A.P Moller-Mrs Uns/Adr

everyone, and thank you for joining this earnings call today as we present our second quarter result for 2024. My name is Vincent Clerc. I'm the CEO of Epimolar Maersk, and with me in the room today is our CFO, Patrick Yianni. As usual, we will start with the highlight from the quarter just passed. The second quarter was marked by increased momentum and ramp-up in earnings relative to the first. We saw strong market demand, which gave volume growth tailwind across all our segments, and a continuation of the situation in the Red Sea, which led to constrained vessel capacity and some port congestion. We closed our books with an EBITDA and EBIT of $2.1 billion and $1 billion respectively, demonstrating agility and adaptability in the face of a dynamic market environment. In logistics and services specifically, organic growth is gaining momentum following the normalization we saw in 2023. And with the higher profitability, we also saw the EBIT margin rebound sequentially to 3.5%, which is not where we want to be, but puts us on a good course towards our goal of being above 6%. About one month ago, we decided to withdraw from the DB Schenker sales process. I want to be very clear that our strategy to grow logistics and services is more relevant today than ever. We remain committed to growing the business through organic investments, where we already have the necessary capabilities to win and to scale, as well as through value-accretive acquisition that bring us additional capabilities and coverage. Our assessment, after careful review, was, however, that Dibishanker did not fit this. And it would have brought along significant integration-related risks that would have put our own momentum at risk. In ocean, we saw profitability building up on the back of higher freight rates, and we delivered a good EBIT margin of 5.6%. This is despite the fact that the higher spot rate we saw during the quarter are yet to fully materialize into higher realized rates from the way we run our business on contracts in the ocean segment. We expect to see the full impact from higher rates in the third quarter. And as far as the Red Sea disruption is concerned, we are now entering the ninth month of continued threats and attacks on vessels passing through or near the Strait of Bar-el-Mandeb. The situation on the ground is not de-escalating. Rather, we believe the situation is entrenched and expect to stay at least until the end of 2024. Market demand has so far been very strong, leading to an increase in our full-year expectation, but we are uncertain of the extent to which this strong volume we have seen thus far will hold up into Q4 adjusted for normal seasonality patterns. And we have terminals, which continued its strong break. The segment demonstrated excellent performance, leading to one of the highest EBITDA levels ever. All these developments, as you saw last Thursday in our ad hoc stock exchange announcement, has led us to raise our guidance for 2024 to an underlying EBITDA of $9 to $11 billion and an underlying EBIT of $3 to $5 billion and a free cash flow of at least $2 billion. Let me get back to the details on this later in the call. Now going a bit deeper, this quarter was no exception to our maintenance. profitable growth and on strong cost discipline to deliver good results in all our segments. In logistics and services, we have well and truly closed the chapter of the normalization of 2023 and saw solid revenue growth of 7.3%. This revenue growth was driven broadly across the product portfolio, reflecting both strong volume performance of existing contracts and large number of new implementations coming online. Ground freight, despite the implementation challenges mentioned last quarter, warehousing, air and first mile were especially strong. Even more importantly, along with the higher revenue, margins tracked positively with a segment EBIT margin of 3.5%, as we dealt effectively with the implementation challenge we experienced with customers' contracts in ground freight in the first quarter. As we are moving into a more business-as-usual setup there, we are moving back to growing our ground freight and our overall L&S business profitably. Finally, we have seen significant improvement in the SG&A cost base. We continue to work on calibrating the cost base by increasing productivity on the back of new technology deployment. This work, together with the efforts on asset utilization or warehousing wide space, have more improvement potential and will be central to getting us structurally above the 6% EBIT margin target we have for the segment. Moving on to ocean, we demonstrated solid delivery in the second quarter, which is the second full quarter impacted by the rerouting of our network away from the dangers of the Red Sea. Our volume showed a strong year-on-year growth of 7%. As the disruption became entrenched and demand continued strong, we saw across the market an increased shortage of capacity and equipment, And as a result of the longer turn times from the longer roads, also port congestion, especially in Asia and in the Middle East. All this led to a significant new upward movement in rates in May and June. This translated into an immediate impact on volumes coming from the spot market. For the significant majority of our volumes, which are under contract, increased price have been secured as well, but we will see a delayed impact coming through in the second part of the year. Securing these increases is of course crucial for us as we do face significant and potentially sticky extra costs to maintain the fluidity of cargo flows, including higher charter rates and more equipment needed. Finally, notwithstanding the rerouting, we are carrying on with implementing our new network design for the future as we work with Hapag-Lloyd to go on with the Gemini network in February 2025. As you may know, the operational cooperation encompasses 58 services on the key east-west trade lanes, comprising 26 mainline of service and 32 shuttle services across 85 port terminals. The arrangement constitutes a truly unique and innovative hub-and-spoke model, which will lead to fewer bottlenecks and therefore industry-leading reliability. We are all very excited about the launch and are confident that this will give us a competitive edge in OCEAN. And then on terminals, we saw another uptick in what was already an excellent performance last quarter. Top-line growth came from higher volumes and higher ancillary revenues. Save for the extraordinary quarters peak congestion related in storage in 2021 and 2022, we closed this quarter with the highest EBITDA ever, which is a testament to the constant underlying progression and strength of terminals. Just as we look to grow our portfolio with new locations, we also continued with our investments in our existing locations at a pace, not least into automation and expansion. Moving on to our scorecard, which measures our ongoing strategic transformation. A few important points to make here. First, we discussed that this quarter we saw a rebound in logistics and services, a build-up of momentum in ocean, and a continued excellent performance in terminal. It is therefore fair to say that our overall business is on the mend and improving. So we expect the scorecard to improve progressively in the coming quarters. Secondly, we measure the scorecard metrics on the last 12 months basis, a period that covers still the tail of the normalization of 2023, and therefore distorts the snapshots of the last 12 months view at the end of this second quarter. We expect better metrics simply from having these noisy quarters of 2023 falling out of the measurement period. Overall, our foundation and starting point for here in 2024 are real and strong. We have an average ROIC of over 30% over the midterm to date, and EBIT margins are trending up in all our segments, and a remarkable ROIC in terminal at 12.2%. As we progress further into the year, we also progress on the key priorities that we have set for ourselves to make 2024 a success. In logistics and services, the second quarter was marked by higher organic growth as well as margin recovery towards the 6% goal. Simply put, we made progress, but while we made progress, we are not where we need to be yet. We need to sustain that momentum in the quarters to come, first by further improving our performance in ground freight, that is our middle and last mile business, after we have begun to remedy the situation from last quarter. Second, by increasing asset utilization where it lags, either through new contracts where possible profitably, through site consolidation, or offloading of unneeded capacity. And finally, by continuing to improve productivity with the gradual rollout of our technology platforms. In Ocean, the outlook is radically different from what it was just six months ago, but still subjects to a higher-than-normal level of uncertainty. We need to keep responding with high agility to protect our colleagues at sea, serve our customers as well and fairly as possible, and ensure continued strong recovery to cover at minimum the extra costs we are incurring, present and future, as a result of this disruption. Since the outbreak of the disruption, we have effectively protected all our colleagues and assets. We have also chartered about 172,000 TEUs of extra capacity to mitigate the impact of the disruptions on our customers' cargo flow, and we have had numerous commercial discussions to ensure that the costs linked to these actions will be covered. We will continue to work in that direction, as well as manage yields and costs relentlessly. This agile approach in the short term continues to be underpinned by a strong and consistent strategic perspective. We are, for instance, executing on our fleet renewal program as communicated in 2021, targeting the delivery rates of about 160,000 new TEUs per year. The separate announcement we made today on vessel orders for delivery from 2026 to 2030 illustrates both an agile response to the present circumstances where shipyards faced extended delivery times and had demanded that we watched a batch multiple years of delivery at once, and our commitment to staying the course with a steady renewal that will sharpen our competitiveness and enable the decarbonization of our operation and maintain a disciplined approach to deployment. In terminal, it's all about sustaining our good momentum while not becoming complacent and continuing to invest in growth. Lean implementation is now complete across our entire portfolio of gateway terminals. We now look to become an even leaner through a further strengthening of lean and lifting the bar increasingly. for ourselves. This quarter, we have also seen good progress in our two landmark greenfield terminals, with Rijeka in Croatia going live next year, and that will be followed by Swape in Brazil in 2026. Finally, as you know, our hubs terminals are going to play the critical nodes of our new network design under the Gemini network. Of our seven hubs terminals, we have just three remaining that require an infrastructure upgrade, which we look out to carry in the beginning month of this year. Before I get to the updated guidance, I would like to present an updated version of a slide that you may recognize from our previous two quarters. As we have progressed through the year, we have more data on the current state of affairs and the future outlook. As mentioned, the ongoing Red Sea disruption has become so entrenched that it has offset the impact of increased supply on potential overcapacity, which we spoke about earlier in the year. In parallel with the tonnage being absorbed in longer routes, we have seen strong market demands and more recently port congestions, which have caused rates to increase, especially in the second quarter. Rates have eased somewhat in the past month with the easing of congestion and the continued injection of new capacity, but they remain elevated compared to before the outbreak of the red sea situation. When we look at the chart on this slide, we see that our expectation of the timing and pace of rate normalization has been pushed out several times with the prolongation of the disruption. Similarly, strong market demand and port congestions have also contributed to higher rate levels compared to the original view we had back in February. Meanwhile, things have been more predictable on the supply side, with new buildings entering the global fleet at a 2-3% increase per quarter, exactly as we had expected. While we currently see no signs of overcapacity, the incoming supply of vessel capacity will continue to put downward pressure on rates in the coming month. The biggest question mark for us is therefore now on the demand side. We have seen a strong bounce back in container volumes so far this year compared to 2023. Much of this is related to cyclical restocking as many businesses globally feel more optimistic about the state of the economy. While there is less worry about the economy, however, there is still worry about geopolitics in the world. And that is where we could be seeing some pulling forward of demand, most notably in North America, with the U.S. election in November and the uncertainty about future import tariffs. Moreover, there is a potential risk of industrial action following the pending labor union talks that could lead to supply chain disruptions for businesses who rely on goods and inputs to keep running. Our guidance range, specifically the high versus the low end, is largely driven by the uncertainty in the container volume demand in Q4 and when and how new tonnage gets deployed. If the current strong market demand holds, adjusted for normal seasonal fluctuation, we expect rates to taper but remain high throughout the fourth quarter. On the other hand, if the Q4 volumes are weak because of significant demand that has been pulled forward, we expect faster normalization. In both cases, though, we expect coming out of the year in much better shape than we did some months ago. And that is a good segue to the next slide. Most of the content of this slide is not new for you following our ad hoc announcement last Thursday, but allow me to highlight a few points here. First, the year is playing out much stronger such that we revise our container volume growth for 2024 to 4% to 6% compared to our previous outlook of settling towards the upper hand of the 2.5% to 4.5%. We still expect to grow in line with the market. As far as our financial guidance is concerned, we raise our earnings and free cash flow range on the back of several factors. First is the ongoing supply chain disruption in the Red Sea situation, which we now expect to continue at least until the end of the year. Second, the robust container market demand, sustaining upward pressure on rates and volumes across all our segments. Nevertheless, we are conscious that mid-term supply and demand remains unclear. And for now, the first two factors are deferring the issue of oversupply indefinitely. Taking those factors into account, we revise our underlying EBITDA and EBIT guidance for 2024 to $9-11 billion and $3-5 billion, respectively, with a free cash flow of at least $2 billion. A quick note here that the increase in the free cash flow guidance is affected mainly by the slightly higher capex we now expect in 2024 or 2025 of $10 to $11 billion due to the earlier prepayment of the vessels we ordered, which is because of the batch of orders a bit higher than what we had previously planned for, as well as an increase in networking capital reflecting the higher freight rates at the outcome of the year. With that, I would like to pass the floor to Patrick for a closer look at our financial performance. Patrick?

Thank you, Vincent, and thanks to all of you who have joined us on the call today. Against the backdrop of higher rates in ocean and profitability in all of our segments, we saw strong sequential improvement in performance in the second quarter. we delivered an EBITDA of $2.1 billion and an EBITDA of $963 million, implying margins of 17% and 7.5% respectively. When compared to the still pandemic-inflated second quarter of last year, our Q2 results show a revenue that starts to be comparable, while both earning measures are still significantly behind. Sequentially, We also recovered to positive a free cash flow of $397 million in the second quarter, compared to a negative $151 million in the first, which allows our balance sheet to remain strong, with total cash and deposits of $19.7 billion and a net cash position of $3.6 billion. Finally, I want to remind that we successfully completed the spin-off of Switzerland towards the start of the quarter. The spin-off represents a further return of approximately $1.2 billion to our shareholders based on the latest market cap. Now let's take a closer look at our cash flow generation. Starting from the left, we see cash flow from operation this quarter of $1.6 billion, which was impacted by an increase in net working capital of $260 million, which we typically see in an increasing freight rate environment from higher customer receivables. This cash absorption contracts with the cash release period in the same quarter last year, when the decreasing volume and freight rates were the main environment. As a result, cash conversion remains somewhat soft at 76%, but has improved sequentially from 69% in the first quarter. Of the total capex of $9.4 million this quarter, $578 million, or about 65%, relates to our ocean business, of which in turn 60% relates to vessels and 40% to equipment and hubs. Further cash movements came from payments of withholding tax on our dividend distribution earlier this year and a settlement by Switzerland on intercompany balances on its demerger from the APMM Group in late April. Moving on to slide 13, I want to briefly come back on our unchanged thinking on capital allocation to manage financial risks while seizing growth opportunities in order to pursue shareholder value creation. As we all know, the ocean business is quite volatile, and this volatility also underpins our strategic rationale for moving towards more stable and predictable cash flow profile with greater contributions from logistics and services and terminals. These elements are at the core of our capital allocation, which correspondingly follows three criteria. In the immediate future, as we mentioned earlier in relation to our guidance, it is still unclear how the supply and demand balance will eventually play out in the context of the succession of temporary disruptions like the Red Sea situation. Until we have a more certain outlook, our first priority remains to be able to sustain several tough years without compromising the financial stability and growth of the Group, which implies keeping a strong liquidity position. Secondly, we continue to invest in our fleet renewal program, as we have announced today as well, in line with our ambition to reach net-zero greenhouse gas emissions by 2040, while pursuing organic growth opportunities in logistics and services and terminals. In addition, we will continue to consider selective value-creative acquisitions opportunities for added capabilities and coverage. Finally, we remain committed to our dividend policy of distributing our profits annually and to return any excess cash through share buyback programs. Any decision on allocation and return of capital is therefore to be seen in this context. Now let's have a look at the financial performance of our segments, starting with Ocean on slide 14. Again this quarter, we saw strong sequential improvements to profitability, driven by favorable freight rates, spurred by the impact from the Red Sea disruptions, and boosted by robust volume growth. Volumes increased about 7% year-on-year and 6% sequentially. Rates increased, driven by the absorption of capacity due to the rerouting around the Cape of Good Hope, and increased port congestion, especially in Asia and Middle Eastern ports. This level of congestion meant it was more significant in May and June, but has since then eased from its peak. We also continued to optimize our rerouted network during the quarter, improving our delivery and quality levels. While our reliability has improved, it still remains a challenge, which we must address in the coming quarters. Overall, we saw sequential recovery in our profitability, with an EBIT turning positive at $470 million, representing an EBIT margin of 5.6%. Moving on to the ocean EBITDA bridge on slide 15, we can see a few notable elements behind the change in EBITDA compared to the second quarter of last year. First, what is noteworthy this quarter is to have both positive volume and freight rate effects for the first time since under the pandemic fuel boom in 2021. Secondly, the freight rate effect of $236 million is offset by higher costs related to the Red Sea rerouting, mostly from the high network costs from higher bunker consumption due to the longer distances and the higher speeds. The third point, nevertheless, is that we have a substantial revenue recognition effect in this quarter as increased volumes, increased rates, and increased transit times all contributed to increase the difference between loaded and recognized revenue. This drives a major part of the $985 million shown in other revenue impact when compared to the previous year. This position will unwind, and we have a bottom-line impact in the second quarter. Moving on to the KPIs for ocean on slide 16. In the second quarter, freight rates increased 2.3% year-on-year and 5.5% sequentially. Our contract business means the sequential development of our average loaded rates lags any spot rate development, but will catch up and have a significant impact in the third quarter. Operating costs, including bunker, increased by 1.9%, by higher container handling costs, partially offset by significantly lower SG&A costs. Meanwhile, our unit cost at fixed bunker decreased 0.9% year-on-year, despite the Red Sea effect and the associated higher bunker consumption, and also decreased 4.5% sequentially, mainly driven by strong volume growth. Despite increasing our fleet by 3.5% year-on-year and 2.3% sequentially to 4.3 million TEUs, our capacity utilization remained tight at 97%. In times of volatility and uncertainty, our customers value the stability of contracting, as reflected in the high share of contracting at 76% for the quarter. We, however, expect contracting to land at approximately 70% for the full year. Now turning to our logistics and service business on slide 17. The segment saw growth momentum, delivering volume growth across all product families for the second quarter in a row, which more than offset the generally low rate environment. Revenue increased 7.3% year-on-year and 3.7% sequential. Growth was particularly pronounced in ground freight and last mile in North America, and air in Asia and Europe, where the first mile was generally strong in all regions following the ocean volumes. As Vincent mentioned earlier, profitability has started to recover after bottoming out in the first quarter. The progress of our initiatives to address issues in the ground freight and warehousing, as well as our focus on costs, with, for instance, SG&E decreasing 19% year-on-year, allowed us to generate an EBIT of $126 million, equivalent to a margin of 3.5%. While those results are not where we want to be, they put us on a good track towards our 6% EBIT goal. Let's have a closer look at our service models on slide 18. Managed bias or revenue decreased by 9% to 491 million as mix was improved, which allowed to increase the EBIT R margin to 18.1%. Growth across all products in Fulfilled Buy saw its revenue increase 13% to $1.4 billion. We continued to optimize our warehousing footprint and address the inefficiencies in ground freight mentioned previously, which led to an EBITDA margin of negative 3.2%, up sequentially on negative 6.2% in quarter one, but still down year on year on negative 1.9% last year. Finally, transported by at higher volumes, in air, LCL and first mile, delivering revenue of $1.7 billion, up 8.4% year-on-year. The EBITDA margin was stable at 7.4%, benefiting sequentially from better operational efficiency. Finally, turning to our terminal business on slide 19, terminals delivered another quarter of excellent performance with volume growth, higher tariffs, and some additional storage revenue from localized congestion, leading to a revenue growth of 15% year-on-year. Volume increased 6.8%, driven by strong growth in North America and in Asia, where our Mumbai terminal became fully operational again following construction closures last year. The strong top-line growth, together with effective cost management, generated an EBIT margin of 32.4%, increasing both year-on-year and sequentially. The return on invested capital remained high at 12.2%, well above our mid-term target of 9%, and we continue to invest to ensure the further growth of this segment. When looking at the components of the increased flexibility and profitability on slide 20, It becomes apparent that volume growth and, to a larger extent, an increased revenue per move were the main contributors. Driven by a tariff increase, a more favorable custom mix, and additional storage revenue, revenue per move increased by 6.7%, while cost per move was under control. Overall EBITDA increased to $408 million, equivalent to an EBITDA margin of 37.5%, and representing a double-digit increase both year-on-year and sequentially, highlighting the continued strength of the business. With that, we will continue to the Q&A session. Operator, please go ahead.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star, then two. Questions on the phone are requested to use only handsets while asking a question. In the interest of time, please limit yourself to one question. Anyone who has a question may press star and 1 at this time. The first question is from Christian Nebelcu, UBS. Please go ahead.

Hi. Thank you very much. Maybe it's a two-part question, so apologies about that. But coming to the slide 8, where you show your low-end scenario of the freight rate more or less in line with the second quarter for the end of the year. Normal seasonality means the volumes are going to be down around 5%, 6% sequentially in September, October versus the peak. You've mentioned we had front loading, so the decline might be more pronounced than that. So what are the factors that give you confidence that by October the rates are not going to be back to pre-Red Sea disruption? if you can elaborate a little bit on that. And so just in connection with this, if I look at your slide 8 and the other data points that you said, it does seem that your EBITDA Q4, so your exit rate, should be meaningfully above the Q2. for three reasons. First of all, your spot rate in Q4 is more or less aligned with Q2. Secondly, you're no longer going to have the timing of revenue issue that depressed your EBITDA in Q2. And thirdly, you've mentioned throughout the call that you've renegotiated higher contract rates, which we don't really see in the Q2 EBITDA. So am I understanding this correctly? Your Q4 EBITDA exit rate should be meaningfully above Q2, or am I missing anything? Thank you.

Yeah, thanks very much, Christian, for highlighting the value of our slide on eight. So clearly, I think, as you see here, the scenarios, the low end sees a reduction of rates in the Q4, where the uncertainty relies on the volume. So you have the seasonal effect, which we have counted in our simulation, which you highlighted. But it's really about knowing how much has been pulled forward or not, which will determine ultimately the action level in the Q4. And that's where the uncertainty lies. So that is, I would say, the unknown effect, which then determines the deterioration of the rates in Q4. But overall, we do not see right now that rates would come back to pre-Red Sea in the Q4. But we see them coming down sequentially, and then we can debate the rate of the decrease depending on this volume situation in Q4. But that is the level of uncertainty we see today, having decent visibility both on volumes and the contracted rates which we have. As you know, we are not totally exposed to fully spot which is a delay in profitability we have now but that gives us also a certain buffer when we look into q4 so more sequential reduction of rates should they deteriorate more on the spot rate Now, when we look at the EBITDA on Q4, so clearly, just to put everybody on the page and that we highlighted as well in our presentation here, is that Q3 will be the peak of the year, right? Clearly building momentum from the Q2, both because of... of increased contract rates and the revenue recognition effect. So we have longer transit times. You have a delay because of contracted versus spot. Those two effects push profitability more into Q3 versus Q2. And then we have the uncertainty in Q4. So as we see today, Q4 will be lower than Q3. But for the above stated reasons as well, I would agree to your statement that Q3 is probably higher than Q2 in terms of EBITDA. I hope that answers your question.

So you said that Q4 is higher than Q2. Your last statement. Yeah. Thank you very much. Thank you.

Thank you. The next question from Ulrich Bach, SEB. Please go ahead.

Yes, hello. Thank you for taking my question. Just on your logistics and services, I know you talked about some of the initiatives that you've done to improve growth and margins, but you also mentioned something about a new system which has increased productivity. So can you perhaps elaborate a bit about this system and what the additional impact from both the system but also the other initiatives that we can look for during the second half of the year? So how far will we get towards the target of 6% EBIT margin?

Yeah, thank you, Ulrik. So you're correct. I think the... The expectation that we have is that the recovery we're starting to see here sequentially on Q2 needs to confirm itself and needs to actually reinforce itself on the back of three main initiatives. One is, as you know, we've been talking about for years the investments that we're making in digitalizing our processes and deploying new platforms gradually for companies to gain on both productivity but also the features and the things that we can sell to customers. We are this year and will continue into next year to be in rollout phase for a lot of these initiatives. So we will gradually see, I expect that some of the improvements that Patrick mentioned on SG&A cost, they will continue to come through at a certain pace as we move forward with the rollout. I mentioned also asset utilization takes a bit more time because in some cases you need to go through the commercial pipeline. You need to implement new contracts or you need to consolidate or offload certain sites, which takes a little bit of time. But there is quite a bit of improvement that needs to come here in the second part of the year here also to help us lift the margin that we have on our revenue here. And then the third one is, of course, that we continue to see the progress on ground freight where we have had some issues in implementation in the first quarter. The ongoing volumes, they are pretty good, and we don't see a big risk on that front. So from the rest, like the ongoing business and level of activity, we feel good. So it's about now seeing those three initiatives deliver more and sustain themselves so that we can get above the 6% sooner rather than later.

That's clear. Thank you.

The next question from Muneeba Kayani, Bank of America. Please go ahead.

Hi, Vincent and Patrick. I just wanted to clarify a bit more on the contracts that you talked about in terms of kind of where, what portion of the contract volumes have these higher rates kind of Where are the rates on contracts now, if you can give us a sense roughly, versus where SPOT is? And kind of where are these revisions on both Asia, Europe, and Trans-Pacific? Thank you.

Yeah, thanks very much, Moniba. Let me jump on that question. I would say when you look at the contracts, it obviously takes more time because you have mechanism in the contracts to adapt to a rising spot rate. So we have a time lag when the rates go up. We have now reached a level in terms of renegotiation during Q2 where I would say the contracts have been adjusted. And at the same time, you see the spot rates have actually eroded a little bit in the last few weeks. So you'll see both lines converge over time. And then we would expect in Q4 spot rates to come down and contracts to progressively then erode at a lower pace as we enter into the Q4. So that is the pace of the elements. It's not a one-to-one, but clearly there has been a lot of effort in the second quarter and a lot of discussion with customers as well to adjust the contracts to the higher level of cost that we have. As you have seen, Q2, we have not recovered the additional cost that will come in Q3 as we have progressively adjusted the contract rates. And the revenue recognition as well, then, is more of a timing effect. But the contract rates per se have been adjusted and will drive profitability in Q3.

The next question from Dan Toggo Jensen. Carnegie, please go ahead.

Yes, thank you for taking my question here. Maybe a question relating to the costs. Unicost still at least a fixed bunker down compared to last year, despite you consuming 18% more fuel. Can you elaborate a bit on the dynamics here? Network costs, as far as I can see, it has come down per So I guess it's partly relating to time trial costs rolling off or the time trial contracts rolling off. But what is the outlook for the coming quarter? Time trial rates probably are on the rise again. And have you secured capacity? for the peak and for the higher activity that you expect throughout second half? That's the question. Thanks.

Yes, I think the – thank you for underlying that because there are so many things happening that this is actually a very important point. The key driver for the reduction in unit cost is the asset utilization. 97% utilization across the network. is helping a lot. And so we have basically 7% more volumes on the network that is marginally bigger from a TU perspective to what it was last year. But because of the longer sailing routes, actually on offered capacity is basically the same. So that is the main driver. We have secured the capacity. I mean, we have secured the capacity that we need right now. The one thing that I want to say from a unit cost perspective, I think going forward, there is a couple of levers for us to continue to that. One is to maintain asset utilization. And two is actually in order to mitigate some of the impact of the disruption, all networks today across the board are sailing at full speed. That's why you see actually that the freight bill, as you rightfully point towards, it has been increasing quite significantly. So part of it is we're sailing more miles, but the other part is we actually is also sailing faster. So there is a big opportunity for us to actually manage the influx of capacity in the coming quarters by lowering the the fuel bill and setting the speed down, which will extend transit times a little bit more, but will actually manage to offset some of the erosion that we see on the prices if they were to confirm themselves by taking the cost also down. And that's certainly something that we will look at balancing now between what is more... Earnings are creative. Is it to deploy more capacity or is it to lower the unit cost? And that's the type of levers we need to do or we need to look at depending on how rates are evolving or how demand is evolving. If there is a taper of demand in the fourth quarter, then it is economically very interesting for us to plug some of the tonnage into slow steaming. If demand continues strong, then we may have to accept a higher freight bill in order to move more volumes. The time charter, just one closing comment, the time charter was high during COVID. It came a bit down, and now it's pretty high again. So it's not playing a big role at this stage, but obviously with a very strong demand and so far more shortage of capacity than not, we've seen very high charter rates. As more new tonnage comes in, then this will also slowly taper off.

Understood. Thanks a lot.

The next question from Alex Irving, Bremstein. Please go ahead.

Hi, good morning. Thanks for taking my question. Mine's on volumes. So to what extent do you think the strong performance in Q2 was a result of an early peak season, shipments coming out of tariffs, or just demand recovery? You called out all those factors, but where do you see the balance lying? And are you expecting another peak season at the more normal late summertime, please?

That's a good question, Alex. I wish I had a really good answer. Unfortunately, it's not like we can put a sticker on the containers that have been pre-poned and the ones that are normal demand. What I can give you in terms of color is the following. The markets that are driving most of the growth right now are actually Europe and emerging markets. It is not North America. North America is actually sequentially quite stable, but it is Europe and emerging markets, Latin America, Africa, India, that are actually driving a lot of the imports. And there I think that there are two things that are playing. Since the Ukraine invasion by Russia, there has been an expectation that Europe would go into possibly a big recession. and a lot of customers have held back on orders and tried to work their inventory as far down as possible in expectations of much lower demand. What has happened so far and seems to be happening is actually the European consumer is withstanding the situation better than had been expected. And therefore, there is like a cyclical replenishment of inventory in Europe and an adjustment of the traffic to what is underlying demand in Europe. That's what we're seeing at the moment. The second was that a lot of the economies, the emerging economies, came out of COVID in not as good shape as some of the more mature economy because of the lack of ability from government to provide stimulus and stimulate consumption. So last year, demand was fairly subdued in most of these markets. Now that everybody has gone back to work and is earning again, we're seeing a rebound in consumption in those emerging markets that is driving some of the year-on-year growth. So some of that part, I think, is... In Europe, it's going to kind of slow down a little bit because the higher demand will stay with us. The replenishment of inventory will eventually go away. And whether it's half and half or what it is, I don't know. The other part into North America is a bit more complicated because there market is fairly stable. We're seeing that inventory levels in the U.S. are a bit higher today than they were at the beginning of the year, but they are not abnormally high. So whereas there could be some bring forward of orders out of fear of possible tariffs into next year or fear of delay from a strike or labor action on the East Coast, whereas this could be the case. It does not seem to be the case to an extent that is very significant or would cause significant concern for the lull that would follow this. So at least at this stage, our bet is – and what we're seeing from what we have done so far in the quarter and the purchase orders we can see from customers – is continuous strong volumes in the third quarter and a normal seasonal taper-off in the fourth quarter, but not much more than that.

Thank you.

Next question from Lars Heindorf, Nordea. Please go ahead.

Yes, morning. Thank you for taking my question. It's on the balance sheet. I'm just trying to get a sense. I know you're probably not going to say anything about next year, but I'll give it a try anyway. So consensus for next year, expect you to make around 5 to 6 billion in EBITDA. which also implies probably a small positive cash flow. And given the current guidance that you give for this year, you're probably likely to end up with a net cash position by the end of the year. So the question is just how strong a balance sheet do you need sort of to withstand a prolonged downturn in the ocean part of the business in order sort of before you start to announce a possible new buyback?

Thank you, Lars. As we tried to explain, as you well know, clearly it's... It's a good situation. We are going to have a strong balance sheet, and we are aware of it. But we also have to look at the still unclear balance of supply and demand looking forward. So as we said, we will know more about Q4 in a few weeks' time, and Q4 will then shed a bit of light on 2025, and we will start to remodel the years ahead. Clearly, you have different scenarios. You can go from The scenario we also painted a year ago when we came out with our February 24 guidance of actually seeing an overcapacity coming and depressing prices tremendously, which do really then justify a very, very strong balance sheet. And the need to – because we need to invest and to grow the businesses. But also you could now, maybe in you, imagine less or more benign scenario where over time, you know, demand remains strong and supply gets distributed and – that the impact of the additional supply in the years to come is maybe not as catastrophic as it could have been. So we'll have to see those scenarios. For now, they are open, and therefore, we will keep a strong balance sheet up to that point. Because as you have seen, first of all, it is about ensuring that the balance sheet is strong so we can invest in ocean to decarbonize our fleet. We can invest in logistics to grow. We have a lot to grow there. Terminals is also obviously growing. It's a very good business, which any port addition is not totally unconsequential in terms of cash. And obviously, we will continue to do acquisition, as Vincent as well highlighted. So from that point of view, there is plenty of good use of cash to increase as well the return on the group as well. So that will be the balance of those elements. Thanks.

Thank you.

The next question from Petter Haugen, ABG Sandal Collier. Please go ahead.

Hey, good morning. Thank you for taking my question. This is about the fleet renewal program. So you now have 800,000 EUs for delivery. Could you share some numbers in terms of how much of that is already ordered and also how the division stands between the chartered long-term shelter fleet and what you plan to own yourself. And finally, how do we square that with scrapping? One specific way to pose that question would be if you plan to keep the fleet size also beyond 2025 and hence seeing as much capacity to leave as being delivered. Thank you.

Yeah, let me take this. So if you look at the press release that we published in connection with the fleet renewal program, we are recommitting to having a fleet that stays around the 4.3 million TEUs. So we will match the phasing in of this new tonnage with scrapping of ships that are coming to the end of economic life. And therefore, this order is not going to contribute in any way, shape or form to an overcapacity across the industry or anything like that. But it is really what it is, which is a renewal program as we have ships that are getting old. And we need to make those investments. It's in line with what we communicated in 2021. It's about 160,000 TEUs a year that we just had to batch now because the delivery times are starting to get clogged up with the yards. And we need to place multiple years of orders at once. But the delivery will be pretty regular also with the ships that we already have from now all the way up to 2030 at around these 160 that we had guided at the time. Most of these ships are already ordered. We expect about 500,000 TEUs to be on long-term charter and 300,000 TEUs to be owned. And most of the orders are already placed or will be in the coming weeks.

Okay, thank you. And I forgot a final part here about the fuel choice of the new building. So it's been... a bit of writing that you are now using or going to place orders for the conventional fuel fuels and not the methanol ships. Could you shed some light on why doing that change now?

Yeah, let me do that. So we've been clear for a while that I think the future in shipping is going to be with a lot of different technologies living side by side at the same time. We will, of course, continue to have bunker fuel for the next many years being part of the mix. We will have methanol. We have started to have methanol, and this will grow. We have already in the market a lot of LNG, and this will also continue to grow if you look also at the order book. And I'm sure that sometime soon we will see also ammonia coming online as a new propulsion technology that will enable the decarbonization. For us, the assessment has been the following. There is a high level of uncertainty about both availability of fuel and price of fuel in the future, or price of green fuels in the future. And there is a high level of uncertainty on how the regulatory regime is going to shape up. And therefore, there is a necessity for us in order to be able to reach the decarbonization agenda that we have in a way that is economically competitive. There is a need for us to hedge some of the bets that we're making on technology and not taking... only one way or only one bet and then depend on assumptions that we have very little influence into making happen. So our view was that this was the opportunity for us to balance the bets. We are very happy that thanks to the... The work that we have done with methanol today, this is a viable and scaling technology across the segment and has a lot of momentum. But we also need to make sure we are exposed to some of the other propulsion technologies so that we don't have all of a sudden risk to have a significant disadvantage for a reason or another.

Sounds wise. Thank you so much for your answers.

The next question from Jacob Lux, Wolf Research. Please go ahead.

Hey, thanks for your time. I just wanted to get your thoughts on any color around the potential East Coast strike and the likelihood of it happening and what impacts this would have on your business.

Okay. Let me take that, Jacob. So I will say that I still look at the likelihood of having really strong industrial action as in a strike or something like that as being highly unlikely. It has not been the case, whereas we have had lockdowns and strikes and a lot of disruption, sometimes in connection with negotiations on the West Coast. It has never been the case on the East Coast. So it is still our expectation that... The contract expires in September. There may be some extension of the contracts, as there is a lot that still needs to get negotiated. But I hope that we can get to see eye to eye with the ILA without having to get there. If this was to happen, the impact of such a strike could be potentially quite significant. in terms of the congestions that it would create, the delay and the absorption of capacity that it would suddenly create. I mean, that would be a really big bottleneck in a very, very traveled trading route.

I appreciate the time. Thank you.

Last question from Satish Sivakumar. Siti, please go ahead.

Yeah, thanks again for taking my question. I got questions on the logistics. If I look at the managed revenue segment, you've seen obviously the revenues have declined, but the margin has gone from 12% to 18%. And if I had to say, think about the exit rate to quarter three and quarter four, this margin improvement, it's coming from you unwinding unprofitable contracts? Are you pushing through price versus volumes here? So, yeah, any color on what should we think about margin normalization here?

Yeah, thanks, Satish, for your question. So, indeed, we have had a very nice margin improvement on managed buy in the last few quarters. You can see that improvement actually already in Q1 and now continuing in Q2, I think, if I remember correctly, we had 16% in Q1, we're now at 18%. I would expect this profitability to level off at this level. We have worked a lot on our mix of business, so improving on less volume-driven business and focusing on... or we have good advantages and we offer good service to our customers. That is, I would say, probably complete, and you won't see an increase in those proportions going forward. We will focus on growing the business, which is underlyingly growing, but we have just reframed the business and focused on the more profitable part of that business. I hope that answers your question.

I won't get on a precise number, but I think we are satisfied with the nice level of profitability we have today.

Thank you.

Okay, thank you, everybody, for a really good Q&A session. And now to conclude with some final remarks as we built on a quarter just passed with an increased momentum and this ramp up that we discussed on earnings. We saw growth and profitability coming hand in hand in logistics and services as reflected in this good revenue performance. The cost control that we have worked on already since last year having a positive impact from these initiatives. And then as we are addressing also some of these operational challenges that we have had and that especially last quarter had a big impact. The margin is not where we want it to be, but there is progress and we will continue to track positively in that vein in the segment. We witnessed also solid delivery in ocean on the back of higher rates and higher volume, all while we still have much to look forward to with the full impact of the good activities of the second quarter to come into the third quarter. We have a longer Red Sea disruption and a strong market demand, but also an unclear mid-term supply and demand balance. Meanwhile, in terminals, we continued our streak of excellent performance underpinned by strong volume growth and cost control. It is truly a business with constant progression and strength. Finally, we raised our guidance for 2024, driven by our latest view on the rest of the year and the subject to uncertainty in the fourth quarter. Thank you to the entire Maersk team for a job well done here in this second quarter. To the analysts and investors, thank you for your interest in Maersk, and we look forward to seeing you on the upcoming roadshows and events. Thank you very much. Bye-bye.