AP Moeller - Maersk A/S

CSE:MAERSK B

Earnings Call Analysis

Strong Quarter with Increased Guidance Amid Market Challenges

In the second quarter of 2024, A.P. Moller - Maersk saw significant momentum, achieving an EBITDA of $2.1 billion and EBIT of $1 billion. The strong market demand, although impacted by disruptions in the Red Sea, drove volume growth and higher freight rates. Logistics & Services grew by 7.3% year-on-year, with EBIT margins at 3.5%. Maersk also revised its 2024 guidance, projecting an underlying EBITDA of $9-11 billion and EBIT of $3-5 billion, with a free cash flow of at least $2 billion. The company remains cautious given geopolitical uncertainties but is optimistic about maintaining growth and profitability【7:0†source】【7:1†source】【7:2†source】.

Quarter Performance and Market Environment

In the second quarter of 2024, A.P. Moller-Maersk saw a noticeable increase in market momentum and earnings. The company navigated higher ocean freight rates, robust demand, and the ongoing complex situation in the Red Sea, which impacted vessel capacity and port congestion. CEO Vincent Clerc highlighted that this resulted in a significant increase in EBITDA and EBIT, reaching $2.1 billion and $1 billion respectively.

Financial Performance and Profitability

CFO Patrick Jany noted substantial sequential improvement in financial performance. The second quarter witnessed an EBITDA margin of 17% and an EBIT margin of 7.5%. Compared to the first quarter, the company also turned around its cash flow situation, generating positive free cash flow of $397 million. Total cash and deposits stood strong at $19.7 billion, with a net cash position of $3.6 billion. This financial robustness was complemented by the successful spinoff of Svitzer, returning approximately $1.2 billion to shareholders.

Impact of Red Sea Disruption and Freight Rates

The continued disruption in the Red Sea has been a significant factor for the company, leading to higher operating costs and rerouting of vessels. Despite these challenges, Maersk has maintained high utilization rates and seen an increase in average freight rates by 2.3% year-on-year and 5.5% sequentially. This navigational adjustment has also contributed to the company's overall operational efficiency and cost control measures.

Growth in Logistics & Services

Maersk's Logistics & Services segment showed solid revenue growth of 7.3% year-on-year, driven by gains in Ground Freight, Last Mile, and First Mile services. Profitability in this segment is recovering, with the EBIT margin improving to 3.5%. Significant improvements were seen in SG&A costs, which decreased 19% year-on-year, helping the company move towards its target EBIT margin of 6% for this segment.

Terminals Business Performance

The Terminals segment delivered excellent performance, with volume increasing by 6.8% year-on-year and revenue growing by 15% over the same period. The segment achieved a remarkable EBIT margin of 32.4%, and the return on invested capital stood at 12.2%. This growth was fueled by effective cost management and tariff increases, highlighting the constant underlying strength and progression of the business.

Revised Financial Guidance for 2024

Given the current strong market demand, ongoing disruptions, and higher freight rates, Maersk has revised its guidance for 2024. The company now expects an underlying EBITDA of $9 billion to $11 billion and an underlying EBIT of $3 billion to $5 billion. Free cash flow is projected to be at least $2 billion. These updates reflect an optimistic yet cautious outlook, as the market environment remains volatile and unpredictable.

Supply Chain and Market Demand Outlook

Looking ahead, Maersk faces uncertainties regarding supply and demand balances. The company anticipates continued strong market demand and port congestion in the near term, with the potential for rates to remain high throughout the fourth quarter. However, if demand significantly fluctuates, a faster normalization of rates could be expected. The company's strategic moves, including a recent network design collaboration with Hapag-Lloyd, are expected to improve reliability and give a competitive edge in the market.

Earnings Call Transcript 2024-Q2

[Vincent Clerc, executive]

Hello, everyone, and thank you for joining this earnings call today as we present our second quarter results for 2024. My name is Vincent Clerc. I'm the CEO of A.P. Moller - Maersk. And with me in the room today is our CFO, Patrick Jany.

As usual, we will start with the highlights 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 tailwinds 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 & Services specifically, organic growth is gaining momentum following the normalization we saw in 2023 with a 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 acquisitions that bring us additional capabilities and coverage.

Our assessment after careful review was, however, that DB Schenker did not fit this. And it would have been -- 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 Bab el-Mandeb. The situation on the ground is not deescalating, 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 to the -- 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 level 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 billion to $11 billion, and an underlying EBIT of $3 billion 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. The quarter -- this quarter was no exception to our maintained profitable growth and on strong cost discipline to deliver good results in all our segments.

In Logistics & 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 challenges we experienced with customers' contracts in Ground Freight in the first quarter. As we are moving into the more business -- 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 white 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 full -- 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 continues 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 routes, 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 cost 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 Germany network in February 2025. As you may know, the operational collaboration encompasses 58 services on the key East-West trade lanes, comprising 26 main line of service and 32 shuttle services across 85 port terminals. The arrangement constitutes a truly unique and innovative hub and spoke model which we 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. [ Same ] 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 & Services, a buildup of momentum in Ocean and a continued excellent performance in Terminals. 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 as the end of the second -- at the end of the 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 Terminals 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 & 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 possibly -- 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 subject 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 cost 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 a demand that we watched multiple years, 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 Terminals, 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 for ourselves. This quarter, we have also seen good progress in our 2 landmark greenfield terminals with Rijeka in Croatia going live next year, and that will be followed by Suape in Brazil in 2026.

Finally, as you know, our hubs terminals are going to play a critical -- are going to play the critical nodes of our new building -- our new network design under the Gemini network. Of our 7 hubs terminals, we have just 3 remaining that require an infrastructure upgrade, which we look out to carry in months 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 2 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 injection -- 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% to 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 months. 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 see -- 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 strong -- much stronger, such that we revised 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 raised 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 expected 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 midterm 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 revised our underlying EBITDA and EBIT guidance for 2024 to $9 billion to $11 billion and $3 billion to $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 billion 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 net working 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?

[Patrick Jany, executive]

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 a strong sequential improvement in performance in the second quarter. We delivered an EBITDA of $2.1 billion and an EBIT 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 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 Svitzer towards the start of the quarter. The spinoff 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 operations 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 a 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 $904 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 Svitzer on intercompany balances on its demerger from the APMM Group in late April.

Moving on 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 from moving towards more stable and predictable cash flow profile with greater contributions from Logistics & Services and Terminals. These elements are at the core of our capital allocation, which correspondingly follows 3 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 & Services and Terminals. In addition, we will continue to consider selective value-accretive acquisitions opportunities for added capabilities and coverage.

Finally, we remain committed to our dividend policy of distributing our profit 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 East and 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 a 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 (sic) [ excluding ] 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 terms 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 & Services 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% sequentially. Growth was particularly pronounced in Ground Freight and Last Mile in North America, and Air in Asia and Europe. While 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&A 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 growth.

Let's have a closer look at our service models on Slide 18. Managed by saw revenue decreased by 9% to $491 million as mix was improved, which allowed us to increase the EBITA margin to 18.1%. Growth across all products in fulfilled by saw its revenue increase of 13% to $1.4 billion. We continued to optimize our warehousing footprint and address the inefficiencies in [ bond rate ] mentioned previously, which led to an EBITA margin of negative 3.2%, up sequentially on negative 6.2% in quarter 1, but still down year-on-year on negative 1.9% last year.

Finally, transported by at higher volume in Air, LCL and First Mile, delivering revenue of $1.7 billion, up 8.4% year-on-year. The EBITA margin was stable at 7.4%, benefiting sequentially from better operational efficiency.

Finally, turning to our Terminals 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 midterm 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 tariff increase, a more favorable customer 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, go ahead.

[Operator]

[Operator Instructions] The first question is from Cristian Nedelcu, UBS.

[Cristian Nedelcu, analyst]

Maybe it's a 2-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 sorry, 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?

[Patrick Jany, executive]

Yes. Thanks very much, Cristian, for highlighting the value of our Slide on 8. 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 actual 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. 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 -- 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 increased contract rates and the revenue recognition effect. So we have longer transit times. You have a delay because of contracted versus spot, those 2 effects push profitability more into Q3 versus Q2. And then we have the uncertainty in Q4, right? So as we see it 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 the question.

[Cristian Nedelcu, analyst]

So you said that Q4 is higher than Q2 EBITDA, your last statement?

[Patrick Jany, executive]

Yes.

[Operator]

The next question is from Ulrik Bak from SEB.

[Ulrik Bak, analyst]

Just on your Logistics & 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 to increase -- which has increased productivity. So can you perhaps elaborate about -- a bit about this system? And what the additional impact from both the system but also the other initiatives that we can look so far during the second half of the year? So how far will we get towards this -- the target of 6% EBIT margin, please?

[Vincent Clerc, executive]

Yes. Thank you, Ulrik. So you're correct. I think 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 -- 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 where 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 have a pretty good -- 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 the process -- sustain themselves so that we can get above the 6% sooner rather than later.

[Operator]

The next question is from Muneeba Kayani, Bank of America.

[Muneeba Kayani, analyst]

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 Transpacific.

[Patrick Jany, executive]

Yes. Thanks very much, Muneeba. Let me jump on that question. The -- 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 had a -- 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 will see both lines converge over time. And then we would expect that in Q4 spot rates to come down and contracts to progressively then erode at a lower pace as we enter into Q4.

So that is the pace of the elements. It's not a one-to-one, but clearly, there's 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 in 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.

[Operator]

The next question from Dan Togo Jensen, Carnegie.

[Dan Jensen, analyst]

Maybe a question relating to the costs. Unit cost still, at least the fixed bunker, down compared to last year despite you consuming 18% more fuel. Can you elaborate a bit on the dynamics here? Network cost, as far as I can see, has come down per [indiscernible]. So I guess it's partly relating to time charter costs rolling off, with time charter contracts rolling off. And -- but what is the outlook for the coming quarters, time charter rates probably are on the rise again. And have you secured capacity for the peak and for the higher activity that you expect throughout the second half? That's the question.

[Vincent Clerc, executive]

Yes. I think the -- thank you for underlining 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 a network that is marginally bigger from a TEU perspective to what it was last year. But because of the longer sailing routes, actually offered capacity is basically the same. So that has been -- that is the main driver.

We have secured the capacity -- I mean there is -- 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 pointed towards, has been increasing quite significantly. So part of it is we're sailing more miles, but the other part is we are actually 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 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 accretive, 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 -- 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 the 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.

[Operator]

The next question from Alex Irving, Bernstein.

[Alexander Irving, analyst]

Mine's on volumes. To what extent do you think the strong performance in Q2 was a result of an early peak season, shipments coming ahead of tariffs or just demand recovering? 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 summer time, please?

[Vincent Clerc, executive]

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 preponed and the ones that are normal demand. What I can give you in terms of color is the following. What is driving -- 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 2 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 seems to have happened so far -- 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 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 is 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 are 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 us -- 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 a continuous strong volumes in the third quarter and a normal seasonal taper off in the fourth quarter, but not much more than that.

[Operator]

Next question from Lars Heindorff, Nordea.

[Lars Heindorff, analyst]

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 expected to make around $5 billion to $6 billion in EBITDA, which also implies probably a small positive cash flow. And given the current guidance that you gave for this year, you probably like it 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 to sort of -- before you start to make -- announce a possible new buyback?

[Patrick Jany, executive]

Thank you, Lars. As we tried to explain, as you well know, clearly, it's a good situation wherein we do 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, right? So as we said, we will know more of our Q4 in a few weeks' time. In Q4, we then share a bit of light on '25, 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 lower capacity 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 to grow the businesses. But also, you could now -- maybe now imagine less or more benign scenario where, over time, 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 acquisitions 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.

[Operator]

The next question from Petter Haugen, ABG Sundal Collier.

[Petter Haugen, analyst]

This is about the fleet renewal program. So you now have 800,000 TEUs 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 charter -- long-term charter fleet and what you plan to own yourself? And finally, how do we square that with scrapping? One specific way to close 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.

[Vincent Clerc, executive]

Yes. 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 being -- 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 this 160,000 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 it -- the orders are already placed or will be in the coming weeks.

[Petter Haugen, analyst]

Okay. 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 dual fuels and not the methanol ships. Could you share some light -- shed some light on why doing that change now?

[Vincent Clerc, executive]

Yes. 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 at some time 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, 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 best 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 bet. We are very happy that thanks to 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.

[Operator]

The next question from Jacob Lacks, Wolfe Research.

[Jacob Lacks, analyst]

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 it would have on your business.

[Vincent Clerc, executive]

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 negotiations on the West Coast, it's 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. I would need -- 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 conditions 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.

[Operator]

Last question is from Sathish Sivakumar, Citi.

[Sathish Sivakumar, analyst]

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 into quarter 3 and quarter 4, is this margin improvement, it's coming from you unwinding unprofitable contracts? Or are you pushing through price versus volumes here? So yes, any color on what should we think about margin normalization year.

[Patrick Jany, executive]

Yes. Thanks, Sathish, for your question. So indeed, we have had a very nice margin improvement on managed 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 had 18%. I would expect this profitability to level off at this level. We have worked out on our mix of business. So improving on less volume-driven business and focusing on where 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.

[Sathish Sivakumar, analyst]

It would be around 18% as we go into the next 3 quarters versus last year, you have seen sequential improvement?

[Patrick Jany, executive]

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

[Vincent Clerc, executive]

Okay. Thank you, everybody, for a really good Q&A session. And now to conclude with some final remarks as we build 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 & 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, where it 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 a 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 midterm 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 is subject to uncertainty in the fourth quarter.

Thank you to the entire Maersk team for a job well done here in the second quarter. To the analysts and investors, thank you for your interest in Maersk, and we look forward to seeing you on the upcoming road shows and events. Thank you very much. Bye-bye.