invest in that market because we believe that also going forward, there will be ongoing conversion of some of the conventional ships into reefer, which means that, that segment will likely grow faster than the overall market. And we also believe that provided you give good service and you have the equipment available that you can achieve margins that are above what you can achieve in some other segments.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [55]

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And just on rates so far this year, how have they been compared to last year?

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [56]

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It has been fairly stable compared to last year. I mean there have been some trades where rates have gone up. There have also been some trades where they have gone a little bit down. I wouldn't know the exact number. But I would say that if you assume that the trend in rates there is not much different from what we have seen on the dry side, that you are on the safe side.

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Operator [57]

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This was the last question for today. Please direct any further questions to the Investor Relations team. I would like to hand the conference call back to Rolf Habben Jansen for closing remarks.

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Rolf Habben Jansen, Hapag-Lloyd Aktiengesellschaft - Chairman of the Executive Board & CEO [58]

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Okay, not much closing remarks. Thank you very much for your time, appreciate the questions and hope to speak to you again soon. Thank you, bye-bye.

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Operator [59]

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