AP Moeller - Maersk A/S

CSE:MAERSK B

Earnings Call Analysis

Challenging Times Ahead with Focus on Control

The company faces stickier costs led by increased fleet employment and container investments, reflecting a trend of longer transit times. EBITDA guidance indicates a potential rise in net debt-to-EBITDA ratio above the 1.5x target due to deterioration in earnings, acknowledging increased financial prudence in planning. Share buybacks have been reduced, preferring instead a spin-off of the Towage business Svitzer. Acquisitions during the cycle's trough are still being considered if strategically sound. The Gemini Cooperation with Hapag-Lloyd demonstrates a commitment to quality service despite the break from the 2M alliance and industry uncertainties. With a dividend of DKK 515 per share, the company is poised to improve Logistics & Services performance despite 2024's uncertainties stemming from overcapacity and Red Sea disruptions.

Addressing the Logistics Challenges and Market Dynamics

The company navigated a complex landscape characterized by disruptions in the Red Sea and a consequential need to mobilize 7% of the global container fleet to mitigate these issues. Existing capacity and increased speeds provided temporary relief, with new builds expected to fill gaps and stabilize service speeds within three quarters. Despite an escalation of the Red Sea situation, with variables on its duration, the company forecasts a reversion of rates to pre-disruption levels once new capacity outstrips the impact of current disruptions. This period of adjustment continues to produce high transport costs as the company undertakes to pass on network cost increases from deploying more capacity and consuming more bunkers.

Financial Outlook Amidst Supply and Demand Fluctuations

Expecting global container growth between 2.5% and 4.5%, the financial forecast includes an underlying EBITDA ranging from $1 billion to $6 billion, with the possibility of an EBIT as low as negative $5 billion or as high as $0. Free cash flow is expected to be greater than $5 billion. Investment (CapEx) remains steady, forecasted to be between $8 billion and $9 billion for the upcoming year, with projections extending to $9 billion to $10 billion in the subsequent period. These figures reflect strategic responses to market demand unaffected by network disruptions and the potential of additional capacity service imbalances.

Q4 Performance Metrics: Navigating Decreased Rates

In the fourth quarter, the company experienced a decrease in EBITDA to $800 million with a margin of 7.1%, and a negative EBIT of $0.5 billion, reflecting a margin of -4.6%. Despite this, the company posted a net profit after tax of negative $500 million. For the year, the net result was robust at $3.9 billion, coupled with a full-year free cash flow of $4 billion. Shareholder returns were at an all-time high with $14.1 billion returned through dividends and share buybacks, leading to a decrease in cash and deposits from $28.6 billion to $19.5 billion, with a net cash position of $4.7 billion.

Financial Performance: A Segment-Based Perspective

The Ocean business segment experienced a mix of positives and negatives: an 11% increase in volumes indicated strong commercial performance but was offset by a 50% decrease in freight rates from the previous year's fourth quarter. The EBIT for this segment was notably negative at $920 million. Nonetheless, operating capacity decreased by only 3.3% from the prior year's Q4, showcasing high utilization. Looking ahead, the company aims for contractual volumes to increase from 68% to 70% in the next year. On the cost control front, operational costs decreased by 3.2%, driven by lower bunker, container handling, and slot charter costs, thanks to improved network utilization.

Earnings Call Transcript 2023-Q4

[Vincent Clerc, executive]

Welcome, everyone, and thank you for joining us on this earnings call today as we present the fourth quarter and annual results for 2023. My name is Vincent Clerc. I'm CEO of A.P. Møller - Maersk. And with me in the room today is our CFO, Patrick Jany.

On Slide 2, you will see our usual disclaimer on forward-looking statements. Please familiarize yourself with this at your convenience. For now, let's move straight to the next slide.

Despite a continuing difficult environment, 2023 was a solid year, which -- in which we delivered on our guidance and have systematically sharpened our competitiveness in the course of the year. We closed the year with a total annual revenue of USD 51.1 billion, an underlying EBITDA of $9.8 billion and $4 billion, respectively, of EBIT. It generated a net profit of $3.9 billion.

Not only have our businesses delivered, but we have also emerged from the pandemic fuel boom with a more balanced and attractive business portfolio with greater contributions from Logistics and Terminals than we had going into the COVID. In parallel, our comprehensive focus on cost and organizational efficiencies contributed to our solid bottom line performance in this transition year. As a result, we are now well positioned going into 2024 and the uncertainties that lie ahead.

2023 was also another big year of cash returns to shareholders. Next, the largest dividend in our company history that returned $10.9 billion to shareholders. We also executed one of the largest share buyback that returned $3.1 billion. Overall, we generated total shareholder return of 6%.

In December, we confronted -- we were confronted with the outbreak of the Red Sea conflict, a situation we have responded to decisively. Let me begin by saying that we are horrified by the escalation of these unfortunate conflicts. Our #1 priority is ensuring the safety of our seafarers and the safety of our customers' cargo. That is and remains and will always be our bottom line.

Following attacks on commercial vessels in the region, including our own, we have diverted all vessels due to transit in the Red Sea and the Gulf of Aden, south around the Cape of Good Hope for the time being and until further notice. The diversions have minimal impact on the fourth quarter given that they began late in the final 2 weeks of 2023. We reflect the expected impact of this disruption though, in our 2024 guidance to which I will speak later.

If we go into 2024 with a significant supply -- we go into 2024 with a significant supply side challenge in shipping. We spoke about it in November '23, and that remains unchanged. The Red Sea disruption is absorbing some of the overcapacity temporarily. However, the structural imbalance will catch up during 2024 and exacerbate over time, irrespective of whether the situation in the Red Sea endures or resolves itself.

Given the uncertainties that lie ahead and in line with the implementation of our integrated strategy, A.P. Møller - Maersk will exercise a prudent capital allocation with the following actions: First, propose a dividend of DKK 515 per share for 2023; second, immediately suspend the share buyback program with the re-initiation to be reviewed once market conditions in Ocean have settled; and finally, initiate a demerger and spinoff of A.P. Møller - Maersk storage activities in Svitzer as a stand-alone listed company on Nasdaq Copenhagen with shares distributed pro rata to APMM shareholders. The demerger and distribution of the Svitzer Group share will be tax exempt from a Danish tax purpose.

This move is in line with the steps we have taken in recent years under our strategy to simplify our business and focus on integrated logistics offers immediate -- that offers immediate value to shareholders. The final decisions will be approved at the Extraordinary General Meeting scheduled for April 2024, and we refer you to the separate stock exchange announcement for further information. Patrick will also share financial headline figures for Svitzer later on in the call.

We believe that these decisions -- with these decisions, we stand in a strong position both strategically and balance sheet-wise for the years ahead.

Now let's take a look at our key businesses, starting with Logistics & Services. Logistics & Services continues to be at the heart of our transformation. 2023 marked a transitional year for Logistics & Services where both price and volumes on our existing business underwent a normalization on the back of the COVID fuel booms of '21 and '22. In parallel, we focused our efforts on further integrating our recent acquisition into the Maersk family, expanding our capabilities and coverage.

While the correction of the past year had a negative impact on growth rates and margin, the fact that we were able to continuously secure strong new customer win gives us confidence that our value proposition is strong and that there is solid underlying demand for our products. This demand and the increased cost focus we deployed in 2023 will be key to the continuation of the successful transformation of A.P. Møller - Maersk.

In Ocean, we continued our efforts in bringing down cost to 2019 levels in lockstep with the normalization of freight rates. These initiatives cushioned some of the impact of the increasing oversupply in container shipping. While the trade disruptions in the Red Sea may provide temporary employment for some of the overcapacity, the phasing in of the current large order book will continue to exert further downward pressure on rates during the second part of 2024. Our job going forward is simple, it is to ensure that our asset utilization remains high, operating costs low while, of course, maintaining quality and in particular, reliability for our customers.

As mentioned previously, Q4 impact from the Red Sea disruption was minimal. Let me round off the Ocean by adding that we are proud to have welcomed the first of our 18 large methanol-enabled vessel on order Ane Maersk. Following the arrival of Laura Maersk, the world's first methanol-enabled vessel in September '23, this new large vessel with a capacity of 16,000 TEU marks another step towards our 2040 target of net zero greenhouse gas emissions.

Finally, in Terminals, we generated very strong performance despite the normalization of storage revenues following the congestion we saw under the boom. A combination of all three key levers, namely costs, tariff increases and utilization contributed to the double-digit ROIC of 10.5% ahead of our already ambitious midterm targets. Through applying greater automation and lean methods, we see potential for further uplift in earnings and ROIC in our Terminal business.

So let us turn the page on 2023 by looking at our midterm targets. We're proud to have delivered solid results and stand in a strong position for the year ahead. Returns, as measured by overall APMM ROIC and Terminals ROIC are solid, while Ocean has generated an EBIT margin above our target. In Logistics & Services, we have a rebased business with a clear line of sight towards growth and margin uplift. Looking forward, we are ready to tackle 2024 head on and embrace the opportunities that will arise with our strategic priorities. First, Logistics & Services.

We look there to renew with growth and raise margins. We do this by building on the baseline from 2023 and by carrying momentum that we saw with new customer wins.

There is still potential to rightsize our fixed cost base and to grow our margin. Looking to our acquisitions, we will further leverage their capabilities to accelerate growth towards our midterm ambition.

Then in Ocean, our immediate task at hand in the light of the Red Sea situation is to maintain stable and reliable operations for our customers and stakeholders without giving slip to our cost containment efforts. We maintain our relentless focus on delivering best-in-class performance for our customers and gear up for the exciting Gemini network launching in 2025.

Finally, in Terminals, we are proud but not complacent as we sustain momentum on our operational excellence and focus on growth. 2023 sets the new normal on performance, which we must confirm in 2024 by continuing the good work on operational excellence where we see more potential and by capitalizing on joint opportunities with Logistics & Services that can help increase the value capture around our portfolio. Finally, we continue to expand and extend our existing Terminals portfolio.

Before I provide guidance for 2024, I would like to spend a few minutes on sharing some perspective on the Red Sea disruption that our Ocean business and the rest of the industry are currently facing.

First, it is important to highlight that the disruption is only affecting about 36% of our volumes in our Ocean business. Secondly, that we are dealing with a situation that is fundamentally different from what we saw during COVID and will, therefore, play out very differently.

COVID disruptions occurred from a sudden surge in demand that resulted in congestions and bottlenecks on the land side that clogged up the global supply chain. The Red Sea disruption from a shipping perspective is a rerouting of cargo along longer routes.

We see no sign of congestions or bottleneck or shifts in demand. The global supply chain remains fluid and demand and supply steady. This is because there are levers today to absorb the impact without further disruption by using the capacity that was underemployed at the end of 2023 by accelerating the service speed that has been slowed down during '23 and by gradually plugging new tonnage into the existing rotations.

To regain balance and sell all impacted service through the Cape of Good Hope at a similar service speed to what we had in the Q4 of 2023. So Suez, we estimate that about 6% to 7% of the global container fleet will be required. As illustrated on the chart on the left side, a combination of the mobilization of existing excess capacity of about 2% and sailing the global fleet faster -- at faster service speed has so far mostly cushioned the impact of the disruption. New builds will gradually phase in at 2% to 3% net growth per quarter and fill in the missing positions before the seasonal Q3 peak seasons and allow a reduction of service speed. It is, therefore, just a matter of time, and we estimate this to a maximum of 3 quarters until the capacity issue is fully resolved.

The situation is still in a -- the situation in the Red Sea itself is still in an escalation phase, and it is therefore hard to predict whether it will last a quarter or a whole year. Nevertheless, and regardless of the duration, we expect that these new deliveries will eventually overwhelm the impact of the Red Sea disruptions and rates will revert towards pre-disruption level as illustrated on the right-hand side.

It is important to note that the cost of transport will remain high as long as the network needs to sail along these longer routes. Passing on these significant cost increases, in particular, network costs from deploying more capacity and consuming more bunkers is one of our key tasks at the moment.

The impact to our customers has been significant already. They are facing longer trips, additional charges and lower scheduled reliability caused by having to reroute ships southwards. We are working diligently at mitigating as much of this impact as possible, but these efforts come at a premium.

All in all, the situation will help alleviate the losses in Ocean in Q1 but the overall impact of the disruption will depend on how long the situation lasts and how quickly additional capacity comes into service, leading to a wide range of scenario and possible outcome for the year.

So what does this mean for our 2024 guidance? First, it is important to remind ourselves that demand is not expected to be affected in any way by these disruptions. We expect global container growth to be in the range of 2.5% to 4.5% and to grow in line -- and we expect to grow in line with the market.

Secondly, let me also remind you that we make the 2024 financial outlook against the backdrop of the persisting significant underlying oversupply challenge, which will materialize fully over the course of 2024 and high uncertainty around the duration and the degree of the Red Sea disruption. For the purpose of the outlook, we have assumed the duration of the Red Sea disruption to last anywhere from 1 quarter to a full year, which is reflected in our wide guidance range.

Considering these factors and noting that earnings will be front-loaded towards the start of the year, given the Red Sea disruption, our outlook is for an underlying EBITDA in the range of $1 billion to $6 billion, an underlying EBIT in the range of negative USD 5 billion to USD 0 and a free cash flow greater than USD 5 billion. CapEx for 2023, 2024 remains unchanged in the range of $8 billion to $9 billion and is expected to be in the range of $9 billion to $10 billion in '24, '25.

I will now pass over to Patrick for a closer look at our financial performance.

[Patrick Jany, executive]

Thank you, Vincent, and thank you, everyone, for joining us today on our conference call. With the financial results of the fourth quarter, we closed on a year marked first, by normalization from the peak levels of 2022 and 2021 and later by the rapidly increasing supply in the shipping industry.

While volumes recovered throughout 2023, the impact from decreased freight rates is plainly visible in the financial performance of our business, but we managed to deliver on our guidance with strong cost containment and focus on high asset utilization becoming the key priorities.

Looking specifically at the fourth quarter, our Q4 EBITDA decreased to USD 800 million, generating a margin of 7.1%, while EBIT decreased to minus USD 0.5 billion, reflecting a margin of minus 4.6%. Thanks to a positive financial result, this translated into a net profit after tax of minus USD 500 million, leading to a strong net result for the full year of $3.9 billion. Free cash flow decreased to $1.7 billion negative in the fourth quarter in accordance with our forecast and leading to a full year free cash flow of $4 billion.

In terms of return to shareholders, the year marked a record $14.1 billion cash returned through dividends and share buyback, the largest payout in the history of our company. This implied a decrease of our cash position, and we ended the year with total cash and deposits of $19.5 billion, down from $28.6 billion at the end of 2022 and with a net cash position of $4.7 billion.

Now let's have a closer look at the cash flow development this quarter on Slide 13. We generated cash flow from operations of $166 million driven by significantly lower EBITDA of $839 million and with a negative impact from higher net working capital of $513 million. The increase in net working capital was again marked by securing advantageous long-term conditions with vendors like in the previous quarter.

Gross CapEx increased this quarter to $1.3 billion, bringing gross CapEx for the full year to $3.6 billion. Accordingly, for the period of '22 and '23, our CapEx was $7.8 billion, close to our lowered CapEx guidance of around $8 billion communicated in November, reflecting intensified cost measures and cash preservation priority in light of our current market outlook.

Free cash flow was negative $1.7 billion, and we proceeded with a USD 770 million spent on our share buyback, while realizing some cash inflow through the divestment of our remaining shares in Höegh Autoliners resulting in a positive cash flow of $168 million.

Moving on the financial performance of our segments. We'll begin with our Ocean business on Slide 14. Volumes increased 11% in the fourth quarter, indicating a good commercial performance, but the revenue was overwhelmingly impacted by the 50% lower freight rates compared to Q4 2022.

On the graph to your right, you can see quarter-by-quarter contraction of revenue and EBIT, resulting from decreasing freight rates since the peak in 2022 with a period of normalization being followed by increasing headwinds from rapidly growing industry supply.

As expected, Ocean turned negative this quarter, generating EBIT of negative $920 million representing a $5.7 billion decrease compared to the Q4 of the previous year. It has to be noted that the sequential decrease actually also held true during the quarter itself.

As you heard from Vincent at the beginning of this call, the ongoing Red Sea situation had minimal financial impact on the results for our Ocean business in the fourth quarter.

Moving on to Slide 15, we can see graphically the main elements with a positive impact from increased volumes in the fourth quarter being overshadowed by the impact from the 50% freight rate decline compared to Q4 of the previous year.

Next, you can see the positive contribution from lower bunker prices and the efforts of our cost control activities reflected in improved container handling costs and network costs, where we also had some negative impact from decreased demerger and retention and revenue recognition items.

Moving on to Slide 16. Freight rates continued the downward trajectory in the fourth quarter, declining another 8.1% from the level in the third quarter of 2023. This was in line with our expectations as market supply continues to increase month by month while capacity mitigating measures, such as ship recycling and idling remain at very low levels.

Conversely, volumes increased 11% this quarter due to higher demand from Asia to Europe, North and Latin America and Africa trades given the low basis of the previous year. Sequentially, volumes showed a seasonal decrease of 1.8% reflecting a stabilized and rather solid volume situation.

On average, operating capacity decreased 3.3% since Q4 2022, resulting in high utilization which was flat sequentially, in line with our strategy of maximizing the usage of our existing fleet size. In terms of demand, our contractual volumes were stable at 68% in 2023, and we expect this to further increase to 70% in 2024.

Let's have a closer look at our Ocean cost base on Slide 17. Despite the significantly increased volumes, total operation costs actually decreased 3.2% in the fourth quarter, driven by lower bunker costs, container handling cost and slot charter costs. Total bunker cost decreased by 10%, driven by about a 9% lower average bunker price and increased bunker efficiency from better network utilization, which resulted in a 1.3% lower bunker consumption.

As you see on the graph, unit costs in fixed bunker terms continued to increase throughout 2023, down 13.6% in the fourth quarter. This trend highlights the results of our strong focus on bringing costs down and maximizing utilization of our network while benefiting from the increased volumes and lower charter costs.

Now let's move on to our Logistics & Services segment on Slide 18. As discussed earlier, 2023 was a transitional year for Logistics & Services business. Operational excellence became a key priority as markets normalized and prices rapidly adjusted back to prepandemic levels. We made progress on optimizing our fixed cost base and adjusted our footprint to the current market environment.

While we are still facing headwinds from lower prices and subdued activities in our verticals, which are reflected in the fourth quarter financials, we enter 2024 with a strong Logistics & Services business with good customer wins throughout 2023, reconfirming our belief in the long-term growth potential of Logistics & Services as a central pillar of our integrated strategy.

While volumes increased in the fourth quarter, partly due to recent acquisitions, lower prices resulted in revenue decreasing by 8.2% with organic revenue declining 10%. The organic revenue suffered from slower-than-expected activity in our verticals, particularly retail and lifestyle as well as automotive and technology.

EBIT for the quarter was $60 million, including restructuring charges of $33 million, resulting in an EBIT margin of 1.7%. The EBIT performance is obviously below our ambitions. And as previously alluded to, recurring margins will be one of our key focus areas for 2024.

Moving on to Slide 19. The impact from lower rates in the fourth quarter can be seen across all our by Maersk service models. Revenue in Managed by Maersk decreased 21% to $479 million, driven by lower rates in the Logistics with a positive contribution from higher volumes and supply chain management. EBITA margin increased to 16.9%.

Fulfilled by Maersk saw revenue decreased by 7.6% to $1.5 billion, primarily from lower volumes and rates in warehousing and distribution. Performance compared to last year should be seen in the light of the excess inventory from the unwinding of the global supply chain disruption moving through the system. We generated quite some vacant space. The EBITA margin accordingly decreased to minus 4%.

Transported by Maersk revenue decreased by 4.1% to $1.6 billion, where the EBITA margin declined slightly to 4.9%. This was mainly due to lower rates in air.

Let's talk about our Terminals on Slide 20. Our Terminals business delivered another very strong quarter. Given the volatile market conditions, this highlights the resilience of this business. Despite normalization of storage revenue, Terminals revenue increased 2% to $1 billion, driven by increased volumes across the board. Terminals continued to deliver strong EBIT of $234 million, corresponding to a 23% margin, which is largely unchanged year-on-year. Return on invested capital for the full year was 10.5%, well above pre-congestions level and ahead of our midterm targets of above 9%. Finally, CapEx increased to $222 million due to ongoing modernization and automation projects at our terminals in the U.S. and Spain.

Now let's look at the individual components by turning to Slide 21, where we see that volumes increased 3.2% this quarter equivalent to an increase of 6.8% in like-for-like terms with most of the volume growth coming from the Americas and Africa and with a lower contribution from the remaining regions.

Revenue per move decreased by 1.8% with a decrease from normalized storage revenue being offset by increased tariffs, while cost per move decreased by 2.4%, given effective cost-saving measures and despite inflationary pressure. Lastly, utilization increased by 3% to 77% due to higher volumes and also partly offset by increased capacity.

We turn to our Towage & Maritime Services on Slide 22. Revenue increased slightly to $571 million, which was driven by increased performance in Maersk Container Industries and Svitzer, offsetting the divestment of Maersk Supply Services early in the year. EBIT decreased by (sic) [ to ] $107 million. This mostly reflects the decreased contribution from Höegh Autoliners, which was sold down during the quarter.

Finally, I want to comment on the financial performance of our Towage business, Svitzer, which as was mentioned earlier at the beginning of the presentation, the Board has initiated a spin-off as a stand-alone entity to be listed on NASDAQ Copenhagen. The demerger and distribution of Svitzer Group shares will be tax exempt for Danish tax purposes with trading expected to start on April 30, subject to prior EGM approval.

Svitzer has a strong financial profile, generating consistent revenue at attractive margins. Since 2019, the revenue grew 5% per year on average to a total of $839 million in 2023, delivering an EBITDA of $246 million, equal to a margin of 29%.

Finishing up on our segment review, we will now continue with the Q&A session. Operator, please go ahead.

[Operator]

[Operator Instructions] And the first question comes from Alexia Dogani from Barclays.

I'm sorry. This question comes from Lars Heindorff from Nordea.

[Lars Heindorff, analyst]

It's on the demand side. You just mentioned that you've seen any impact despite the situation in the Red Sea. So maybe you could give us a little bit of insight what you've seen at least here in the early parts of this year, and particularly around the Chinese New Year where we normally see a rush? You mentioned the 2.5% to 4.5% full year growth. Will that be sort of evenly distributed over the quarters and also in light of the fairly strong volume growth that you achieved here in the fourth quarter?

[Vincent Clerc, executive]

Yes. Lars, let me take that. If you remember, at the beginning of '23, was marked by some destocking, especially in the U.S. that took most of the -- that took basically the first part of the year and kind of worked itself out in the third quarter. And then since then, actually in 2023, we have seen volumes in the second part of the year actually become stronger. So we expect basically on a sequential basis to continue at this level with a little bit of growth.

So if you think in terms of market growth, a lot more in Q1 and Q2, a lot less in Q3 and Q4. Pre-Chinese New Year rush was normal. So not especially strong, not especially weak, but kind of like how we expected this. So I think that's -- it's actually -- I think one of the funny thing that is happening right now is on the demand side, it's more stable than what we usually see. It's very, very stable levels of demand. And of course, this market then -- because it's against this low base from last year, is mostly into North America that you will see the market growth.

[Operator]

And the next question now comes from Alexia Dogani from Barclays.

[Alexia Dogani, analyst]

Can you hear me?

[Unknown Executive]

Yes, we can.

[Alexia Dogani, analyst]

All right. Sorry, I just wanted to elaborate a little bit more on the guidance ranges for 2024 and the scenario. You indicated on the statement that given the current situation, Q1 losses may be alleviated. Does that mean breakeven? And can you give the expected benefit from the revenue side but also offset from the cost side?

[Patrick Jany, executive]

Yes. Thanks very much for your question, which is certainly an important one today. So when you look at the guidance, it is pretty wide, as you have noticed, because it really covers, I would say, two extreme scenarios. One is that the crisis stops now in the next few weeks in Q1. And the other one is that continues for the full year. So it obviously gives you quite a wide range of scenarios.

What we certainly can see is that the Q1 has a certain benefit because of the additional revenue that we have. We also have a significant additional cost, as was mentioned earlier, right? So it's not tremendous impact, but it will help to alleviate as we say, the losses which we would have had in Q1, normally, which you can also see developing in the last year and in Q4 in particular.

So I would say we will certainly have a better Q1 than we would have had. Whether we touch breakeven or not is then another story, but we're pretty close to it, I would say.

Then on the -- in -- stops, then you have this immediate effect of reversal, we cannot charge the surcharges. We'll have still additional costs to underwind the situation in the Red Sea, which then will drag our performance in Q2 immediately in that scenario, and that leaves you to the minus [ 5 ].

If we imagine that the situation continues for the full year, then you -- in very simplistic terms, you could imagine that you have a repeat of the Q1 with some additional effect on the contracts and so on as the year progresses which could lead to a 0 scenario. And reality will probably be in between, right?

And that is obviously, I think it's pretty clear -- or we try to be clear on the assumptions and also on the mechanics in the slide that Vincent was showing earlier for you to understand the mechanics and then be able to take your own on what is your view for the year.

[Alexia Dogani, analyst]

And Svitzer is not include right? In the guidance? We should assume it's excluded. I know it's small, but just to be clear.

[Patrick Jany, executive]

Svitzer, I guess, in our numbers were never really valued, right? In a way, we have almost not often talking about it. So the spin-off here is a significant additional value to shareholders because we actually have a very nice business, which was -- which is not seen in our numbers. And therefore, our numbers per se are not affected by Svitzer not being part of the group.

As I said, we have taken that out. We expect the spin-off to go by end of April 30th or April as first trading day and therefore, then it's included from our numbers.

[Operator]

And the next question comes from Cristian Nedelcu from UBS.

[Cristian Nedelcu, analyst]

Could you give us any color on the contract negotiations? I think usually, at this time in the year, you've rolled over around half of your contracts. I think Asia, Europe, usually, you finalize them by the end of December. But in the context of the current Red Sea situation, could you give us some comments around what you signed so far and how that price -- that contract price looks -- the current spot rates on Asia, Europe?

[Vincent Clerc, executive]

Yes, Cristian, let me give you a little bit of color on this. And I want to start with the prevailing price levels before the middle of December, so end of November, if you take it. That is actually the benchmark that most of the contracts in the European season were being negotiated on. And even as the Red Sea started to unfold, that did not change the prevailing levels that the contracts were being signed up at.

What has changed is that we were able -- or we are able to pass on the additional cost and some surcharges for the further cost that we will have, as Patrick mentioned, we've been able to put that on top as a separate line if you will, on the contract. So that is what is going to be able to provide an uplift to the Q1, as Patrick mentioned.

However, the contractual terms are such that the moment the ships do not sail through Suez again, this will go away in automatically, basically, in that same week and it will be an immediate adjustment of this.

This is why actually, if you think about the performance level that we will see in Q1 versus what will happen if this normalizes with the overcapacity will be a much more rapid adjustment of prices back to what we were seeing prior to the Red Sea. And that means the second quarter that -- in the scenario -- the extreme scenario that Patrick was mentioning, the second quarter that we see a significant and extremely rapid adjustment compared to what you would normally see where it's more of a contract by contract negotiation and so on and so forth. So here, this is just handled completely differently.

So we were able -- through this mechanism to basically pass on the cost right from the get-go. So even on the first ship that sails south of the Cape of Good Hope, we were able to recoup the extra cost by doing it this way. The flip side is that we will over recover on cost at the beginning and we are likely to under-recover, as Patrick mentioned, because this will go away in one go, but we will still have some costs that will stay with us for a while longer and that we will need to unwind on the other side of it.

Getting the ships back into their normal rotations, getting containers back into the right places, some of the tonnage that we're chartering in right now, we might have for longer than what the crisis is going to last and so on and so forth. So actually, if you look at it either over the year or maybe a little bit longer, depending on when this normalizes, it's still ambiguous today whether this seen as a whole is a positive or not because we are basically signing up for costs that we're not completely clear on how long and how much.

And we're signing up for revenues, which both on per FFE and on the duration are not extremely clear either. And this somehow will need to bottle itself up in something that makes sense from the P&L. But this is in no way a bonanza, the type of which we saw when the COVID situation occurred. It's -- I think for me, that's really important for all of you to understand that it's fundamentally different. It applies only on about 1/3 of the volumes.

The rest -- so the other 2/3 of the business, they develop right now pretty much the same way as what we were expecting when we talked 3 months ago in November.

[Operator]

And the next question comes from Sam Bland from JPMorgan.

[Samuel Bland, analyst]

Just a slightly longer-term one. I guess I'm conscious of what the second half of 2024 might look like. But what's the sort of working assumption on -- yes, there's a lot of capacity coming in 2025. Are we sort of in for about 2 or 3 years? Or are there reasons to think, I don't know, some capacity actions make it get a little bit better from next year? What's obviously hard to tell, but what's the working assumption on sort of duration of this bad and weak market we might be in?

[Vincent Clerc, executive]

Yes. Thanks for that. I guess that's a pretty good question. I mean today, we're trying to guide on '24. And already there, you can see we have a pretty wide range for how this can play out. So I think we're going to need to wait a little bit to provide clarity on '25.

A couple of things to say. Of course, I think you're right, this public data. It's not all of the order book that will be delivered in '24. There is an almost as big size of delivery of tonnage in '25 as there is in '24. And so on the headline number, this is not good news.

I also want to say that there are levers also that the industry so far has not used but that have been used in the past, such as scrapping. It's been underused for the past few years for COVID reasons and right now, because everything needs to sail in order to keep things fluid. But you will see this pick up as things normalize.

So I think the industry still has levers to try to avoid what -- if you just look at the headline number, could be a difficult '25. And that's what we need to work on now in the months and quarters to come. And then when the time comes, we'll be able to guide you better on '25.

[Operator]

And the next question comes from Robert Joynson from BNB Paribas.

[Robert Joynson, analyst]

A question on DB Schenker [ sale ], which with the sale process is obviously now well underway. Under the previous CEO, Maersk was clear that it had no interest acquiring Schenker. And Vincent, you yourself stated that Maersk was not interested in taking over a forwarding company in an interview that you gave back in December 2021. The question is have you now changed your mind? Is Maersk now potentially interested in buying Schenker? And if that is the case, why?

[Vincent Clerc, executive]

Thanks, Robert. I was wondering how long it would take for that question to come. So I'm happy that you are the one actually asking it. So our strategy is very clear, we need to diversify our revenue streams and our earnings streams towards the more stable and less volatile part of the supply chain, which is pretty much anything outside Ocean 2PL.

In that respect, having something like a Schenker coming on the market is definitely something that Maersk cannot simply say we're not even going to look at it. Whether this is a deal that -- I mean, it's definitely not a do or die, for sure, for us to get it. It's not necessarily also the most likely outcome, but it is something that we need to look into.

And the reason for us doing that is simply just the size of the deal. The fact also that when a deal like this happens, it will have a consequence whether we do the deal or we don't do the deal because it will change the landscape in logistics depending on who does the deal. There is also a fundamental price issue and whether we could see a synergy case that is compelling. So there is like different reasons.

And then on the freight forwarding side, I think one of the things that has changed in there is the following, a, it's the resilience of the earnings on the other side of COVID, which you can see when you look at both Schenker and some of its competitors, but also the fact that we have one company in CMA that has been able to house both a 2PL offering and a 3PL offering under the same roof and has been able to do that as far as we can see successfully.

So I think certain dis-synergies that we may have feared in the past may not be as -- it may not be what we thought they were. And then for the rest, we need to look into it. It would not be I think responsible of us not to look at and then we'll have to see where this goes.

[Operator]

And the next question comes from Omar Nokta from Jefferies.

[Omar Nokta, analyst]

I just wanted to ask, it's perhaps a two-part question. Just in terms of the volumes that you outlined for the year, the 2.5% to 4.5% growth. How comfortable are you with that given the Red Sea diversion if they persist for longer? Given the rerouting, does that not potentially reduce the volume potential quite meaningfully?

And then the second part of it is, do you see the need to reshuffle networks to make sure that volume potential into Europe is maintained as we get closer to peak season?

[Vincent Clerc, executive]

Yes. So the projection, we're fairly comfortable with because, as I mentioned, when Lars had the question, actually, if you look at it on a sequential basis, a lot of it is coming on the back of a base effect as you don't have. We don't expect a restocking or -- neither restocking nor destocking during the year. So on a sequential basis, it's okay.

Then as you mentioned, yes, some of the ships now are on longer routes, so you risk having holes here and there. What we have done so far is -- and that's also similar to what the industry has done as a whole. We've sped up the ships to actually diminish the delays and the impact that this would have in terms of potential loss of capacity in Asia. We've chartered a few extra ships, and we had also a bit of available tonnage to start with.

So we're getting into a higher -- yes, more dense utilization, you could say. And what we feel is that we have the levers and the capacity in our hands in order to be even if this was -- if the Suez disruption was to last for the year, we have the capacity to be able to grow with the market with the tonnage that we have.

[Operator]

And the next question comes from Dan Togo Jensen from Carnegie.

[Dan Jensen, analyst]

A question here again, on the contracts. Vincent, you alluded to around 36% of your volumes exposed to the Red Sea situation. I know if you include Pacific here, we have seen Pacific rates tick up maybe as a consequence of what's going on in the Red Sea. We also have contract negotiations right now and effects here from May. Have you in your guidance included any upside from the Pacific? And how do you see those negotiations unfold?

[Vincent Clerc, executive]

All right. So on the Pacific, what we have seen so far is of course about a little bit more than half of what goes -- or more than half of what goes to the East Coast of the U.S. whether it is from Asia, the Far East, but also from, of course, the Middle East and India is affected by the rerouting. And there, you've seen, I think, some level of adjustments.

The rates into -- from Asia into the West Coast of the U.S. have seen relatively small adjustments. The contract negotiation will really start heating up about a month from now. So it's really too early for me to call whether there is any -- there will be any spillover. So far, if you look at the spot rates into the West Coast, it's very minimal, what's going on.

[Dan Jensen, analyst]

And so to conclude, no impacts or no upside included, so to say, in your guidance for now?

[Vincent Clerc, executive]

I think that the range that we have provided is wide enough that we can take some positive impacts and still be within the guidance.

[Operator]

And the next question comes from Patrick Creuset from Goldman Sachs.

[Patrick Creuset, analyst]

Patrick. Thanks so much for the color on the contracts. I'm sorry to keep coming back on this. But just to be clear, so the all the Asia-Europe contracts, so the vast majority were basically reset at pre-Red Sea disruption levels, just to confirm? Or are there some that sort of rolled through December more in line with what we're currently seeing on spot?

And then what does that mean in terms of change year-on-year in terms of dollar per 40 foot? I think you've given this in prior years, right, where you saw the contract rates develop.

And then finally, a little add-on, just looking at Q1, is it still fair to assume 20%, 25% spot market exposure on the East West?

[Vincent Clerc, executive]

Yes. So let me start with the last one. So our percentage exposure to the spot market is around 25% to 30%. So I would say mid- to high 20s. That's -- and that will continue to be the case throughout the year. That hasn't changed.

The contracts that have been negotiated before, yes, they were -- they will -- they have been renegotiated, you could say, at a base rate on a like-for-like basis, in line -- not far away from the prevailing levels that you saw at the end of November. It's difficult for me to give you a delta on what it means year-on-year because since -- during the year, if you look at the quarter-on-quarter contracting levels, they have been moving quite a bit. So it's difficult for me to give you that delta because it's not super meaningful actually to do that with those movements.

But it is a significant downward adjustment, which was also what we flagged in November when we presented the third quarter. So that part has happened. It is cushioned now by this separate items on the builds, if you will, that cover for the Red Sea situation. And for now, it's holding and then we will have to see for how long. And obviously, we hope still that this is not going to be something that lasts for way too long.

[Operator]

And the next question comes from Sathish Sivakumar from Citi.

[Sathish Sivakumar, analyst]

I've got a question here around the vertical exposure. So if you look within the Logistics division, what is the exposure for, say, consumer, retail type goods versus industrial-type goods? And how does that compare within the Ocean segment?

[Vincent Clerc, executive]

Yes. So I think we have flagged in the previous quarters that we have more exposure to retail and lifestyle brands in our Logistics business than we do have in our shipping business. And it is actually something on our journey now that we need to keep on diversifying because what we see, as I mentioned, is that there is -- we have a good product market fit with what we offer. Customers like what they're getting.

But our offering is meeting the needs of those verticals in FMCG, in retail and in lifestyle, much better than it is able to meet the needs of industrial customers. We have a few exceptions, but it's still -- the capabilities are tilted towards those verticals. So we're going to change this over time, but it is not something you can do overnight.

[Sathish Sivakumar, analyst]

So this would be one of the rationale for you to like say, looking at Schenker or any other asset that comes out in the market?

[Vincent Clerc, executive]

I think I don't want to make this about DB Schenker because DB Schenker is one thing that we can look at. But I think it is one of the key rationale element for why we have done M&A so far and it is a key element behind why we will need to do more M&A in the future in order to do this because developing those capabilities organically is simply going to take too long.

And being able to in-source those capabilities, we have seen it with the acquisitions that we have done. Yes, you have to do integrations. There is a lot of painful work and sometimes you get a faster start or a lower start and markets move and so on. But it is still a better road when you need to add capabilities to do it this way than having to build it from the ground up. That's, from a timing perspective, is simply going to take too long.

[Operator]

And the next question comes from Cedar Ekblom from Morgan Stanley.

[Cedar Ekblom, analyst]

Just a question on surcharges and costs. We've seen many press releases from the company over the last couple of weeks, which have suggested surcharges a couple of hundred million dollars per FFE, and in some cases, even more than $1,000. I'd like to understand what you've actually seen on the cost side in terms of the increase around associated with going around the Cape of Good Hope? Because some of the trade price that you're reading suggests that the operating cost increases are only a fraction of the surcharge increases. And I don't know if that's a fair reflection or if actually you're seeing a much larger cost increase for your business.

[Vincent Clerc, executive]

Yes. So I think what -- the way to see this is we can only recover the costs on the container that moves south of the Cape but the cost we're signing up for, they will be with us for a longer time. You can see -- a simple illustration of this is to see we could get benefits on the freight rates from the COVID disruptions in [ '20 ] for the duration of those disruptions. Now those disruptions are gone. That's why the Q4 looks the way that it is. But we still have a lot of costs that we're carrying that came during COVID -- inflation in the cost base that we're carrying today. And that's why our unit cost is not yet back to the level of 2019.

So I think you're going to see a similar profile here where in Q1, we will over-recover compared to the straight cost of transport. That is -- that you will see. And that's why, as Patrick mentioned, this will cushion the earnings in the first quarter. But over time, this is pushing inflation in the cost that we will take some time to work out of the system again.

So if you look at it strictly at a quarter, yes, you are correct, there is over recovery. If you look at it for the whole episode and how this is -- however long this is going to take, then I think it's very ambiguous today to say that those -- the revenues that we recoup will be enough to shoulder the cost that will be with us for -- that we're signing up for a longer duration.

[Cedar Ekblom, analyst]

Can you talk a little bit about which costs are stickier? Because ultimately, your variable costs on bunker and insurance fees, I understand those should be quite variable as soon as the issue is resolved. So what are the stickier costs that you believe are necessary in order to justify a couple of hundred at least dollar increase in your cost per FFE? I'm just interested to understand that because it seems exorbitant relative to what we understand the operating cost is.

[Vincent Clerc, executive]

Yes. So the container turn time is going to go down because the transit time is longer, which means that we need to invest into either leasing or buying containers. We will continue to have in the fleet for longer than what we need.

We also need to employ 6% more fleet. So if you look at our -- in order to guarantee the service. So it's not just variable cost. And those ships -- since we don't know how long the crisis is going to be, now we have to sign them up for 2 years, 3 years. And so our ability to then rightsize the fleet will not be instant once those costs go.

So it's mostly into what would be normally covered by CapEx. So it's size of the fleet, price that we're paying, the charter rate. The charter rates have, of course, also shot up as a result of the current situation and the price of containers as well. So that's mostly in this area that you need to look at.

And again, I don't know today how much cost we're going to sign up for because that's in the process of happening. And I don't know today how long I can hang on to the revenues that we're getting today. So eventually, you need to look at the total bucket of revenues that you've gotten with the total bucket of cost that you've signed up to know whether this was appropriate, but this was a bit more or a bit too little.

[Operator]

And the next question comes from Ulrik Bak from SEB.

[Ulrik Bak, analyst]

Just a question on your EBITDA and free cash flow guidance. This implies that your net debt-to-EBITDA ratio could rise above your previously stated target of 1.5x. Would you just offer some comments on that and also in relation to any potential acquisition? And also whether there would be any consequences of moving above 1.5x.

[Patrick Jany, executive]

Yes. No, thanks for your question. Indeed, as you've seen, we are facing quite a difficult time, and you can see the Q4 results with that. We're deteriorating EBIT and EBITDA. So any ratio on EBITDA to net debt will deteriorate as EBITDA goes down, right? So that is a consequence for 2024. And that is certainly, I would say, an the element where we talk about financing and balancing structure, why we have been more on the conservative side than looking at 2025, 2026 balance sheet structure.

So post normalization, we had, let's say, excessive strong years in '21, '22. And now we are going through the normalization effect and the overcapacity effect, which we don't know exactly the duration but ultimately, it will get resolved. And then you have to see the balance sheet strength at the end of it. And that is where our ratio applies.

Temporarily on the lowest point of the cycle, you'll be out of ratios, that is clear. But this is why we actually also measure our financial strength and the financial strength of the balance sheet. So how much cash do we have? How much access to cash do we have? And this is why we're on the conservative side when you look at cash and we are preserving cash because ultimately, this is what will make the difference and keep on growing the business organically.

So we have quite a significant CapEx program, both on the decarbonization of fleet and in logistics, but also potentially take advantage for some acquisitions to grow our Logistics & Services business. So the ratio is one thing, but I think the rating agencies will obviously see through that as well and know the shipping cycle per se.

So it's a matter of things through the cycle but keeping a very strong balance sheet, which we're also doing by, obviously, as you have seen, reducing the share buyback again, and we prefer to reward our shareholders this year by a spin-off, which is an in-kind return to shareholder which from the actual absolute and magnitude amount will be pretty similar to actually what we expected with the share buyback.

[Ulrik Bak, analyst]

And -- but would you be comfortable doing potential M&A at the trough of the cycle?

[Patrick Jany, executive]

Well, I think there are two things in a trough of a side. First, your own financials look a little bit more hardened, which is what you highlighted. On the other hand, hopefully, prices come down as well. So if it makes sense from the strategic and the business point of view, it's certainly something that we will consider and continue to consider.

[Operator]

And the next question comes from Muneeba Kayani from Bank of America.

[Muneeba Kayani, analyst]

I wanted to ask about the Gemini Cooperation. And Vincent, I think you had said last year that you didn't expect musical chairs after the 2M alliance broke up. Now with the cooperation with Hapag, how do you see your competitors reacting to this?

[Vincent Clerc, executive]

Yes. Thank you. And it is true that certainly, a year ago, when we announced that we would be exiting 2M, it was not with the immediate view that we would actually enter a different collaboration. I think what has changed our mind here is the like-mindedness -- the like-minded approach to quality and a different way of designing network and delivering service to customers, which we felt was so strong and inked actually in the collaboration -- etched in the collaboration so well that this actually brought some significant pluses for us compared to what we could have done going along.

So that is a very strong plus. The collateral of it is, of course, that there are some existing partners in -- especially on the alliances that now need to find a solution for how they want to go. I think what -- I do not know what that solution is going to be. I think you would have to talk to some of them. But what I have seen so far is they seem to think that even if they lose Hapag-Lloyd, which is about 30% of that alliance, they think that the 70% that they have left would have the critical mass to remain competitive.

And so if that is what happens, then you would not see musical chair, but you would just see a world going from four alliances to basically -- from 3 alliances to 4 networks.

[Muneeba Kayani, analyst]

And how do you [Technical Difficulty] MSC to respond to your announcement, if I may follow up?

[Vincent Clerc, executive]

Yes, I don't know. You would have to ask them. I don't know. I am pretty sure that MSC has the size to stand on their own because they're bigger than Maersk. And if Maersk can do it, them being bigger can definitely do it as well. Whether it is their intention or whether they have different intentions, I would not know.

[Operator]

Ladies and gentlemen, in the interest of time, we have to stop the Q&A and I hand back to Vincent Clerc.

[Vincent Clerc, executive]

Thank you. And now to conclude with some final remarks as we head into this new financial year. First, I have to say that we are proud to have concluded solid results in what was a transitional year and that we've been able to deliver on our guidance.

On the back of our 2023 earnings, we proposed this dividend of DKK 515 per share. Given our focus on capital preservation for the coming period, we do suspend the share buyback program with the re-initiation to be reviewed once the market conditions in Ocean have settled.

But to round off on the capital return to shareholders, we have, as Patrick also mentioned a couple of times, initiated the demerger and spin-off of our Towage business Svitzer.

Finally, our guidance for 2024 contains a lot of uncertainty, not the least because of the significant oversupply challenges that we're seeing and the Red Sea disruptions. But our job is very clear, in such a volatile market, it is imperative that we are proactive and ahead of the curve, focusing on things within our control, and that is staying close to our customers, maintaining best-in-class operation and cost control so that we can protect our profits and deliver.

Thanks to the preparation done in 2023. We feel that we are well prepared to improve on our Logistics & Services performance to execute efficiently on Ocean while gearing up for our new network and continuing to transform in Terminals. Thank you very much to all of you.