AP Moeller - Maersk A/S

CSE:MAERSK B

Earnings Call Analysis

AP Møller-Mærsk Faces Tough Q3, Adjusts Outlook

Amid a tough market, AP Møller-Mærsk reported Q3 revenues of $12.1 billion with an EBIT margin of 4.4%. Despite increased volumes in Ocean and Logistics & Services, price declines negated these gains. The company faces subdued demand, price normalization, energy cost inflation, and geopolitical uncertainty. With ongoing freight rate pressure and overcapacity leading to further price reductions, Mærsk predicts full-year results at the lower end of their previous EBITDA ($9.5B-$11B) and EBIT ($3.5B-$5B) guidance range. They've reduced costs, cutting 6,500 jobs, and aim to cut 3,500 more. This is expected to save approximately $600 million in SG&A in 2024. As strategic adjustments continue, including potential CapEx cuts and reassessment of the share buyback program, the outlook for container volumes has narrowed, and the company braces for continued economic headwinds.

Navigating Through Challenging Waters: A.P. Møller - Mærsk's Third Quarter of 2023

For A.P. Møller - Mærsk, the third quarter of 2023 was a period exemplifying resilience amid adversity. The company managed to meet financial expectations with group revenues hitting $12.1 billion and an EBIT margin of 4.4%. The results showcased an interesting dynamic: an uptick in Ocean and Logistics & Services volumes juxtaposed with declining prices across transportation modes due to market saturation and overcapacity. This paints a picture of a shipping industry grappling with a new status quo — substantial macroeconomic pressure, demand softness, and operational costs escalating, particularly with energy prices and geopolitical uncertainties in play. Venturing into the future looks equally daunting with a looming overcapacity in the Ocean segment expected to usher in relentless waves of price reductions.

A Strategic Maneuver: Cost Management and Restructuring

Realizing the impending tough tide, Mærsk took proactive measures early in the year, implementing cost-cutting steps across its operations. The tangible results of these initiatives were the severance of 6,500 jobs and plans for a further reduction of the workforce by 3,500. This strategy is poised to deliver around $600 million in SG&A savings by 2024, underscoring the firm's commitment to right-sizing its cost base in anticipation of the market's vagaries. Nevertheless, these efforts also come with a cost: an expectation of around $350 million in restructuring charges, most of which will be recognized within 2023.

Deep Dive into Operational Segments: Ocean and Logistics & Services Business

A deeper look into Mærsk's performance reveals that the Ocean sector experienced a 5% increase in volumes, complemented by an 11% reduction in cost per unit. However, the segment's robustness was challenged by the influx of additional capacity which disrupted the market equilibrium, thereby eroding profitability. Conversely, the Logistics & Services business echoed a similar pattern of volume recovery albeit muddled by feeble rates across transport modes. An acute decline in organic revenue by 22% was attributed to the lag effect of continued destocking, especially within the retail and lifestyle sectors in North America.

Terminals Prove Steadfast, But Shifting Tides on the Horizon

In contrast to the volatility experienced by the shipping segments, Mærsk's terminal business stood firm, buoyed by dynamic pricing and judicious cost-saving actions that buffered the blows from rising costs. The terminals sustained strong profitability with an EBITDA margin of 35%, mirroring performances from the same quarter last year. The company managed to maintain volumes close to the prior year's levels, with only minimal absolute declines due to strategic exits, notably in Latin America.

Adjusting Sails: Refined Guidance Amidst Headwinds

Reflecting on the cautious optimism post a spike in third-quarter volumes, Mærsk fine-tuned its full year guidance on container volume growth to a reduction of between 2% and 0.5%. With freight rates in freefall and no respite from macroeconomic headwinds in sight, the 2023 full-year financial outlook has been realigned to the lower end of prior forecasts, with EBITDA projections narrowed to between $9.5 billion and $11 billion, and EBIT to between $3.5 billion and $5 billion. To safeguard its financial solidity, the company doubled down on its commitment to cost containment leading to a solid bottom line and maintained expectations to generate a free cash flow of at least $3 billion.

Steadfast Strategic Commitment and Customer Partnerships

As Mærsk traverses the turbulent market landscape, it emphasizes the importance of a lean operating model and the agility to respond swiftly to changing conditions. Given the ongoing market turmoil, Mærsk is reevaluating capital expenditures and may reconsider its share buyback plans for 2024. Amid these austere measures, the company underscores its unwavering dedication to its broader strategy, prioritizing diversification of revenue sources and fostering customer partnerships to steer through the uncertain climate.

Earnings Call Transcript 2023-Q3

[Vincent Clerc, executive]

Welcome, everyone, and thank you for joining us on this earnings call today as we present the results of our third quarter of 2023. My name is Vincent Clerc. I'm the CEO of A.P. Møller - Mærsk. And with me in the room today is our CFO, Patrick Jany. On the second slide, you see our usual disclaimer on forward-looking statements. Please familiarize yourself with this at your convenience. For now, let's move straight into the fourth slide. Despite an increasingly challenging market environment, we closed the third quarter 2023 with a financial performance in line with expectations generating group revenues of USD 12.1 billion with an EBIT margin of 4.4%. The third quarter saw an uptick in volumes in our Ocean and Logistics & Services businesses. At the same time, we have seen prices decline across all transportation modes at an accelerated pace, overshadowing the positive impact from higher volumes. The new normal we are now headed into is one of more subdued macroeconomic outlook and thus, of soft volume demands for the coming years, prices back in line with historical levels and inflationary pressures on our cost base, especially from energy cost and will also increased geopolitical uncertainty. This outlook is compounded in the shipping front by increasing supply side risk. Since the summer, we have seen overcapacity across most regions triggering a new wave of price reductions. At the same time, scrapping and idling of tonnage has not yet picked up. We, therefore, expect further headwinds as the market conditions in ocean are worsening. In light of the worsening conditions in ocean and the ongoing pressure on freight rates, we now expect a full year results towards the lower end of the previously communicated ranges from EBIT and EBITDA. Moving to the next slide. The materialization of these supply side risk and their impacts on freight rates ushers a very uncertain trading environment with significant further downside risk potential. And given the number of new vessels still on order, one that could stay with us for quite a while. In this context, we must make sure that we are fully prepared to face whatever scenario will happen, right size our cost base and leave ourselves the room we need to further our strategic progression and take advantage of the opportunities that will invariably arise. With constant care and knowing that we were headed towards leaner time, we initiated several cost reduction measures early in the year across all of our cost base. These measures have cushioned our results across all business segments, and as they were all affected by price decreases. Organizational costs were not immune. We implemented a hiring freeze and reduced all nonnecessary expenses, including marketing and contingent workforce early on. These measures have allowed us to cut 6,500 jobs so far this year, and we are now intensifying these efforts. We now aim to further decrease our workforce by another 3,500 positions with 2,500 to be carried out in the coming months and the remaining to extend into early 2024. These efforts will bring our total workforce below 100,000 or more than 10,000 below the 110,000 we started the year with. We, therefore, now expect restructuring charges of approximately USD 350 million, with the vast majority to be recognized in 2023. These compounded efforts will deliver around $600 million of SG&A savings in 2024. We will continue to adapt our plan to the market reality. In parallel, we will continue our efforts on increasing asset utilization and operational expense reductions. We also cut our CapEx and are considering all options to preserve financial headroom and investment capacity, including a review of the continuation of our share buyback program in 2024. Now let's take a closer look at the quarterly performance of our segments, starting with Ocean on Slide 6. Ocean volumes increased in the third quarter. We increased our volumes by 5% while we reduced our cost per unit by 11, further showing progress on reducing our operating cost. Constantly optimizing our network efficiency, we ended the quarter with 95% utilization on offered capacity, a 4% to 5% percentage increase over both last quarter and Q3 2022. This quarter, we also saw additional capacity enter the container shipping market at an accelerated pace, leading to a supply and demand imbalance, which put significant downward pressure on profitability. Looking at the industry order book, which you all know very well, there are still a lot of new vessels expected to enter the market in Q4 and next year. At the same time, mitigating measures such as idling and scrapping are expected to remain at low levels in Q4. As in previous ocean cycles, we have continued to use every tool in our toolbox for dynamic capacity adjustments. We continue to deploy tools such as slow steaming and idling and focused on cost containment, ultimately achieving an EBIT margin at breakeven level in this quarter. Let me also briefly address a big highlight in the last quarter. We celebrated the name-giving of the world first methanol- enabled container vessel named Laura Maersk. We had a great ceremony here in Copenhagen, and we are fortunate to be joined by some of you for a tour of the landmark vessel. This is a significant milestone in our company history, and we hope that this helped build momentum for the green transition of shipping. Now moving to Slide 7, please. In our Logistics & Services business, we saw similar to Ocean, a recovery in volumes over the quarter. We had good customer wins, demonstrating that there is still solid underlying demand for our product offerings. However, the rates have been weak across all transportation modes in particular, air and land side transportation. The trend we observed since the beginning of the year amplified into the third quarter. The sector of retail and lifestyle, especially in North America, remain challenged as these verticals are closely linked to our ocean business. On an organic basis, revenue declined 22%. We continue to expect a more subdued top line development until the transitory effect from the ongoing destocking have fully played out. As I already indicated in the second quarter earnings call, we increased our focus on cost management to regain momentum towards our longer-term 6% EBIT margin ambition. We already see the early results of this increased cost focus, leading to a stabilization of EBIT margins in the third quarter. Moving to our terminal segments now on Slide 8. Our terminal business remains resilient and continues to generate robust returns. Dynamic pricing, combined with a focus on cost savings initiatives enabled us to offset the inflationary impact, resulting in a strong EBITDA margin performance of 35%, basically flat compared to the year -- to last year's Q3. Compared to last year's Q3, volumes were essentially flat on a like-for-like basis, while declining slightly in absolute terms due to the exit primarily in Latin America. The solid profitability resulted in a ROIC of 10.3%.Before moving to our revised 2023 guidance, let's return to our midterm road map, please, and let's change to Slide 9. Looking at our road map, we are on target for our group, Ocean and Terminal ambition, also helped by the extraordinary years behind us. Going forward, the focus in Ocean is on further efficiency and cost improvement as well as higher utilization of assets and continuously improving the quality of our operation. The performance of our Logistics & Services segment is below our midterm ambition, and clearly, we are not pleased with this development. While the underlying business remains solid, and we continue to gain new commercial wins, organic revenue remain impacted by the transitory normalization process. As already discussed in the last quarter, we have increased our commercial efforts in logistics and services and intensified our focus on cost to find a path back to profitable growth. We have already seen some improvement this quarter even in light of the rapidly declining rates, and we expect a return to strong organic growth once the cyclical effects of the normalizations have been worked out. Now moving to Slide 10. I'd like to close with our guidance slide. As mentioned at the start, we saw a pickup in volumes in the third quarter, but do not believe that this to be the end of the continued inventory destocking and our volumes outlook generally remains muted. Reflecting on the pickup in Q3 volumes, we narrow our full year guidance container volumes outlook to minus 2% to minus 0.5%, a small increase from our previous outlook of minus 4% to minus 1%. At the same time, freight rates have been declining. And given the supply and demand imbalance, we see no end to the economic headwinds on a short-term basis. Consequently, we adjusted our full year financial outlook and now expect results towards the lower end of the previous guidance of USD 9.5 billion to USD 11 billion EBITDA and $3.5 billion to $5 billion EBIT. We continue to expect free cash flow of at least $3 billion. Our focus shifts towards protecting margins given the weaker economic outlook, and we accordingly cut our CapEx guidance, now expecting approximately $8 billion for 2022, 2023 and $8 billion to $9 billion for '23 and '24. Now I will hand over to Patrick for a closer look at our financial performance. Patrick, please go ahead.

[Patrick Jany, executive]

Thank you, Vincent, and welcome to everybody on our call today. As Vincent just discussed, our third quarter results were in line with expectations in a difficult market, increasingly tested by the ongoing increase in supply in Ocean. We generated revenue of $12.1 billion, significantly below last year's third quarter, but only down 7% sequentially. Our strong focus on cost containment led to a solid bottom line performance despite rough market conditions. Q3 EBITDA was $1.9 billion, down from the $10.9 billion in Q3 2022 with the decrease coming from Ocean impacted by rapidly declining freight rates compared to the peak quarter of last year. EBIT decreased to $0.5 billion. Our net profit for the quarter was strong at $0.6 billion on the back of a strong financial result. This quarter, we continued to execute our share buyback and repurchased shares for $763 million, resulting in a record $13.2 billion cash return to shareholders in 2023. We also maintained a strong cash and deposits position of $21.9 billion with a net cash position of $6.8 billion at the end of Q3, very much in line with previous year. As mentioned by Vincent earlier, we faced a high level of uncertainty in Ocean and are taking all measures to guarantee a sound competitive cost position and maintain a resilient balance sheet. On the cost side, it means that we are intensifying our restructuring measures, now aiming to reduce an additional 3,500 positions, leading to restructuring costs of $350 million. This is an increase of $200 million compared to the $150 million we announced back in February when we guided for a total of $450 million, which was composed of $300 million impairment of former brands like Hamburg Süd and the first part of the restructuring for $150 million. This amplified restructuring, combined with other cost measures, will provide savings of $600 million in '24 compared to our 2023 cost basis. On the balance sheet side, we have been further reducing CapEx and now guide for $8 billion for 2022, '23 period and $8 billion to $9 billion for '23 to '24 million, so a reduction of at least $2 billion compared to the midpoint of our previous guidance. In addition, depending on the unfolding of the market situation, we are prepared to consider further measures, including the continuation of our share buyback program to preserve our financial investment capacity and resilience. Let's now have a closer look at our cash flow development on the next slide. Starting on the left of the bridge, we generated $1.4 billion cash flow from operation in the third quarter, which was driven by the lower EBITDA of $1.9 billion. As in Q3 of last year, we have had a lower cash conversion in that quarter as we used year negotiation with suppliers to also secure lower cost basis for the years to come. Gross CapEx was $820 million in Q3 as we had lower investments, mainly in oceans and terminal. CapEx in the first 9 months was $2.4 billion, almost $1 billion lower than in the same period of the prior year. Free cash flow was a negative $124 million, mainly from the lower profitability from the quarter and combined with a slight increase in working capital. So the cash generation this quarter comes, on the one hand, from the divestment of our U.S. Marine management operations, which is included in this acquisition net item on the cash flow bridge and the emittance of a green bond of $750 million. The net proceeds were placed in short-term deposits Now let us move on to the Ocean segment on Slide 14, where we see that despite the uptick in volume, our Ocean business suffered from the rapid decline in rates. Freight rates were down 58%, and our revenue in Ocean consequently fell 56% compared to the previous year. As you can see on the graph on the right, Ocean profitability has been subject to the ongoing normalization of the market since the peak in Q3 2022. However, the accelerated pace at which additional capacity has been deployed this quarter has led to further margin pressure. In Q3, Ocean profitability reached breakeven level with a negative EBIT of $27 million. Our key priority has been to contain our costs, combined with a strong focus on operational excellence and asset utilization. If you turn to Slide 15, you can see the oversized freight rate effect in clear detail. But you can also see that our Ocean team has performed well in cost containment. Similar to the second quarter, in Q3, our 3 major cost buckets of bunker, container handling costs and network costs, all positively contributed to profitability. We also see the impact from a decline in other revenue as the additional earnings from last year's global congestions are left behind. Moving to Slide 16. Q3 marked the fourth consecutive quarter of significant freight rate declines since the peak observed last year. We had a sequential decrease of 14% in the quarter, which is expected to continue given the increasing supply-demand imbalance in the Ocean market and the fact that contract rates will continue to converge toward shipment rates. Remember that we're also back in our annual contract negotiation cycle and our new contracts will be negotiated with current spot price levels as a reference. In the third quarter, we saw a positive evolution of volumes with a seasonal pickup of 5% compared to the second quarter this year. Volumes actually improved by 9%. We also continue to manage our capacity dynamically. In the third quarter, we operated approximately 3% less capacity than the prior year and have achieved a strong utilization on offered capacity at 95%, 5 percent points higher than last year and 4 percentage points higher compared to the second quarter. At the same time, global congestions has last dissipated and scheduled reliability has improved compared to both previous year and previous quarter. Our share volume contracts -- our share of volumes on contracts were 68% in the quarter, and we expect the same share for the full year of 2023, on par with the previous year. On Slide 17, you can see the results of our successful cost- containment efforts. Operating costs were down 19% in the quarter and even stronger decrease compared to the 17% in the second quarter. The lower cost base was driven primarily by lower bunker costs, which were down 39% year-on-year. We continue to deploy slow steaming, contributing to a 7.5% decrease in bunker consumption, and we had a 34% lower average bunker price. Unit cost at fixed bunker was down 11% year-on-year to $2,287 and down 4% sequentially. A strong achievement, which shows that we are on a good path to consistently reduce our cost of operations. On Slide 18, we turn to Logistics & Services. Revenue declined there by 16% on a reported basis and was 22% lower on an organic basis. As Vincent mentioned in his earlier remarks, we are not pleased with this performance. The decline was driven by the phenomena we observed since the first quarter of the year, a strong destocking of our key customers, indicating that our logistics and services segment is particularly sensitive to container volumes in the retail and lifestyle sectors, especially in North America. And as with Ocean, our L&S business also suffered from lower freight rates, particularly in air and road transportation. The lower revenue base led to a decline in profits, yet as a result of our renewed cost containment efforts in the third quarter, we were able to stabilize the EBIT margin with a sequential increase of 50 basis points. We will continue with our increased cost management focus over the next quarters. In order to regain momentum and show progress towards our 6% midterm EBIT margin ambition. Taking a look at the details of Logistics & Services on Slide 19, you see that the lower rates were visible in all of our by Maersk product families with managed by Maersk and fulfilled by Maersk additionally impacted by lower volume. In Managed by Maersk, we observed lower demand, partly offset by contribution from the acquisition of joint venture. In fulfilled by Maersk, revenue decreased by $1.3 billion, which was driven by lower volumes and rates in warehouse and distribution, middle mile and e-commerce in North America, but partly offset by growth from LF Logistics. The performance of our transported by Maersk product family was impacted by lower rates in air, LCL and inland, particularly in North America and Europe. On Slide 20, we turn to terminals, which continue to perform very well under the difficult market conditions. Revenue decreased by 11% to $1 billion. This was driven by slightly lower volumes and the ongoing normalization of last year's extraordinary storage income. Sequentially, revenue increased actually by 5%. EBIT decreased to $270 million, driven by lower storage revenue and net gain from divestment impairments reported in Q3 2022. Margins were practically unchanged at a very high level. Our Terminals business continues to show strong cost control, leading to strong overall margins despite inflationary pressures. The ROIC increased to 10.3%, demonstrating the consistent strong performance in the segment. Now let's look at the EBITDA bridge on Slide 21. Here, you can see the volume effect where volumes were down 4% and flat like-for-like. The net impact on EBITDA is positive due to a better location mix. On the revenue per move side, decreased by 6.5% to $314. As in previous quarters, the normalization of port congestions drove the lower revenue per move outweighing the effect of CPI-related tariff increases. And on the cost side, the cost per move decreased by 5% to $244. Lower energy costs were here offset by higher depreciation from progress on terminal modernization projects, mainly in Nigeria and Los Angeles. To finish up on Slide 22, we turn to Towage and & Maritime Services. The revenue decline in the third quarter was mainly due to the exclusion of Maersk Supply Services, which was divested in May. In addition, contraction in Maersk Container Industries was partly offset by a robust performance of [Indiscernible]. The year-on-year increase in EBIT is driven primarily by the gain on sales of the U.S. Marine management business with a net gain of $94 million and a gain from sale of shares of Höegh her Autoliners. Following our segment review, I would like to hand over to the operator for the Q&A session.

[Operator]

Ladies and gentlemen, at this time, we will be questions-and-answer session. [Operator Instructions] Our first question comes from Sam Bland from JPMorgan. Please go ahead.

[Samuel Bland, analyst]

It would be on, I guess, the group, although the trading and profitability is clearly on downward trend, there is still a very strong balance sheet. What was the thinking behind reviewing the share buyback at this point, which maybe is a little bit earlier than some people had expected? Thank you.

[Patrick Jany, executive]

Hi, thanks very much for your question. So indeed, I think we do have a strong balance sheet, but we also have a high uncertainty ahead. So on the one hand, as you know, we are strongly committed to return to shareholders. We have returned $13 billion this year, and if I actually go back to 2020, we returned $ 27 billion. So there's no doubt that if possible, we will continue to return cash to shareholders. On the other hand, it's about securing sustainable cash flows for the group by continuing to invest in our strategy, by continuing to develop logistics and services in an environment which we predict will be quite uncertain. And we have for now quite a wide range of scenarios ending up for 2024. Therefore, I think it is only a responsible way to drive the company by taking all measures and preparing all measures necessary to ensure that we can, both on the cost side and on the balance sheet side, they're actually ready to weather any type of scenarios which might happen. And that is really what we are getting prepared for. I hope that answers your question.

[Operator]

The next question comes from Lars Heindorff Nordea. Please go ahead.

[Lars Heindorff, analyst]

Thank you. Also, a question regarding the buyback and maybe more on the balance sheet. You were very clear about your return targets for the various divisions in terms of ROIC and margins and so forth. But I mean, what would be a desired EV to administrate and debt level on the balance sheet, assuming that we will get such a scenario that you described earlier in your presentation for '24? Been going back to your Capital Markets Day presentation in '21, where you state that above 3x, that means that you are no longer investment grade, and then you have another threshold which is around 1.5x EBITDA. So just to get a feeling of where are we on that scale? And what sort of the level at which you think is unsustainable?

[Vincent Clerc, executive]

Yes. No, thanks very much for your question. So diving a little bit into the balance sheet and how we consider our balance sheet resilience, which is really what it's all about. I think we have a strong commitment to investment grade -- and to a strong investment grade, which I would roughly say it's 1.5x debt -to -EBITDA. Right now, obviously, we're in a very good territory. But if you look ahead, you do have scenarios where we actually have -- or start to be cash negative as we also guide for in Q4 already. And therefore, you can imagine that in the dies part of the scenarios, you do have a cash burn a lower EBITDA, which pushes the ratio, not because of the balance sheet and the debt but because of the lowering of the EBITDA to unsustainable levels. And that is really where we need to get prepared for, both on the increasing EBITDA side, which are the cost measures, but also maintaining a good cash position. And obviously, you also have other scenarios, which are obviously more favorable. I think right now, we do not have the data at the beginning of the season to really see which way the 2024 will firm up. And that is why we also think it is absolutely necessary to flag that with the current level of uncertainty and the level of capacity coming on the market, you do have quite a wide range of scenarios. And that is where, I would say, preserving the balance sheet is extremely important to us. For the investment grade as an overall target but also to preserve liquidity on the one hand, but also flexibility and investment capacity to be able to continue to invest, as I was earlier alluding to in our resisting services business on the organic side, but also take advantage of opportunities, which may arise on the inorganic front when you look ahead a few years ahead.

[Operator]

The next question comes from Muneeba Kayani from Bank of America.

[Muneeba Kayani, analyst]

I just wanted to understand a bit on your guidance. So if I take the EBITDA guidance for the year, it implies $750 million for the fourth quarter. Is this including the restructuring cost of $350 million? And like how much of that would be in the fourth quarter? And just in terms of next year, then, is this kind of -- what is needed to improve the performance from this 4Q implied number? Thank you.

[Vincent Clerc, executive]

I'll take your question here. I think on the guidance for the EBITDA, we are indeed guiding on the lower end of the guidance, which implies a low EBITDA for the quarter, which is really what we see coming and implies the effect to a negative cash position for the quarter as we do have quite significant CapEx commitment as well in the quarter. I think you can extrapolate that for fourth quarters ahead and we come back on our '24 guidance, obviously, in February when we have a better view on those scenarios. That is, I would say, the framework you have to work with. And the profitability really in '24, will still be very much dependent on the movement of the rates and the contracting season, which hasn't yet started. So from that point of view, we need to have more data on at which levels in which geographies at which pace we get volume and rate commitments to form a better opinion on the EBITDA for 2024. But that will be the main driver for our EBITDA evolution in '24. You would expect that the other businesses will progress. But in the sheer proportion of our results, it will be the rates in Ocean, which determine that.

[Operator]

The next question comes from Omar Nokta from Jefferies. Please go ahead.

[Omar Nokta, analyst]

I just wanted to follow up on the cost-cutting measures up to $350 million coming up here. It's going to lead to savings of $600 million, as you outlined in 2024. Just wanted to ask on that, is the $600 million cost savings? Is that a new run rate for beyond '24 as well? Can you go into '250 and onwards? And then with those cost savings, does this in any way affect sort of the integration efforts you have with Logistics and Ocean and the business overall? Thank you.

[Vincent Clerc, executive]

Yes. So on the reduction. So the $600 million reduction that we will achieve next year over this year, that is basically a reset of the line and something we have to hold going forward. After that, it depends, of course, on the speed of the growth and how the productivity targets comes through. So it's not necessarily -- and also what inflation levels we have to deal with in the future year. But that is a fundamental -- this is not like just a diet. This is a reset of the baseline with a 10% less workforce and 10% less cost, and then we'll take it from there and continue to work on further productivity to offset inflation and eat into the growth that we will generate. And maybe coming back on as well on your question on the previous question because I didn't answer totally on the impact on restructuring costs. We expect indeed that it will be -- the majority will be taken this year and it's not part of our guidance as we guide for underlying EBITDA. I hope that clarifies. Thank you.

[Operator]

The next question comes from Robert Joynson from BNP Paribas. Please go ahead.

[Robert Joynson, analyst]

Vincent and Patrick. A question on the freight rate. It was down to around 2,100 in Q3. Could you maybe just talk about the mix within that between spot rates and contract rates? And I'm assuming contract rates are still higher than spot rates on average. And maybe just around that, if you were to mark-to-market based on current spot rates and recently agreed contracts, where do you estimate that number would settle?

[Vincent Clerc, executive]

Hi, Robert. So I think you -- so first of all, you're correct to say that in the third, it will continue in the fourth quarter. Contracts will trade at higher prices than the spot rate. The real trick now is to know what is going to happen with the spot rate during the contracting season in the next 2 months because that will have an impact on how much of a -- how much of an impact will come from the renegotiation of contracts. One of the reason why we are actually taking the measures that we are is, we don't really have visibility of where that will reset and what type of premium we can achieve on top of the -- so what the spot rate is going to be and what type of premium we can achieve on top of that on the contract. But I would say that with the decrease that we have seen in the third quarter and with the expectations that we -- that we're guiding on in the fourth quarter, it is not an insignificant number if we don't see an upward adjustment in the spot market pretty soon. I cannot give you a number at this stage because I think we're going to have the opportunity to come back on 2024, and we don't want to guide at this, but I must flag that the differences between the 2, the way things have evolved here in the last few months. It's not an insignificant gap if it was to close down to what the prevailing levels are today.

[Operator]

The next question comes from Cristian Nedelcu from UBS. Please go ahead.

[Cristian Nedelcu, analyst]

On logistics, we've seen the trend in revenues, weakening over the last few quarters. You mentioned about the difficult short-term outlook. When I think about the goodwill impairment test going forward, I think you spent around $8 billion on M&A over the last few years. Could you tell us a bit more about how much buffer you have within the goodwill impairment testing before you need to book any charges there? Thank you.

[Vincent Clerc, executive]

Yes. Thanks very much, Christian, for your question. I think impairment is something we do regularly. So it is not something which would come as a surprise. And we certainly see that the logistic business is bottoming out as we have mentioned as well, we have a stabilization at a low level, which is certainly not the level we aspire to us. As you know, we aspire to the 6% EBIT margin. Any impairment test event test is always modelled through multiple years ahead, taking as well in account. The measures that we have introduced both on the cost side and the growth that we actually do have on the market when you clean up for the effect of the normalization. So overall, I would say we are totally confident that the business will generate its cash flows and support assets. Looking forward, you see the restructuring costs as well this quarter. And this will provide a more healthy base to actually see the growth coming through as well in terms of results in the quarters ahead.

[Operator]

The next question comes from Alexia Dogani from Barclays.

[Alexia Dogani, analyst]

Thank you. Good morning. Can you elaborate why you have decided to implement the fifth phase of the buyback despite the cautious outlook you're signaling? And why have you decided to proceed with this $1.6 billion of buyback instead of continuing some of your CapEx investments? And can you elaborate what CapEx is not going to happen over the next 2 years given your revisions? Thanks.

[Vincent Clerc, executive]

Yes. So I think what we are flagging today is that the uncertainty of the evolution of the rates in the past months and in the coming quarters will be fundamental to determine the path forward and the cash flow generation for the years ahead. And therefore, that is why we flagged a review of the share buyback. It's not that we have taken the decision to stop it. But I think it's our responsible responsibility to flag the fact that when we turn cash negative, you'll have to look as well at all the components which are cash out. So from that point of view, it's just, I would say, a flagging that we are, as I said earlier, until committed to shareholder returns. I think you've seen that from our numbers. And we really return cash as much as we can. But we also stay with a strong balance sheet to invest in growth. And growth is also CapEx, as you rightly mentioned. So we have reduced CapEx on a few levels. Also on the Ocean side, right, on pacing a bit here, the CapEx investment notion because prices are still high on the ship side. And therefore, we would expect that by delaying a bit, we probably will not end up with a higher cost base on the opposite. It will probably be a bit positive from that point of view. So we have to be cautious and invest wisely. But certainly, we do plan to continue to invest as well in gross resisting energy services. That is certainly a part of the CapEx ahead. So there is no reduction, I would say, from that element. And as you've seen, we have been investing in the past and we would expect those levels to continue as well in the future in resisting services.

[Operator]

The next question comes from Dan Togo Jensen from Carnegie Investment Bank. Please go ahead.

[Dan Jensen, analyst]

I was just wondering, when we look into where '24 and how we should think about your contract coverage usually or at least in the past couple of years, have had a coverage of some 70% on contracts. Will that be materially different in '24? I guess it's down to exactly where you can cut the line for what contract rates would be. But what will be the threshold of you not sign contracts? Will that be they are not much different from spot rates and then you will enter in to 2'24 much more open than you usually are? How should we think about that ratio? Thanks.

[Vincent Clerc, executive]

Yes. If you look at the development since -- from last year into this year, our contract coverage in Ocean has been pretty consistent around 68%, 69%. And that is what we intend to continue to have both in '24 and even in '25 and beyond. We think that it does make sense for us to continue to work with contracts. It provides us better coverage, better visibility and better predictability. It provides us also with yields over time that are absolutely competitive with anything else. So we will continue to do that in the downturn here and believe that this is actually going to play out well for us.

[Dan Jensen, analyst]

Despite rates actually being at unprofitable levels?

[Vincent Clerc, executive]

Yes. But if rates are at unprofitable -- if rates are at unprofitable level on contracts, then they're also significantly unprofitable at the spot rate level. And I think if you look at -- if you look simply at the amount of tonnage that is in the process of being built in the yards and the phasing in of that capacity, these difficult market conditions, they are likely to stay with us not only for 2024, but also longer.

[Operator]

The next question comes from Ulrik Bak from SEB.

[Ulrik Bak, analyst]

HI, Vincent and Patrick. The reduction in your CapEx guidance for '24, will this affect your growth perspective in Logistics and & Services and also the pace of your fleet renewal and investments in green transition? And also perhaps just some color on where this CapEx is taken from. Thank you.

[Vincent Clerc, executive]

Yes. So if you look at CapEx going forward, I think there are 2 buckets of savings. First and foremost, we're completely committed to continuing to grow our activities in the Terminal division, which is showing incredible resilience and very, very strong performance. Patrick went and talked about it earlier today. We also believe in the continued potential of our Logistics & Service division and that it's -- from a CapEx perspective, it's much lighter, but we will continue to prioritize the opportunities that we have in that field. Whether the growth, I mentioned a more subdued macroeconomic outlook. There is a little bit that comes out of logistics and services in our guidance because we expect a slightly lower growth. We still want to get back to the 6% EBIT and the 10% growth that we talked about at our Capital Markets Day in 2021. But there is probably less headroom upward from those numbers in the type of macroeconomic environment we're headed into. On the other side, on ships, I think if you look at -- as Patrick mentioned before, the prices in the yards today, I think they reflect mostly a trading environment the way that it was last year, more than the trading environment, the way that we're talking about looking at for next year. And if we looked at all cycles, it has sometimes taken time for asset prices to adjust and come back in line with the more -- to be more correlated with the trading environments where they need to operate. Our expectations is that the current levels of new buildings or new ships is unsustainable and will have to correct. And therefore, taking a pause for a while, while this happens, makes sense for us. We've looked at it also from the perspective of our energy transition goals and so on. And at least, obviously, the longer we take that pause and the longer that correction come, the more we will have to look at it at some point. But for the time being, this is something that we can perfectly manage for quite a while before this becomes a risk for our green transition.

[Operator]

The next question comes from Patrick Creuset from Goldman Sachs. Please go ahead.

[Patrick Creuset, analyst]

Hi, Vincent and As Patrick. I mean, you said there's a range of scenarios for '24, '25. If we assume the market actually got worse from here in terms of rates, how much would you be able and willing to cut CapEx even further as the new guidance? And what's the order of priority between doing that, cutting CapEx further versus scrapping the buyback?

[Vincent Clerc, executive]

So with the guidance that we have put forward, actually, there is -- if you think about '24 and '25, there is not a lot of uncommitted CapEx that we can still cut because you have 2 things. One is you have the CapEx that we have in our Terminal division and in Logistics and & Services, which, from a return on investment perspective is quite positive. So that we would need to cut -- that we would definitely want to continue to support. And it leaves us back with cutting further into CapEx into Ocean, which is basically containers and chips, which is what we have with what is fueling most of the reduction today. So the reason why we are actually flagging a review of the share buyback program, it is that we have actually taken quite a few of the hard decisions in -- on the CapEx. And it is also important that we don't just go in the bunker and have no investment in the future of the business. While we go through this cycle, we need to keep that headroom that Patrick talked about to do the stuff that makes sense and that will put us stronger on the other side. So what that means is basically now a lot of the hard stuff on OpEx, on organization and CapEx is in place. And what we have to review now is the share buyback program depending on what the outlook actually will shape up to be between now and February, where we'll have a bit more clarity. The big moving factor is the freight rate levels that we will see in 2024, which for me is too early to call, but that we will be able to have a more firm opinion with when we come back in 3 months with our full year results and our guidance for '24.

[Operator]

The next question comes from Jain Parash from HSBC. Please go ahead.

[Parash Jain, analyst]

My question is also hovering around outlook for the Ocean business. And if you simply do on the back of the annual calculation, assuming the Terminal, Logistics doesn't see much swing going into the fourth quarter, it seems that your Ocean business EBIT margin will be negative double digit, which it has never been in the past. How do you characterize this cycle we're on versus on the previous cycle has a stronger balance sheet of yourself and the period is turning out to be a curve for the sector? And more importantly, do you think that fourth quarter in your view is kind of a likely trough in the cycle? Or actually, we probably will think going to get worse going into the '24, '25?

[Vincent Clerc, executive]

Yes. Thank you for that question. It's a great lead in to basically elaborating on what Patrick mentioned in terms of the wide range of scenarios for how this can go. So let me put it this way. If the EBIT was to be as negative as you painted in Q4, what that means is that nothing has happened to the spot market during that quarter. And then it would not be the throw because what it will mean is the thing that needs to happen on top of that is a reset of the contract levels down to those levels. And that would end up worse rather than better. So I think that's -- either we see a Q4 that is better than we expect. And then I think that can have a profound impact on what 2024 is going to look like if the Q4 is actually not shaping -- it's actually not delivering some type of improvements, then I think that we're looking at a pretty dire situation in 2024. That is something that I think is not a foregone conclusion what is going to happen. That's why we're working with very different scenarios. But it is -- the range of potential outcome is much wider, I think, than what we have seen in the past. Whether that constitute occurs for the segments of having all that balance sheet. I think that's maybe more for you to have an opinion on that for me to voice it. But it is clearly, I think we're faced with a wider range of possible outcome. Hence, the proactiveness and the decisiveness of the measures that we have taken, which is also what we have been discussing here in these questions and the fact that we're not leaving anything on turn and want to be fairly transparent with you on what's going on. And that's also why we're flagging that even the share buyback, we'll have to look at, even if it's fairly early in the cycle because these possible outcomes are quite wide, and we have relatively few months to actually see where this is going to -- how -- what this is going to point towards.

[Operator]

The next question comes from Sathish Sivakumar from Citi. Please go ahead.

[Sathish Sivakumar, analyst]

I got a question on the purchase orders. If I were to say, compared with the end of quarter 2 and now all the purchase orders within the logistics segments have evolved and you did actually had weakness in retail and lifestyle. What about the other verticals as the trends that are seeing – the trends that in the are seeing other verticals? Thank you.

[Vincent Clerc, executive]

Yes. So on POs from customers into North America and Europe, we've seen a little bit of seasonal pickup, but very limited. So that's why we think that underlying when we get into -- when we look into Q4 and forward, we don't really see a big recovery from the segment. So some seasonal goods, but not a lot of strength underpinning these purchases or other volumes. Obviously, from the PO perspective, we have pretty good data on retail and lifestyle because they work on the basis of POs. A lot of industrial -- a lot of the verticals from industrials do not cut POs actually. So there, you only -- you don't have that advanced window, if you will, you only see what shows up at the terminal when it's time to move from the factory. I think the way that we're seeing this market is -- actually, this is not really -- the demand is relatively steady. There is no pickup, but it's relatively steady.

[Operator]

The next question comes from Michael Vitfell-Rasmussen from Danske Bank. Please go ahead.

[Michael Vitfell-Rasmussen, analyst]

A question for Patrick here. So I was a bit surprised that the net working capital was a drag in the third quarter. So if you could just please elaborate on this and especially kind of talking payment conditions towards clients also as we look into 2024. So if you could give kind of any directional impact on net working capital. Thank you.

[Patrick Jany, executive]

Coming back on that time on that item. I think if you actually look back to the Q3 of last year, we had the same phenomenon. So it doesn't really come as a surprise. We have used Q3 again to enter into negotiations with suppliers to secure as well better, better conditions and cost for the year ahead. That obviously implies a bit of a trade-off, so more on the payables side than on your question, which is the receivables side. I think here, we see that actually, we are firm and there is no significant improvement nor deterioration of our accounts receivable on that manner, right? So I think that is a good sign. And that really explains our Q3, which if you take, I would say, those measures out on the procurement side, we would have had a cash conversion above the 100%.

[Operator]

The next question comes from Mark Zeck from Stifel. Please go ahead.

[Marc Zeck, analyst]

Just one on charter costs, I believe there was a bit of an expectation that the high charter cost that you had in 2022, '23 will phase off in 2024 and beyond. If we talk about that these charter costs that go into basically the D&A component, could you give us a bit of a feeling how much of an improvement you might expect in 2024 at those high-priced charters phase out slowly? Thank you.

[Vincent Clerc, executive]

Yes, you're absolutely correct that we indicated earlier, and we confirm that part of the cost improvement we see in '24 will come from lowering over our charter time charter rates. I think we'll come back, obviously, in February with a more precise guidance to your point for the year of 2024. But we have indicated earlier on, as you know, that we aim to significantly reduce our cost per unit to actually heading towards 2019 levels when you adjust for bunker. That's certainly a view we have for the coming quarters and years to get there, and that will be an element in '24. So that allows us to further reduce our cost per unit.

[Operator]

We have a follow-up question from Lars Heindorff from Nordea. Please go ahead.

[Lars Heindorff, analyst]

It's regarding the sort of log-exempt regulation from the EU. I don't clearly understand your worries about next year given the amount of the capacity coming into the sea. But besides the rate negotiations, which is coming up, I just want to hear your view on how you think that will affect the deployment of capacity and you don't have good on various trades. I don't think maybe you have a view, but I don't think you will share it at this point in time. But all sort of in general terms, how that will play out and how that -- what kind of impact you think that VSAs will have in the market here going into the spring of next year?

[Vincent Clerc, executive]

Yes. So from my perspective, this will have very little impact, if any at all. The only thing that has changed is that the automatic exemption has been withdrawn. And it is, therefore, subject now to self-assessments and assessment according to the normal rules, which, in many cases, we were doing anyway because you needed to be ready if there was any questions or anything. So the ability that lines have to form VSAs or alliances or collaborations for me is completely -- is not a big change compared to what we have had before. It changes a bit the amount of admin we have in connection with that, but not our ability to actually make those VSAs. I think we have ample data to show that these alliances and VSAs have been good for the consumer because they have produced to lower-cost networks and, therefore, have resulted in cheaper Ocean freight rates, maybe when we look at next year, too cheap. But it is not something that I expect will have much of an impact. At least for us, when we think about 2024, this is not really a factor.

[Operator]

The last question for today's call comes from Muneeba Kayani from Bank of America. Please go ahead.

[Muneeba Kayani, analyst]

Thank you for taking my question again. Vincent, you -- earlier in your comments, you said you would take advantage of opportunities that will invariably arise. Could you elaborate kind of what you meant by that? Thank you.

[Vincent Clerc, executive]

Yes. So I mean, 2 things to be very clear. First of all is, as I mentioned, in some of the assets, whether across all of whether it's terminal concessions, ships, even leasing of warehouses are -- the asset prices have still not really adjusted to the outlook and are still, to a large extent, factoring some of the boomers prices. So by keeping our powder dry and being able not to overload our order book or our CapEx programs by purchasing at the peak, we give ourselves the opportunity to get more out of that money and to create some value from these investments. That's one front. The second, and it is that we are absolutely determined to continue to diversify the revenue streams of Maersk can build our -- and expand our capabilities, both within the terminal business and the logistics business here in the coming years. And that's that continues to be our strategy. It has been our strategy for a while. For this year, it's going to generate over $1.5 billion in EBIT which we can -- hopefully, with the logistics improving next year, which we can continue to grow. And that will cushion actually whatever downturn there is in Ocean. And it just underlines the importance for us to continue to invest in that direction. So to supplement asset prices coming down, there will or may be at some point in that cycle, interesting assets in the logistics front that we can pick up and that allow us to continue to add capabilities and business lines to what we're doing. And if and when those align, we want to make sure that we can take advantage of the opportunity and not be constrained at that time. Good. In closing, I would like to leave you with the following final remarks. In an increasingly challenging market environment, we delivered a third quarter performance in line with expectations. While we saw an uptick in volumes, we saw price decline across all transportation modes at an accelerated pace. And we expect the market conditions in Ocean to worsen further due to the additional capacity coming into the market and due to the fact that mitigating measures such as idling and ship recycling have not been effective. In this environment, we maintain our guidance range but now expect our result in 2023 towards the lower end of the previously communicated ranges of EBIT and EBITDA. The increased uncertainty and volatility highlight the necessity to maintain a lean and efficient organization. We are, therefore, acting quickly and preparing ourselves. We are now intensifying our cost measures, including CapEx and reviewing all measures, including the continuation of our share buyback in 2024 to improve our cost position and maintain strong and resilient balance sheet. Finally, I want to close with reinforcing our commitment to our strategy, and I was just in on it with the last question. If there was ever an environment illustrating why we must continue to diversify our revenue and build closer partnership with our customers, then this environment is absolutely it. While we will have all -- while we will make all the adjustments necessary to weather what is coming, we will not relent on investing in our strategy, which has a strong backing from our customers. With this, thank you for your attention, and we'll talk, I guess, soon. Bye-bye.