Hapag-Lloyd Aktiengesellschaft (HPGLY) Q3 2023 Earnings Call Transcript

Hapag-Lloyd Aktiengesellschaft (OTCPK:HPGLY) Q3 2023 Earnings Conference Call November 9, 2023 5:00 AM ET

Company Participants

Rolf Habben Jansen – CEO

Mark Frese – CFO and Chief Procurement Officer

Conference Call Participants

Sam Bland – J.P. Morgan

Sathish Sivakumar – Citigroup

Cristian Nedelcu – UBS

Omar Nokta – Jefferies

Alexia Dogani – Barclays

Marc Zeck – Stifel, Nicolaus & Company

Ben Thielmann – Berenberg

Lars Heindorff – Nordea

Ash Nadershahi – CreditSights

Patrick Creuset – Goldman Sachs

Christian Cohrs – Warburg Research

Unidentified Analyst – Morgan Stanley

Rolf Habben Jansen

Thanks, everyone, for making the time to join us here this morning. We would be very happy — we’re happy to give you an update on the last quarter and also try to look a little bit ahead. I mean, maybe a couple of opening remarks. I think when we look back at the quarter, the first thing, of course, is freight rates remain very much under pressure. That leads to an increasingly challenging market environment. I would say volumes have, on the other hand, been fairly healthy. For the first time, we report on the Terminal segment, also for us a milestone, I think that we closed the transaction with SAAM on the 1st of August and also the fact that we got the okay to launch a new joint venture on Cabotage, I think, is a good step ahead for us in South America.

On the financials, if we look at the nine months, I think results are definitely solid, but also if you look at Q3, you can clearly see that results are increasingly under pressure. Volumes picked up in Q3, but rates continue to go down. Net liquidity position is very healthy. When we look at the market order book, still quite high. Demand not so bad, but not expected to go up very rapidly. And that also means that when we look at supply growth versus demand growth, that is quite likely that when looking at the remainder of 2023, but also in 2024 that supply growth will outpace demand growth. What are we going to focus on going forward, I think we narrowed down the outlook for 2023. So we’ll wrap up the year and continue and start preparing also for the years to come. We adjusted slightly our — or narrowed down the bands of the forecast, talk a bit more about that later. In terms of business, we’ll continue to focus on providing good quality to our customers. We will put increasingly focus on cost because we do need to do whatever we can to get cost out of the system. But of course, we’ll also continue looking for ways to further grow and expand our business.

When looking at a bit more detail in net volumes and rates, looking at the orange line in the top graph, you can see that over the last quarter, volumes have really not been that bad, a little bit clearly above 22% and even a little bit above 21%, which I think is quite encouraging. And I do expect also that in the remainder of this year, volumes will remain above the 2022 levels. That also means that towards the end of the year, we’re probably going to be looking at a more or less flat development compared to last year, which is certainly better than some feared in the beginning of the year, but fairly consistent with what we have also seen. Rates, of course, are a problem. When we look at the Shanghai Index, which still gives a pretty good indication, you see that, by and large, we are back to the levels that we have pre-COVID and in some cases, even lower. That is a problem because costs are up and in reality, 25%, 30% above 2019 levels, not only because of inflation, but also because nowadays, we’re forced to use low sulfur fuels and also faced, for example, higher time charter rates. But of course, inflation also played a role there.

Then when we look at what we are doing, as I said, we are definitely stepping up our efforts to take out cost because we have to find ways to mitigate the impact of the lower freight rates, which as I said, in some trades are definitely below cost. I would say, in particular, the Far East and the Atlantic are under tremendous pressure at this point in time. What we’ve done different this time than we have done in the past, and I’m actually quite happy with that is that together with our partners, we have now not chosen to go on blank services on a week-by-week basis, but rather remove entire services from the network. And as you can see on this graph, that means that in the end, we have taken three or actually even four services out, one service already a little bit earlier to PSW. Now we take out of the PN3. We also take out the SC5 [ph] and we take out the EC4. That does not mean that these port pairs are no longer being covered, but they are being covered through other ship systems.

So what are our teams doing, try to make sure we take all the cost out that was related to congestion. I think in fairness, that’s more or less completed, adjust the network, as outlined also on this graph, make sure we avoid all nonessential spend, step up our efforts on procurement to make sure that we indeed always get the services that we buy at a competitive cost and adequate quality. And of course, we need to ensure that we also get the benefits out of the investments that we have done amongst others in our new builds and terminals and also in the fleet upgrade program.

Two more things before I hand it over to Mark, since the third quarter, we’re now also reporting the terminal infrastructure as a separate segment as it definitely is a separate business. We have established a terminal holding in there. We have appointed Dheeraj Bhatia as the Head of the Terminal Holding. He will join — he will move into that position in January 2024. And in that division, we will group all the investments that we have done, and that includes the ones that you see here on SAAM, which was closed in August, J M Baxi Step 1 closed in April, but also things like CTA and Gruppo Spinelli that have been with us for longer. I think the next time we’ll try to put the terminal not upside down the way it looks right now, but for the next time.

Then the other thing to mention here is the Cabotage business in Brazil. Very happy that we have been able to get the okay from ANTAC to form this joint venture together with our local partner Norsul. We’ve been working on preparing that for quite a long time. That will allow us to offer Cabotage services in Brazil and give us access also to markets where so far, our access was quite limited. The plan is to start sailing there in January or at least in the first quarter of 2024, where that helps us to strengthen our position in Brazil, which we see as a very important market in South America. So very happy that we got the okay for that and looking forward to develop that business further. And with that, I would hand it over to Mark to take us through the numbers.

Mark Frese

Very good. Thanks, Rolf and also from my side, good morning to everyone. Looking at the first nine months, they were characterized by weaker demand and significantly lower freight rates as said, with the corresponding negative impact on group’s revenue and earnings development. In this challenging market environment, we have again delivered a solid operating result and maintained a strong balance sheet. And yes, with the comfortable net liquidity position coming to that a bit later again. However, the downward trend in quarterly earnings have continued in Q3, as shown on the next slide.

As expected, the tailwind from last year’s exceptional freight rates environment dissipated over the year. In comparison to the peak earnings in last year’s Q3 — the Q3 2023. Group EBIT declined quite significantly to U.S. $228 million, as you can see here. For the nine-months period, revenue decreased by 46% to U.S. $15.3 billion. EBITDA and EBIT fell to 4.5 million or, respectively, U.S. $3 billion for the EBIT. Group profit came in higher than the operating profit at 3.4 billion, sorry, due to positive interest income on our substantial cash balances and fixed income from investments.

As previously mentioned by Rolf, business activities have been structured in Q3 into the liner shipping and the Terminal & Infrastructure segment following the acquisition of SAAM Ports and Logistics. And with this new segment structure, we want to emphasize the rising importance of our growing terminal business and for sure, improve transparency on the two segments. The new Terminal & Infrastructure segment comprises Hapag-Lloyd’s stake in 20 terminals in Europe, Latin America and the United States, India, North Africa as well as other infrastructure investments. It has contributed an EBITDA of U.S. $38 million and an EBIT of U.S. $29 million in this year. And it’s important that you bear in mind that the new business segment is still in the process of being formed and therefore, does not reflect the result of a full nine-months period. As said, Spinelli is integrated since Jan, J M Baxi since April, and SAAM since August, so only for two months.

Overall, transport volumes in the Liner Shipping segment increased by 4.5% in the third quarter compared to the same period last year, and that is mainly due to the good performance on the trades from the Far East to the Americas and Europe. In contrast, volumes on the Atlantic declined both quarter-on-quarter and year-on-year in that very difficult market situation in this trade. Following the good volume development in Q3, nine-months volume are close to last year’s levels. And we expect this neutral to positive volume trends to continue in Q4, looking at the development we are seeing right now. The average freight rate in Q3 2023 decreased further, and that by more than U.S. $200 per TEU quarter-on-quarter to U.S. $1,312 per TEU and the average grade bunker price declined only slightly to U.S. $58 per ton.

Our high contract portfolio, including multiyear contracts and our balanced geographic exposure has helped us to cushion the severe spot freight rates decline in the first nine months of 2023. And I think it’s important to say, but it’s clear, however, going forward, it is clear that we are not immune to the deteriorating market environment and the spot rates on many trade lanes have reached or are approaching unsustainable levels with the respective effect.

And as outlined already by Rolf, we are accelerating our initiatives to bring down cost to mitigate the impact of the low freight rate environment. I think that is focus for today. That’s very clear. Unit costs in the first nine-months of 2023 were down by 9% or around about U.S. $120 per TEU when we compare to the prior year period. In comparison to the peak unit costs seen in Q3 and Q4 2022, we were able to reduce the cost levels by more than 16% to U.S. $1,222 per TEU in Q3. And this improvement in unit cost was mainly driven by lower bunker prices for sure, active cost management, and the benefits from the easing of port congestions such as lower storage costs for containers, which we see in handling and haulage.

Looking at our cash flow, we see that free cash flow stayed clearly positive, which was driven by the still very good results in Q1 and Q2. However, without the payment for the SAAM terminal business in August, which led to a cash outflow of U.S. $847 million free cash flow in Q3 would also have been positive. The nine-months operating cash flow came in at U.S. $5 billion due to the solid operating results and positive working capital effects. Cash outflow for investments in the Terminal business, including the participation in Spinelli, J M Baxi and the acquisition of the SAAM portfolio amounted to 1.8 billion. Investments in vessels and container fleet amounted to U.S. $1.4 billion. The investment cash flow also includes a net cash inflow of $1 billion from the liquidation of time deposits and interest income on our substantial cash position of more than 500 million in that period. The financing cash flow — cash outflow, sorry, of U.S. $13 billion, mainly related to the dividend payment in May, as you know. In total, our cash balance stood at U.S. $6.7 billion at the end of Q3 2023.

And as usual, I would like to conclude with a brief look on our key balance sheet ratios. Per September 2023, our equity was around U.S. $21 billion. That is 65% as equity ratio, which is well above our target of 45%. Despite the high dividend payment in May and the investment in our Fleet and the Terminal portfolio, we maintained a comfortable liquidity position of U.S. $3 billion and at the same time, when we add asset liquidity reserve, which includes fixed income investments of around 2 billion and our undrawn revolving credit facilities at the end, it stood and amounted to U.S. $9.5 billion as liquidity reserves. And having said that, I hand over to Rolf again for the market update and financial outlook.

Rolf Habben Jansen

Thank you, Mark. Yes, a few more words from my end. First of all, let’s have a quick look at the order book. We see the order book still very substantial with at the moment, about 26% and quite a lot of deliveries also being scheduled. I think that leads us also to the view, as I mentioned in the beginning that when we look at the upcoming number of quarters, probably 6% to 8%, then we certainly expect supply growth to outpace demand growth, which will continue to put pressure on the market. We see orders that are being placed coming down. I think that’s good news. I do expect that also to continue and as such, the order book will gradually start normalizing.

Idle fleet is still relatively low with quite a big number of ships in dry docks. So that will also be the case in 2024, but I do expect that idle fleet to pick up. It also shows you that if in the end, you look at what is actually that balance between supply and demand, that it’s not so easy to assess how big that gap really is. If I look at the reports that have been out over the third quarter, then most people report on quite good utilization. That goes for us but also for some of our competitors. There’s actually not that much that is really idle at this point in time. So how much real effective overcapacity there is at this point in time, that may actually be a little bit less than many people think. That doesn’t take away though that supply growth is probably going to outpace demand growth when you look at the upcoming six or eight quarters.

Looking at the next graph there, I think we see exactly what I just tried to point out. We do not expect to see a dramatic recovery of demand in the next couple of quarters there. The macro environment remains challenging with two big — with two wars going on around the globe. Interest rates still pretty high. Inflation also higher than it should be and consumer sentiment, not great. Having said that, the volume at the moment is, as we said before, not that weak. And that also means that as we compare to a weak first half of this year as we move into 2024, that we most likely will see a decent growth rate in 2024. And we also shouldn’t rule out the possibility that some of the commodities that have been very much down, but that they are quite voluminous like furniture and outdoor, for example, then that comes back a little bit. So I think there is also a base scenario thinkable where we’re going to be a little bit positively surprised on the demand side. But by and large, it will be a challenging market, not only in the remainder of this year, but certainly also in 2024 and potentially also still a bit after that.

We have narrowed down the range of our outlook as we are approaching the rest of the year — as we’re approaching the end of the year. I think on transportation volume, we do expect to see some growth towards the end of the year. We are flat until Q3, but we do expect to see growth in Q4. Bunker consumption price is down, very volatile though. It’s been up a couple of weeks ago, now it’s again quite a bit down. Freight rates, of course, very much under pressure, and then we narrowed down the ranges on EBITDA and EBIT. Of course, there is the usual uncertainty around that, but I do believe that this is a fair adjustment and narrowing down of the range.

That brings me to the priorities for the rest of this year and also beyond. First of all, we need to make sure that we remain focused on providing good quality service and make sure that our customers remain happy. We just completed our last customer satisfaction survey, and there we got very good feedback. So that’s at least on the right track. We need to make sure we’re adapting to challenging market environments and take out costs there where needed. We gave you some examples in this presentation. We’ll continue to further build the terminal business and make sure that we leverage also the synergies that there are between the two segments of our business. And then we will also wrap up our strategy towards 2030, towards the end of this year. And we will communicate that to our teams in the first quarter and most likely also externally a little bit after that.

That brings us, I think, to the end of the presentation that we have prepared. And with that, I’d be happy to take any questions that you may have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And today’s first question comes from Sam Bland with J.P. Morgan. Please go ahead.

Sam Bland

Thanks for taking the question. I have two, please. The first one is on sort of spot versus contracted rates. I guess there’ll be some contracts which have to get negotiated on a roughly calendar year basis. As you sort of go into those negotiations, could you just talk a little bit about what sort of premium there is currently on those contracts versus where the spot rates are today, or where maybe the spot rates might be in the next few weeks? And the second question, a bit of a difficult sort of crystal ball one, which is obviously — I think everyone is coming to the idea that the next couple of years might not be so good. But how bad do you think they might be, I guess, if we look back to maybe 2009 or something, are we kind of thinking about that sort of level for two years where the industry is very deeply loss-making, I know it’s kind of impossible to say, but do you have a feeling on what it could look like? Thank you.

Rolf Habben Jansen

Maybe the first one, your comment on where do we think that contract rates are going to land compared to spot. I mean very difficult to say. I mean the — it’s still also a little bit early. I think we see expectations out there for contract rates that are unrealistic and at those levels, we will not close because we’re not going to close contract rates at levels where we, for sure, will lose a lot of money, then we’d much rather take out the cost and capacity if and when that’s needed. I guess expectations are still in a very wide range, but I would expect that in the end, those contracts, which will be closed with the start of beginning of the year will be above the spot levels that we see today.

And then your second question in terms of how bad this is going to get, as you said, it’s a little bit of a crystal ball type of question. What we see at the moment is that the rates have really dipped in some trades, far below where they should be. I think that normally, you will see them then bounce back after a couple of quarters at the latest. Hopefully, that will happen now as well. I think that’s a little bit our base case as the only caveat to that is that, of course, most people have very healthy balance sheet at this point in time. So it could potentially take a little bit longer, but I personally do not expect that.

Sam Bland

Okay. Just a little bit of a follow-up on the first one. Rather than sort of talking about where contracted rates might land, could you just talk about where they are actually today, are they still a long way above spot or not sort of today or let’s say, in the fourth quarter?

Rolf Habben Jansen

It depends. I mean, you cannot give a general answer to that also because that varies very much by trade and also depends on when people have closed those contracts. So this is really difficult to give an answer on that. And there’s also contract rates that are linked to indices, for example. So those will be reasonably close to spot. So that’s not possible to give a straightforward answer to that.

Sam Bland

Okay, understood. Thank you.

Operator

Thank you. And our next question comes from Sathish Sivakumar with Citi. Please go ahead.

Sathish Sivakumar

Hi, thanks for taking my questions. I’ve got three questions here. So firstly, on the vessel utilization within your network, if you could actually compare by trade lanes, like Asia to Europe versus Transpacific and versus Transatlantic that has actually evolved during the quarter, that will be helpful? And secondly, on the volume outlook into Q4. What is your booking visibilities now and again, how does that compare by those three major trade lanes? And the third one is more around the industry question actually. Yes, I could see that you are taking some routes out of the network. But why we’re not seeing like the ramp-up in scrapping like structurally addressing the capacity issue? Thank you.

Rolf Habben Jansen

Maybe I’ll take them one by one. In terms of utilization, I think we’ve seen healthy utilization levels on all the East-West trades. The Transpacific and the Far East trade have been in the high 90s. If we look at the Transatlantic, it’s maybe a little bit lower, but Transatlantic always tends to be a little bit lower than the other two. So also there, we are definitely in the 90s.

In terms of volumes and bookings, I mean, visibility is always somewhat limited. We, today see still quite decent daily bookings and daily equipment releases. So that’s, I believe, why we’ve also said we expect that towards the end of the year once we close Q4, that we will see a slight increase in volume compared to what we saw last year. That means, of course, that Q4 needs to be pretty strong.

And then I think your last question was on the industry and scrapping. I mean, we are certainly stepping up our efforts on that as well. We have already sent a number of ships to the scrap yard this year and are actually also looking at what is going to be our program for the upcoming two or three years. I think one factor that prevents some people from sending stuff to the scrap yards is that many of those older ships have also been put on fairly long-term time charters throughout the pandemic. And if you are still on a long-term — still on an expensive time charter, it certainly raises the hurdle to send something to scrapping. Having said that, the global fleet has certainly aged — it’s clearly aged since 2009. So we will see scrapping going up very significantly in the second half of this decade.

Sathish Sivakumar

Just a follow-up on that scrapping. Is there any constraint actually from a shipyard perspective, or scrapping capacity at the shipyards?

Rolf Habben Jansen

I think your question was whether there was enough capacity. At the moment, there is not a capacity constraint, but if I look three or five years out, then I’m pretty sure that scrapping capacity will be very tight.

Sathish Sivakumar

Okay, thank you.

Operator

Thank you. And our next question today comes from Cristian Nedelcu with UBS. Please go ahead.

Cristian Nedelcu

Excellent. Thank you very much. Can I please ask you, first of all, regarding your guidance and what you imply for Q4 and we’re already in mid-November, you have visibility on what’s on your vessels today for the next few weeks, your guidance range is very — has very wide implications for Q4 EBITDA so I guess, can you help us a little bit to understand is the midpoint of your guidance assuming the spot rates today are staying broadly flat to where they are or does it assume any movement in rates over the next sort of two to three weeks and other than that, what else could impact your EBITDA in Q4 over the next 45 days that we don’t know already today?

The second question, coming back to the question from Sam on rates. So you mentioned also earlier that spot rates are close to 19 levels on many of the trades. I guess from today’s perspective, if you reset most of these contracts at a bit of a premium to the spot rates, is it fair to assume that the sort of $1,070 per TEU, the sort of rates you are generating back in 2019, those are a reasonable expectation for 2024 or any reason why that’s not the case?

And the last one, we’ve seen this Panama Channel restrictions over the next few months, so meaningful restrictions into January and February. Could you tell us a bit about your strategy there, are you going to go via Suez, are you going to redirect some of the vessels to West Coast, and do you expect any meaningful disruption or meaningful reduction in effective capacity as a consequence of the Panama Channel restrictions? Thank you.

Rolf Habben Jansen

Well, I mean, first of all, in terms of outlook, I mean, we’ve said about that what we think and what we know. I mean the market is extremely volatile and dependent on where spot rates go, I believe, in our — we hope or at least when we gave — when we adjusted the guidance, we still assume that there’s going to be a little bit of recovery in a couple of the trades because the rates are very unsustainable. So that’s something that still needs to — that we still need to see happening, but that is certainly an element which is in there. So what did we assume, we assume what we can see, but we also assume that there’s going to be a little bit of recovery in the spot rates in some of the key markets.

In terms of rates for — you said this is reasonable to assume a rate that is going to be slightly above 2019. Well, I certainly don’t hope so, because as we said many times before, costs are probably 25%, 30% above what we had in 2019. So if we would end up at the rate level, which is at the level of 2019 then you would have an extremely bad result in 2024. And in all honesty, I also don’t think that, that’s where we’re going to get to. So I think we are going to land somewhat higher than what you indicated.

Your last question on the Panama Canal, I think the drought in the Panama Canal is a real problem. The latest news we heard on that is that the capacity is potentially going to go down with 30% or 40% in the beginning of next year. That means there are a number of ships that are going through there today, cannot all go through there. And then we have to find solutions for that, where of course rerouting some of it via Suez is certainly one of the options.

Cristian Nedelcu

Right, that is very helpful. Thank you. So just to clarify on the first one, so I think you mentioned you assume a little bit of a recovery on a few trades on the spot rates. Is this to get you to the midpoint of your guidance or does that recovery gets you to the sort of high end of your guidance for FY 2023? Thank you.

Rolf Habben Jansen

I mean, if that would get us to the top end of the guidance, then we would not have given the guidance the way we did. I mean, we gave this guidance and that guidance has a low point and a midpoint and a high point. And you asked what are the assumptions underlying that, and I said those are the rates that we see at this point in time. And we also expect to see a bit of a recovery, especially on the two most problematic trades.

Cristian Nedelcu

Understood, thank you.

Operator

Thank you. And our next question today comes from Omar Nokta with Jefferies. Please go ahead.

Omar Nokta

Thank you. Hi, good morning Rolf and Mark. Yes, just a couple of follow-ups for me. Maybe just on the last point regarding the weakness we’re seeing. You highlighted that early on in the conversation regarding the Atlantic being exceptionally weak. I just wanted to ask kind of what’s perhaps behind that weakness and what could trigger a recovery, as we understand it, it looks like perhaps a good amount of capacity was rerouted into that trade earlier this year, I just wanted to get a sense from you if you’re starting to see, I guess, one, perhaps, is the recovery there demand driven or is it more supply being rerouted away? And then any color you can give on where that supply goes to?

Rolf Habben Jansen

I think when you look at the Atlantic, the weakness is very much demand-driven. I mean demand has maybe not fallen off a cliff, but it has been very much down in the last two quarters. Of course, there was also some additional supply that certainly didn’t help because it’s always about the balance of the two. And the demand is down and supply is up, that’s, of course, not a good combination. We have taken some measures to adjust capacity and we’re working on some further measures to take out costs, because in this trade we are currently in some places really far below cost. And then hopefully, we will see somewhat of a recovery in the market fairly soon.

Operator

Thank you. And our next question today comes from Alexia Dogani with Barclays. Please go ahead.

Alexia Dogani

Yeah, good morning. Thank you for taking my questions. I had three, if possible. Just firstly, can you give us an indication how much it costs roughly to scrap a ship per TEU or any kind of point of reference you can share and also similarly, the cost of idling? Then secondly, just on your comments about the — kind of the rate levels at the moment for the negotiating season and the fact that they need to be substantially higher than 2019, given your cost position. Why would customers at the moment be willing to give you a premium to spot and how kind of are these discussions playing out? And then finally, in terms of the volume development, have you seen any switch of low-value and high — sorry, low value, high-volume product categories that are exiting freight forward our networks and coming directly to the shipping lines? Thank you.

Rolf Habben Jansen

Okay. I mean, in terms of scrapping, I mean scrapping you typically get a — you get a certain amount of money per ton of steel that you scrap. I don’t know what the latest numbers, but it tends to be between $300 and $400 per ton of light steel that is being scrapped. The cost of idling, I think the best way to answer that is that if you do not sail a voyage, you save about 65% of the cost and the 35% of the cost is what remains. Then you asked the question on rates and whether people are willing to pay higher rates. I mean, I think that depends very much on what the position is and the readings that people have on the market, because in the end, what you do is you agree a rate for the next 12 months that on the one hand gives you certainty of the rate that you will pay.

On the other hand, you have to make an assessment of when you think that spot rates will go up. And of course, you also have higher certainty to get space. And we have seen in the past many, many times that sometimes we all of a sudden have space constraints and then the market changed tremendously. And I would also — even if you look at 2024, I think there are all kinds of scenarios thinkable. I was just reading this morning about the negotiations that are taking place on the — that are going on in the U.S. on the East Coast where already now people in the public domain are talking about possible strikes and stuff like that. These are also the type of risks that you somehow need to factor in when you want to decide what am I going to do for the full year. So different people take different decisions there. It depends on how they read the market for the full year.

And the last point on whether people with low-value commodities are going more directly to the lines, I think the low-value commodities are typically dealt with directly by the carriers, so there’s not that much of a shift. But you are absolutely right that many of the low-value commodities are on a direct contract with the lines.

Alexia Dogani

Thank you very much.

Operator

Thank you. And our next question today comes from Marc Zeck with Stifel. Please go ahead.

Marc Zeck

Hey, good morning. Thank you for taking my questions. I’ve got a question actually on charter rates and the cost that goes through your D&A. Could you give us a feeling for once those high charter rates phase out in 2024 and 2025, what do you assume might be a fair depreciation per TEU figure for 2024 and 2025, if those high charter rates phase out?

Second question would be actually on the Terminals business and the equity accounted investees or investments that you get there. It seems like Q3 was actually negative for those port business. I mean, could you explain maybe a bit the moving parts here like other than that, like the Indian investment like Spinelli Group, which of these companies are actually contributing negatively currently to the business?

And the last question would actually be on freight rates. And I guess we’ve got a pretty good idea of what’s happening in Transatlantic for instance — Transpacific. Could you give us a feeling for freight rates on the North-South trade, are these, let’s say, still reasonable or are they as bad as for, let’s say, Far East or Transatlantic? That’s all from my side. Thank you.

Rolf Habben Jansen

Let me try and take numbers one and three, and Mark will then comment on the Terminals one. I think on the time charter rate, I mean, I would not know how things exactly work out on depreciation. What I can say is that we also have a number of time charters that start to run out in 2024 and 2025 because they were closed throughout the pandemic in 2021 and 2022. And what you will see is that we will close those time charters against lower rates. And if you would just as a guidance, take something like MSI which gives you a good indication of where time charter rates are going to go, I think that should allow you to also make an estimate of how much we — what will happen to our time charter rates. Our average duration of the time charters that we have in our book is currently between two and two and half years. And then on the freight rates, do you want to add something, Mark, on that one?

Mark Frese

I couldn’t determine the question maybe, I think.

Rolf Habben Jansen

Okay. Then I’ll take the freight rate first. So there, I would say that on North-South routes, we also see volatility. It’s a little bit more stable than the East-West trades, but that’s a very normal pattern. I think we always see that the movement there comes a little bit later. So let’s see how that develops in the upcoming couple of quarters. And then, Mark, two more questions to you.

Mark Frese

Yes. Just on the terminals, I think there was no negative contribution to our EBIT line of the terminals we have acquired. You know that the CTW, [indiscernible] in the turnaround, so that terminal had a negative contribution and ramping up the holding companies, but everything else, positive contribution. And that we are also seeing for the full year.

Marc Zeck

Thank you very much.

Operator

Thank you. And our next question today comes from Ben Thielmann with Berenberg. Please go ahead.

Ben Thielmann

Yeah, hey everyone. Just one or two more questions from my side. Maybe first one on free cash flow run rate. We have seen that free cash flow was negative in Q3 with roughly 500 million. Should we expect any significant change here in Q4 or is it likely that we also show somewhere between like 500 million and 700 million here in Q4? That’s the first question. Second question would be what mechanisms do you still have left to cut down cost a little bit, we have seen that Maersk was cutting headcount roughly 9%, do you also have an ace in the hole to cut down costs a little bit or maybe a little bit of color on these two questions? Thank you.

Rolf Habben Jansen

When we look at costs, we look at every cost category. We do not anticipate to make significant adjustments to the number of staff that we employ. If I look at the plan that we have for next year, that’s roughly flat. All in all, which doesn’t mean that we don’t make changes, but overall, the numbers look roughly flat. Every other cost category we look at, we try to save bunker, we try to rationalize services. We try to look for ways to cut terminal, trucking and cost and to also bring down repositioning costs. So we look at every cost category. And then I think — and then I’ll hand it over to Mark for the question on the free cash flow.

Mark Frese

Yes. Just maybe important factor, what is the development we are seeing right now. We have talked about the cash flow development and the operating cash flow we have seen for the nine-months period and the influence our investments had when it comes to free cash flow. When we are looking forward for the full year development also in total, a positive free cash flow or a positive operating cash flow development overall, and that should result at the end also in respective development of the free cash flow. So for the full year, that’s how we look at that.

Ben Thielmann

Okay, thank you.

Operator

Thank you. [Operator Instructions]. Today’s next question comes from Lars Heindorff with Nordea. Please go ahead.

Lars Heindorff

Sure, good morning. Thank you for taking my questions. Also a few from my part. So the first one is regarding the contract negotiations. I’m fully aware that you can’t disclose pending negotiations and in particular, not upcoming negotiations. But to what extent is the ETS part of your negotiations as we head into the next year and you will start to have to pay for these Emission Trading System and then how is that perceived by the customers that you have been talking about this with, regarding in those contract negotiations that you have done so far? That’s the first one.

The second one is on the capacity side. A little bit curious to find out now that you have actually closed down three loops in Eastern Europe. Do you have any more plans about further reductions as we head into the early parts and this is particularly in the light of the EU Commission’s CIBA announcements that you will have to maybe make some changes to your VSAs as of the 1st of April next year?

And then last, just a housekeeping question maybe, which is in the report, you have some comments about the supply on a global basis for next year where there’s a statement that you expect — I know this is from Drewry, but you still have it in the report that slippage will account for around about 1 million TEU. As far as I can see, so far, slippage is close to zero. And what we’re hearing is some Chinese yards, they’re delivering on plan, so maybe just a few comments on that as well? Thank you.

Rolf Habben Jansen

Okay. Maybe let’s take them one by one. First of all, your question on ETS. I think we — so far, what we see is that we treat that as a separate surcharge, and that is accepted by most customers. The second question on capacity, whether we intend to do more, we are certainly looking at some other ways to take out our streamline services to reduce costs. But this has absolutely nothing to do with the decision that was taken by the European Commission, and also the decision by the European Commission does not mean that we have to change any of the VSAs that we have in place as we speak. The block — the fact that the block exemption rule was no longer extended in reality does not mean anything for the alliances because the alliances were not covered by the block exemption. Anyway, that is about smaller corporations that in future now also need to file. So no impact from there.

And then when you look at the supply and slippage, yes, that’s indeed, as you rightfully point out, Drewry’s assessment. Difficult to judge whether they are going to be right or wrong. I think when we look at our own ships that are going to be delivered, we see some slippage, yes, because some of that is a little bit delayed, whether in the end that is going to be the number that is called by Drewry, I really don’t know. You would have to ask them.

Operator

Thank you. And our next question today comes from Ash Nadershahi with CreditSights. Please go ahead.

Ash Nadershahi

Yeah hi, thanks for taking my questions. Just had a quick question on the Atlantic, Transpacific and Far East routes. Can you just confirm that those three routes are now loss-making for Hapag-Lloyd and I just wanted to make sure I understood the current utilization rate across the whole firm for the third quarter?

Rolf Habben Jansen

I mean we don’t disclose results on individual trades. But what I can tell you is that if you look at spot rates that we see today, especially on the Far East and the Atlantic, those are not covering the cost of moving the boxes from Asia to Europe. And then when we look at utilization, we don’t publish — we don’t talk about utilization across the fleet, so we don’t publish those numbers. What I’ve said before is that when you look at the East-West trades, that Far East and Transpacific are in the high 90s and that Transatlantic traditionally also because we deploy different types of ships there is a little bit lower and also that in Q3 was in the 90s.

Ash Nadershahi

Okay, thank you.

Operator

Thank you. And our next question comes from Patrick Creuset with Goldman Sachs. Please go ahead.

Patrick Creuset

Hi, good morning. There doesn’t seem to be any sign of idling or scrapping at this point. So it seems as there’s more financial pressure required to actually see capacity cuts in the industry. And assuming this capacity adjustment takes longer than you seem to anticipate at this stage, what are the measures you’re putting in place to preserve cash, if any, at this point thinking about any further shareholder returns on the 2023 result, anything you can do on CAPEX, charters, etcetera?

Rolf Habben Jansen

I think, first of all, I think you do see idling going up, yes. If you look at the measures that we have announced, that will also result in us freeing up quite a lot of capacity, yes. I mean, if you look at what we are trying to do in addition to that, is try to drive cost down, yes. That’s the way to preserve cash. And of course, the other levers we have, are to curtail investments. We will not go crazy on CAPEX, that’s also how we have put it into our budget and the decision on dividend is due later.

Patrick Creuset

Thanks.

Operator

Thank you. And our next question today comes from Christian Cohrs with Warburg Research. Please go ahead.

Christian Cohrs

Yes, hello. Thanks for taking my questions. You mentioned in your presentation that you intend to expand the Terminal business. Do you have any certain regions in mind? Secondly, and a couple of years from now on, what is the critical size of the terminal business that you envisage? And lastly, now with the new situation in the Port of Hamburg with MSC becoming a co-shareholder at HHLA, what is your reaction to that and does this have any consequences for you? Thank you.

Rolf Habben Jansen

First question, the size of the — or second question, was that — I think the size of the Terminal portfolio, I mean, that — we will see that. I think we’ve grown the Terminal portfolio quite significantly over the last two to two and half years through SAAM, through J M Baxi, Spinelli and investments in Tanga, Damietta and Wilhelmshaven. That gives us — it’s already a decent size. I would think though that if you fast forward five or seven years, that that portfolio will likely still be more significant. In terms of whether there are specific regions that we are looking at, there are all kinds of projects that come on to our table, but I don’t think that right now is the time to disclose where we would be looking.

And then finally, the HHLA MSC situation, in and of itself, that will not have a huge impact on Hapag. First of all, we have a contract with HHLA that runs till the end of next year, and we will likely start negotiating an extension of that somewhere in 2023. But at the end, there is enough capacity in the Port of Hamburg to accommodate all of our ships across the various providers. So I believe we will have enough options to send our ships to Hamburg if and when we decide to do it.

Christian Cohrs

That’s clear. Thank you.

Operator

Thank you. And our next question comes from Tom Swift [ph] with Morgan Stanley. Please go ahead.

Unidentified Analyst

Yeah, hi gents. Thanks. I guess just a question from the credit side. I think just in terms of — I think back to Patrick’s last question, just in terms of preserving cash. Can you talk, I mean, directionally about where CAPEX is going into next year and also maybe being able to pull on working capital a little bit to also preserve cash? Thank you very much.

Rolf Habben Jansen

I mean you are just fully — I mean if you look at CAPEX, then I think our core CAPEX will next year likely be somewhat below depreciation, the way that I think we look at it right now, and then we can still decide whether we want to do a little bit more or less depending on how the year develops. Working capital is always a focus item. And I believe we have working capital reasonably well under control, and I hope that, that will be the case also going forward.

Unidentified Analyst

Thank you.

Operator

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

A – Rolf Habben Jansen

Yes, not that much to add, I think. Thank you very much for the time. Hopefully, we were able to give you a little bit of a perspective on Q3 and shed some light on how we look ahead and hope to speak to and hear from you again soon. Thank you very much.