AP Moeller - Maersk A/S

CSE:MAERSK B

Earnings Call Transcript 2021-Q3

[Soren Skou]

Good morning, everybody, and thank you all for listening in to our earnings call for the third quarter of 2021. My name is Soren Skou. I'm the CEO of A.P. Moller Maersk, and I'm joined today by our CFO, Patrick Jany; and Vincent Clerc, the CEO of Ocean & Logistics. Vincent will provide some details and insights into the acquisition within Logistics & Services that we have also announced today.Now the third quarter of 2021 was again a quarter where we saw a significant impact to our business and performance by the continuation of the exceptional market situation in Ocean and across the supply chain. High demand by consumers, particularly in the U.S., combined with lack of labor in Ports & Warehouses and particularly lack of truckers in many markets have led to congestion and bottlenecks across. And ship capacity is to-date tied up waiting outside ports at a time when demand is very strong. This has led to record high freight rates, but also increased cost and complexity for us. Our customers' supply chains have been heavily disrupted in many cases. And in response, we have taken several initiatives to alleviate these disruptions and the impact they have on our customers' business.This includes expanding our capacity in Ocean to an all-time high level. Frankly, anything that can sail is out sailing today, and we have increased also the average speed of our vessels. In Terminals, we have expanded gate capacity significantly, in some cases, doubled it. We have established express truck lanes. And the utilization of our Terminals is at a record level of 78% for this quarter. In Logistics & Services, as an example, we have opened 61 new warehouses during 2021 so far, to expand our geographical footprint and to be able to service our customers even better.Many of you who are listening in today, I'm sure, are focused on the market situation and when things will revert to normal. But it is also important for us to take note of the significant progress on the strategic transformation that we have achieved, and especially in Logistics & Services, even if the transformational progress is being overshadowed by the very high freight rates in Ocean. I will shortly come back to the strategic progress made in the quarter.Now the financial numbers that you see on this slide, they speak for themselves. So I will not elaborate much, except to say that we are delivering the 13th quarter in a row with year-on-year earnings progress, and the quarter is the best-ever quarter in the history of the company. With a net result of USD 5.5 billion in Q3, we're actually delivering a quarter which is better and the best year ever for the company. And what is also very important for me to underline, we are delivering record results in Ocean and in Logistics and Terminal, so across the business. We will guide for the full year 2022 when we come to February, as we always do. However, we are today reiterating the 2021 guidance we gave in September, meaning that we expect Q4 more or less in line with Q3. And we also say today that we now expect a Q1 more or less in line with Q4 as demand remains strong as far out as we can see in our booking data.Now turning to Slide 5. We continue to deliver strongly on the transformation of A.P. Moller Maersk, and we are well on track in terms of executing on the road map for '21 to '25 that we introduced back in May at the Capital Markets Day. In fact, I would say that the pandemic is helping us accelerate the integrator strategy. The importance of integrated logistics, the importance of having asset control, of having committed capacity, of being able to affect and control outcomes, of being digitally connected, all of this is front and center with our customers today as they are struggling to manage their global supply chains. And that is, frankly, why we continue to rapidly grow revenue in Logistics & Services, organically, 33% year-to-date, which is significantly above the market growth. And the majority of the growth is related to strong commercial synergies with our top 200 Ocean customers, accounting for 64% of the organic growth in the first 9 months. As we are getting bigger in logistics, we are also getting better at managing the business and the profitability has improved significantly. We now have very healthy margins in Logistics.There are really 3 things that I'm particularly proud of in this quarter as the CEO of A.P. Moller Maersk. The first is the development in Ocean contracts or in our contract portfolio in Ocean. A key pillar in building a more stable, higher quality Ocean business is to develop a stronger long-term customer relationships. We want to develop more long-term partnerships where we provide value for our customers by offering differentiated value propositions, catering to the specific needs of each customer and tying the whole thing together with integrated end-to-end logistics solutions. And we also want to reduce our exposure to the transactional and commoditized short-term port-to-port market, where we are a price taker and where we are subject to wild swings in spot rates.We have continued, as you can see, to grow our contract portfolio -- our long-term contract portfolio during the pandemic. From 2019 and until 2022, we expect that we will have grown the long-term contracted volumes in absolute terms by more than 40%. And in the long-haul trades, we expect that around 7 million FFE or more than 65% of the total long-haul volumes will be served through long-term contracts in 2022. And in addition, we also have 1 million FFE under long-term contracts in the regional trade, so in total of 8 billion FFE. While we have grown the volumes under contract substantially over the last 2 years, we have also increased the freight rates on the long-term contracts with around USD 1,000 in 2021 or about 50%. For 2022, we currently expect to see further freight rate increases in long-term contracts as part of the yearly contract renegotiations, but for the whole portfolio at a more moderate level than seen in 2021 as many contracts have been renegotiated early already and are reflected in the Q3 numbers. The increase in rates on long-term contracts, obviously, will help mitigate some of the financial impact of any weakness in the short-term freight rates when such weakness will occur at a point in the future.The second thing that I'm particularly proud of is the growth in Logistics. It ties together with the first, of course, as growing the long-term contract portfolio is a facilitator for the organic growth in Logistics & Services as part of the end-to-end service offering. Since Q4 2019, we had grown Logistics revenue quarter-on-quarter at a CAGR of 8%. While at the same time, we have increased EBITDA from USD 31 million to -- in the fourth quarter of '19 to $267 million this quarter. That is a quarter-on-quarter CAGR of 36%. Most of the growth is organic, but we have also made a number of successful acquisitions based on the thinking that we are buying quality companies with strong capabilities, companies that are profitable and well-managed with good technology and good facilities, and most importantly, with products we can sell directly to our Maersk customers. This allows us to pay for these acquisitions by supercharging the growth of the acquired companies. And we have quite a track record now of doing that.In Logistics, we are now having -- if we look at the third quarter and prorate that, we now have an annualized run rate of revenue above USD 10 billion and EBITDA above USD 1 billion and an EBIT around $800 million. And that is, of course, before the acquisition that we announced earlier today. Our Logistics & Services business has and will become an important contributor to the financials of this company. And most importantly, I want to underline that the growth that we are seeing in Logistics today is driven by commercial synergies and large Ocean customers wins. In other words, it's volume driven growth. It's not a price-driven growth, and it's not inflated by high Ocean freight rates.Finally, the third thing I'm particularly proud of this quarter is the development in Terminals. In 2017, we set out to restore profitability and returns in our Terminals business, and we can now conclude, we have succeeded. Last 12 months, return on invested capital in Terminals hit 10% in this quarter, driven by hard-core focus on cost and efficiency over the last 4 years, and we are well placed to continue to deliver strong earnings in terminals in the coming years.Now on Slide 7, we have shown an illustration of the historical cash returns to shareholders since 2017 where we started this transformation journey. The strong financial performance enables us to invest in CapEx to support strong organic growth of the business as well as to acquire companies to support the transformation, particularly in Logistics & Services. And at the same time, we returned substantial cash to shareholders through dividends and share buybacks. This year, we have -- so far this year, we have distributed DKK15.7 billion or around $2.5 billion in dividends and share buybacks to shareholders with the final trends of our latest share buyback program concluded during this quarter.During early November, the first tranche of the $5 billion share buyback program that was announced in May '21 for 2022 and '23 will commence. In addition, we are announcing today that the Board of Directors have approved an extra share buyback program of DKK32 billion or around $5 billion to be executed in '24 and '25, bringing the total committed share buyback program to DKK64 billion or USD 10 billion, which is equal to close to 20% of the current market cap. In addition to the extraordinary cash distribution from share buybacks, the ordinary dividend will be paid out to shareholders based on the dividend policy of 30% to 50% of underlying net profit.On the right-hand side of this graph, we have tried to illustrate the dividend level based on consensus estimates for net profit and at a payout ratio of 30%. Our aim is to create a stable dividend every year, but of course, the exceptional high earnings expected in 2021 will positively influence the level of dividend that we pay out in 2022. Interestingly, the illustrative distribution to shareholders that we show here based on 30% dividend for '22 to '25 is equal to 40% of the market cap of the company. And the numbers are based on, as I said, the net profit consensus for '21 to '24, a total of DKK243 billion or about 2/3 of the market cap of the company.Now to summarize my initial comments here, we are very satisfied with the strategic progress in the quarter. We expect to continue to accelerate the development of the company. And a key driver for that is -- in Logistics & Services will come from acquisitions. This morning, we have announced an acquisition and asset purchase within the Air freight space. And that will enable us to further expand the end-to-end service offering to our customers. And to give more insight and details, I now hand over to Vincent. Vincent, please?

[Vincent Clerc]

Thank you, Soren. As communicated at the Capital Markets Day this year, inorganic investments within Logistics & Services have a high priority in our capital allocation to further expand and improve the capabilities and services to our customers. You have all seen this slide before when we announced 2 e-commerce acquisitions last quarter. It is taken from our Capital Markets Day deck, so I won't spend much time on this. But instead, move on to the next slide and talk about the acquisition we announced today.As part of expanding our capabilities today, we announced the acquisition of Senator and the purchase of 2 777 aircraft, which adds to our Air business and existing fleet. I would like to talk a bit about why Air freight and the 2 acquisitions are important and critical to accelerating the growth in Logistics & Services and our ability to provide an end-to-end offering for our customers.Firstly, our vision to become the global integrator of container logistics is predicated upon the ability to provide a one-stop shop for our customers. Air freight is considered a key service offering to achieve that vision as part of a multimodal service offering. We currently operate a fleet of 15 aircraft through Star Air. And with the acquisition of Senator and the purchase of 2 new builds, we expand the Air freight network and build on the Star Air's fleet by developing the capabilities, reach and platform for our Air offering and expanding our controlled Air capacity status. This improves our ability to respond to our customers' demand for higher reliability, speed and accountability. This is, therefore, an important milestone in terms of accelerating the integrated strategy and filling a capability gap without our logistics -- within our Logistics & Service product portfolio while doubling our overall tonnage.On the next slide, we have shortly summarized the background of Senator. Senator is a company that was founded in 1984 and is leading and well-renowned air based freight forwarding company. At present, the company has more than 20 own controlled flights per week and a sizable network out of Europe and into the U.S. and Asia. Further, they have a very experienced frontline organization and operations expertise, which enables sizable commercial and operational synergies of approximately $141 million on a cumulative EBITDA basis by 2025, excluding transaction and integration costs. Based in 2021 forecast, the revenue is estimated to be around $973 million with an EBITDA of around $88 million, reflecting a margin of approximately 9%. The acquisition will contribute to close a significant gap in our Logistics & Service offering and add strong capabilities and geographical reach, which further enables our integrated vision and is expected to close in the first quarter of 2022.And with that, I hand over the word to Patrick.

[Patrick Jany, Executive VP, CFO & Member of Executive Board]

Thank you, Vincent, and good morning to all from my side as well. Turning to the financial highlights of the quarter. Starting with Slide 12. We have, as usual, illustrated the development in the net result. And as you can see, profitability in Q3 significantly improved as net result reached $5.5 billion, which is another record quarter in terms of financial results. The improvement came mainly from Ocean with EBITDA more than doubling, but also with positive contributions from Logistics & Services and Terminals and towage.Overall, our EBITDA increased by $4.6 billion, reaching $6.9 billion, and the EBITDA margin reached 41.8% compared to 23.2% last year. Consequently, EBIT increased by nearly a factor of 5 to $5.9 billion compared to $1.3 billion in Q3 2020, leading to an EBIT margin of 35.3% compared to 13% last year. The other positions had a fairly small impact on profitability, with the main impact coming from the increase in depreciation, which was mostly due to the IFRS 16 effect of vessel charters, partly offset by the change in depreciation policy earlier this year. As a consequence of the increase in operation profitability, the net result in the quarter reached $5.5 billion, nearly double of the net result for the whole year 2020 in one single quarter, clearly a reflection of the continuation of the exceptional circumstances.Now turning to Slide 13, our cash flow from operations remained exceptionally strong, up by Factor of 3 compared to last year to reach $6.6 billion on the back of an increase in EBITDA. Cash conversion was still high at 95%, on par with last year. Free cash flow in the quarter was $5.3 billion after considering capitalized lease installments, gross CapEx, net financial expenses and received dividends. The capitalized lease installments and CapEx were still relatively low this quarter and will increase in the coming quarters due to the higher charter installments and more investments. For leases, this is already partially reflected in the $1 billion increase in capital leases in the balance sheet, and for Capex, the spend will increase in Q4 and into next year as investments ramp-up in line with our existing guidance. From the free cash flow, we acquired Visible, bought back shares and repaid debt. Our net interest in bearing debt is now only $3.1 billion, down $6.1 billion since the end of last year. Excluding lease liabilities, which amount to $10.1 billion, we actually have a net cash position of $7 billion.Now let us turn to the development in each of our segments, starting with Ocean on Slide 14. This quarter, our Ocean business was still impacted by the continuation of the exceptional market conditions, leading to network disruptions, congestions, adding up as well additional costs caused by shortages across the supply chain. This, in combination with a surge in demand also drove up freight rates. Additional capacity was deployed versus last quarter to service our customers and support demand. Revenue in Ocean grew 84% on the back of the steep increases in freight rates, with volumes remaining flat. EBITDA more than tripled from $1.80 to $6.3 billion, with a margin of 47.7%, offsetting a cost increase of 28%, driven by handling and network cost increases and higher price of bunker fuel. EBIT increased by $4.4 to $5.3 billion, reflecting an EBIT margin of 40.8%.On Slide 15, we can see that the EBITDA increase in Q3 was again, and like in the previous quarter, mainly driven by the extraordinary environment of capacity constraints and mainly in Landside Transportation, which impacted rates significantly and contributed to USD 5.5 billion increase in EBITDA alone. The increase in bunker prices had a negative impact on EBITDA of $600 million as average bunker price per ton increased from $290 per ton to $504, equivalent to a 74% increase. This, of course, gets compensated on our revenue, although with a time lag through the BAF clauses. Container handling costs and network costs, including an increase in bunker consumption of 7%, impacted by higher deployed capacity and increase in average speed, went up by more than $500 million in Q3 due to the disruption across the supply chain. SG&A, net foreign exchange and others had a positive impact of $142 million, mainly impacted by an increase in other revenue and demurrage revenue.Turning to Slide 16, our average freight rate increased by 87% in the quarter, driven by the previously mentioned higher demand across all regions, in combination with bottlenecks and congestions, also driving up both long and short-term freight rates. The increase was driven by all trades with North-South taking the lead on year-on-year development by an increase of 86%. Comparing to last quarter, rates increased by 17%. As mentioned previously, total volumes for the quarter remained flat at minus 0.6%, mainly driven by lower East-West volumes and offset by the inter-regional volume increase of 2.9%. Comparing to last quarter, volumes were actually down 2% and versus the third quarter of 2019, that is pre-COVID, volumes were down by 4%. We want to stress that the decrease in volumes is not a lack of demand, but rather the current market situation with congestions and bottlenecks across the supply chain.If we then turn to Slide 17 and look at the right-hand side of the slide, it becomes clear that we continue to focus on building long-term relationships with our customers. For the quarter, the volumes on long-term contracts on long-haul trades increased by 25%, resulting in an estimated split of 63% or close to 6.5 million FFEs on the long-haul volumes being on long-term contracts for the full year of 2021. As Soren mentioned in his introduction, part of the increase in freight rates seen this quarter are due to the effect from early renegotiations of long-term contracts for 2022. Adding to this, an increased share of those long-term contracts is actually now on multiyear contracts, currently around 1.4 million FFEs compared to 1 million in the previous quarter. This helps ensure predictability and stability, both in earnings and in the service to our customers.Our operating costs increased for the quarter, mainly driven by congestions, particularly in the Terminals. The increase was also heavily impacted by higher bunker price and increased vessel speed in an attempt to mitigate impacts to reliability from the congestions. Total bunker cost increased by 87%, driven, therefore, by a 74% increase in bunker price on the one hand, but also a 7% increase in bunker consumption from increased deployed capacity and higher average speed of vessels. This drove an increase in unit cost at fixed bunker of 14%. The sequential increase of this unit cost was only 4.8%. It is important to note that these increases are, of course, also impacted by the fact that volumes were down both versus last quarter and year-on-year. When we talk about our costs for the quarter, it is important to keep in mind that some of those costs will come down once the market normalizes. We expect that as consumer demand and freight rates come down, container handling costs will follow, including lower terminal costs and full consumption will diminish. Some network costs are, however, expected to remain at a higher level in the coming years, driven by higher chartering costs and cost inflation.Let us now turn our attention to Logistics & Services, where we, once again, in Q3, have performed strongly and the positive momentum seen in the previous quarters continued with a revenue growth of 38%. The majority of which was organic revenue growth at 33%. This is well above our target of 10% communicated at the Capital Markets Day earlier this year. All 3 product families contributed positively to the growth. Gross profit increased significantly by 37% to $641 million, reflecting a gross profit margin of 24.7% and EBITDA nearly doubled to $267 million, reflecting a margin of 10.3%. As a result, the EBIT margin for the quarter was 7.5%, which is above the target set at the Capital Markets Day of 6%. The organic growth rates are, once again, a validation of our strategy of growing with our Ocean customers and building capabilities to service more of their needs in terms of logistics and end-to-end solutions. This is reflected in 64% of organic revenue growth in the first 9 months, coming from our top 200 Ocean customers, in line with our strategic objectives.Slide 20 shows the continued progress in terms of growth and earnings quality of the Logistics business. We spoke already about revenue growth and gross profit. So let us turn our attention to the EBIT conversion, which continues to improve, hitting 30% for the quarter and thus lifting the long term, the last 12-month basis to 26%, confirming the leverage effect to our profitability from the increase in activity. The acquisition of Visible that was closed early August, contributed with inorganic growth in revenue of 5% to the overall revenue growth, while EBITDA was negatively impacted by transaction and integration costs of $10 million.Diving deeper into the 3 product families on Slide 21, we see that all 3 main segments contributed to the growth in EBITDA, which nearly doubled to $209 million, reflecting an 8% margin. In Managed by Maersk, which includes integrated management solutions, revenues reported a growth of 48% to $433 million, driven by an increase in volumes in the logistics of 18%. This increase firstly reflects a low base in Q3 2020, impacted by COVID, and secondly and perhaps more importantly, reflects strong demand for retail spending, particularly in the U.S., as well as new business wins. We see this as a positive development and a proof point for our integrated strategy. For Fulfilled by Maersk, revenue grew by 40% to $606 million, driven by new activities in contract logistics as well as higher volumes and a very strong footprint in warehousing and distribution in North America. Revenue growth was also impacted by the acquisition of Visible as well as EBITDA, which we already covered. Finally, revenue in Transported by Maersk was up 34% to almost $1.6 billion, driven by an increase in Landside Transportation volumes from the higher penetration ratio into existing Ocean business. Further revenue growth was driven by increased Air freight forwarding volumes.On Page 22, we turn to Terminals and Towage, where the strong momentum continued with an EBITDA increase of 32%, which was mainly driven by gateway terminals. EBITDA in gateways terminals increased to $379 million, and the EBITDA margin consequently increased to 35.9%. When talking about the performance in our Terminals, it is important to note that the congestions was a significant issue still in this quarter, as you all know. However, we have taken several steps to mitigate the impact on our customers and alleviate the situation. This includes expanding gate capacity significantly. For instance, in North America, we doubled the number of gate work shifts. In many terminals, we have introduced express truck lanes to try and move boxes out of the congestions terminals even quicker. Consequently, the utilization of our gateway terminals is back at record levels of 78%. For our gateways, EBITDA margin increased to 36.9%, while ROIC was 10%, which is 4.8 percentage points higher than Q3 2020, and above our Capital Markets Day target. Revenue in Switzerland was positively impacted by strong grain exports and increased RORO activities in Australia and RAP activities in Morocco, partly offset by slower markets in Europe. Terminal Towage revenue increased due to new charters in Angola, the U.K. and Belgium. Revenue increased, therefore, by $18 million to $185 million, while EBITDA was on par at $54 million.Turning to Slide 23. We have bridged the EBITDA increase in gateway terminals from $274 million last year to $379 million in Q3 this year, showing the effects of volumes, revenue and costs. Volumes increased well above market at 9.6% on a like-for-like basis, mainly driven by strong volume growth in North America, Latin America and Asia, driving $47 million of the EBITDA impact. Revenue per move increased 13% to $340 per move, driven mainly by higher storage income, which was exacerbated by the congestion situation in North America, while cost per move increased 3.9% to $238 per move, mainly as a result of higher volume in high-cost locations and higher variable concession fees. In Terminals, we continue to focus on the profitable gateways in our portfolio, which has led to an agreement to sell our 30% shareholding in container terminals, Wilhelmshaven in Germany to Hapag Lloyd,, subject to approval by the antitrust authorities.And finally, turning to manufacturing and others, we concluded the strategic review of MCI, as communicated on our Capital Markets Day with a sale to China International Maritime Containers with closing subject to regulatory approvals. The revenue in MCI decreased this quarter to $134 million, mainly as a result of prioritizations of volumes. For Maersk Supply Services, revenue grew by $18 million to $83 million as increased activity reflected the improved market conditions in Q3 2020, which was impacted by COVID. EBITDA decreased to $7 million mainly driven by postponement of repair and maintenance and lower cost in Q3 2020, which was, therefore, a low base.With that, I will pass the word to Soren for the full year guidance.

[Soren Skou]

Thank you, Patrick. And as I already said, we are reiterating the guidance that we provided, I think, about 6 weeks ago of an EBITDA in the range of $22 billion to $23 billion. EBIT in the range of $18 billion to $19 billion and a free cash flow of more than $14.5 billion. As it looks now, we do not expect to be able to grow with the market. We are upgrading the guidance on market growth to 7% to 9% for 2021. Of course, our volumes are subject to high uncertainty because it really depends on how many ships we can get out of the congestion to carry more business. I also want to underline that we are repeating our CapEx guidance despite the somewhat low level of CapEx that we've had in the past quarter. This should not be an indication that we do not expect to suspend the full CapEx guidance. It's clear that the current trading conditions are subject to more than normal uncertainty due to all of the issues that we have discussed. But we expect, as I already said, also current situations to continue into Q4 and into Q1. So with that, let us start with some questions.

[Operator]

[Operator Instructions] Our first question comes from Michael Rasmussen with Danske Bank.

[Michael K. Vitfell-Rasmussen]

Well done to all of you standing team. So 3 questions from my side. First of all, under 17%, the sequential rate growth in the third quarter, you do mention that new long-term contract negotiations are part of that. I do understand that some of that is earlier renovations -- negotiations versus normal. Can you please tell us how large a share of, I guess, it's -- 8 are Europe contracts that we do see in the numbers already now. So that's my first question. My second question is on your comments on the further moderate rate increases in 2022. If you could please elaborate a little bit more on that other than the rollover, which you mentioned? And also, if you could please add a few comments on the spot rate assumptions. My final question is on -- basically, there's been recently a bit of talk in the present, I even think that you sent out an announcement on freight forwarders, i.e., that you obviously prioritize your own clients versus freight forwarders. Can you discuss a little bit how you think about running the logistics business at arms linked terms, please? That was 3 questions.

[Soren Skou]

Let me start on the freight forwarders. Let's be clear, freight forwarders make up a very substantial part of our book of business, and we expect to continue to have a very substantial share of our business with freight forwarders. We have developed 2 quite successful products that we're selling to freight forwarders. One is the Maersk Spot product, which is, of course, a 2-way commitment product, that's entirely digital and very popular with -- particularly with small and medium-sized freight forwarders. And then we have a Block Space product, which is popular with -- especially with larger freight forwarders that buy fixed -- a fixed amount of capacity and pay for used or unused, so to speak. In terms of the rates, it's very clear that we've had a quite unusual year in the sense that many customers have been willing and wanting to commit capacity for longer periods. As Patrick said, we now have 1.4 million FFE of multiyear contracts. But we have certainly also seen many customers wanting to negotiate early for 2022. And typically, in connection with having higher demand than we actually -- that they actually had contracted for in 2021. So that's why we've already seen a significant part of the resetting of our contract rate portfolio also for 2022 in this quarter. I think this is probably -- we still, of course, have contracts that we set at the calendar year, and there are still -- that are going to be negotiated by -- between now and Christmas. And when we get to February next year, we will be able to give a much better guidance for how that will end. But of course, we do expect that contracts that are negotiate -- being negotiated between now and Christmas will be closed at significantly higher volume, and that will move the average up moderately for 2022.

[Michael K. Vitfell-Rasmussen]

And Soren, maybe a comment on the spot rates.

[Soren Skou]

So we are -- I mean, we're just -- I mean, we are reiterating our guidance. So I guess, by that, you can imply that we're not seeing much change in the short term.

[Operator]

Next question comes from Robert Joynson with Exane BNP Paribas.

[Robert John Joynson, Senior Transport Analyst]

Three questions from me, please. First of all, on cash returns. The net debt is now down to $3 billion. You did more than $5 billion free cash flow in Q3. So even after including the leases, it appears like the balance sheet will be net cash by year-end. You previously said that maintaining BBB+ equates to net debt-to-EBITDA of around 1.5x. And as far as I can say, that won't be possible based on ordinary dividend of kind of 30% to 50% payout. So in that context, could you maybe talk us through the latest thinking on special dividends? And then the second question on contract rates, just a little bit of a follow-up. Soren, you just mentioned that some contracts will be renegotiated a little bit early than normal before Christmas. Could you maybe just kind of give an indication of what share of the long-term contracts will be renegotiated during the traditional period of January through to April or May of next year? And then the final question just on the EBITDA guidance. It implies somewhere between 6 and $7 billion for Q4. So the midpoint essentially implies Q4 is less profitable than Q3. Now given that the average revenue per container, I imagine, should be up in Q4 versus Q3, could you just maybe talk through your expectations on unit costs? Are you expecting quite a significant rise in the final quarter?

[Patrick Jany, Executive VP, CFO & Member of Executive Board]

So maybe starting with your last question first on the EBITDA guidance. So we actually, as you know, confirm our guidance for the full year, which effectively implies, as you rightly say, an EBITDA for the last quarter between 6 and $7 billion. And I think the full range applies. So I think that's where we see the business going. And indeed, as you rightly mentioned, obviously, we see the demand continuing to be strong. We see, obviously, the constraints as well, remaining strong in terms of actual volume shift. So there is an element here that we cannot ship everything that we have on the book and that we are -- and our vessels are in a big traffic jam, as you know, and that increases cost on the other hand as well. So it is, as you rightly say, a combination of good market conditions, good and solid freight rates environment. But clearly, volumes being constrained and an increase in cost position issue continue actually to develop in the next quarters as the full impact of the bunker price is not yet in our P&L, and you see inflation positions taking up in some handling costs and terminal costs as well. So the EBITDA being the net of it all, we see a rather stabilization at this very high level for the coming quarters, which is why we guide on a Q4 de facto very close to Q3 and Q1 next year, very close to Q4 as well. Now going to your first question on the cash return. So clearly, yes, we do have a comfortable cash position of $7 billion and net debt, including liabilities of minus $3 billion. I think we'll see where we end up by year-end. I think the lease liabilities are obviously coming up as well as we have the dual effect, as you know, of higher charter rates, which we have contracted, but also a longer period of rates and therefore, a whole proportion of time charter, which actually comes into the balance sheet, which is also one driver of this $1 billion increase you have seen now, actually for 2 quarters in a row. And you can expect this to continue as we still receive this capacity on our balance sheet. Now coming to your question, I think from the financial point of view, we should not focus now on the end of the year and what is the cash balance, and are we now solid BBB, super solid BBB. I think we have to position the company in the long term. We are building here a company, which is -- will have a strong balance sheet over the years and will be returning cash strongly over the years, which is also our guidance for the share buyback in '24 and '25. So it's a strong signal on qualitative improvement in terms of earnings and returns to shareholders over the years. And that's -- when we look at the capital structure, we have to look at a post normalized capital structure in '23, '24. And that is where we will then touch a solid BBB. We might be on the very solid side up to them, but that's not a reason now for an extraordinary additional dividend. I think we have a 20% return in ROIC, as you can see in Logistics & Services. So a good reason for us to invest further in that growth and to actually get the contributor, the integrator into a reality in next years by investing into that business and provide, therefore, a solid balance sheet when you look 2, 3, 4 years ahead. So that's the policy in how to understand it, really. And then on the contract, Soren?

[Soren Skou]

Yes. I think all we can say or add in terms of color is there's a very -- there's a high interest for negotiating contracts. And when we get to February, when we have the annual result announcement, we'll be able to provide guidance for 2022. We expect that we will be substantially done with contract negotiations, frankly. So well ahead of the normal 1st of May deadline we have in the Pacific. But of course, lots of things going on, not just up to the calendar year, but also up to 1st of April. So early -- we are going to be done early this year.

[Robert John Joynson, Senior Transport Analyst]

Does that include the Pacific, Soren?

[Soren Skou]

Yes.

[Operator]

Our next question comes from Sathish Sivakumar with Citi Group.

[Sathish Babu Sivakumar, VP & Analyst]

I got 2 questions. Firstly, on the contract volumes. How does the mix actually compare, especially on the long-term contracts between your top 200 customers and versus the overall portfolio? Is it like similar 67% split? Or you see more room to gain market share within the top 200 customers? And then just on the contract rates again, can you confirm if all these rates are negotiated still on ex bunker basis?

[Soren Skou]

I mean all of our contracts have bunker adjustment clauses, period. So we are not taking any bunker risk in long-term contracts. In terms of the contract portfolio, I think, around or slightly above 50% of the volume comes from top 200 customers.

[Operator]

Our next question comes from Sam Bland with JPMorgan.

[Samuel James Bland, Research Analyst]

I have, I think, 2 questions, please. The first one is on the sort of charter rates and the lease liabilities. Just give an idea of kind of how far through the rechartering of the chartered fleet you are? And I suppose, I think we've seen about a $600 million increase in lease liability in the last quarter, kind of where that can get to as all of the ships have moved on to 3 or 4 year charters? And if there's anything you can say on sort of what the P&L cost uplift associated with that will be? And I think my second question will be where there's -- I mean I suppose to be interested on logistics, on, we've seen very strong organic revenue growth and strong margins. Can you talk about how much of that you think is also linked to sort of congestion and sort of unusual freight market development? And so could part of the logistics profitability also reverse as some of these bottlenecks come out?

[Patrick Jany, Executive VP, CFO & Member of Executive Board]

So going to your first question on the increased impact of the charter on our P&L and balance sheet. I think you have seen this increase actually $1 billion actually in Q3, it's been offset by different positions, particularly in terminals to the $600 million you mentioned. And that will still increase for a couple of quarters as you've seen that we have increased the size of the fleet as well. We're not 4.2%, and we are guiding for 4.1% to 4.3%. So we will -- this is a very recent addition. So you'll see now the balance sheet probably getting adopted pretty soon, in probably Q4, but then the actual P&L, in fact, is then to unfold more into next year as it's a capacity, which has been taken in more in the second half of this year. You see this increase as well already in the cash flow bridge where we increased, I would say, from a level of previous year of around $400 million a quarter to now $600 million a quarter. So you see this impact coming through progressively. And the same order of magnitude is to be expected as we look forward for the first half of 2022. But overall, absolutely manageable, but it's just a reflection of the current market and of the extended lease duration, which you also mentioned. I think in logistics, the profitability is really driven by gains and business wins and volumes increase. So clearly, I would say the whole supply chain is a buoyant market right now. That is true. However, as you see, we are also expanding our business in the majority with our top 200 customers -- Ocean customers, which ensures its end-to-end logistics. So there's no reason to believe that those volumes will reverse once situation stabilizes. It is really getting and delivering what our customers want, which is an end-to-end logistical approach. This is where the demand lies, and it will continue to be.

[Soren Skou]

And perhaps if I can just add to what Patrick just said. I mean, at the Capital Markets Day, we did set out a target that we want to have an EBIT margin of more than 6%. And we certainly believe we can achieve that. Obviously, we would also like to continue to grow very fast. But right now, it's clear that the extra volume that we are getting is helping us drive margins up across the board.

[Operator]

Our next question comes from Dan Togo with Carnegie.

[Dan Togo Jensen, Financial Analyst]

I'd just like to go back to the questions to the subject of the contracts because you are contracting more and more, now 64%. Where can we see this? And what is, sort of say, satisfactory, what is feasible? I guess you will need -- still need to have some spot volumes available for clients? So that's the first question. And maybe also some comments on the average length of the contracts. How is that now compared to, let's say, a year ago? And then maybe also some comments on the move or the expansion, you could rather say, logistics on Air, taking on Senator. Is this a first step? And how big a network do you need in Air Logistics to fulfill your strategy and continue to be relevant for your top 200 clients?

[Soren Skou]

I think in the air, we are acquiring this company as a growth platform. It effectively doubles our volume in Air freight in one go. And with that, we believe we will have a competitive offering in some of the main corridors. We don't have any targets or ambitions beyond that at this point. Obviously, we hope that we can make this business grow very, very fast, just as we have done with the Performance team and KGH and some of the other acquisitions. So that's how we think about it for now. In terms of average contract length, I think the way you can look at it for 2022 is that we are going to have about 8 million FFE of long-term contracts, 7 from long-haul trades and 1 from the short-haul trades. And out of those 8, 1.4 million are multi-year contracts, and we expect the 1.4 in probably will grow a little bit. So you can, I guess, calculate the average from that. And then in terms of long-term target, obviously, you're right that we cannot go to 100% because then we would not have the kind of utilization that we would want in the network. We need the spot market also to help us drive high utilization of the network. We don't have a target -- specific target set at this point, but we do think it can go higher than where we are today.

[Operator]

Our next question comes from Lars Heindorff with Nordea.

[Lars Heindorff, Analyst]

The first one is on congestion. If you could help us out a little bit, I understand that it ties up quite a bit of your capacity. But how much of the capacity is actually tied up owing congestion? And the volume impact that we have seen here with volumes being down year-on-year. How much of that is actually cost? Or is it solely caused by congestion? Or is there any impact in your view from the rising energy prices and hence, also the impact on production in China? That's the first one.

[Soren Skou]

So overall, in the world, around 300 container ships are sitting outside ports, almost 80 of them outside L.A. and Longbridge, but also outside Felixstowe, outside Ningbo and many other places we have congestion. I don't have an exact number, but we think somewhere around 10% of our network capacity is basically tied up in congestion right now. So that's really why we're having a real hard time delivering on the volumes and certainly growing as much as we would like to do. We don't have good evidence on whether the rising energy prices are impacting our volumes, but our assumption would be that, that's probably not a factor of any significance at this point in time. I mean, we know, of course, we still own Maersk Container Industry, even if we have sold it. And there we are impacted to these rolling power cuts, which is specially that you -- instead of working Monday to Friday, it means you are allowed to work Wednesday through Sunday. So you still get 5 days of production. It's just another 5 days than the 5 days you would usually want to work. So that's -- we don't think that's a big factor at this point in our volumes.

[Lars Heindorff, Analyst]

Okay. And regarding the capacity development, you talked a little bit about also in respect to your net debt and leasing liabilities that you have on the balance sheet. Can you say anything about the length or the average length of the TCN that you have? And maybe how much that is up? I understand that we've heard about some of the competitors buying business instead of actually charting them because it's cheaper.

[Patrick Jany, Executive VP, CFO & Member of Executive Board]

Yes. I think we -- there's always a mix between very short-term charters and then charters we activate on the balance sheet, which are typically for a few years, right? So what we have seen is this mix change a little bit because the very short-term doesn't really exist in the market anymore, so you have to go above 1 year. That is probably the most disbalancing shift or change compared to previous situation, apart from the cost of all the charters being obviously higher. So the average length has probably not changed too much, maybe 2 to 3 years, but you have more of it in that range because you have the disappearance of the very short chartering. And the cost is a factor, clearly, but it's also a matter of preserving flexibility. You see as -- currently, the demand pattern is very strong, but -- and support all this capacity, you also have a high-capacity being tied up. So you need those vessels just to ensure a minimum of actual deliveries. Once situation normalizes, you probably will not need all those vessels to carry the same volume. So it's important there to keep this flexibility to revise downward your capacity at one point in time. So we still prefer to have flexibility rather than just looking at the financial cost of it.

[Lars Heindorff, Analyst]

All right. And then the last one is on demerge, or rather maybe I should express it as a dual cost for containers. The line other revenue is actually up very significantly in the third quarter compared to previous quarter in Ocean. So I just wanted to get a feeling for the dual cost and what customers, maybe in some cases, even ocean have to pay for the containers and the demerger attention that you get in Ocean from your customers? I mean, how much -- how is that split? And how much is actually impacting Ocean? And how much is impacting Terminals?

[Patrick Jany, Executive VP, CFO & Member of Executive Board]

Look, I think clearly, as the containers cannot be moved out of the port quickly given the lack of Landside Transportation and in particular, in the U.S., the missing trucks and truckers, there are obviously charges because the whole purpose of the model is to move the containers as fast as possible out of the terminal. So that is -- really the purpose here, it's not to penalize for not being able to adjust because the floor implies that you need to get those containers out very, very quickly. And if you don't, then you actually block the others, which is what's happening now. So that is why those charges are taken to our customers. I think it is 1 factor of the increase in the other revenue line for Ocean. You can see that, that it's actually not that much higher than in Q2. So it is more than last year, clearly, but it's maybe $100 million in that range for Ocean. So nothing significant in terms of actual profitability in Ocean. While in terms of Terminals, we have disclosed here that the -- I would say, most of the increase of the revenue per move, which we have disclosed, 13%, 14% is coming from those charges around the world. So that's a quantification.

[Operator]

Our last question of today comes from Cristian Nedelcu with UBS.

[Cristian Nedelcu]

Could I please ask -- and apologies, I'm coming back to the contract questions before, but you're talking about a roughly $3,000 per container contract rate on average this year. Different third-party providers are suggesting the last few weeks, we are seeing contracts rate at around $4,000 or more. Based on what you disclosed in the past, I think you still have at least around 5 million containers that you need to renegotiate going forward, at least this is what you've done until May this year. So could you elaborate a little bit why you only flag a moderate increase? Secondly, on the 1.4 million multi-year contracts, can you tell us a little bit more if the rate in 2023 is fixed on this contract? And can you provide a bit more color on the enforceability of these contracts? And my last one, if I may, please, regarding logistics and capital allocation, could you give us a rough idea what percentage of your 2023, 2024 group capital employed is likely to be linked to the logistics division or some sort of range or any color in that regard would be helpful.

[Soren Skou]

So let me start with the long -- the multi-year contract, the 1.4 million FFE. We actually have quite a number of them. There are fixed rates, but the majority are -- I mean, so fixed rates for multiple years, but the majority are fixed rate for the first year and then with the floor and a ceiling and an adjustment mechanism that is either yearly or half yearly. So it's a relatively steady contract and revenue stream. And you worked out the $3,000, which is the average for the long-term contracts this year for the 8 million FFE in total. And that is, of course, a combination of front haul and back haul, and it's the total global network. So it's not just Pacific or Europe and so on, therefore, it's always super difficult to compare to a number from the market because what is it actually we are talking about. This is -- the fact this is our average rate this year. We have, as we already have said, been negotiating more contracts early than we would normally have done. And that's why we do not have quite the same number of volumes to still -- to renegotiate. So then we're saying some of the increases that we are seeing, and they have already been baked into the 2021 numbers. And then, of course, they will not be increasing in 2022. So I don't think I can give more color than that on the contracts. And then, Patrick, will you cover the logistics questions?

[Patrick Jany, Executive VP, CFO & Member of Executive Board]

Yes, sure. So indeed, as we grow and we mentioned in Logistics & Services, we are obviously a higher proportion now to invest in this high-return business. And we intend to do so as we have communicated in the Capital Markets Day by at least having a 10% growth, which we are overshooting right now quite significantly. And we are -- we've built 61 warehouses now in the first 9 months, and we will continue to expand those activities in the years to come. I think we guided in our Capital Markets Day for roughly $1 billion CapEx in Logistics, and that's certainly a figure you can take as a reference as well for -- that was for the 2 years, '21, '22, and that's -- wouldn't see right now a reason to believe that it will be reduced in a '23, '24 landscape. So we will continue to invest in logistics as we expand our footprint, as you have seen as well, for instance, in Air with additional aircraft that we have ordered as well. Now the purpose of that is obviously to increase Logistics, which is an asset-light business. So organically, we are now at above 20% ROIC, and that's certainly a very attractive level to continue to invest in it. But if you compare to invested capital, which is now around $2.7 billion for Logistics & Services. If you count, let's say, $1 billion every 2 year coming on it and a bit of working capital as well, you still are at very low numbers when you compare to the $29 billion we have in Ocean right now. So it will be a further increase in that invested capital in the order of magnitude I indicated, but still guaranteeing a very high ROIC. And therefore, a shift on our ROIC quality as well, becoming a bit less asset-heavy in future in terms of looking at returns.

[Soren Skou]

If there are no more questions, then we will go to the final remarks. And let me just say that we've had an, as you all know, another record quarter, and it's across the business, it's across Ocean, Logistics and Terminals, of course, driven by exceptional market conditions, but also driven by successful execution on the strategic transformation in Maersk. We are doing whatever we can to help or alleviate disruptions for our customers. It is adding to our costs as we expand capacity, but we strongly believe that that's what we need to do. We will continue to build a better Ocean business, a higher quality Ocean business by expanding our portfolio of long-term contract volumes. Logistics & Services, organically continue to outperform the growth in the market by a lot. And now we're adding to our capabilities with the acquisition of Senator. We have reiterated our guidance and also today announced a further share buyback. And then let me end by announcing that we will host a virtual ESG day on the 10th of March 2022, where we will give you a lot more insights into the -- into our future ESG strategy. So thank you very much for listening, and we will talk to you again, if not before, then at the next quarter. Thank you.