A.P Moller - Maersk A/S

Welcome, everyone, and thank you for joining us for this earning call today as we present our third quarter results for 2024. My name is Vincent Pleur. I'm the CEO of AP Model Maersk, and with me today in the room is our CFO, Patrick Yanni. As usual, we start with the highlights from the quarter just passed. The third quarter marked another uptick in performance on the previous two quarters of 2024. We saw strong business performance with good progress both financially and operationally across all three main business segments. Overall, we closed our books this quarter with an EBITDA and EBIT of $4.8 billion and $3.3 billion, respectively. On a year-to-date basis, this puts us more or less on the same level as last year, with a year-to-date EBIT of $4.4 billion compared to $4.5 billion in 2023. Compared to last year, however, we, of course, find ourselves in very different circumstances and look into a very different final quarter for the year. Taking in the segments briefly in terms, in logistics and services, we continued our recovery in EBIT margin to 5.1% and are on track towards getting back above our target of 6%. This recovery was the result of strong focus on productivity and cost management and while also continuing to focus on profitable growth. Customer wins have boosted organic growth this quarter well above the market at 11%. Much change has happened in Ocean this past quarter. In our second quarter announcement, we signaled the delayed impact of higher rates that we saw during the second quarter, given general revenue recognitions and our focus on contracts. This benefit of higher freight rates combined with continued strong volumes has delivered substantially higher profit with an EBIT of $2.8 billion. We expect the third quarter to mark the strongest quarter of the year as rates have peaked in July and are partially normalized and stabilized for now. The terminal business demonstrated its inherent resilience supported by good volumes and overall top-line growth, while costs were kept in check. the business delivered its highest EBITDA and one of its highest EBIT levels ever, with an EBIT of $338 million for the quarter. As you have seen, we upgraded the full-year guidance in an ad hoc announcement on Monday, the 21st of October. Container markets demand remains robust, and the traditional peak season took place normally and contributed to the uplift of our expected market growth to 6%. Q4 will continue to be strong volume-wise. Meanwhile, the situation in the Red Sea remains entrenched with the threat level still high. On the back of these realities, we upgraded our full-year guidance such that the now new expected full-year EBIT lands between $5.2 and $5.7 billion and free cash flow will now be at a minimum of $3 billion. I will speak more to the guidance later on this call. As I alluded to at the start, this quarter marks both a strong financial performance and good underlying operational progress, despite continued volatility in the external environment. In logistics and services, we had good momentum in operational groundwork, specifically productivity and cost measures, which expanded the EBIT margin to 5.1% this quarter. Further, we made good progress on addressing our operational challenges in ground freight and warehousing. In terms of the top line, we experienced growth momentum with volume growth across most of our product portfolio, together with good customer wins to support our profitable growth trajectory. With margin improvement, progress on operational challenges, and double-digit revenue growth, we feel good that the quality of our logistics and service business has improved significantly compared to earlier on the year. In ocean, as we expected and signaled last time, we saw the full impact of the elevated rates that we saw in the second quarter materialize in the third quarter. This delay results in third quarter being the strongest quarter of 2024 as rates peaked in July and have partially normalized thereafter and have now stabilized. Amid strong market demand driven by the peak season in Asian exports and the Red Sea reroutings volumes, delivery remains strong in the third quarter, demonstrating the agility of our ocean network and operations. As we look into the final month of the year, we continue to prepare for the launch of the new Gemini network on our east-west trade lanes around the Cape of Good Hope from February 2025. And finally, in terminal, we continued our excellent performance and closed another strong quarter up sequentially, supported by good volumes and higher revenue per move. The resilience of our terminal business stems from our unrelenting focus and progress on operational excellence and on automation. ROIC landed at an impressive 13%, significantly above our 9% target. All this while undertaking growth investments, not the least in our two greenfield projects in Brazil and Croatia, to grow our portfolio of world-class gateway terminals. Before I dive into the scorecard, you may recall we introduced our current midterm targets at our Capital Markets Day in May 2021 amid the pandemic. The midterm covers the period from 2021 to 2025, so there are not too many quarters before we renew our targets for the upcoming midterm. Our plan is to do so at our next Capital Markets Day, which we intend to host sometime in 2025 in London. the exact date will be communicated in connection with our financial calendar. We hope to see many of our analysts and investors at the event at which we plan to share our progress towards becoming an end-to-end logistics provider. Further details will follow. Together with the executive leadership team at Maersk, I look forward to seeing you there. Briefly then, on the scorecard for this quarter, the important point to note is that the last 12-month period still includes the last quarter of 2024, which represented the thaw of normalization and the early days of our cost management efforts. On a group level in Ocean, our last 12 months' performance has been satisfactory, especially when considering the tough end of 2023. Overall ROIC and logistics and services performance especially suffered, as we were left with fixed costs that were over-dimensioned for the normalized activity levels. As you know, we have been working hard to improve our performance in logistics and services, and both organic revenue growth and EBITs have improved sequentially during the course of 2024. As we look forward to the fourth quarter, we can continue to see a fuller and stronger scorecard. Before I add a few words to the guidance upgrades we released last week, let me give you an update on how the supply and demand has unfolded through 2024 and is expected to unfold in the coming quarters. You may recall at the start of the year, we presented two scenarios for the Red Sea disruption, one long and one short. We then presented our view on rate normalization as well as new capacity entered as per the industry order book. Compared to these two lines that we had presented in the early days of the crisis, the reality has pushed the rate trajectory longer out and higher up. Longer out, driven by the continuation of the disruption, and higher up because of the strong market demand, as well as some port congestions in some of the Asian ports that we saw in the second quarter. The Red Sea disruption remains entrenched. such that we plan according to this new reality to launch the Gemini network via the Cape of Good Hope, as I just mentioned. The downward pressure, nevertheless, has come from increasing supply as expected. Rates peaked in July and then have partially normalized as expected and have stabilized for now. As we communicated last Monday on October 21st, for full year 2024, we expect container market volume growth to be around 6% compared to the 4% to 6% previously communicated. On the back of the strong third quarter results, combined with the strong container market demand and the continuation of the Red Sea situation, we raised our financial guidance to an underlying EBITDA of between $11 and $11.5 billion dollars, an underlying EBIT of between $5.2 and $5.7 billion, and a free cash flow of at least $3 billion. Our CapEx guidance ranges are unchanged from the previous guidance. And with this, I would like to pass the word to Patrick for a deeper look at our financials.

Thank you, Vincent, and welcome to everyone on the call from my side as well. Our third quarter saw a significant uptick in profitability, driven by strong performance in all segments, in particular from ocean, which benefited from high freight rates. We delivered an EBITDA of $4.8 billion and an EBITDA of $3.3 billion, both increasing sequentially and year-on-year. EBITDA and EBIT margins also increased to 30% and 21% respectively. This improved operational result allowed us to deliver a net result of $3.1 billion in the quarter. Higher profitability supported the free cash flow, which increased to $2.7 billion, significantly up from the negative cash flow of $124 million in the third quarter of 2023. Accordingly, we maintained a strong balance sheet, with total cash and deposits increasing to $22.3 billion. Our net cash positions stood at $5.6 billion, an increase sequentially, but still below the levels of Q3 2023. Now let's take a closer look at our cash generation on the next slide. Cash flow from operations was $4.3 billion. This included a negative impact from increased net working capital of $440 million, reflecting higher receivables due to the sequential increase in both volumes and freight rates in the third quarter. With higher profitability and a smaller increase in working capital compared to the previous year, our cash conversion increased to 89%, up both sequentially and year-on-year. We spend 940 million dollars in capex this quarter with 560 million dollars or about 60% of it on ocean. This ocean capex amount, around 70% of it relates to vessels and 30% to our equipment and hubs. The capex will significantly increase in our fourth quarter as we will settle prepayments related to the vessel purchases announced last quarter. but we will remain well within the CAPEX guidance. There was a positive cash flow impact of $203 million as well, mainly stemming from dividends received from joint ventures in terminals. Net proceeds for the quarter were reinvested in short-term deposits. Now let's have a look at our ocean segment on slide 12. As expected, ocean had a strong quarter. driven by higher freight rates due to strong demand and the continuation of the Red Sea situation. Volumes were, while mostly flat year on year, increased 2.4% sequentially, driven in particular by exports out of China and Southeast Asia. As highlighted in our Q2 earnings goals, due to the revenue recognition, the full impact of the higher rates at the end of Q2 materialized in the third quarter, supporting the substantial increase in profitability, which increased both year-on-year and sequentially, delivering an EBIT of $2.8 billion for Ocean, representing an EBIT margin of 25.5% compared to a loss a year ago. Moving on to the Ocean EBITDA bridge on slide 13, starting from the left, you can see the substantial impact from EBITDA from increased rate rates, of $3.6 billion compared to Q3 2023. On the cost side, we see a picture similar to the previous quarter, with high network costs driven by the longer sailing routes around the Cape of Good Hope, triggering in particular a 14% higher bunker consumption and more expensive charter costs, as well as higher container handling costs. We still have the negative impact of revenue repugnation, partially offset by a systematic reduction in SG&E costs, which were down 11% compared to previous year. Now let's look at our KPIs for ocean on slide 14. Our average loaded freight rate surged 54% to $3,236 per FFE. This is also representing a significant 29% sequential increase as peak rates seen in early July materialized in the third quarter. Operating costs excluding bunker increased by 2.4% year-on-year, driven by higher container handling costs, but supported by the lower SG&E, as stated previously. The increased costs from rerouting also meant that our unit costs at fixed bunker increased by 3.9% compared to Q3 2023, and sequentially, unit costs increased by 0.4%. As we deploy capacity to adapt to the current market demand, our average operated capacity increased 4.7% year-on-year, or 1.9% sequentially, driven mainly by an increased number of chartered vessels. Despite this increase, our utilization remains very high at 96%. And you see that 75% of the volumes in the third quarter came through our contracts. The higher number of contractual volumes compared to 2023 reflects the significant increase in short-term contracts driven by our customers' need for predictability in a freight rate environment that has been characterized by a high degree of volatility in 2024. As a result, we now expect the share of contract volumes for the full year to be around 75% as well. Now let's turn to logistics and services on slide 15. The logistics business delivered an improved third quarter with continued growth momentum across our products and regions. Volumes increased across most of our products, delivering revenue growth of 11% year-on-year and 7.2% sequentially, supported by solid performance in air, landside transportation, and warehousing. The segment delivered an EBIT of $900 million, representing a margin of 5.1%, increasing both year-on-year and sequentially. The higher profitability was driven in particular by stronger performance from lead logistics and favorable rate development in air, as well as operational efficiency gains across all products. We also continue to strengthen our logistics and service business and have made strides in addressing the operational challenges in ground freight and warehousing that we have highlighted in previous quarters. Fundamentally, we are improving the cost position and the resilience of the business, and will continue to build upon this momentum towards our EBIT margin target of above 6%. Looking closer at the performance of our product families on slide 16, we see that the revenue managed by grew 6% to $624 million in the third quarter, driven by solid development of cold-chain logistics and project logistics. Lead logistics continue to drive profitable growth through enhanced operational efficiency, which resulted in an overall EBITDA margin of 24.2%. Fulfilled Buy had another quarter of growth in all products, particularly in warehousing and last mile, resulting in a revenue growth of 10% to $1.4 billion. Despite increased revenue, the EBITDA margin declined to minus 4.5% due to increased costs in refocusing the ground trade business on core activities. Driven by higher rates in air, LCL, and together with higher volumes in first mile, our transported by-business delivered revenue of $1.9 billion, equivalent to a 13% growth year-on-year. As a result of the improved performance, EBITR margin increased to 8.4%. Let's move on now to our terminal business on slide 17. The third quarter was another very strong one for terminals. The segment delivered record revenue of $1.2 billion, equivalent to a year-on-year revenue growth of 18%, supported by higher volumes, tariffs, and storage revenue. Volumes increased 7.6% year-on-year, driven by significant growth in North America, particularly in Los Angeles and Port Elizabeth, as well as in Asia-Middle East, where our Mumbai terminal became fully operational again earlier this year. This offset the negative volume impact from the situation in the Red Sea. Successfully growing the top line while maintaining cost discipline, the EBIT margin increased to 28.6%, increasing year-on-year while keeping at a high level sequentially. Consequently, the return on invested capital increased to 13%. Turning to the segments EBIT-DAR bridge on slide 18. The components of profitability that you can see on the bridge highlight the strength and the resilience of our terminal's business. While increased volumes have a positive impact on profitability, the lion's share comes from the higher revenue per move, which increased 9.3% year-on-year, driven by higher tariffs, improved product mix, and higher storage revenue. The higher revenue per move alone more than offsets the increased costs from inflation and currency headwinds. Terminals delivered an EBITDA of $424 million, equivalent to an EBITDA margin of 35.8%, slightly up here on the air, but lower than in Q2 2024. This concludes the financial review of our segments, and we will continue with the Q&A session. Operator, please go ahead.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star 1 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 2. Questionnaires on the phone are requested to use only handsets when asking a question. In the interest of time, please limit yourself to one question only. Anyone who has a question may press star 1 at this time. Our first question comes from Alex Irving, Bernstein. Please go ahead.