AMKAF - A.P. Møller - Mærsk A/S (AMKBY) Q3 2023 Earnings Call Transcript

2023-11-03 15:07:04 ET

A.P. Møller - Mærsk A/S (AMKBY)

Q3 2023 Earnings Conference Call

November 03, 2023 6:00 AM ET

Company Participants

Vincent Clerc – Chief Executive Officer

Patrick Jany – Chief Financial Officer

Conference Call Participants

Sam Bland – J.P. Morgan

Lars Heindorff – Nordea

Muneeba Kayani – Bank of America

Omar Nokta – Jefferies

Robert Joynson – BNP Paribas

Christian Nedelcu – UBS

Dan Togo Jensen – Carnegie Investment Bank

Ulrik Bak – SEB

Patrick Creuset – Goldman Sachs

Jain Parash – HSBC

Sathish Sivakumar – Citi

Michael Vitfell-Rasmussen – Danske Bank

Marc Zeck – Stifel

Presentation

Vincent Clerc

Welcome, everyone, and thank you for joining us on this earnings call today as we present the Result of our Third Quarter of 2023. My name is Vincent Clerc. I’m the CEO of A.P. Møller – Mærsk. And with me in the room today is our CFO, Patrick Jany. On the second slide, you see our usual disclaimer on forward-looking statements. Please familiarize yourself with this at your convenience. For now let’s move straight into the fourth slide. Despite an increasingly challenging market environment, we closed the third quarter 2023 with a financial performance in line with expectations, generating group revenues of US$12.1 billion with an EBIT margin of 4.4%. The third quarter saw an uptick in volumes in our ocean and Logistics & Services businesses. At the same time, we have seen prices decline across all transportation modes at an accelerated pace, overshadowing the positive impact from higher volumes.

The new normal we are now headed into is one of more subdued macroeconomic outlook and thus of soft volume demands for the coming years, prices back in line with historical levels and inflationary pressures on our cost base, especially from energy cost and will also increased geopolitical uncertainty. This outlook is compounded in the shipping front by increasing supply-side risk. Since the summer, we have seen overcapacity across most regions, triggering a new wave of price reductions. At the same time, scrapping and idling of tonnage has not yet picked up. We therefore expect further headwinds as the market conditions in ocean are worsening. In light of the worsening conditions in ocean and the ongoing pressure on freight rates, we now expect a full year result towards the lower end of the previously communicated ranges from EBIT and EBITDA.

Moving to the next slide, the materialization of these supply-side risks and their impacts on freight rates ushers a very uncertain trading environment with significant further downside risk potential, and given the number of new vessels still on order, one that could stay with us for quite a while. In this context, we must make sure that we are fully prepared to face whatever scenario will happen, right-size our cost base and leave ourselves the room we need to further our strategic progression and take advantage of the opportunities that will invariably arise.

With constant care, and knowing that we were headed towards leaner time, we initiated several cost reduction measures early in the year across all of our cost base. These measures have cushioned our results across all business segments, as they were all affected by price decreases. Organizational costs were not immune. We implemented a hiring freeze and reduced all non-necessary expenses, including marketing and contingent workforce, early on. These measures have allowed us to cut 6,500 jobs so far this year, and we are now intensifying these efforts.

We now aim to further decrease our workforce by another 3,500 positions, with 2,500 to be carried out in the coming months and the remaining to extend into early 2024. These efforts will bring our total workforce below 100,000, or more than 10,000 below the 110,000 we started the year with. We therefore now expect restructuring charges of approximately US$350 million with the vast majority to be recognized in 2023. These compounded efforts will deliver around $600 million of SG&E savings in 2024. We will continue to adapt our plan to the market reality. In parallel, we will continue our efforts on increasing asset utilization and operational expense reductions. We also cut our CapEx and are considering all options to preserve financial headroom and investment capacity, including a review of the continuation of our share buyback program in 2024.

Now let’s take a closer look at the quarterly performance of our segments, starting with ocean on Slide 6. Ocean volumes increased in the third quarter. We increased our volumes by 5% while we reduced our cost per unit by 11%, further showing progress on reducing our operating cost. Constantly optimizing our network efficiency, we ended the quarter with 95% utilization on offered capacity, a 4 to 5 percentage increase over both last quarter and Q3 2022. This quarter we also saw additional capacity enter the container shipping market at an accelerated pace, leading to a supply and demand imbalance which puts significant downward pressure on profitability.

Looking at the industry order book, which you all know very well, there are still a lot of new vessels expected to enter the market in Q4 and next year. At the same time, mitigating measures such as idling and scrapping are expected to remain low at low levels in Q4. As in previous ocean cycles, we have continued to use every tool in our toolbox for dynamic capacity adjustments. We continued to deploy tools such as low steaming and idling and focused on cost containment, ultimately achieving an EBIT margin at breakeven level in this quarter.

Let me also briefly address a big highlight in the last quarter. We celebrated the name giving of the world first methanol enabled container vessel named Laura Mærsk. We had a great ceremony here in Copenhagen, and we’re fortunate to be joined by some of you for a tour of the landmark vessel. This is a significant milestone in our company history, and we hope that this will help build momentum for the green transition of shipping.

Now moving to Slide 7, please. In our Logistics & Services business, we saw, similar to Ocean, a recovery in volumes over the quarter. We had good customer wins, demonstrating that there is still solid underlying demand for our product offerings. However, the rates have been weak across all transportation modes, in particular Air and Landside transportation. The trend we observed since the beginning of the year amplified into the third quarter. The sector of Retail & Lifestyle, especially in North America, remained challenged, as these verticals are closely linked to our Ocean business.

On an organic basis, revenue declined 22%. We continue to expect a more subdued top line development until the transitory effect from the ongoing destocking have fully played out.

As I already indicated in the second quarter earnings call, we increased our focus on cost management to regain momentum towards our longer term 6% EBIT margin ambition. We already see the early results of this increased cost focus, leading to a stabilization of EBIT margins in the third quarter.

Moving to our Terminals segment now on Slide 8, our Terminals business remains resilient and continues to generate robust returns. Dynamic pricing combined with a focus on cost savings initiatives enabled us to offset the inflationary impact, resulting in a strong EBITDA margin performance of 35%, basically flat compared – to last year’s Q3.

Compared to last year’s Q3 volumes were essentially flat on a like-for-like basis, while declining slightly in absolute terms, in absolute terms, due to the exit primarily in Latin America. The solid profitability resulted in a ROIC of 10.3%.

Before moving to our revised 2023 guidance, let’s return to our midterm roadmap please and let’s change to Slide 9. Looking at our roadmap, we are on target for our group Ocean and Terminals ambition, also helped by the extraordinary years behind us. Going forward, the focus in Ocean is on further efficiency and cost improvement, as well as higher utilization of assets and continuously improving the quality of our operation.

The performance of our Logistics & Services segment is below our midterm ambition, and clearly we are not pleased with this development. While the underlying business remains solid and we continue to gain new commercial wins, organic revenue remain impacted by the transitory normalization process. As already discussed the last quarter, we have increased our commercial efforts in Logistics & Services and intensified our focus on cost to find a path back to profitable growth. We have already seen some improvement this quarter even in the light of the rapidly declining rates, and we expect a return to strong organic growth once the cyclical effects of the normalizations have been worked out.

Now moving to Slide 10, I would like to close with our guidance slide. As mentioned at the start, we saw a pickup in volumes in the third quarter, but do not believe that this to be the end of the continued inventory destocking and our volumes outlook generally remains muted. Reflecting on the pickup in Q3 volumes, we narrow our full year guidance container volumes outlook to -2% to -0.5%, a small increase from our previous outlook of -4% to -1%.

At the same time, freight rates have been declining, and given the supply and demands imbalance, we see no end to the economic headwinds on a short term basis. Consequently, we adjusted our full year financial outlook and now expect results towards the lower end of the previous guidance of US$9.5 billion To US$11 billion EBITDA and US$3.5 billion to US$5 billion EBIT. We continue to expect free cash flow of at least US$3 billion.

Our focus shifts towards protecting margins given the weaker economic outlook, and we accordingly cut our CapEx guidance now expecting approximately US$8 billion for 2022 2023 and US$8 billion to US$9 billion for 2023 and 2024.

Now I will hand over to Patrick for a closer look at our financial performance. Patrick, please go ahead.

Patrick Jany

Thank you, Vincent. And welcome to everybody on our call today.

As Vincent just discussed, our third quarter results were in line with expectations in a difficult market increasingly tested by the ongoing increase in supply in ocean. We generated revenue of US$12.1 billion, significantly below last year’s third quarter, but only down 7% sequentially. Our strong focus on cost containment led to a solid bottom line performance despite rough market conditions.

Q3 EBITDA was US$1.9 billion, down from the US$10.9 billion in Q3 2022, with the decrease coming from Ocean impacted by rapidly declining freight rates compared to the peak quarter of last year. EBIT decreased to US$0.5 billion.

Our net profit for the quarter was strong at US$0.6 billion on the back of a strong financial result.

This quarter, we continued to execute our share buyback and repurchased shares for $763 million, resulting in a record $13.2 billion cash return to shareholders in 2023. We also maintained a strong cash and deposits position of $21.9 billion with a net cash position of $6.8 billion at the end of Q3, very much in line with previous year. As mentioned by Vincent earlier, we faced a high level of uncertainty in Ocean and are taking all measures to guarantee a sound competitive cost position and maintain a resilient balance sheet.

On the cost side, it means that we are intensifying our restructuring measures, now aiming to reduce an additional 3,500 positions, leading to restructuring costs of $350 million. This is an increase of $200 million compared to the $150 million we announced back in February when we guided for a total of $450 million, which was composed of $300 million impairment of former brands like Hamburg Süd and the first part of the restructuring for $150 million. This amplified restructuring, combined with other cost measures, will provide savings of $600 million in 2024 compared to our 2023 cost basis.

On the balance sheet side, we have been further reducing CapEx and now guide for $8 billion for 2022, 2023 period and $8 billion to $9 billion for 2023 to 2024 million, so a reduction of at least $2 billion compared to the midpoint of our previous guidance. In addition, depending on the unfolding of the market situation, we are prepared to consider further measures, including the continuation of our share buyback program to preserve our financial investment capacity and resilience.

Let’s now have a closer look at our cash flow development on the next slide. Starting on the left of the bridge, we generated $1.4 billion cash flow from operation in the third quarter, which was driven by the lower EBITDA of $1.9 billion.

As in Q3 of last year, we have had a lower cash conversion in that quarter as we used yearly negotiation with suppliers to also secure lower cost basis for the years to come. Gross CapEx was $820 million in Q3 as we had lower investments, mainly in oceans and terminal. CapEx in the first nine months was $2.4 billion; almost $1 billion lower than in the same period of the prior year. Free cash flow was a negative $124 million, mainly from the lower profitability from the quarter and combined with a slight increase in working capital. So the cash generation this quarter comes, on the one hand, from the divestment of our U.S. Marine management operations, which is included in this acquisition net item on the cash flow bridge and the emittance of a green bond of $750 million. The net proceeds were placed in short-term deposits

Now let us move on to the Ocean segment on Slide 14, where we see that despite the uptick in volume, our Ocean business suffered from the rapid decline in rates. Freight rates were down 58%, and our revenue in Ocean consequently fell 56% compared to the previous year. As you can see on the graph on the right, Ocean profitability has been subject to the ongoing normalization of the market since the peak in Q3 2022. However, the accelerated pace at which additional capacity has been deployed this quarter has led to further margin pressure.

In Q3, Ocean profitability reached breakeven level with a negative EBIT of $27 million. Our key priority has been to contain our costs, combined with a strong focus on operational excellence and asset utilization.

If you turn to Slide 15, you can see the oversized freight rate effect in clear detail. But you can also see that our Ocean team has performed well in cost containment. Similar to the second quarter, in Q3, our three major cost buckets of bunker, container handling costs and network costs, all positively contributed to profitability. We also see the impact from a decline in other revenue as the additional earnings from last year’s global congestions are left behind.

Moving to Slide 16. Q3 marked the fourth consecutive quarter of significant freight rate declines since the peak observed last year. We had a sequential decrease of 14% in the quarter, which is expected to continue given the increasing supply-demand imbalance in the Ocean market and the fact that contract rates will continue to converge toward shipment rates. Remember that we’re also back in our annual contract negotiation cycle and our new contracts will be negotiated with current spot price levels as a reference.

In the third quarter, we saw a positive evolution of volumes with a seasonal pickup of 5% compared to the second quarter this year. Volumes actually improved by 9%. We also continue to manage our capacity dynamically. In the third quarter, we operated approximately 3% less capacity than the prior year and have achieved a strong utilization on offered capacity at 95%, five percent points higher than last year and four percentage points higher compared to the second quarter.

At the same time, global congestions has last dissipated and scheduled reliability has improved compared to both previous year and previous quarter. Our share volume contracts – our share of volumes on contracts were 68% in the quarter, and we expect the same share for the full year of 2023 on par with the previous year.

On Slide 17, you can see the results of our successful cost containment efforts. Operating costs were down 19% in the quarter, and even stronger decrease compared to the 17% in the second quarter. The lower cost base was driven primarily by lower bunker cost, which were down 39% year-on-year. We continued to deploy slow steaming, contributing to a 7.5% decrease in bunker consumption, and we had a 34% lower average bunker price.

Unit cost at fixed bunker was down 11% year-on-year to $2,287 and down 4% sequentially, a strong achievement, which shows that we are on a good path to consistently reduce our cost of operations.

On Slide 18, we turn to Logistics & Services. Revenue declined there by 16% on a reported basis and was 22% lower on an organic basis. As Vincent mentioned in his earlier remarks, we are not pleased with this performance. The decline was driven by the phenomena we observed since the first quarter of the year, a strong destocking of our key customers indicating that our Logistics and Services segment is particularly sensitive to container volumes in the Retail & Lifestyle sectors, especially in North America.

And as with Ocean, our L&S business also suffered from lower freight rates, particularly in air and road transportation. The lower revenue base led to a decline in profits. Yet, as a result of our renewed cost containment efforts in the third quarter, we were able to stabilize the EBIT margin with a sequential increase of 50 basis points. We will continue with our increased cost management focus over the next quarters in order to regain momentum and show progress towards our 6% mid-term EBIT margin ambition.

Taking a look at the details of Logistics & Services on Slide 19, you see that the lower rates were visible in all of our by Mærsk product families with Managed by Mærsk and Fulfilled by Mærsk additionally impacted by lower volume. In Managed by Mærsk, we observed lower demand partly offset by contribution from the acquisition of Martin Bencher. In Fulfilled by Mærsk, revenue decreased by $1.3 billion, which was driven by lower volumes and rates in Warehouse And Distribution, Middle Mile and E-commerce in North America, but partly offset by growth from LF Logistics. The performance of our Transported by Mærsk product family was impacted by lower rates in Air, LCL and Inland, particularly in North America and Europe.

On Slide 20, we turned to Terminals, which continued to perform very well under the difficult market conditions. Revenue decreased by 11% to $1 billion. This was driven by slightly lower volumes and the ongoing normalization of last year’s extraordinary storage income. Sequentially revenue increased actually by 5%. EBIT decreased to $270 million, driven by lower storage revenue and net gain from divestment impairments reported in Q3 2022, and margins were practically unchanged at a very high level.

Our Terminals business continues to show strong cost control, leading to strong overall margins despite inflationary pressures. The ROIC increased to 10.3%, demonstrating the consistent strong performance in the segment.

Now, let’s look at the EBITDA bridge on Slide 21. Here you can see the volume effect where volumes were down 4% and flat like-for-like. The net impact on EBITDA is positive due to a better location mix on the revenue per move side decreased by 6.5% to $314. As in previous quarters, the normalization of port congestions drove the lower revenue per move outweighing the effect of CPI related tariff increases.

And on the cost side, the cost per move decreased by 5% to $244. Lower energy costs were here offset by higher depreciation from progress on terminal modernization projects, mainly in Nigeria and Los Angeles.

To finish up on Slide 22, we turn to Towage & Maritime Services. The revenue decline in the third quarter was mainly due to the exclusion of Mærsk Supply Services, which was divested in May. In addition, contraction in Mærsk Container Industries was partly offset by a robust performance of Switzerland.

The year-on-year increase in EBIT is driven primarily by the gain on sales of the U.S. Marine Management business, with a net gain of $94 million and a gain from sale of shares of Höegh Autoliners.

Following our segment review, I would like to hand over to the operator for the Q&A session.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Sam Bland from J.P. Morgan. Please go ahead.

Sam Bland

Thanks for taking the question. It would be on, I guess, the group although the trading and profitability is clearly on a downwards trend, there is still a very strong balance sheet. What was the thinking behind reviewing the share buyback at this point, which maybe is a little bit earlier than some people had expected? Thank you.

Vincent Clerc

Yes, hi. Thanks very much for your question. So indeed, I think we do have a strong balance sheet, but we also have a high uncertainty ahead. So on the one hand, as you know, we are strongly committed to return to shareholders. We have returned $13 billion this year, and if I actually go back to 2020, we returned $27 billion. So there’s no doubt that, if possible, we will continue to return cash to shareholders.

On the other hand, it’s about securing sustainable cash flows for the group by continuing to invest in our strategy, by continuing to develop Logistics & Services in an environment, which we predict will be quite uncertain. And we have for now, quite a wide range of scenarios painting up for 2024.

Therefore, I think it is only a responsible way to drive the company by taking all measures and preparing all measures necessary to ensure that we can both on the cost side and on the balance sheet side, be actually ready to weather any type of scenarios which might happen. And that is really what we are getting prepared for. I hope that answers your question.

Sam Bland

Yes, understood. Thank you.

Operator

The next question comes from Lars Heindorff from Nordea. Please go ahead.

Lars Heindorff

Yes, thank you. Also a question regarding the buyback and maybe more on the balance sheet. You’re very clear about your return targets for the various divisions in terms of ROIC and margins and so forth. But, I mean, I mean, what will be a desired EV to net interest bearing debt level on the balance sheet? Assuming that we will get such a scenario that you described earlier here in your presentation for 2024. I’ve been going back to your capital market day presentation in 2021, where you state that above three times, that means that you are no longer investment grade. And then you have another threshold which around 1.5 times EBITDA. So just to get a feeling of where are we on that scale and where will sort of be a level which you think is unsustainable.

Patrick Jany

Thanks very much for your question. So diving a little bit into the balance sheet and how we consider our balance sheet resilience, which is really what it’s all about. I think we have a strong commitment to investment grade and to a strong investment grade, which I would roughly say is 1.5 times debt to EBITDA. Right now, obviously, we’re in a very good territory, but if you look ahead, you do have scenarios where we actually have or start to be cash negative, as we also guide for in Q4 already.

And therefore, you can imagine that in the Dios [ph] path of the scenarios, you do have a cash burn, a lower EBITDA, which pushes the ratio not because of the balance sheet and the debt, but because of the lowering of the EBITDA to unsustainable levels. And that is really where we need to get prepared for both on the increasing EBITDA side, which are the cost measures, but also maintaining a good cash position.

Vincent Clerc

And obviously you also have other scenarios which are obviously more favorable. I think right now we do not have the data at the beginning of the season to really see which way the 2024 will firm up. And that is why we also think it is absolutely necessary to flag that with the current level of uncertainty and the level of capacity coming on the market, you do have quite a wide range of scenarios, and that is where I would say, preserving a balance sheet extremely important to us for the investment grade as an overall target, but also to preserve liquidity on the one hand, but also flexibility and investment capacity to be able to continue to invest, as I was earlier alluding to in our Logistics & Services business on the organic side, but also take advantage of opportunities which may arise on the inorganic front, when you look ahead a few years ahead.

Operator

Thank you. The next question comes from Muneeba Kayani from Bank of America. Please go ahead.

Muneeba Kayani

Good morning. Thanks for taking my question. I just wanted to understand a bit on your guidance. So if I take the EBITDA guidance for the year, it implies $750 million for the fourth quarter. Is this including the restructuring costs of $350 million and how much of that would be in the fourth quarter? And just in terms of next year, then is this what is needed to improve the performance from this 4Q implied number? Thank you.

Patrick Jany

I’ll take your question here. I think on the guidance for the EBITDA, we are indeed guiding on the lower end of the guidance, which implies a lower EBITDA for the quarter, which is really what we see coming and implies the effect to a negative cash position for the quarter, as we do have quite significant CapEx commitment as well in the quarter.

I think you can extrapolate it that for four quarters ahead and we’ll come back on our 2024 guidance, obviously in February when we have a better view on those scenarios. That is, I would say the framework you have to work with and the profitability within 24 will still be very much dependent on the movement of the rates and the contracting season, which hasn’t yet started. So from that point of view, we need to have more data on at which levels, in which geographies, at which pace we get volume and rate commitments to form a better opinion on the EBITDA for 2024. But that will be the main driver for our EBITDA evolution in 2024. You would expect that the other businesses will progress, but in the sheer proportion of our results, it will be the rates in Ocean, which determine that.

Hope that answers your question.

Operator

The next question comes from Omar Nokta from Jefferies. Please go ahead.

Omar Nokta

Thank you. Hi, guys. Good morning. I just wanted to follow-up on the cost cutting measures. Up to $350 million coming up here, it’s going to lead to savings of $600 million, as you outlined in 2024. Just wanted to ask on that, is the $600 million cost savings, is that a new run rate for beyond 2024 as well? Can it go into 2025 and onwards? And then with those cost savings, does this in any way affect sort of the integration efforts you have with logistics in Ocean and the business overall? Thank you.

Vincent Clerc

Yes, hi. So on the reduction, so the $600 million reduction that we will achieve next year over this year that is basically a reset of the line and something we have to hold going forward. After that it depends, of course, on the speed of the growth and how the productivity target comes through. So it’s not necessarily and also what inflation levels we have to deal with in the future year. But this is a – this is not like just a diet. This is a reset of the baseline with 10% less workforce and 10% less cost. And then we’ll take it from there and continue to work on further productivity to offset inflation and eat into the growth that we will generate.

Patrick Jany

And maybe coming back on, as well on your question – the previous question, because I didn’t answer totally on the impact on restructuring costs, we expect indeed that it will be the – the majority will be taken this year and it’s not part of our guidance as we guide for underlying EBITDA. I hope that clarifies. Thank you.

Operator

The next question comes from Robert Joynson from BNP Paribas. Please go ahead.

Robert Joynson

Yeah. Good morning, Vincent and Patrick. A question on the freight rate. It was down to around $2,100 in Q3. Could you maybe just talk about the mix within that between spot rates and contract rates? I’m assuming contract rates are still higher than spot rates on average? And maybe just around that if you were to mark-to-market based on current spot rates and recently agreed contracts, where do you estimate that number would settle? Thank you.

Vincent Clerc

Yes. Hi, Robert. So first of all, you’re correct to say that in the third and it will continue in the fourth quarter, contracts will trade at higher prices than the spot rate. The real trick now is to know what is going to happen with the spot rate during the contracting season and the next three months, because that will have an impact on how much of an impact will come from the renegotiation of contracts.

One of the reason why we are actually taking the measures that we are is we don’t really have visibility of where that will reset and what type of premium we can achieve on top of the spot. So what the spot rate is going to be and what type of premium we can achieve on top of that on the contract. But I would say that with the decrease that we have seen in the third quarter and with the expectations that we’re guiding on in the fourth quarter, it is not an insignificant number if we don’t see an upward adjustment in the spot market pretty soon.

I cannot give you a number at this stage because I think we’re going to have the opportunity to come back on 2024. And we don’t want to guide at this. But I must flag that the differences between the two, the way things have evolved here in the last few months, it’s not an insignificant gap, if it was to close down to what the prevailing levels are today.

Robert Joynson

Okay. Thank you.

Operator

The next question comes from Christian Nedelcu from UBS. Please go ahead.

Christian Nedelcu

Hi. Thank you for taking my questions. On logistics, we’ve seen the trends in revenues weakening over the last few quarters. You mentioned about the difficult short-term outlook. When I think about the goodwill impairment test going forward, I think you spent around $8 billion on M&A over the last few years. Could you tell us a bit more about how much buffer you have within the goodwill impairment testing before you need to book any charges there? Thank you.

Patrick Jany

Yes. Thanks very much, Christian for your question. I think impairment test is something we do regularly, so it is not something which would come as a surprise. And we certainly see that the logistics business is bottoming out. As we have mentioned as well, we have a stabilization at a low level, which is certainly not the level we aspire to. As you know, we aspire to the 6% EBIT margin.

And any impairment test is always modeled through multiple years ahead, taking as well in account the measures that we have introduced both on the cost side and the growth that we actually do have on the market when you clean up for the effect of the normalization. So overall, I would say, we are totally confident that the business will generate its cash flows and support its assets looking forward, because we actually do have a nice business here. We do have a cost issue, which we mentioned since a few quarters. We are tackling it as you see the restructuring costs as well this quarter, and this will provide a more healthy base to actually see the growth coming through as well in terms of results in the quarters ahead.

Christian Nedelcu

Thank you very much.

Vincent Clerc

Thank you. The next question comes from Alexia Dogani from Barclays. Please go ahead.

Alexia Dogani

Thank you. Good morning. Can you elaborate why you have decided to implement the fifth phase of the buyback despite the cautious outlook you are signaling? And why have you decided to proceed with this $1.6 billion [ph] of buyback instead of continuing some of your CapEx investments? And can you elaborate what CapEx is not going to happen over the next two years, given your revisions? Thanks.

Patrick Jany

Yes, no, thanks very much for your question. So I think what we are flagging today is that the uncertainty of the evolution of the rates in the past month and in the coming quarters will be fundamental to determine the path forward and the cash flow generation for the years ahead. And therefore, that is why we flag a review of the share by back. It’s not that we have taken the decision to stop it. But I think it’s our responsibility to flag the fact that when we turn cash negative, you’ll have to look as well at all the components, which are cash out.

So from that point of view, it’s just I would say, a flagging that we are, as I said earlier on, totally committed to shareholder returns. I think you’ve seen that from our numbers. And we really return cash as much as we can, but we also stay with a strong balance sheet to invest in growth. And growth is also CapEx, as you rightly mentioned. So we have reduced CapEx on a few levels. Also on the Ocean side, right, on pacing a bit here, the CapEx investment in Ocean because prices are still high on the ship side and therefore we would expect that by delaying a bit, we probably will not end up with a higher cost base on the opposite, it will probably be positive from that point of view.

So we have to be cautious and invest wisely. But certainly we do plan to continue to invest as well in growth in logistic services. That is certainly part of the CapEx ahead. So there’s no reduction, I would say, from that element. And as you’ve seen, we have been investing in the past and would expect those levels to continue as well in the future in registering services.

Operator

The next question comes from Dan Togo Jensen from Carnegie Investment Bank. Please go ahead.

Dan Togo Jensen

Yes, thank you. I was just wondering when we look into 2024 and how we should think about your contract coverage, you usually, at least here in the past couple of years, have had a coverage of some 70% on contracts. Will that be materially different in 2024? I guess it’s down to exactly where you can cut the line for what contract rates will be. But what will be the threshold of you not signing contracts? Will that be if – they are not much different from spot rates and then you will enter in to 2024 much more room than you usually are? How should we think about that ratio? Thanks.

Vincent Clerc

Yes, if you look at the development since from last year into this year, our contract coverage in ocean has been pretty consistent, around 68%, 69%. And that is what we intend to continue to have both in 2024 and even in 2025 and beyond. We think that it does make sense for us to continue to work with contracts. It provides us better coverage, better visibility, and better predictability. It provides us also with yields over time that are absolutely competitive with anything else. So we will continue to do that in the downturn here and believe that this is actually going to play out well for us.

Dan Togo Jensen

Despite rates actually being at unprofitable levels?

Vincent Clerc

Yes, but if rates are at unprofitable level on contracts, then they’re also significantly unprofitable at the spot rate level. And I think if you look at – if you look simply at the amount of tonnage that is in the process of being built in the yards and the phasing in of that capacity, these difficult market conditions, they are likely to stay with us not only for 2024, but also longer.

Dan Togo Jensen

Understood. Thank you.

Operator

The next question comes from Ulrik Bak from SEB. Please go ahead.

Ulrik Bak

Yes. Hi, Vincent and Patrick. Also a question from my side. The reduction in your CapEx guidance for 2024, will this affect your growth perspective in Logistics & Services and also the pace of your fleet renewal and investments in green transition and also perhaps just some color on where this CapEx is taken from? Thank you.

Vincent Clerc

Yes, so if you look at CapEx going forward, I think there are two buckets of savings. First and foremost, we’re completely committed to continuing to grow our activities in the Terminals division, which is showing incredible resilience and very, very strong performance. Patrick went and talked about it earlier today. We also believe in the continued potential of our Logistics & Services division. And that it’s from a CapEx perspective, it’s much lighter, but we will continue to prioritize the opportunities that we have in that field.

Whether the growth I mentioned a more subdued macroeconomic outlook. There is a little bit that comes out of Logistics & Services in our guidance because we expect a slightly lower growth. We still want to get back to the 6% EBIT and the 10% growth that we talked about at our Capital Markets Day in 2021. But there is probably less headroom upward from those numbers in the type of macroeconomic environment we’re headed into.

On the other side on ships, I think if you look at as Patrick mentioned before, the prices in the yards today, I think they reflect mostly a trading environment the way that it was last year, more than the trading environment, the way that we’re talking about looking at for next year. And if we looked at all cycles, it has sometimes taken time for asset prices to adjust and come back in line with the more – to be more correlated with the trading environments where they need to operate.

Our expectations is that the current levels of new buildings or new ships is unsustainable and will have to correct. And therefore taking a pause for a while this happens makes sense for us. We’ve looked at it also from the perspective of our energy transition goals and so on. And at least, obviously, the longer we take that pause and the longer that correction come, the more we will have to look at it at some point. But for the time being, this is something that we can perfectly manage for quite a while before this becomes a risk for our green transition.

Ulrik Bak

Thank you.

Operator

The next question comes from Patrick Creuset from Goldman Sachs. Please go ahead.

Patrick Creuset

Hi Vincent and Patrick. I mean, you said there’s a range of scenarios for 2024, 2025. If we assume the market actually got worse from here in terms of rates. How much would you be able and willing to cut CapEx even further as a new guidance? And what’s the order of priority between doing that a cutting CapEx further versus scrapping the buyback? Thank you.

Vincent Clerc

So with the guidance that we have put forward, actually there is, if you think about 2024 and 2025, there is not a lot of uncommitted CapEx that we can still cut because you have two things. One is you have the CapEx that we have in our terminal division and in Logistics & Services, which from a return on investment perspective is quite positive. So that we would need to – that we would definitely want to continue to support and it leaves us back with cutting further into CapEx into Ocean which is basically containers and ships, which is what we have with what is fueling most of the reduction today. So the reason why we are actually flagging a review of the share buyback program, it is that we have actually taken a quite a few of the hard decisions in – on the CapEx and it is also important that we don’t just go in the bunker and have no investment in the future of the business while we go through to this cycle.

We need to keep that headroom that Patrick talked about to do the stuff that makes sense and that will put us stronger on the other side. So what that means is basically now a lot of the hard stuff on OpEx on organization and CapEx is in place. And what we have to review now is the share buyback program, depending on what the outlook actually will shape up to be between now and February, where we’ll have a bit more clarity. The big moving factor is the freight rate levels that we will see in 2024, which for me is too early to call. But that we will be able to have a more firm opinion with when we come back in three months with our full year results and our guidance for 2024.

Patrick Creuset

Okay. Thanks.

Operator

The next question comes from Jain Parash from HSBC. Please go ahead.

Parash Jain

Okay. Thank you. My question is also hovering around outlook for the Ocean business and if you simply do on the back-of-the-envelope calculation, assuming the terminal logistics doesn’t see much swing going into the fourth quarter. It seems that your Ocean business EBIT margin will be negative double digit, which it has never been in the past. How do you characterize this cycle versus all the previous cycles has a stronger balance sheet of yourself and the peers is turning out to be a curse for the sector? And more importantly, do you think that fourth quarter in your view is kind of a likely trough in this cycle? Or actually we probably will think it’s going to get worse going into the 2024, 2025? Thank you.

Vincent Clerc

Yes, thank you for that question. It’s a great lead in to basically elaborating on what Patrick mentioned in terms of the wide range of scenarios for how this can go. So let me put it this way. If the EBIT was to be as negative as you painted in Q4, what that means is that nothing has happened to the spot market during that quarter and then it would not be the trough because what it will mean is the thing that needs to happen on top of that is a reset of the contract levels down to those levels. And that would end up worse rather than better.

So I think that’s either we see a Q4 is better than we expect and then I think that can have a profound impact on what 2024 is going to look like. If the Q4 is actually not delivering some type of improvements, then I think that we’re looking at a pretty dire situation in 2024. That is something that I think is not a foregone conclusion what is going to happen. That’s why we’re working with very different scenarios, but it is – the range of potential outcome is much wider, I think, than what we have seen in the past. Whether that constitute a curse for the segments of having all that balance sheet, I think that’s maybe more for you to have an opinion on that, for me to voice it.

But it is clearly, I think, we’re faced with a wider range of possible outcome, hence the proactiveness and the decisiveness of the measures that we are taken, which is also what we have been discussing here in these questions and the fact that we’re not leaving anything unturned and want to be fairly transparent with you on what’s going on. And that’s also why we’re flagging that even the share buyback we’ll have to look at, even if it’s fairly early in the cycle, because these possible outcomes are quite wide and we have relatively few months to actually see what this is going to point towards.

Operator

The next question comes from Sathish Sivakumar from Citi. Please go ahead.

Sathish Sivakumar

Yes. Thank you. I got a question on the purchase orders. If I had to say compare at the end of quarter two and now all the purchase orders within the logistics segments have evolved and you did actually flag weakness in Retail & Lifestyle. What about the other verticals that I see. The trends that you’re seeing in the other verticals? Thank you.

Vincent Clerc

Yes. So on POS from customers into North America and Europe, we’ve seen a little bit of seasonal pickup but very limited. So that’s why we think that underlying when we get into – when we look into Q4 and forward, we don’t really see a big recovery from the segment. So some seasonal goods, but not a lot of strength underpinning these purchase order volumes. Obviously from the PO perspective, we have pretty good data on Retail & Lifestyle because they work on the basis of POS. A lot of the industrial – a lot of the verticals from industrials do not cut POS actually. So there you only – you don’t have that advanced window, if you will. You only see what shows up at the terminal when it’s time to move from the factory. I think the way that – the way that we’re – the way that we’re seeing this market is, actually this is not really – the demand is relatively steady. There is no pickup, but it’s relatively steady.

Sathish Sivakumar

Okay. Got it. Yes. Thank you.

Operator

The next question comes from Michael Vitfell-Rasmussen from Danske Bank. Please go ahead.

Michael Vitfell-Rasmussen

Yes. Thank you so much. A question for Patrick here, so I was a bit surprised that the net working capital was a drag in the third quarter. So if you just please elaborate on this and especially kind of talking payment conditions towards clients also as we look into 2024. So if you could give kind of any directional impact on networking capital? Thank you.

Patrick Jany

Yes. Thanks very much for your question and coming back on that time on that item. I think if you actually look back to the Q3 of last year we had the same phenomenon. So it doesn’t totally come as a surprise. We have used Q3 again to enter into negotiations with suppliers to secure as well better conditions and cost for the year ahead. That always implies a bit of a trade off. So more on the payable side than on your question which is the receivable side. I think here we see that actually we are firm and there is no significant improvement, no deterioration of our accounts receivable on that matter, right? So I think that is a good sign. And that really explains our Q3 which if you take, I would say those measures out on the procurement side, we would have had a cash conversion above the 100%.

Vincent Clerc

Great. Thank you very much, Patrick.

Operator

The next question comes from Marc Zeck from Stifel. Please go ahead.

Marc Zeck

Good morning and thank you for taking my question. Just one on charter cost. I believe there was bit of an expectation that the high charter cost that you had in 2022, 2023 will face off in 2024 and beyond? If we talk about those charter costs that go into basically the D&A component, could you give us a bit of a feeling how much of an improvement you might expect in 2024 as those high price charters phase out slowly? Thank you.

Vincent Clerc

Yes. No, you’re absolutely correct that we indicated earlier, and we confirmed that part of the cost improvement we see in 2024 will come from lowering over our charter and time charter rates. I think we’ll come back obviously in February with a more precise guidance to your point for the year of 2024. But we have indicated early on, as you know, that we aim to significantly reduce our cost per unit to actually heading towards 2019 levels. When you adjust for bunker, that’s certainly a view we have for the coming quarters and years to get there, and that will be an element in 2024 that allows us to further reduce our cost per unit.

Marc Zeck

Awesome. Thank you.

Operator

We have a follow up question from Lars Heindorff from Nordea. Please go ahead.

Lars Heindorff

Yes, thank you. It’s regarding the consortia Block Exemption Regulation from the EU. I clearly understand your worries about next year, given the amount of capacity coming into the sea, but besides the rate negotiations which is coming up, I just want to hear your view on how you think that will affect the deployment of capacity.

You don’t have to put it on various trades, I don’t think it. Maybe you have a view, but I don’t think you will share it at this point in time, but always sort of in general in terms how that will play out and how that, what kind of impact you think that the CIBA [ph] will have in the market here going into the spring of next year.

Vincent Clerc

Yes, so from my perspective this will have very little impact, if any at all. The only thing that has changed is that the automatic exemption has been withdrawn and it is therefore subject now to self assessments and assessment according to the normal rules, which in many cases we were doing anyway because you needed to be ready if there was any questions or anything. So the ability that lines have to form VSAs or alliances or collaborations for me is completely is not a big change compared to what we have had before. It changes a bit the amount of admin we have in connection with that, but not our ability to actually make those VSAs.

I think we have ample data to show that these alliances and VSAs have been good for the consumer because they have produced lower cost networks and therefore have resulted in cheaper ocean freight rates. Maybe when we look at next year too cheap, but it is not something that I expect will have much of an impact, at least for us when we think about 2024. This is not really a factor.

Lars Heindorff

Okay, thank you.

Operator

The last question for today’s call come from Muneeba Kayani from Bank of America. Please go ahead.

Muneeba Kayani

Thank you for taking my question again. Vincent, earlier in your comments you said you would take advantage of opportunities that will invariably arise. Could you elaborate kind of what you meant by that? Thank you.

Vincent Clerc

Yes, so, I mean, two things to be very clear. First of all is, as I mentioned, some of the assets whether across all of, whether it’s terminal concessions, ships, even leasings of warehouses, the asset prices have still not really adjusted to the outlook and are still to a large extent factoring some of the boomies prices. So by keeping our powder dry and being able not to overload our order book or our CapEx programs by purchasing at the peak, we give ourselves the opportunity to get more out of that money and to create some value from these investments. That’s one front.

The second and it’s is that we are absolutely determined to continue to diversify the revenue streams of Mærsk and build and expand our capabilities both within the terminal business and the logistics business here in the coming years. And that continues to be our strategy. It has been our strategy for a while.

For this year it’s going to generate over a $1.5 billion in EBIT which we can hopefully with the logistics improving next year, which we can continue to grow and that will cushion actually whatever downturn there is in Ocean and it just underlines the importance for us to continue to invest in that direction. So to supplement asset prices coming down, there will or may be at some point in that cycle interesting assets in the logistics front that we can pick up and that allow us to continue to add capabilities and business lines to what we’re doing. And if and when those align, we want to make sure that we can take advantage of the opportunity and not be constrained at that time.

Muneeba Kayani

Thank you.

Vincent Clerc

Good. In closing, I would like to leave you with the following final remarks. In an increasingly challenging market environment, we delivered a third quarter performance in line with expectations. While we saw an uptick in volumes, we saw price decline across all transportation modes at an accelerated pace. And we expect the market conditions in ocean to worsen further, due to the additional capacity coming into the market and due to the fact that mitigating measures such as idling and ship recycling have not been effective. In this environment, we maintain our guidance range but now expect our result in 2023 towards the lower end of the previously communicated ranges of EBIT and EBITDA. The increased uncertainty and volatility highlights the necessity to maintain a lean and efficient organization. We are therefore acting quickly and preparing ourselves.

We are now intensifying our cost measures, including CapEx, and reviewing all measures, including the continuation of our share buyback in 2024 to improve our cost position and maintain strong and resilient balance sheet. Finally, I want to close with reinforcing our commitment to our strategy. And I was just in on it with the last question.

If there was ever an environment illustrating why we must continue to diversify our revenue and build closer partnership with our customers, then this environment is absolutely it. While we will make all the adjustments necessary to weather what is coming, we will not relent on investing in our strategy which has a strong backing from our customers with this. Thank you for your attention and we’ll talk, I guess, soon. Bye-bye.

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A.P. Møller - Mærsk A/S (AMKBY) Q3 2023 Earnings Call Transcript