AP Moeller - Maersk A/S

CSE:MAERSK B

Earnings Call Transcript 2023-Q1

[Vincent Clerc, CEO]

Good morning, everyone, and thank you for joining us today as we present the First Quarter 2023 Results. My name is Vincent Clerc, CEO of A.P. Møller - Maersk, and I am joined today by our CFO, Patrick Jany.

Yes, when we last met in February, we expected a continuation of lower volumes driven by the inventory correction, and that is indeed what we saw this quarter. Similar to our Q4 2022, these lower volumes were felt across all segments. So the environment and therefore, our first quarter results were very much in line with internal expectations. Overall, the Company is performing well during this period of extreme market normalization.

In Q1 2023, we generated $14.2 billion of revenue and delivered an EBIT margin of 16.4%. While the absolute numbers are significantly below those of prior year in the wider context and compared to our pre-pandemic performance, this is still an outstanding quarterly result. The headwinds we face, including continued uncertainty about consumer behaviors, are quite clear, and we have started to proactively manage costs. We will intensify and adjust those efforts as necessary depending on the direction of the wins. Given the progression of the past quarter, we maintained our guidance for the full year 2023, which is based on essentially flat Ocean rates and an anticipated improvement of volumes in the second half of the year.

Let's take a look now at the segment performance in the quarter, starting on Slide 5. Although the normalization of the Ocean industry is proceeding as anticipated, inventory destocking has been the red threat in this cycle. Over the quarter, we worked to dynamically adjust capacity and maintain strong utilization at 88% on offered capacity. We can see that the rest of the industry is also using those tools of blankings and idling so that during the quarter rates have stabilized. This is encouraging.

We are also pleased to see the 2023 contract negotiation season progressing as expected and that our customers continue to see value and deeper contractual relationship with us despite all of the fluctuations. To date, we have signed about 75% of our anticipated annual contract volumes. Similar to the previous quarter, we are signing contracts trending towards, but still above spot rates. Looking forward into the year, much about the volumes and rate development in the second half of the year remains uncertain. We continue to believe in a recovery of volumes, but given the industry order book, the supply side risk that we flagged last time, remain.

As I mentioned earlier, we have been engaging in proactive cost containment, which is most visible in Ocean. There, we can see that the colleagues have dusted off the old playbook, and we have -- that we have successfully used before. This quarter, we implemented slow steaming, improved our network design by dynamically managing capacity using more efficient vessels and improving utilization. We will continue those efforts throughout the year.

Finally, you may notice that we have adjusted our view on contracts and shipments this year. Now we include all volumes in the view as long-haul volumes take an increasing share and have restated the previous years. Nonetheless, we continue to believe that when we look on a full year basis, we still have about 70% of our volumes on contract, underscoring the stability of our contract demand.

Moving to Slide 6. In Logistics & Services, we see the effect of the continued destocking. Our revenue was up 21%, but this is entirely due to the consolidation of our acquisitions made last year, LF Logistics, Pilot and Senator. As on an organic basis, we saw a 9% revenue decline. From the public data available, we can see that the vertical of retail, lifestyle and consumer goods as well as the geographies of North America and Europe have led the destocking behaviors and volume decline in those past two quarters.

Given the acquisitions we have made, we have a strong exposure to these geographies and verticals, which underscores the challenge for our L&S segment.

That said, and to add some positive color, we're able to partially offset lower volumes with new commercial wins in the same geographies. These wins helped to buffer the double-digit decline that we saw from some larger customers and demonstrate that our integrated product offering continues to lend well with these large customers. We can report that although we have had negative organic revenue growth from our top 200 Ocean customers, they still performed best and took a lower share of the overall organic decline. On the Terminal, on Slide 7, we find a similar story, not only about volumes, but also about exposure to North America. There, this is where we have seen the steepest decline in import volumes since Q3 2022 and is also where we saw the worst port congestion build up about 18 months ago.

As that congestion has released, we now see the double effect of lower volumes and lower storage income. However, here too, I'm pleased to see the strong cost control. Despite the difficult environment, terminals has been able to keep the underlying profit and essentially stable by reducing cost per move, while increasing underlying revenue per move through CPI-based tariff increase. This can be seen in the excellent ROIC of nearly 12%, which is a remarkable achievement in this market. Turning to Slide 8.

Let's review where we stand in terms of delivering on our long-term KPIs. This quarter, we are flashing mostly green across the board. Although as we move through the year and the normalization effects are felt, we will certainly face challenges, particularly on organic revenue growth target for our L&S as well as its EBIT margin. It is important to remember here that although we report on these targets on a quarterly last 12 months basis, we are really aiming for the full year number. And there, we feel we continue to be on track.

Moving to Slide 9. Before I finish up with guidance, I would like to give you a high-level view on the proof points we aim to deliver in the coming years as we're faced with these new market circumstances. For 2023, it is clear to deliver growth and profitability of our -- for our Logistics & Services segment despite the challenges faced by the industry. It won't be easy and much rests on our performance in the second half of the year. But after enjoying extraordinary strong market conditions over the past few years, now is the time to prove that our logistics growth wasn't simply a function of Ocean success.

I believe deeply in the integrated strategy, and now we need to show that it works.

In the background for the past several years, we have been working on our technology platform. On the one hand, we have a lot of legacy systems to consolidate and rationalize. On the other, what we are trying to accomplish in terms of creating an integrated platform for our end-to-end logistics offering has not been done before, so the bar is high. Nonetheless, by mid-2024, our aim is to launch elements of our new tech platforms so that we can go beyond localized solutions and drive scalable growth in truly integrated global logistics. Finally, by 2025, we will have regained full control -- full operational independence and flexibility on Ocean.

We are looking forward to the launch of a more modular integrated network combining the strength of all our divisions, bringing significant efficiency gains and lower volatility as well as providing our customers with superior flexibility and service levels. To close with our guidance here on Slide 10. As I have mentioned previously, given the economic development in line with expectations, our guidance remains unchanged. We continue to expect a recovery in volumes in the second half of the year. Although beyond some demand stabilization, we do not yet see signs of significant recovery and risks to consumer demand remain.

Our global GDP growth expectations are still, therefore, muted at 1.8%, and we continue to expect the ocean container market growth to be in the range from minus 2.5% to plus 0.5% for the full year. Based on these assumptions, the full year -- for the full year 2023, we expect an underlying EBITDA of $8 billion to $11 billion, an underlying EBIT of $2 billion to $5 billion and a free cash flow of at least $2 billion. Our cumulative CapEx for 2022 to 2023 is also unchanged at $9 billion to $10 billion, and we introduced a new cumulative target for '23 to '24 of $10 billion to $11 billion. As we guided in February, we have taken an impairment and restructuring charge for -- as part of our brand unification exercise. Some amount remains from the initially guided USD 450 million.

And with that, I will now turn over to Patrick, who will guide us through the financial highlights.

[Patrick Jany, CFO]

Thank you, Vincent. And allow me to also welcome everyone on the call today. As Vincent just discussed, Q1 '23 was very much in line with our expectation of a continuation of the inventory correction in the first half across the whole business and rates coming off their peak levels in Ocean. This implies that the figures we discuss today represent the peak quarter of the year as the progressive erosion of contract rates in Ocean towards spot levels will be the main element determining profitability in the next quarters. Based on this, the revenue of $14.2 billion and an EBITDA of $4 billion were logically significantly below prior year, but still at a strong level with EBITDA margin of nearly 28% and an EBIT margin of over 16%.

Our free cash flow was strong as well at $4.2 billion and benefited from favorable working capital movement, which I will address later. Following our AGM on March 28 and the approval of the proposed dividend of DKK 4,300 per share, we returned USD 9.4 billion in the form of dividends. When including the share buyback executed in the quarter, this sums up to a cash return to shareholders of $10.1 billion. Despite the significant payout, we retained a net cash position of $7 billion at quarter's end, which supports our continuing CapEx and ongoing share buyback plans.

Now let us take a look at the development of cash flow in details on Slide 13. Starting with our operating cash flow on the left. In Q1, we generated $5.3 billion driven by our EBITDA of $4 billion as well as a favorable swing of approximately $1.3 billion in working capital given the contraction of the business compared to last year. As we have now experienced most of the leveling out for the balance of the year, we expect significantly less net cash release from working capital. Our gross CapEx was $838 million in Q1, which is in line with our full year guidance, but was nearly 40% lower than the prior year quarter as in Q1 '22, we made a down payment for our green methanol enabled vessels, which inflated the previous year figure.

The biggest cash event in Q1 was a significant return to shareholders of $10.1 billion, for the payment of which we reduced our short-term deposits by $7.8 billion. The strong cash generation in the quarter allowed to keep a strong net cash position of 7 billion, which is really based on the cash and deposit number of $22.3 billion to be compared with $28.6 billion by Q4 2022. Please note that we have moved the corresponding slide with the details of the total cash and deposits through the appendix. Slide 14 visualizes the normalization happening in Ocean after the peak earnings in 2021 and 2022. Revenue was 37% lower driven primarily by a similar drop in rates and to a lesser degree by lower volumes, which were 9.4% below previous year.

Nonetheless, as we noted on a group level, the Q1 EBIT margin of close to 20% is still far in excess of what we achieved pre-pandemic and the protection that our long-term contracts offered in Q1 was the reason for that. If we turn to Slide 15, we can see this rate effect in clear detail. However, we can also see that the organization has performed well in cost containment by moving proactively, helping to mitigate some of the rate effects. In the container handling cost line, we can see the effect of lower detention and demurrage charges support congestions released, which is part of the behavioral costs we discussed last year. In addition, as mentioned previously, we implemented slow steaming across the board in Q1, which led to a decrease in bunker consumption.

These savings explain the majority of the gain in network costs, excluding bunker price. And the savings were still compounded by some revenue recognition effect. Moving to Slide 16. As we described last quarter, when thinking about the progression of rates over the course of 2023, we expect to see some benefit from previous contract rates in the first half of the year, but that this benefit will disappear as contracts are progressively renegotiated, and new rates are implemented. Indeed, this has been the case also in Q1 with average freight rates dropping nearly 37% on an annual basis and nearly 26% on a sequential basis.

In fact, this is now the second quarter where we have seen a mid-20% sequential drop. We have seen our contract negotiation season progress very much according to plan with continued strong interest in contracts and rates progressively moving towards spot rates.

When it comes to our average operating fleet capacity, you can see the efforts on controlling capacity with a reduction of just over 1% sequentially compared to Q4 2022, while volumes dropped 3% in the same period. When it comes to our definition of the share of contract versus spot volume, given that our long-haul volumes takes an increasing share of the total and short-term volumes also have a rising contract share, we decided to simplify our reporting and report the share of contracts on our total volumes. This gives us simpler and holistic view, and we have restated accordingly.

Nonetheless, we believe that for the full year 2023, we will still hit our previous target of a 70-30 contract versus shipment split as we can see that our customers value the contractual relationship with us, and we also value that tighter relationship as it is a key to selling a greater share of logistics services and executing our integrated strategy. Finally, our share of multiyear contracts was stable with 1.8 million FFEs at the end of the first quarter.

On Slide 17, you can see that our cost containment efforts led to a cost reduction of 9.6%. As mentioned, we made a wider use of slow steaming, which led to 11% decrease in bunker consumption more than compensating for the slightly higher average bunker price. Thus, despite the volume decrease of over 9%, we were able to keep the unit cost at fixed bunker to a minimal gain of 1% or 2.9% once adjusted for the financial impact of the exit from Russia in Q1 2022. I would also like to note here that we performed our annual review on the bunker cost used for this calculation. And this year, based on the price evolution over the previous year, we made the decision to increase the price at which we benchmark the fixed bunker from USD 450 per ton to USD 550 per ton.

On Slide 18, we turn to Logistics & Services, where revenue growth of 21% in the first quarter was, again, driven primarily by the acquisitions we consolidated over the course of 2022. This led to 30% higher organic -- inorganic revenue and a 9% decline in organic revenue. In contrast to our Q4 results, where our top 200 customers still provided us with positive organic revenue growth, in Q1, they did decline as they were also affected by the destocking, but to a lesser extent as volumes were partially compensated by new wins. When we presented the full year guidance in February, we did anticipate a continuation of the ongoing inventory correction. And as our business is strongly exposed to retail and consumer goods, future development will depend on consumer and retailer behavior.

So we are watching those trends carefully. The lower revenue led to a corresponding decline in EBIT to $135 million and an EBIT margin of 3.9%, slightly above the previous quarter, but clearly below previous year. This profitability was in line with our expectation, and we will actively monitor the volume development to adapt the cost structure proactively in the coming months. Taking a look at the details of Logistics & Services on Slide 20. Similar to our results in Q4, the lower volumes were visible in all of our by Maersk product families.

In Managed by Maersk, higher demand for booking services in our lead logistics activities helped to offset lower volumes from existing customers and supply chain management. In addition, our cold chain logistics activities grew organically and our project logistics business benefited from the integration of the Martin Bencher acquisition. Under Fulfilled by Maersk, we see the effect of inventory correction in lower contract logistics and e-commerce volumes, which led to overall lower organic revenues, yet these were offset on a reported basis by the consolidation of LF Logistics and Pilot. In Transported by Maersk, we continue to see lower volumes in both Air and LCL. And in this quarter, we also felt the impact of lower air rates.

This was offset by the consolidation of Senator, so that reported revenues were flat for the quarter. As we expected, after the Q4 2022, Q1 was another tough quarter.

As Vincent mentioned earlier, given our acquisitions and therefore, our strong geographical presence in North America, we are exposed to the U.S. retail and consumer goods sectors, which seem to be the hardest hit at present. Based on purchase orders that we see through our 4PL activities, we do not yet observe a consistent pickup of volumes trending into the Q2. Therefore, although we do still anticipate a recovery of volumes in the second half of the year, the timing is not yet clear.

On Slide 20, we turn to Terminals, where the effect of lower volumes is also visible. As we mentioned earlier, the release of port congestions was essentially complete by late last year, and therefore, we have seen a decline in both revenues and profitability due primarily to lower congestions related storage income, but also lower volumes. From a geographic perspective, it was North America that drove the majority of the decline as we saw 27% of our volumes at our Terminals there. And this is also where we saw the highest levels of port congestions last year. The comparison base in terms of profitability is, of course, still distorted by the $485 million impairment that we took last year on our Global Port International Holding in conjunction, we are exit from China -- from Russia.

Adjusted for that, we can see an approximately 50% decline in profitability. That said, when we compare to pre-pandemic volumes, so going back to Q1 2019, for example, we see that overall volumes are down less than 1%. And at the time, our EBIT is up USD 54 million or 35%, which underscores how far Terminals has come in improving profitability. This is clearly visible in the 11.9% ROIC well in excess of our 9% target. And let's look at the components by turning to Slide 21.

Here, we can see the volume effect, which was primarily driven by North American import volumes. The biggest drop was in revenue per move effect, which is where the lower storage income makes itself felt. This was partially offset by CPI-related tariffs increase. And at the same time, terminals also brought down cost per move by 3.4%, demonstrating the ability to compensate for lower volumes. Sequentially, cost per move was down 8% when compared to Q4 2022.

Thus, underlying margins are quite protected by the combination of tariff increase and cost reductions. To finish up on Slide 22, we turn to Towage & Maritime Services. The most significant announcement here was the planned divestiture of Maersk Supply Service to A.P. Møller Holding, our parent company. This marks the completion of our decision to divest all energy-related activities, and the transaction is expected to close during Q2.

In the Q1, we saw a good performance in most of the TMS segment, and in particular, in Svitzer, while the market environment for MCI remains challenging given the low container demand.

Following our segment review, I would like to hand over to the operator for the Q&A session.

[Operator]

[Operator Instructions] The first question comes from the line of Alexia Dogani with Barclays.

[Alexia Dogani, Barclays]

Vincent, in the morning on the Bloomberg interview, you indicated that you're working towards regaining your unit cost to 2018 and 2019 levels. Can you kind of give us the building blocks to get there? And how long would it take you to get there?

[Vincent Clerc, CEO]

So I think what we are trying to do now is really to roll back as much of the inflationary pressure as we have seen. And we need to take a benchmark that is '18 or '19 to see what it was before that. It's improbable that we can roll it all the way back down to those levels, but that's a bit the challenge that we're taking on, and we'll have to see how far we can bring it down. We still are facing some inflationary pressure, but we're also seeing more and more levers where that we can act on.

We talked about slow steaming. This is something we're implementing across the network right now, and it will have a -- it has a significant impact on both our fuel bill, but also our emissions. The second one is also on managing capacity proactively. So through blanking sailings and making sure we adjust our network to the size of the demand and not sell with low utilization. And then finally, there is a lot of work that needs to be done on the procurement side because we're seeing as the market lines up, that we will see the charter market come back down.

We see also that congestions on the land side means that a lot of the prices that did increase during the pandemic, they will face now deflationary pressure in the next couple of years.

So whereas it's a bit too early for us to give a precise goal of where we think we can take it because it's -- the work is ongoing to try to determine this. I think we've given ourselves the challenge to aim high and really take some of the hard decisions that will be necessary to roll this as much of this back as possible.

[Operator]

The next question comes from the line of Cristian Nedelcu with UBS.

[Cristian Nedelcu, UBS]

It's about the Ocean profitability in the second half of the year. So to think some ballpark math here, I think the CCFI is currently around 20% higher than the 2019 levels. If you translate this into average freight rates, that would be somewhere around $350 higher rate than in '19. At the same time, the bunker cost per container is around $100 higher than '19 and your unit cost ex-bunker are around $500 higher than '19. So I guess where I'm going with this, my ballpark estimates here would suggest that second half EBITDA in Ocean, the run rate should be somewhere around 0.

And implicitly, your EBIT should be negative. Just checking if I'm missing any important point in my calculations, sorry if I'm too skeptical here.

[Patrick Jany, CFO]

Thanks very much for your question. I think directionally, clearly, we have guided that the Q1 here was the strongest, and that accounts for Ocean, and we will see a regression of profitability as the new contracts come in, and they are, as we also said, tending towards shipment rates, right? Now they are approaching, obviously, a little bit the spot rates from the higher side, right? So we expect that contracts will always be a little bit higher than the actual spot as the first element to your bridge. And second, as Vincent was saying, we're also working on costs.

So we will not guide on the actual numbers. But clearly, our guidance that we have given for the year, and we reconfirm today, implies a much lower profitability in Q3, Q4. And then we'll see where exactly we'll end depending on as whether the market [indiscernible] spot development in the second half.

[Operator]

The next question comes from the line of Robert Joynson with BNP Paribas.

[Robert Joynson, BNP Paribas]

Just one question on the free cash flow guidance, which you've left unchanged at least $2 billion. Given that you produced over $4 billion in Q1, I think some people are interpreting the unchanged guidance as an implied negative free cash flow for the remainder of the year. Could you maybe just provide some color around that? Do you expect free cash flow to be negative during the final three quarters? Or is it maybe that too pessimistic?

[Patrick Jany, CFO]

Thanks for your question. No, clearly, I was a bit in the link on the previous question. We clearly have seen the peak as well in sort of free cash flow generation, right? So that is clear, we shouldn't expect to have this effect of quite a still strong EBITDA and a reversal of working capital per due over the next quarters. The reversal of working capital will abate or it has probably abated.

And then it's back to what is the EBITDA generation in the last few quarters combined with higher CapEx, right? So when we talk about free cash flow, you've seen that the CapEx have been fairly small or restrained in the first quarter compared to our yearly guidance.

So you'll have, on the one hand, a lower cash flow generation, no working capital contribution in rough terms and higher CapEx, which, on the free cash flow generation, clearly indicates that the next quarters, particularly the second half, will be much, much lower. And that will explain why we keep the guidance. The guidance is actually being above, right? So we will be above, and then we'll see how much. But clearly from the cash generation and from the profitability, we have passed the peak of the year.

[Operator]

The next question comes from the line of Sathish Sivakumar with Citi.

[Sathish Sivakumar, Citi]

So my question is actually on the volume exposure. If you say -- if you had to put it roughly in two broad buckets, what is your exposure to, say, verticals that are exposed to consumers, like retailers, compared to industrial goods, like machinery? And just related to that, actually, how does the inventory levels compare on those two broad category levels?

[Vincent Clerc, CEO]

Yes. So I think it's a bit different across the segments. Because we have a very high or much higher market share in our Ocean segment than we have in the logistics segment, you could say that our exposure in Ocean is much more even to what happens in the global economy. Whereas in our logistics business, there, it's much more related to retail, to FMCG and to lifestyle verticals and technology. And those are verticals that are -- so I would say our logistics part is much heavier exposed to the consumer consumption end products than what you see in our shipping business.

And that's why also what you see in both Q4 numbers and Q1 is that actually the impact on growth across the logistics segment is being felt actually quite pronounced because the wins that we continue to implement, they come in slowly and the adjustment comes in at once. So you can't just write it out under the growth. What we have also is especially in the destocking that is currently taking place is especially affecting North America, more than Europe. And that you see also come through in the Terminal results because our two largest facility in Los Angeles and in Newark, they actually also feel the fact that there is just simply fewer volumes coming through the pipeline.

So these are circumstances that are temporary in nature whether they're going to last seven months, eight months, 10 months, that's the part that for -- or a few more, that's the part that is really, really hard for us to predict. As Patrick was saying before, we don't have clear data so far from our 4PL that this is coming to an end right away. But it is going to because we can clearly see that the level of adjustments that there has been in what is coming through is significantly below what the macro would indicate. So consumption now is well ahead of what is being moved. So it's the inventory that takes the difference.

[Operator]

The next question comes from the line of Sam Bland with JPMorgan.

[Samuel Bland]

It's around recent Transpacific rates. We've seen quite a sharp bounce there over the last month or so. Can you just talk about what you think that might be driven by? And whether it's had much of an effect on contract negotiations on that line versus what you might have expected a couple of months ago?

[Vincent Clerc, CEO]

Yes. So indeed, there's been quite a bounce actually, because the -- this destocking that we just talked about, actually has affected the U.S. mall. We saw the rate decrease faster there, and there has been a bounce back now because actually, this -- it looks like things are firming up a little bit, which is positive. It doesn't really affect the contract rates in this case because actually, you go through different rounds of the tenders and the offers are actually put in front of the customer a little bit earlier.

And anyway, a bit higher than what prevailing spot level that you have.

So this does not really impact the contract rates, which actually closed on the Pacific pretty much as we expected. But it is a positive with respect to seeing the market that actually reacts rationally to the fact that once the destocking start to stabilize, then we see the price gradually recover.

[Operator]

The next question comes from the line of Michael Vitfell-Rasmussen with Danske Bank.

[Michael Vitfell-Rasmussen, Danske Bank]

Could you just add a few comments in terms of what you see in competition doing out here? And this is mainly on the Ocean side. Are they being as rational as you guys are being? Are they slow steaming as much and basically having the same approach towards customers?

[Vincent Clerc, CEO]

That's a great point to make here. Actually, this stabilization of rates that you see take place here in the first quarter, it could not be possible if it was only Maersk that was behaving in a rational way. We've seen actually significant blanking activities across all alliances as they are faced with a lot less demand and have had inflationary pressure in their cost base as well in the last couple of years. So there is a need to revert to cost containment and protect utilization. We see that happen across the different trades.

So we've seen a fairly rational or more rational behaviors, and that is evidenced by the fact that if you look at the down cycles in connection with the financial crisis in '89 or in connection with 2015, '16, the market, as it adjusted down, went all the way down and then had to kind of rebound to find a balance. In this case, what has happened is the market went down, but found a balance without having to go and hit all the way to the bottom and then recover a little bit after a few months. So I think we see definitely better conduct and more rationality in how this is being handled so far.

The part that I want to keep though, because it goes back to the supply side risk that we talk about in our guidance is that at the operational level, it seems that there is a lot more rationality. On the ordering level, there is still a concern for us to see the level of ordering and what needs to phase into '23 and '24, which means that there are still some risks about how we're going to see this phased in, in the coming quarters.

[Operator]

The next question comes from the line of Ulrik Bak with SEB.

[Ulrik Bak]

Yes. Can you perhaps talk about the different cost items in Ocean where we saw double-digit declines this quarter year-over-year. How much of this is related to the volume decline? And perhaps other measures that you may have taken? And also to what extent can these cost improvements be extrapolate in the coming quarters?

[Vincent Clerc, CEO]

I'm sorry, the line was really bad, I must admit. I did not understand the question. Can you try to take it again?

[Ulrik Bak]

I have a different line here.

[Vincent Clerc, CEO]

Okay.

[Ulrik Bak]

Yes. Can you perhaps talk a bit about the different cost items in Ocean where we saw double-digit declines during the quarter? How much is related to volume decline? And other measures that you may have taken. And also, to what extent can these cost improvements be extrapolated to the coming quarters?

[Patrick Jany, CFO]

Yes. So maybe just to start on [indiscernible]. Effectively, we have seen a good development here on the cost side. I think the main element, which contributed in Q1 a good cost element, was the slow steaming, which clearly had the impact of reducing our consumption by 11%, so quite a substantial amount and more than offset the 3% increase in bunker price we saw. So otherwise, the single most important item.

Then we had still a bit of revenue recognition coming in, the same effect as we had in the working capital as this is coming down, it helped a little bit.

And interestingly, then more when you look forward, we had some of the behavioral costs coming back in terms of terminal costs, in terms of container repositioning, given that the congestion has reduced. So that we expect those costs to also come back in the next quarters.

[Operator]

The next question comes from the line of Dan Togo Jensen with Carnegie Investment Bank.

[Dan Togo Jensen, Carnegie Investment Bank]

Yes. Maybe looking a bit at logistics and the top 200 clients here promotions. Can you give some color on the churn here among these top 200? How many are the same now compared to '19? And also in more maybe in absolute terms, or in relative terms, if you can do that, how much of revenue in logistics today comes from these top 200?

And how much was it, let's say, one, two years ago? I mean, they are growing more than the rest of the clients in logistics and they're also falling less as we can see here in this quarter. And maybe some color on the incremental margin on this growth from these top 200 when it returns, what we can expect?

[Vincent Clerc, CEO]

So by and large, these 200 customers are pretty much the same. They may have had three or four or five of them that have changed and evolved as we move. But they reflect our key client and runway program across the Company, and it's pretty much the same benchmark. So the growth is not a factor of churn. We've not lost any customer actually in the last three years and continue to grow with most of them at quite a significant pace.

And as you rightfully say, if you look at all the last few quarters, you will see actually that their growth is faster than the average.

So their share of the business is actually increasing. That's actually the focus that we have right now because we -- clearly, it is the larger companies that tend to choose to work with direct asset providers and so on, and some of the SMEs are more geared towards the freight forwarder business model. So we're focusing on the customers that appreciate the direct relationship with asset providers and grow up our business through working with them.

[Operator]

The next question comes from the line of Lars Heindorff with Nordea.

[Lars Heindorff, Nordea]

Also a question for my part on the Logistics & Services. It's regarding air cargo. We have seen ocean rates coming down, but we also see now air cargo rates trending actually quite significant downwards. If I understand it correctly, you have around about 22 aircraft in your portfolio, of which four to five is parked. I just want to get a sense for how much of the total logistics business is at air cargo?

And also how many airplanes are you still taking on or you have more in your order book yet to come?

[Patrick Jany, CFO]

Yes, maybe just to start here on the answer here. Overall, we report our air business in Transported by Maersk. And to your question, the proportion, it is fairly small within Transported by Maersk. The main element here is our intermodal, so the containers, drayage and so on, the land side of our Ocean transportation, that is the main element here, on the Transported by Maersk. The activities, per se, have different split.

So we -- our own planes are probably the smallest part of the business. We do have, indeed, probably around 20 planes. But most of them are actually, as we have had for many, many years, on the contract for UPS and DHL and so on. So I'm not reporting our numbers. We just have a waitlist of those aircrafts.

We use a few aircraft currently on our own. We'll have three coming up next year. But from the total air activity, what is more important is the part from Senator, which is a contracted capacity, not own planes, but actually reserved, which we can also release and expand according to demand. And then we, obviously, have a part on belly space. So it is -- we're not totally dependent on our own planes, which actually represent the smallest part of our air business.

[Vincent Clerc, CEO]

If I can just add one comment. So I think it's fair to say that the normalization has taken place also in air freight. That's also what you were into [last], and we see airfreight as being actually more volatile, which means, as Patrick is saying, that there we will continue to rely on procuring capacity in different ways so that we have a lot more flexibility there than we have in Ocean. We see this as being very necessary. So we're going to keep moving on own airplane to a small part of what we do, but there are customers for whom this is a necessity, and we will continue to be able to support them.

But there is also a lot of areas where we will not rely on our own capacity, and we'll continue to grow through mechanisms that are similar to what other 3PL are using and using really the belly space of the airlines.

[Operator]

The next question comes from the line of Muneeba Kayani with Bank of America.

[Muneeba Kayani, Bank of America]

I just wanted to understand, in your view, do you think the industry at these levels is loss-making at the spot rate levels? And so how do you kind of -- how does that factor into how you think about capacity discipline in the second half of the year and if there is a demand rebound?

[Vincent Clerc, CEO]

I think we -- if you look at the guidance that we provided and take out what we have delivered this quarter, then I think as we were into also in one of the previous questions, then at these levels, the industry is certainly not creating economic profit. And in many cases, it depends a bit on your geographic exposure and your contract exposure and so on, but you are either in a black or a pink or more -- maybe more red breakeven, depending on what type of exposure you have. If you're very exposed to the spot, you may actually be -- and very exposed to East-West, you may actually be in loss-giving territory. And for different -- may have slightly different exposures and could still be in black.

So I think what this shows is the real necessity to protect earnings to really have a very, very disciplined approach to capacity and cost in general. I think some of the cost savings that we have seen here in the first quarter, there is still more legs to it in the coming quarters. So we can affect actually and bring the breakeven point further down. But there is also some work that needs to happen on making sure that we do maintain a higher capacity utilization. I think our capacity utilization here in the first quarter was 88%, which is not a bad number.

But in a strong market, we're usually able to push that up to 91%, 92%. And that makes actually a big difference on the network that we have in here.

So as the volumes recover, we can gain 3%, 4% on the utilization, and that will certainly help also move the breakeven point. So we have the levers to actually handle this normalization in a rational and good way, even if it's a bit difficult. But you can -- you have seen in the past some irrational behaviors. We've not seen so much of it in this time, but let's say, in the second part of the year, whether they happen or not. I think, for us, our expectation right now is that people will be rational.

And that's what we will continue also to execute on our side.

[Operator]

The next question comes from the line of Anders-Redigh Karlsen with Kepler Cheuvreux.

[Anders-Redigh Karlsen, Kepler Cheuvreux]

My question goes on fleet growth and capacity. And if you could share some thoughts around the order book. Are you seeing any delays? Are you seeing any regulatory effects on the existing fleet? And are you also seeing some exits from fleet in total by scrapping?

[Vincent Clerc, CEO]

Yes. So from the order book, I think that -- in essence, any type of delays out of the yard is not going to have a material impact on the outlook because you are typically able to negotiate something between one to four months delay, which here, if you look at the size of the order book, is not going to make a big difference, whether it comes a couple of months before or after. So that, I think, is the first thing. So the delivery windows the way that they are, may move a little bit, but it's not something that should materially affect the outcome.

What we see, though, is the implementation of the CII regulation and also of the ETS with the EU, that will have an impact that is still hard to quantify on capacity depending on how this is being implemented and how this is being enforced. So that could have certainly some positive impact on absorbing some of the capacity that is coming online.

Then the next step is also, which you are into, is scrapping. There has been virtually nothing scrapped here in the last couple of years. We should see that normalize and come back to maybe at least close to what the yard capacity is because there is demand for this right now. I don't think that we have seen yet this activity pick up to the level that we will follow in the normalization, but it also has to do with that. If you just look at the results of the quarter, it was still rational to deploy this tonnage during the first quarter because the prices were still profitable enough that you would keep pretty much anything that you can [sailing].

I think as we get into the reality, we talked about in some of the previous questions of the second half year, you will see a gradual increase in scrapping, which will also have some type of positive impact. That being said, you add this all up, it still requires a fair amount of discipline and a continued rationality. What we have seen in the last six months from the different carriers and alliances, you will need to continue to see it to avoid another downturn.

[Operator]

We have a follow-up question from Alexia Dogani with Barclays.

[Alexia Dogani, Barclays]

Vincent, again, kind of going back to your opening remarks around the change that we should expect in 2025. I think you talked about more modular services, increased flexibility, better stability. Can you kind of explain a bit more what you were implying? Because obviously, that could be a comment attached to the alliance benefits. But clearly, it is in relation to the alliance breakup.

So can you just explain what your network strategy is going to be post 2025 and this modularity, comment, please?

[Vincent Clerc, CEO]

It's a pretty broad topic. So I'm going to try to give you the pixie version of this. I think basically what there is in here is that for us, since the inception of the alliances, actually, the scale benefits that we were able to get through the alliances have basically gone away. We have grown organically to a size where we today can deploy effectively alone what an alliance could needed to do together about eight years ago.

What the alliance have given us is scale economics, which is basically the ability to deploy 22 -- 20-plus thousand TEU ships effectively and reduce unit cost. What it has not given is modularity, flexibility and so on because you actually are up still in having basically in a way the disadvantage of being an asset provider by having a heavy balance sheet, but the disadvantage of being a 3PL by having half of your customer promise is actually riding on somebody else's ship and being a bit at the mercy of the operating decisions that they are making. And same in reverse for your partners.

So I think for us, what is really key now is that we regain the operational control so that we can turn assets into choice for our customers and make a play for quality. And from that, I think we will talk in due time about exactly how that looks like operationally, but we do believe that we can actually create a network that is where we can increase asset intensity. So more -- we will need less capacity to move the same amount of volumes -- or the asset turn, sorry, we can increase the asset turn, less capacity to move the same amount of volumes, less carbon footprint, more reliability and also very competitive transit time.

So I think we cannot do that today in an alliance setup. We will do that once we get out of the alliance and have the implementation of our unique network, and that's one of the proof points that I talked about for 2025.

[Operator]

Another follow-up question from the line of Cristian Nedelcu with UBS.

[Cristian Nedelcu, UBS]

Just a question on Q2 Ocean. And Patrick, you mentioned that the benefit from prior contract rates that will persist also in Q2. I guess my question is, could you give us a bit of color how this benefit would look versus the Q1 benefit? Is it similar? Slightly below?

Or is it half of what you saw in Q1? Any type of color there? And in relation to this and your prior comments on striving to further improve unit cost development, how should we think that Q2 unit cost in Ocean sequentially?

[Patrick Jany, CFO]

Obviously, we do not cut on the quarter, right? So I'll be more broad in my answer. But clearly, I think, as you know, the contract renewals happen in Q1 and Q2, right? So the Q1 is very much marked still by contract levels of the previous year and the ones we just had done in Q4 '22, which were at a different level. So when you look into Q2, you actually have quite a lot of the volumes, which are already they're not rebased at a new level because a lot of things have been based in signed in Q1, and it's still a dynamic quarter in itself because there's a whole U.S. season and so on being signed during the quarter itself, typically by 1st of May.

So it's an evolving quarter in terms of freight rates. But as we discussed earlier on, the tendency is for contract rates to tend towards spot, which means that new contract rates are lower than previous contract rates, which means a direct impact on the EBITDA of Ocean. So clearly, I would say, expect a further reduction, which is totally in line with our guidance.

And on the cost side, I think we will continue, obviously, the elements that we have started. Slow steaming will continue. We are -- as Vince was highlighting earlier on, looking at the costs and having a few leads to reduce cost further. That will be a progressive development over the next few quarters. But I would expect a good and decent development of our costs in the second quarter, but it's a multi-quarter, multi-year effort to bring down and roll back inflation into our cost position as well.

[Operator]

Another follow-up from the line of Lars Heindorff with Nordea.

[Lars Heindorff, Nordea]

Yes. Just a housekeeping question that's on the revenue side in Ocean. Maybe I'm not forecasting a significant difference from many others, but I have what I call box revenue, which is basically rate times multiplied with the volume and then I have other revenue. Other revenues still continue to be quite high as we enter into this. I would have thought it would decline more with a normalization in the Ocean market and the [merchant] attention declining.

Are there any impact from MOT, or any other explanation why this part of revenue is still so high?

[Patrick Jany, CFO]

No, I think you're right with the direction. Clearly, it is declining progressively. I think if you look also on a quarterly level, it is coming down. We would expect this as well to continue to come down in Q2. The MOT effect was only marginal in the first quarter.

So it was positive, but it was marginal. But for directionally, you're right that this position comes down as demurrage charges also come down.

[Operator]

Another follow-up from the line of Robert Joynson with BNP Paribas. Mr. Joynson, your line...

[Robert Joynson, BNP Paribas]

Apologies, everyone. I was on mute. Just a follow-up question on contract rates, but specifically on the 1.8 million FFE, they are on multiyear contracts. Are those rates similar to the contracts agreed so far this year? Or are they materially higher or lower?

Any color there would be great.

[Vincent Clerc, CEO]

Yes. So these contracts are -- they have their own mechanism to adjust and they have -- they follow basically this indexing that we have agreed with the customer. And right now, they are actually higher than what they, otherwise, is. They were also lower I got to say, in '21 and '22 than what we otherwise could have gotten. And now it's a bit the other way.

They will converge over time with the rest of the contract. So especially if you think about 2024, they will gradually get into -- in line with what the new reality is. But here in 2023, they provide us some nice and welcome caution for the adjustment that is taking place.

[Operator]

This conclude our Q&A session, and I hand back to Vincent Clerc.

[Vincent Clerc, CEO]

Okay. Thank you very much, and thank you, everybody, for participating.

In closing, I would like to leave you with the following final remarks. Despite all the challenges of lower import volumes and inventory corrections, the organization and all the Maersk colleagues around the globe have pulled together to produce a very solid and strong Q1 results. After the past couple of years, which were heavily affected by the pandemic, this transition to a new normal is progressing in line with our expectations. We, therefore, maintain our guidance of $8 billion to $11 billion EBITDA and at least $2 billion free cash flow.

This new trading environment, we find ourselves in this new -- this new trading environment we find ourselves in, provides the impetus for us to continue transforming A.P. Møller - Maersk into the global integrator of container logistics. Our customers demand it. Many of the challenges that has affected their global supply chains over the past couple of years may have temporarily abated, but they still remain unresolved. Through our strategy, we have the potential to solve for them and be able to protect our customers better when new disruptions will occur.

Therein lies a great growth opportunity and more favorable shareholder return profile. And this is, ultimately, what truly integrated logistics is really about.

At the same time, this environment also enhances the necessity to manage our cost base with urgency to roll back some of the inflationary pressure we have felt over the past couple of years and realized productivity gains from the digitization efforts and from the growth that we have realized. Time and again, our Maersk colleagues have demonstrated their ability to pull through challenging times and these pivotal moments and to deliver strong progression by focusing on the right priorities. I am very confident in our ability to do just that this time around as well.

And that is it. Thank you, folks.