A.P Moller - Maersk A/S

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.