Earnings call: Hapag-Lloyd sees a significant increase in earnings in 1Q

Hapag-Lloyd AG (ETR: HLAG) reported a solid first quarter in 2024, with a significant increase in earnings before interest and taxes (EBIT) to $400 million, driven by improved freight rates and increased volumes. The company has made notable progress on its strategic initiatives, focusing on customer satisfaction, sustainability, and profitability. Despite a year-on-year decline in average freight rates, the company saw a quarter-on-quarter increase and a boost in volumes.

Revenue rose by 13% to $4.6 billion, and earnings before interest, taxes, depreciation, and amortization (EBITDA) tripled to $942 million. Hapag-Lloyd distributed a dividend of €1.6 billion in the second quarter and maintains a strong cash balance. The company's outlook remains solid, with an expectation of approximately 4% demand growth for the full year.

Key Takeaways

• Hapag-Lloyd's EBIT reached $400 million in Q1 2024, with a 13% increase in revenue to $4.6 billion.
• The company's EBITDA tripled to $942 million.
• Average freight rate decreased by 32% year-on-year but increased by 14% quarter-on-quarter.
• Volumes improved by 6.9% compared to the same period last year.
• The cash balance was reported at $6.3 billion, with an additional strategic liquidity position of $2 billion.
• A dividend of €1.6 billion was distributed in Q2 2024.
• The company expects a demand growth of around 4% for the full year.
• The inactive fleet levels remained low.

Company Outlook

• Hapag-Lloyd aims to stay within the top 5 global players by 2030.
• A new container tracking product has been launched.
• Plans to retrofit ships to methanol are underway.
• The company has adjusted its earnings outlook, expecting freight rates to decrease moderately compared to 2023.
• Growth in liner and terminal business, service and operational quality improvement, emission reduction, cost management, and investment in employee capabilities are prioritized for 2024.

Bearish Highlights

• Middle East volumes were down due to suspended services through the U.S. because of security concerns in the Red Sea (NYSE:SE).
• Increased unit cost to US$1,256 per TEU due to rerouting around the Cape of Good Hope.
• Bunker expenses rose owing to longer voyage times.
• Handling and haulage expenses increased due to higher transshipment costs.
• CEO Rolf Habben Jansen acknowledged the possibility of returning to losses in the second half of the year, despite a good cost performance in Q1.

Bullish Highlights

• Strong increase in volume on Transpacific and Far East trades, with Transpacific volumes up 28% YoY.
• The company has seen healthy growth, particularly on the BCO side.
• The transatlantic market is expected to recover in rates due to tight capacity.
• Increased scrapping is expected in the second half of the decade.

Misses

• An unusually high gap between contract rates and spot rates in some trades, with the potential need for adjustment depending on demand and contract compliance.

Q&A Highlights

• CEO Rolf Habben Jansen discussed the approach to contracting with customers amid market volatility, with more sign-ups than the previous year.
• Visibility into future demand is limited, but recent weeks have shown strong demand.
• Terminal infrastructure earnings or margin targets are too early to be provided.
• New deliveries were slow in Q1, but an increase in capacity is anticipated throughout the year.
• Contract rates are similar or slightly higher compared to last year, with around 50% contracted out on the transpacific route.
• Spot rates saw a spike recently, which may be temporary.

In summary, Hapag-Lloyd has demonstrated a robust start to 2024, with a focus on strategic growth and operational efficiency. The company's financial health appears strong, and despite some challenges, the outlook for the year remains positive.

Full transcript - None (HPGLY) Q1 2024:

Operator: Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Hapag-Lloyd Analyst and Investors Q1 2024 Results Conference Call. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO; and Mark Frese, CFO. [Operator Instructions] I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.

Rolf Habben Jansen: Thank you very much and welcome, everybody and thank you very much for taking the time to talk to us today on our comments on the first quarter and let me maybe start with a general introduction before I hand it over to Mark for comments on the financials and then I'll wrap it up before we take your questions. Yes. Maybe a couple of key messages when it's around the first quarter. I think when we look at the first quarter, we've seen generally quite strong demand, probably a little bit stronger than many anticipated, even if in fairness, that also comes on the back of a very poor first quarter in '23. So we also should not overrate it. I believe the industry has reacted quite well on the Red Sea crisis and has been able to stabilize most of the global supply chains. Also because we have had indeed some ships available. In terms of numbers, I would say it's been a solid start to the year, where we delivered an EBIT of about $400 million, of course, driven by volumes that are definitely up and freight rates that have also recovered somewhat from the unsustainable levels that we saw, especially in the spot market in the fourth quarter of '23. At the same time, I think we've made good progress on our strategic agenda, both in terms of building up our terminal unit that Mark will talk a bit more about later but we also launched our strategy both internally as well as to the capital markets where [indiscernible] we also intend to further build up our terminal and the infrastructure portfolio. And as a result of the -- as we look at the results for the first and also an outlook on the second quarter, we've decided to narrow our earnings outlook in the upper half of the original range. When we look at the market, a couple of highlights maybe to that. I think we can clearly see that global container volumes are up. Seasonal pattern actually quite normal but especially January, February up very significantly compared to '23 which admittedly was also quite low. The 2 markets where we saw the -- or the market where we saw the best recovery was on the transpacific. And of course, we have seen that it's good that we have some ships available because that allows us to carry also all those boxes, even if we see that there are still a couple of holes in the schedule. But as there are no further ships available, that is currently, I would say what it is. We've seen recently a very steep increase in spot rates. It's a little bit difficult to understand where that spike comes from. We do see very strong demand over the last number of weeks but the background of that is a bit unclear. Is that a short-term spike? Or does it really have to do something with an early peak season or some restocking activities here or there. When we look at our strategy, maybe just a very quick glance at that, probably more a reminder for most of you, as I suspect that many of you have joined some of our earlier calls or were participating on the Capital Markets Day. We said in terms of strategic direction, our view is definitely to remain a pure play or to become a pure play plus player, a little bit of a nuance or a difference compared to what we had in our previous strategy, where we said our focus is the liner business. Now we explicitly add in there also the terminals business and also the ambition to further grow our inland share, where to put some stakes in the ground, we believe that by 2030, it is realistic to have stakes or controlling stakes in over 30 terminals and an inland share of over 30% should also be feasible. In terms of our market position, we aim to remain in the top 5 globally also by 2030. That means probably that over that 7-year period, we need to grow slightly ahead of market. And we also shouldn't forget that as we are, as an industry, likely sailing slower in 2030 than we do today that anyway it means that we need a fair bit of extra capacity. How do we intend to win? Clear objectives when it's around quality. Our Net Promoter Score, very important. We measure that twice a year, we believe we should aim to be above 50 all the time. In terms of OTD, we've always said we'd like to become much more reliable when it's around the schedules. That's where our also -- our new venue with Gemini, of course, plays an important role. We think that getting to over 80% on box level is feasible but will take some time. And of course, we also need to work on the digital experience. Then on the sustainability front, we committed ourselves to the 1.5-degree trajectory as agreed in -- as laid down in the Paris Agreement. That means we have to reduce our absolute emissions with about 1/3 versus 2022 until 2030. That's a very ambitious goal but we think it's possible. And in terms of performance, it's -- of course, we need to make sure we remain profitable, earn back our cost of capital, continue to focus on unit cost and drive productivity further up. A bit more detail on a couple of those points, customer satisfaction. On the customer side, I think we continue to get good feedback from our customers. We just concluded our last customer experience survey with over 7,000 responses. And those people gave us a Net Promoter Score of slightly over 60. When you look at the size, we've taken delivery of a number of ships and also getting some new charters into our vessel that means that our vessel capacity is now up to 2.1 million TEUs which indeed keeps us in the top 5. A couple of other things worth mentioning is, I think, the launch of our new container tracking product, a little bit more about that on the next slide but also in the context of sustainability, I think some tangible things which we announced over the last 3 months in the first quarter to start retrofitting some ships to methanol. And I believe it's also worthwhile mentioning that we won ZEMBA's first tender. I think that's -- on the one hand, a nice illustration of what we are doing on sustainability and that people recognize that. But it's also, I think, a really good sign that a number of large corporations explicitly commit themselves to be willing to pay for decarbonization because in the end, that will not come for free. Then my last slide, dry container tracking. I think we announced that to you -- we talked about that to you quite a few times already. I think we've been proud to launch our first dry container tracking product. Life position we call it. That definitely will improve supply chain visibility for many of our customers. Because we are going to provide them with near real-time data on all of their boxes. That means you get door-to-door visibility, you can take better data-driven decisions. And of course, you can plan the movements of your goods more accurately. We see a good initial uptake on that. But I think most importantly is that this product will become still a lot better in the course of the year. And it will be very interesting to see what the response of the market will be if we fast forward 6, 12 or 18 months. I think and with that, I wrap up my introduction. And Mark would hand it over to you.

Mark Frese: Yes. Thanks, Rolf and welcome also from my side to everybody. Looking at the numbers in a little bit more detail now, I think it's clear if we compare our group figures for the first quarter results of the previous year. The financial performance has clearly deteriorated. However, it's important to remember that last year's Q1 performance was, for sure, still outstanding and is no way comparable to normal profitability levels we have seen before. And I think that is true either in container shipping or in most of other industries. Over the course of last year, the earnings of most container lines deteriorated and even turned into negative territory in Q4 2023. This was extreme, you can really call it irrational -- an irrational point in profitability in that period. And I believe that we have now returned to a more reasonable earnings level right now. Therefore, we can be satisfied with the financial performance in Q1. And this is all more true given that our balance sheet ratios remain very strong with a substantial net liquidity position and an equity base of US$21 billion. Taking now a closer look at our financial performance. We see that earnings have declined significantly compared to the still exceptional asset performance in the first quarter of last year. However, profitability levels improved strongly quarter-on-quarter and even compared to Q3 2023 due to the recovery in demand and even more so due to the healthier freight rate environment. Revenue rose quarter-on-quarter by 13% to US$4.6 billion, while EBITDA tripled to US$942 million. EBIT amounted to close to US$400 million, US$396 million following a loss of US$251 million in the previous quarter. Group profit came in at US$325 million. On segment level, Liner Shipping contributed the largest part of group EBIT as Terminal & Infrastructure segment is still in the process of being formed and ramped up. Terminal & Infrastructure revenues increased significantly to US$107 million as of some terminals -- and to some terminal companies were not consolidated until August 2023 and therefore, not included in Q1 '23 figures. Segment EBITDA amounted to US$35 million and segment EBIT to US$18 million. And that is very much in line with our expectation and planning of ramping up the Terminal business. In the Liner Shipping segment, revenues declined year-on-year to US$4.5 billion, while EBIT was down by -- to US$378 million. This development is mainly due to the lower average freight rate as we can see. On the next page, our average freight rate in Liner Shipping declined by 32% from almost US$2,000 per TEU in Q1 '23 to US$1,359 per TEU in Q1 '24. When compared to the previous quarter, however, the negative trend was reversed. And I think that is the most important message and our average freight rate increased by 14% quarter-on-quarter. At the same time, volumes improved by 6.9% to more than 3 million TEU year-on-year and 1.6% quarter-on-quarter, even though Q1 is seasonally a weaker quarter. We recorded the strong volume increase on the Transpacific and on the Far East trades, the transpacific volumes were up 28% year-on-year as demand in the United States picked up again as the destocking cycle seemed to be at the end. On the other hand, the Middle East volumes were clearly down as we were forced to suspend most of the services through U.S. due to the tense security situation in the Red Sea. The additional cost associated with the rerouting of assets around the Cape of Good Hope are clearly visible in our unit cost which amounted to US$1,256 per TEU in Q1 '24. Bunker expenses increased quarter-on-quarter mainly due to the longer voyage times while handling and haulage expenses were up mainly due to the higher transshipment costs we have experienced. In the return voyage line item, we benefited from lower Suez Canal cost, for sure. However, this was partially offset by higher expenses for our short-term charter ships and container slot charter costs on third-party vessels. In comparison to the previous year, costs were still down by 5% which is a positive as we implemented cost-saving measures already before and benefited from the unwinding of the congestion situation. Coming now to our cash flow development. Operating cash flow amounted to US$609 million. The longer voyage times and driving freight rate increased our working capital and, therefore, negatively impacted our operating cash flow development. Investment cash outflow of US$386 million was mainly attributable to installments for our new vessels and to purchase of containers. Payments received mainly for interest on our cash investments. And in contrast, resulted in a cash inflow of US$109 million. The financing cash outflow of US$370 million was mainly related to repayments we have done of our debt and lease liabilities. In total, our cash balance stood at US$6.3 billion at the end of Q1 '24, slightly lower than at the end of 2023. As you can see on the next page, this cash balance does not include our strategic liquidity position of US$2 billion which is recognized under other financial assets. Including the strategic liquidity which is currently invested in fixed income assets and including the undrawn revolving credit facilities, our liquidity reserve stands at US$9 billion. While a net liquidity position of €2.6 billion and an equity ratio of 64%, the balance sheet ratio remains very, very strong. And following the AGM approval on the 30th of April '24, we have distributed a dividend of €9.25 per share or in total numbers, €1.6 billion. This outflow will be recognized in Q2 figures. And with that, I hand it back to Rolf for the market update and our outlook.

Rolf Habben Jansen: Thank you. Thank you, Mark. Yes. Maybe a short market update from our side with the chart that you know from us. I think on the one hand, let's talk a little bit about demand growth has been very strong in the first quarter. As we said, about 9% for the full year, we still think it's going to be around about the 4% that we indicated earlier. Maybe it's going to be a little bit higher but still a bit difficult to judge. I think also solid outlook for '25. Inactive fleet, I think that's quite an interesting chart because it demonstrates that the inactive fleet has been very low if you look at the blue graph which is the most relevant one because it's not about the ships that are in dry dock. You will always have some of that. And it's been exceptionally low now already for the last 4 years. And I think that's also something to keep in mind when we look at the global order book which, on the one hand, is coming down but still on a reasonably high level. But yes, those ships are coming in. But to have, again, somewhat of a buffer to take care of some of the disruptions that over the last years, we've seen almost every year is probably not a bad thing. And let's also not forget that scrapping at the moment is still at historically low levels and scrapping will have to come up even significantly beyond the 0.5 million that is now predicted for next year because simply, in the long run, you have to assume that about 4% of the global fleet is going to be scrapped every year as most of the ships are being used up to 25 years and especially with tightening environmental regulations, that number will, in the long run, not go up. And keeping in mind the size of the global fleet that would mean that in the second half of this decade, we should see scrapping of probably closer to 1 million a year as from maybe '26 or '27. So that will also help to rebalance the market at some point. A few words on our earnings outlook. We've made a couple of adjustments to -- smaller adjustments to that. First one being on the freight rate, where we believe that when looking at what we see in Q1 and in Q2, that that will still looking at the full year be lower than what we said -- what we saw in full year '23 but we also think that it's only going to decrease moderately. On transportation volume and bunker consumption price, our numbers remain the same. When it's about group EBITDA and group EBIT, we have narrowed the range that we have given previously where initially on EBITDA, we were from US$1.1 billion to US$3.3 billion. We now narrowed it down to US$2.2 billion to US$3.3 billion or €2 billion to €3 billion. And group EBIT similar from minus US$1.1 billion to plus US$1.1 billion, to between zero and US$1.1 billion. And in euro terms, that means zero to €1 billion, in line of what we see in Q1 and Q2, I think that's a logical step forward. But let's not forget that there's still tremendous uncertainty in the second half of the year. When we look again at our priorities for '24, I think those are pretty clear. First, grow our liner and terminal business in line with our pure play plus model and also in line with the strategy that we have defined. We will continue to work on improving service and operational quality to support those growth ambitions as we believe that being good on that front is absolutely critical if we want to continue to grow our business. We've put forward a number of them, I also illustrated to you a number of tangible initiatives to achieve significant emission reductions that will be difficult in '24 because of the rerouting around the Cape of Good Hope. But we need to at least take initiatives now that will allow us to bring those emissions down significantly in the years to come. We need to continue to be razor sharp on costs. I think we did a good job in managing our costs in the first quarter but that is certainly something to keep a very, very close eye on. We're doing a lot of work to prepare for a seamless transition from THE Alliance into Gemini. And of course, we'll always make sure to do whatever we need to do to take care of our people and we will continue to invest also in their capabilities. And with that, I think we come at the end of the introduction from our side and be happy to take any questions that you may have.

Operator: [Operator Instructions] The first question is from Amy Yi Li with UBS.

Amy Yi Li: I have 3, please, if I may. Firstly, on demand that you talked about with the 7% growth in volumes year-on-year. Can you maybe elaborate a little bit more on what is driving the strong demand in ocean at the moment? You talked about destocking but is there a pull forward of volumes from peak such that maybe we see slightly lower volumes in July, August? Or is it a push for more exports out of China? So any colors you can give there on the demand drivers and any visibility into Q2 demand you have at the moment from your current bookings would be great. And secondly, we have seen some anecdotal evidence that a few of the carriers have reported some equipment shortage as well as port congestions around Asia and Mediterranean. What is your impression there on equipment availability and port congestions? And do you expect these capacity constraints to be resolved quickly in the short term? And lastly, just very briefly on contracts, as contract season is concluding. Can you give any colors on what percentage of the contracts have already been signed? And where have contract rates stabilized compared to the previous year?

Rolf Habben Jansen: Yes, happy to take those questions. Let's try to take them one by one. Maybe let's start with the demand. Demand is more or less as we expected. So far with the exception maybe over the last couple of weeks which have been, as you also pointed out, remarkably strong. It's a little bit difficult to understand why that is at the moment. But I would also like you -- I don't have a much better crystal ball than you have. And I do think there is indeed an element of destocking or restocking in there and possibly with all the uncertainty that there is around the globe, some people pulling forward some orders which is something that that we highlighted as a possibility also when we did our earnings call 6 weeks ago. On equipment and ports, we hear those reports as well. I would say that there is definitely some port congestion in Asia at the moment and also some -- there is a lot of additional work that needs to be done in the Med as well because we have a lot more transshipment there as we can't go through Suez. That causes some disruption but I would not overrate that at the moment and hope that, that normalizes fairly soon. On the equipment side of things, we've actually done a lot on equipment because we also see that you need equipment a lot longer these days because the transit times are a lot longer. And that means that you simply need more boxes to transport the same amount of goods. So yes, equipment is tight here and there but I do not expect that to impact our business significantly because I do think we've taken the right measures there. In terms of contracts, most of the main contract seasons are over, be it Latin America, be it Europe or be it also transpacific. And I would say that by and large, contracts have been closed at levels that are similar or slightly higher than what we saw last year.

Operator: The next question is from Omar Nokta with Jefferies.

Omar Nokta: I just wanted to touch base and just check on, clearly, I think in your opening comments, Rolf, you mentioned that -- whether it's a peak season or restocking or obviously tight this looks like the confidence factors have been driving the strength. Just given the overall volatility that we have been seeing here over the past maybe 4 to 5 months, is that in any way changing your approach and how you're entering into contracts with customers? Does it keep you more spot focused? Or does it maybe reinvigor the need either on -- whether it's a shipper side or your side to secure more long-term visibility. Any color you can give on that type of approach to securing business given the volatility we've seen here in the past few months.

Rolf Habben Jansen: Yes. Well, I think our approach in the contracting season has been to try and secure a little bit more than we had previous year. And that is also how we have completed the contracting season. So I think in general, we've signed up a little bit more. And I think we're happy with that. Particularly on the BCO side. I think we've seen fairly healthy growth.

Operator: The next question is from Sathish Sivakumar with Citi.

Sathish Sivakumar: I've got 3 questions here. Firstly, on the demand. Obviously, you go of line from the pull forward demand coming through. Is there any specific verticals that have stood out that outside of seasonality, actually, these verticals are -- moving goods more than what they normally do. And then what is your actually visibility right now in terms of demand bookings that you are seeing in the system? And then the second question is around the transatlantic rates. If you look at among East-West transatlantic has underperformed even if you look at the last week spot, that's been one of the trade lanes that has come under pressure as well. What is actually holding up the transatlantic use function of demand or supply tightness or supply [ph]. And then the third one is around the terminal infra. If I look at the margins, obviously, they're still early stages but how do you expect the margins to normalize around low 30s still like well below peers. And do you think that's because of the size of the business that's holding it back? Or do you expect that to go maybe around 40s in your term?

Rolf Habben Jansen: Let me try and take and maybe start with the last one. I think on the terminal side, it's really way too early to say something sensible about that to build up that segment and we will continue to do so. I think before we will be able to put out some clear earnings or margin targets. Also looking at the CapEx that we -- or the investment capital that we have there, I think we will still have to wait a number of quarters. So unfortunately, that's too early. On the Atlantic, I think the Atlantic is always late. Whenever we see adjustments in the market, then we typically see that whether that goes up or down that the Atlantic always follows 3 or 4 months later, I would expect to see a bit of a recovery on the rates there also because capacity on the Atlantic at the moment is actually fairly tight. And also there, we see reasonably strong demand but we -- you are right that we don't see that yet. When we look at overall demand, I mean, in fairness, our visibility on that is also quite limited on where that comes from. I think we see it coming from various segments, there's not one or the other segment that really stands out. I would also say that the real -- the first quarter year-on-year was strong but that's also because last year was very poor. I think the second quarter initially was more or less as expected. And now we see very strong demand since the last 2 or 3 weeks or so. So really early to conclude, where that is actually coming from and whether that's underlying strong growth in some categories, destocking or early peak season. I think in a moment that's really unfortunately speculation.

Sathish Sivakumar: And in terms of the visibility, like do you get like 4, 6 weeks out? Or is it still limited?

Rolf Habben Jansen: Yes, it's pretty limited. I mean yes, we have bookings that are 4, 6 weeks out. But in reality, it only becomes firm when we start releasing the equipment which is only a couple of weeks before departure. So our visibility into the future there is actually fairly limited.

Operator: The next question is from Dan Togo Jensen with Carnegie.

Dan Togo Jensen: Firstly, on the guidance, the low end seems to imply that you will return to losses somewhere during second half? Is it only the Red Sea, so to say, that is the trigger for that? Or can you see other things that will trigger that? And once that happens, that we have this turnaround to loss-making rates or how you ever you want to put it, how fast will we see scrapping picking up? Will that be a delay because business needs to return from TC, et cetera? Or do you expect that the market will react relatively fast to that? That's the first question. The second question could be a bit on the cost side because your cost performance, as you highlight here, is quite strong, basically flat sequential unit cost. I was a bit surprised to see that despite the additional cost that you have relating to selling South Africa. Is that level sustainable? And are there any sort of say, movements in the underlying costs that we should be aware of for coming quarters?

Mark Frese: Yes. Well, I think in terms of the guidance, I think we consciously raised the guidance but also still kept a very broad range because when we look at the second half of the year, I think there's a lot of uncertainty. And as we can see from the swings that we see from, for example, the fourth quarter to the first quarter, those things can be quite significant. Whether that means in the end that we are going to lose money in the second half of the year, I think that remains to be seen. I hope not but of course, we don't know. When the scrapping will come up, yes, scrapping will come up, whether that will come immediately when rates stop. I mean, there tends to be a little bit of a time lag there as it also depends on charter contracts that run out and those type of things. But as I mentioned also during the presentation, we do expect that to go up significantly in the second half of the decade with the first uptick in '25. In terms of cost, you are -- I mean, I also think that cost performance in the first quarter was good. I do expect to see some further upward pressure on cost in the second quarter. So we have to see how much of that is going to be sustainable in the end. But I do expect us to deliver also decent cost performance in the remainder of the year.

Operator: The next question is from Lars Heindorff with Nordea.

Lars Heindorff: The first one is on the rates, Rolf, I clearly understand that it's -- you're uncertain about the recent pick up we've seen in volume and obviously also the rate increase in the spot side. But the gap between contract rates and spot rates now appears to be unusually high. At some point, at least something has to give in. So I'm curious to hear your view on maybe where you think and what you think will give in first. That's the first one. And then, the second one is on the ETS. I know it's a small cost only €22 million. But conceptually, have you been able to cover your costs on the tier side? That's the second one. And then, the third one would be on the vessel speeds. Most of your peers have been mentioning that you have been speeding up in order to keep up the schedules while they have been rerouting. So how much have you increased the average speed? And what kind of possibilities of absorbing the capacity that will continue to flow in, do you think you'll be able to absorb if you slow down again?

Rolf Habben Jansen: Yes. Maybe let's take the last one first. I mean, on vessel speed, yes, we have also been speeding up. I don't know exactly how much that is on average, to be honest. So I would be a little bit hesitant to give you a number but it's been significant on quite a lot of the east-west trades. And yes, that would absorb several percentage points of capacity that we realistically would need extra to sell again at normal speeds. In terms of ETS, I think we got really good cost coverage from ETS. We have charged that separately to our customers. And I think by and large, that has been accepted. In terms of rates, I think you are right. I think the spread between contract and spot rates at the moment is in some trades; in fairness, not everywhere, yes; but in some trades, unusually high and at some point, something will have to give. I mean a lot of contracts have right now been concluded for the remainder of the year. So I mean, we have to see it depends also a little bit what demand does because if demand is stronger than many people thought then those that have been speculating on spot rates may also be confronted with fairly significant increases if people have to honor also the allocations and contracts of those that have signed up for the full year. You know that most of the time, those contracts do not get fulfilled in full. If that compliance which would be significantly up this year, then that leaves less space for spot which, of course, could then potentially result in a bigger spread for a longer period of time. But as we said, this is all getting [indiscernible] and mine is probably not much better than yours.

Lars Heindorff: Can I just have a follow-up on that?

Rolf Habben Jansen: Yes.

Lars Heindorff: Sorry, I was unsure if you could hear me. Because then on the contract side, is there any change in customer behavior which you mentioned that you have been doing quite a bit of work and increase in the share of BCOs. Is there any change of behavior there in terms of how much is committed compared to previous contract seasons?

Mark Frese: I don't see a massive shift there. I think we've seen that the tendered volumes tended to be a little bit lower than they were before last year because last year, we all saw reasonably low contract compliance. But I don't see -- this fluctuates a little bit from year-to-year. So I don't see a massive change there, to be honest.

Operator: The next question is from Marco [ph] with Barclays (LON:BARC).

Unidentified Analyst: I've got 2 follow-up questions to some of the topics that have been already covered. So the first one is on what you defined early in the call as unsustainable rates in Q4. But what is your expectation for the second half of the year for spot rates given that, let's say, new deliveries have been kind of slow in the first quarter but will ramp up in the rest throughout the year and therefore, a lot of new capacity will enter into the market. Like do you expect basically rates to go back to where they were before the disruption by the end of the year? Or you have -- you think it's going to be a better picture? So that's the first question. And the second question also on contract rates. I think you mentioned earlier that overall contract rates have been flattish year-over-year. But if you look at least at the spot rate curve, both Q1 but also Q2 2024 in terms of spot rates are a bit down year-over-year. And clearly, this is a follow-up question to the delta that we were just discussing. So you think that, yes, the higher contract rates have been basically driven by shippers just trying to secure capacity as they anticipate disruption for longer?

Rolf Habben Jansen: I think when you look at the contract rates, I said that they were similar to slightly higher compared to last year. So I think that's just very normal. I think that hasn't -- that does not have a lot to do with what happens on the spot market. I think last year, there was an expectation that rates would come down very significantly in the second half year which put a lot of pressure on contract rates at that point in time. That's possibly a little bit different right now. And then going back to your first question, when you look at spot rates, I already mentioned they were completely unsustainable levels in the fourth quarter. Right now, especially in the last few weeks, we have seen them come up a lot. I mean until the last 3 weeks, I thought that the pattern that we saw in spot rates was quite as was to be expected because immediately after the Red Sea crisis, you see then a reaction that the demand spikes because people want to secure space and then spot rates go up quite significantly which we saw in January, February and then they started to normalize. I would say until then, fully normal pattern. Just the last 3 weeks, we've now seen a spike. We have to see what really causes that. I think that's a still a little bit early to judge that. I would not be surprised if at some point, we see those spot rates come down again, somewhat maybe lead to the type of levels that we saw, say, 4 or 5 weeks ago or so.

Operator: [Operator Instructions] We have a follow-up question from Sathish Sivakumar with Citi.

Sathish Sivakumar: Just 2 quick clarifications. First on the contract rates, when you say flat or slightly up, let's assume that across the portfolio or is just on Asia to Europe that we are talking about here? And then the second one is the contract coverage. So transpacific, is it still around 65% contracted out? And like what is your mix today?

Mark Frese: I think when I commented on contract rates, that's indeed across the portfolio. And when you look at contract coverage on the transpacific, we are, as usual, so a little bit above 50%.

Sathish Sivakumar: And across the portfolio, like split-wise, contractors or spot?

Mark Frese: I mean, we have -- when you look at long-term commitments, we have always had -- with us, you could say that it's roughly 1/3 long term, 1/3 mid-term, 1/3 shorter. But then again, there's a lot of hybrids in between and also the contracting periods are different. So it's not so easy to give one quick answer to that also because it varies a lot across trades.

Operator: We have a follow-up question from Lars Heindorff with Nordea.

Lars Heindorff: A follow-up on the volumes. And Rolf, I understand that you are not maybe willing to share any of the verticals and the recent pick up you talk about both in rate and particular on volumes. But on the volume side, maybe I don't know if you can give us a little bit of insight into any geographical areas where you've seen the recent pick up being unusually strong. Yes, that's a follow-up.

Rolf Habben Jansen: I think we've seen strong pick up, particularly on Asia exports but both into Europe and into the U.S. demand is strong but also Latin America does quite well. So it's not actually not so different. That's not such a differentiated picture.

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

Rolf Habben Jansen: Yes. Not much else from my side, except to say thank you very much for your attention. We really appreciate you taking the time to join us for sessions like this. And have a good rest of the day.

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

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