A.P Moller - Maersk A/S

Welcome, everyone, and thank you for joining us on this earnings call today as we present our first quarter results for 2024. My name is Vincent Clerc. I'm the CEO of AP Moeller, and with me in the room today is our CFO, Patrick Ianni. Yes, we can move straight to the slide. The first quarter 2024 played out as we expected. With an EBIT of $177 million, we deliver a strong sequential recovery in earnings. Our three main business segments of ocean, logistics and services, and terminals all saw year-on-year volume growth with a demand that has stabilized. In our ocean business, we saw strong market demand towards the upper-hand volumes of our volumes outlook of 2.5% to 4.5%, while on the supply side, the Red Sea disruptions has persisted for the entire quarter and counting, leading to undersupply as vessels sailed longer routes. These two factors have led to higher rates. We have reconfigured now our network to tackle the disruption and keep our offered capacity intact to our customers. Costs have inevitably risen due to the reroutings, but we have not steered away from our unrelenting focus on cost management to build greater resilience in this business. In the logistics and services, we continue our journey towards raising margins and renewing the business with growth. We saw volume growth across the board in all product families. Margins are still under pressure, challenged by implementing in recent contracts wins in ground freight, also known as middle mile, in North America, and continued white space in warehousing. Nevertheless, in both cases, we know exactly what the problem is and what to do. We just need to get on with our work and deliver better results in the coming quarters. Our terminal business went from strength to strength from the new baseline set in 2023. We saw another good quarter with strong performance while the business continued to invest in growth in the form of further expansion and automation throughout our gateway portfolios. On the back of a strong container market and the Red Sea disruptions likely to remain well into the second half of this year, we raised the lower end of our financial guidance, which I will get back to later on the call. Before we look at the segment more close, let me say that we have had a positive start to the year as we continue to focus on profitable growth and strong cost discipline. Specifically, in logistics and services, we saw strong volumes across all product families, with two of our three service models managed by Maersk and transported by Maersk contributing as expected financially. As mentioned, we have had some short-term challenges in our ground freight, which is part of Fulfilled by Maersk, and where we have a plan in action to address the issue. Furthermore, as part of our efforts to adjust the fixed cost base, we continue to right-size our warehousing footprint and drive utilization up. In ocean, we have seen strong market demand coupled with a temporary reduction in supply due to the Red Sea disruption leading to strong volume and rate performance. As the expectation for the length of the disruption increased, we have reorganized our network, which has brought with it a significantly higher cost, but will guarantee the integrity of our service to our customers. We were able to achieve 95% capacity utilization through the period, but not without reliability challenge, which we now need to tackle. It is impossible to predict how long the current situation will continue, but we are now well positioned to endure this disruption for a longer period. We remain extremely vigilant in our cost management, and we expect price pressure to eventually return as new vessel deliveries with rapidly increased supply. Our terminal business has shown continued robustness and experienced volume recovery, particularly in the U.S. West Coast compared to the first quarter of 2023. The robustness of terminals can be seen in its ability to improve pricing reflected in revenue per move while keeping its cost base stable to improve overall margins. The quarter delivered a ROIC over 11% compared to our mid-term target of 9%, which is a testament to the growth investments that we have made over the years, including the expansion and the automation. We have shown these slides for many quarters now, and the key message this quarter is that our strategic transformation continues despite market uncertainty, And we do that by focusing on cost and seeking profitable growth. This quarter has not produced the best scorecard for our midterm targets. Nevertheless, we have remained disciplined on executing with our existing fleet and maintain effective asset utilization in ocean. we delivered strong return on invested capital in terminals. All this and more have translated into a formidable return of invested capital for APMM, just shy of 35% on average since we presented the mid-term targets back in 2021. As we progress further into 2024, we expect to see fuller circles on this slide. At this point, let me confirm our priorities for the rest of 2024. Essentially, we stay on course as we set back at the start of the year. In logistics and services, we renew the business with growth and raise margin and maintain our course towards getting back to 6% EBIT midterm margin ambition. Specifically, while our gross margin are solid, we need to lift our overall profit margin by addressing first our issues with customer implementation in ground freight in North America and warehousing wide space. Similarly, we need to continue our progress in recalibrating our fixed cost base so it fits our level of business and improve productivity. As we have demonstrated with good volumes growth this quarter, we continue winning more customer contracts, which is very encouraging. In Ocean, we want to deliver best-in-class performance in the current volatile market, while at the same time preparing for the network of the future and the hapagloid cooperation. Front of our mind is selectively injecting new capacity to cater for the ongoing rerouting and strong container markets. Secondly, it's about yield and costs. We continue to manage yields on our ocean asset base and bring down our unit cost in line with our ambition to get back to 2019 levels despite the Red Sea disruption. Gemini Corporation will be a significant contributor towards a cost base that is not only more competitive, but also more resilient against crisis and market headwinds. Finally, it is imperative that we minimize supply chain disruptions for our customers and restore reliability while still preparing for the Gemini Corporation. In terminals, we continue to lift the bar set by our own performance to sustain momentum on margin optimization through lean implementation. We replicate what we have done to date across our portfolio and sustain our ROIC momentum. Secondly, we execute on, among others, two state-of-the-art greenfield terminals later this year, namely Swape in Brazil and Rijeka in Croatia, both of which will be fully electric and showcase the best of APMT to the world. The same ambition applies to our hub terminals, which facilitate our ocean business and will be a key driver for Gemini. We invest and ready those terminals for the Gemini Go Live in early 2025. Before I get to the updated guidance, I would like to say a few words about the ongoing disruption in the Red Sea, as it is the main influencing factor for our adjustment. You may remember a similar version of this slide back in our fourth quarter result three months ago. The way this has played out so far in quarter one is exactly in line with the expectations we communicated back in February. That is, we saw rates first spike in the early weeks of the disruptions on expectation that shortages would inevitably result from the longer sailing distances. As the situation got entrenched, container lines, including Maersk, have reconfigured their respective network and injected extra capacity wherever feasible to cater for the rerouting and the longer disruption. Rates began to ease thereafter. More recently, they have started to increase again on the back of strong market demand, exacerbating the very tight supply as most of the global slack capacity was absorbed in the longer sailing routes. Stronger demand and longer Red Sea disruption will have an immaterial impact on rates in the coming couple of quarters and continue to create inflationary pressure across our cost base that could stay with us for a while. We know that with the new container tonnage coming online at a rapid pace, this will be alleviated sometime during the year, and we will again see a gradual decline in our spot rates. And this is the reality, as we said in our Q4 announcement in early February. No matter how long the disruption may last, market fundamentals of increasing overcapacity in the container markets loom and will eventually prevail. We expect this impact to start hitting us either in quarter three or later. What you see on the left-hand side is an illustration of this. We now know the three-month disruption scenario is no longer relevant, so rates that have been propped up by the ongoing nature of the disruptions. Similarly, the original 12-month view is also outdated given the stronger market demand, which has propped up rates further. However, the significant new capacity coming online will eventually put downward pressure on rates. Again, rates will be propped up by the ongoing nature of the disruption or even stronger market demand. We just don't know how long this disruption will last and to what extent it will impact us, which is why significant uncertainty remains as to the overall financial impact in the latter part of 2024. What we do know, however, is that the disruption has increased the cost of the network. We see it through higher network costs from having to deploy more vessels through time charters that are expensive and carry longer duration, higher bunker costs due to higher consumption from longer distances as well as higher speeds, and higher container handling costs as port bottlenecks have started to increase, especially in the western Mediterranean. While we cover our cost for now, we remind ourselves of the overhang that may remain from it while even after the potential resolution of the situation in the Gulf of Aden. And that is a good segue into the next slide. First, we have seen good container volume growth. A strong Q1 and an expected resilience in volumes in the next couple of quarters put us towards the upper end of the 2.5% to 4% volume growth that we had provided earlier. We maintain our expectations to grow in line with the market. We have already talked about the Red Sea disruption just now, and that it is likely to remain well into the second half of the year, which, together with strong container market demand, will support stronger rates and volumes. On the other hand, we have also talked about the significant oversupply challenges in container shipping that will eventually prevail over the short-term tailwinds that we are experiencing right now. For now, however, market fundamentals are being delayed by the two other effects. Taking all those factors into consideration, we have decided to raise the lower end of our financial guidance such that we now expect the full year 2024 to deliver an underlying EBITDA of $4 to $6 billion, an underlying EBIT of negative $2 billion to break even, and a free cash flow superior to negative $2 billion. So a cash outflow of $2 billion or better. our CAPEX guidance remains unchanged. And with that, I would like to pass the floor to Patrick for a closer look at our financial performance.

Thank you, Vincent, and welcome to everyone on the call from my side. As Vincent said, the first quarter of 2024 developed in line with our expectations. The disruption in the Red Sea impacted our ocean business and combined with strong container market demand on the one hand and excellent performance in terminals on the other, We delivered an EBITDA of 1.6 billion and an EBITDA of 177 million, corresponding to margins of 12.9% and 1.4%, respectively. This represents a sequential increase of 90% in EBITDA, demonstrating a significant recovery in earnings since we closed the books on 2023. These results also led to an improvement in free cash flow, which improved to negative $451 million, compared to a negative $1.7 billion in the fourth quarter. We closed Q1 with total cash and deposits of $19 billion and a net cash position of $3.1 billion, demonstrating a continued robust balance sheet. In terms of returns to shareholders, we distributed $1 billion in dividends this quarter and bought back shares worth $440 million. In addition, we have further increased returns to shareholders with the demerger of Switzer. And before speaking more to it in a minute, I would like to remind everyone that as a consequence of this demerger, Q1-24 marks the last complete quarter with Switzer Torridge activities as part of the Torridge and Maritime Services segment. Our remaining TMS business activities will be presented with unallocated going forward. Focusing on the Switzerland merger, the shares of the Switzerland Group successfully started trading on the Nasdaq Copenhagen on Tuesday, April 30th, after being approved by the AP Merger Merge shareholders on April 26th. The spin-off is in line with the consequent portfolio streamlining we have executed in the last years in order to focus our activities on end-to-end logistics. This pro-rata distribution of Switzer shares to shareholders implies an in-kind distribution of approximately $1.1 billion and the opportunity for our shareholders to directly participate in a leading infrastructure provider with proven track record in terms of profitability and growth. For fiscal year 2024 and thereafter, Switzer expects to pay 40% to 60% of annual net profit available for distribution as dividends, which will provide further cash returns to APMM and Switzer shareholders. On that note, we wish all the best to Switzer and our former colleagues on their onward journey as an independent company. Now looking closely at our cash generation on slide 13, we see that our free cash flow of negative $151 million for the quarter is mainly due to the lower operating cash flow compared to a year ago. The cash conversion was a relatively weak 69% this quarter, mainly due to an increase in working capital as a consequence of increased trade receivables in logistics and services and ocean due to growth and Red Sea disruptions. our gross capex was $706 million, representing a decrease both sequentially and year-on-year due to the timing of vessel deliveries. The main capex this quarter were final down payments on new vessels in ocean, including the delivery of our two methanol vessels, Astrid and Elimersk, and equipment to modernize and automate our hubs and gateways as we expanded capacity and prepare for the new Gemini network. Overall, we are tracking well within our CapEx guidance, and these installments were on track as well. The further bridge to our net cash flow shows our significant returns to shareholders of $1.5 billion and the proceeds of our 1 billion dual-trunch euro bond. Now let's deep dive into each of our three main segments, starting with Ocean on slide 14. As Vincent mentioned, we showed strong delivery notion on the back of the Red Sea disruption, which combined with robust container volume growth drove up container freight rates, compensating for the higher costs brought on by the rerouting and marked a significant sequential rebound, both in terms of revenue and profitability compared to the fourth quarter in 2023, but still significantly lower than the still COVID-influenced high-rate environment of the previous year. Volumes were 7.5% year-on-year, with global container demand recovering from a low previous basis, as we also gathered spate during the quarter. On the other side, the quarter also saw an increase in supply, which began to exert downward pressure on rates, as the immediate extra capacity requirement due to the Red Sea was absorbed. While rates have eased since their peak early in the quarter, they remain elevated, driven by strong demand and the ongoing Red Sea disruption. As we progressed during the quarter, profitability progressively picked up, as the disruption effect receded and the network stabilized, although at higher costs, which will need to be addressed in the coming quarters. Let's turn to the familiar EBITDA bridge on the next slide, which shows that the main element impacting profitability, when compared to the previous year, was the further deterioration of the rate rates by 18%, which more than offset the already mentioned rebound in volumes. Banker price was flat millionaires, and container handling costs, excluding the volume effect, had little to no impact. Network costs increased due to a higher 16% consumption in bunker as a result of longer trips and higher speed for rerouted vessels. Finally, we have a negative $1.1 billion driven mainly by revenue recognition, which will unwind over the coming quarters, combined with mixed effects and lower demerit and detention revenue compared to Q1 2023, when land-side bottlenecks were still quite high. We have touched upon some of the key operational figures on slide 16 already. While freight rates have decreased 18% year-on-year, They have increased 23% quarter-on-quarter, driven by the Red Sea disruption, stronger container market, and extra capacity due to the rerouting. Similarly, unit cost at fixed bunker has increased 9% sequentially, driven by driven by, amongst other, higher bunker consumption over longer distances, and nevertheless, bearing the effect of the Red Sea and comparing to the first quarter of 2023, our unit cost fell by 3%, helped by higher volumes confirming the downward trend as we worked to get our cost back to the 2019 levels. Our average operated fleet capacity increased 1.4% sequentially, and our capacity utilization increased to 95%, to accommodate for the capacity absorption of the Red Sea disruption and the stronger container volume growth. But this had an impact on our reliability, which remained challenged. Now turning on to our logistics business on slide 17. We saw this business return to growth in the first quarter, with volumes increasing across all product families, demonstrating the end of the destocking and confirming the strength of our value proposition towards customers. As a result, revenue has stabilized, delivering $3.5 billion, equivalent to a 1% year-on-year increase, notwithstanding lower rates, especially in first mile and air. The profitability of logistics and services was solid in most products, but severely impacted by challenges in contract logistics and ground freight, such that EBIT was limited to $54 million, equivalent to a margin of 1.5%. In light of the good volume momentum and our actions to tackle the specific cost issues, we expect margins to have bottomed out with improvements to follow in the coming quarters. Let's have a look at our service models on slide 18. While you are familiar with our service model, we just wanted to remind you that managed by MERS contains many of the service businesses, such as lead logistics and customs house brokerage. Fulfilled by MERS contains our contract logistics business and ground freight, also known as middle mile and last mile. And transported by MERS contains our intermodal business with first mile cross-border transportation, air, and LCL. While we have identified issues in implementing new contract wins in ground freight in North America, and we have continuing wide space in warehousing in Europe and North America, both of which sit in Fulfilled by Maersk, it is important to stress that Managed by Maersk and Transported by Maersk are performing and contributing with good volume growth, albeit offset by lower rates. Starting with the top, Managed by Maersk had revenue decrease by 18% to $468 million, resulting from lower rates and a change of mix in lead logistics and customs. Conversely, the EBIT-R margin increased to 17.3%. Next, fulfilled by Maersk, had revenue increased by 8% to $1.4 billion. Overall debate EBITDA margin declined to a negative 6.2% on the back of the difficulties just mentioned earlier. Transported by Maersk, revenue increased 2% to $1.6 billion, while freight rate pressure from air and first mile led to a slight decrease of the EBITDA margin to 6.5%. On side 19, we turn to terminals. which once again delivered a quarter with excellent performance, driven by 9% higher volumes and increased tariffs to compensate for inflationary pressure. From a geographic perspective, North America drove the majority of the increase as U.S. West Coast volumes recovered 29% compared to a weak first quarter 2023 and solid growth in Latin America. The good progression in volumes, together with strong pricing and strong contribution of joint ventures, allowed for a 45% increase in EBIT to $300 million. This also allowed for 11.3% return on invested capital, well above our 9% mid-term target as mentioned earlier. Now let's take a look at the details of terminals profitability on slide 20. Here we can see the rebound in volumes, which is consistent with the volume trend we are seeing across all our business segments. The higher volumes combined with CPI-related tariff increases and a positive consumer mix caused revenue per move to increase 4.5% despite the continued unwinding of storage income. At the same time, cost per move increased only marginally by 1.1%, leading to an EBITDA expansion to $348 million, a 20% increase compared to Q1-23, and a 15% increase sequentially. Once again, the terminal business showed resilience through the ability to protect margins through a combination of tariff increases and operational excellence. With that, we conclude our review for the first quarter, and I would now like to hand back to the operator to start the Q&A session.

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