Stericycle Inc

NASDAQ:SRCL

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

As usual, we start with the highlights from the quarter just passed. The third quarter marked another uptick in performance on the previous 2 quarters of 2024. We saw strong business performance with good progress, both financially and operationally across all 3 main business segments. Overall, we closed our books this quarter with an EBITDA and EBIT of $4.8 billion and $3.3 billion, respectively. On a year-to-date basis, this puts us more or less on the same level as last year with a year-to-date EBIT of $4.4 billion compared to $4.5 billion in 2023. Compared to last year, however, we, of course, find ourselves in very different circumstances and look into a very different final quarter for the year.

Taking in the segments briefly in turns. In Logistics & Services, we continued our recovery in EBIT margin to 5.1% and are on track towards getting back above our target of 6%. This recovery was the result of strong focus on productivity and cost management while also continuing to focus on profitable growth. Customer wins have boosted organic growth this quarter, well above the market at 11%. Much change has happened in Ocean this past quarter. In our second quarter announcement, we signaled the delayed impact of higher rates that we saw during the second quarter, given general revenue recognitions and our focus on contracts.

This benefit of higher freight rates, combined with continued strong volumes has delivered substantially higher profit with an EBIT of $2.8 billion. We expect the third quarter to mark the strongest quarter of the year as rates have peaked in July and have partially normalized and stabilized for now. The Terminal business demonstrated its inherent resilience supported by good volumes and overall top line growth, while costs were kept in check. The business delivered its highest EBITDA and 1 of its highest EBIT levels ever with an EBIT of $338 million for the quarter.

As you have seen, we upgraded the full year guidance in an ad hoc announcement on Monday, the 21st of October. Container markets demand remains robust, and the traditional peak season took place as -- took place normally and contributed to the uplift of our expected market growth to 6%. Q4 will continue to be strong volume-wise. Meanwhile, the situation in the Red Sea remains entrenched with the threat level still high. On the back of these realities, we upgraded our full year guidance such that the now new expected full year EBIT lands between $5.2 billion and $5.7 billion, and free cash flow will now be at a minimum of $3 billion. I will speak more to the guidance later on this call.

As I alluded to at the start, this quarter marks both a strong financial performance and good underlying operational progress despite continued volatility in the external environment. In Logistics & Services, we had good momentum in operational groundwork in -- we had good momentum in operational groundwork, specifically productivity and cost measures which expanded the EBIT margin to 5.1% this quarter. Further, we made good progress on addressing our operational challenges in Ground Freight and Warehousing. In terms of the top line, we experienced growth momentum with volume growth across most of our product portfolio together with good customer wins to support our profitable growth trajectory.

With margin improvement, progress on operational challenges and double-digit revenue growth, we feel good that the quality of our Logistics & Service business has improved significantly compared to earlier on the year. In Ocean, as we expected and signaled last time, we saw the full impact of the elevated rates that we saw in the second quarter materialized in the third quarter. This delay results in third quarter being the strongest quarter of 2024 as rates peaked in July and have partially normalized thereafter and have now stabilized. Amid strong market demand driven by the peak season in Asian exports and the Red Sea reroutings, our volumes delivery remained strong in the third quarter, demonstrating the agility of our Ocean network and operations.

As we look into the final month of the year, we continue to prepare for the launch of the new Gemini network on our East-West trade lanes around the Cape of Good Hope from February 2025. And finally, in Terminal, we continued our excellent performance and closed another strong quarter, up sequentially, supported by good volumes and higher revenue per move. The resilience of our terminal business stems from our unrelenting focus and progress on operational excellence and on automation. ROIC landed at an impressive 13%, significantly above our 9% target. All this, while undertaking growth investments, not the least in our 2 greenfield projects in Brazil and Croatia to grow our portfolio of world-class gateway terminals.

Before I dive into the scorecard. You may recall, we introduced our current midterm targets at our Capital Markets Day in May 2021 amid the pandemic. The midterm covers the period from 2021 to 2025 so there are not too many quarters before we renew our targets for the upcoming midterm. Our plan is to do so at our next Capital Markets Day, which we intend to host sometime in 2025 in London. The exact date will be communicated in connection with our financial calendar. We hope to see many of our analysts and investors at the event at which we plan to share our progress towards becoming an end-to-end logistics provider. Further details will follow. Together with the executive leadership team at Maersk, I look forward to seeing you there.

Briefly then on the scorecard for this quarter, the important point to note is that the last 12-month period, still includes the last quarter of 2024, which represented the throw of normalization and the early days of our cost management efforts. On a group level, in Ocean, our last 12 months performance has been significantly -- has been satisfactory, especially when considering the tough end of 2023.

Overall, ROIC and Logistics & Services performance especially suffered as we were left with fixed cost that were over dimension for the normalized activity levels. As you know, we have been working hard to improve our performance in Logistics & Services and both organic revenue growth and EBIT have improved sequentially during the course of 2024. As we look forward to the fourth quarter, we can continue to see a fuller and stronger scorecard.

Before I add a few words to the guidance upgrades we released last week, let me give you an update on how the supply and demand has unfolded through 2024 and is expected to unfold in the coming quarters. You may recall at the start of the year, we presented 2 scenarios for the Red Sea disruption, 1 long and 1 short. We then presented our view on rate normalization as well as new capacity entered as per the industry order book. Compared to these 2 lines that we had presented in the early days of the crisis, the reality has pushed the rate trajectory longer out and higher up. Longer out driven by the continuation of the disruption and higher up because of the strong market demand as well as some port congestions in some of the Asian ports that we saw in the second quarter.

The Red Sea disruption remains entrenched such that we plan according to this new reality and the launch of -- to launch the Gemini network via the Cape of Good Hope, as I just mentioned. The downward pressure, nevertheless, has come from increasing supply as expected. Rates peaked in July and then have partially normalized and as partially normalized as expected and have stabilized for now. As we communicated last Monday on October 21, for full year 2024, we expect container market volume growth to be around 6% compared to the 4% to 6% previously communicated.

On the back of the strong third quarter results, combined with the strong container market demand and the continuation of the Red Sea situation, we raised our financial guidance to an underlying EBITDA of between $11 billion and $11.5 billion and underlying EBIT of between $5.2 billion and $5.7 billion and a free cash flow of at least $3 billion. Our CapEx guidance ranges are unchanged from the previous guidance.

And with this, I would like to pass the word to Patrick for a deeper look at our financials.

Thank you, Vincent, and welcome to everyone on the call from my side as well. Our third quarter saw a significant uptick in profitability driven by strong performance in all segments, in particular, from Ocean, which benefited from high freight rates. We delivered an EBITDA of $4.8 billion and an EBIT of $3.3 billion, both increasing sequentially and year-on-year. EBITDA and EBIT margins also increased to 30% and 21%, respectively.

This improved operational result allowed us to deliver a net result of $3.1 billion in the quarter. Higher profitability supported the free cash flow, which increased to $2.7 billion significantly up from the negative cash flow of $124 million in the third quarter of 2023. Accordingly, we maintained a strong balance sheet with total cash and deposits increasing to $22.3 billion. Our net cash position stood at $5.6 billion, an increase sequentially, but still below the levels of Q3 2023.

Now let's take a closer look at our cash generation on the next slide. Cash flow from operations was $4.3 billion. This included a negative impact from increased net working capital of $440 million reflecting higher receivables due to the sequential increase in both volumes and freight rates in the third quarter. With higher profitability and a smaller increase in working capital compared to the previous year, our cash conversion increased to 89%, up both sequentially and year-on-year.

We spent $940 million in CapEx this quarter with $560 million or about 60% of it on Ocean. This Ocean CapEx amount, around 70% of it relates to vessels and 30% to our equipment and hubs. The CapEx will significantly increase in our fourth quarter as we will settle prepayments related to the vessel purchases announced last quarter, but we will remain well within the CapEx guidance. There was a positive cash flow impact of $203 million as well, mainly stemming from dividends received from joint ventures in terminals. Net proceeds for the quarter were reinvested in short-term deposits.

Now let's have a look at our Ocean segment on Slide 12. As expected, Ocean had a strong quarter, driven by higher freight rates due to strong demand and the continuation of the Red Sea situation. Volumes were while mostly flat year-on-year, increased 2.4% sequentially, driven in particular by exports out of China and Southeast Asia. As highlighted in our Q2 earnings calls and due to the revenue recognition, the full impact of the higher rates at the end of Q2 materialized in the third quarter, supporting the substantial increase in profitability which increased both year-on-year and sequentially, delivering EBIT of $2.8 billion for Ocean, representing an EBIT margin of 25.5% compared to a loss a year ago.

Moving on to the Ocean EBITDA bridge on Slide 13. Starting from the left, you can see the substantial impact from EBITDA from increased rate rates of $3.6 billion compared to Q3 2023. On the cost side, we see a picture similar to the previous quarter with high network costs driven by the longer sailing routes around the Cape of Good Hope, triggering in particular, a 14% higher bunker consumption and more expensive charter costs as well as higher container handling costs. We still had a negative impact of revenue recognition, partially offset by a systematic reduction in SG&A costs, which were down 11% compared to previous year.

Now let's look at our KPIs for Ocean on Slide 14. Our average loaded freight rate surged 54% to $3,236 per FFE. This is also representing a significant 29% sequential increase as peak rates seen in early July materialized in the third quarter. Operating costs, excluding bunker increased by 2.4% year-on-year, driven by higher container handling costs as supported by the lower SG&A, as stated previously. The increased costs from rerouting also meant that our unit cost at fixed bunker increased by 3.9% compared to Q3 2023. And sequentially, unit cost increased by 0.4%. As we deploy capacity to adapt to the current market demand, our average operated capacity increased 4.7% year-on-year or 1.9% sequentially, driven mainly by an increased number of chartered vessels.

Despite this increase, our utilization remains very high at 96%. And you see that 75% of the volumes in the third quarter came through our contracts. The higher number of contractual volumes compared to 2023 reflects the significant increase in short-term contracts driven by our customers' need for predictability in a freight rate environment that has been characterized by a high degree of volatility in '24. As a result, we now expect the share of contract volumes for the full year to be around 75% as well.

Now let's turn to Logistics & Services on Slide 15. The Logistics business delivered an improved third quarter with continued growth momentum across our products and regions. Volumes increased across most of our products, delivering revenue growth of 11% year-on-year and 7.2% sequentially. Supported by solid performance in air, landside transportation and warehousing. The segment delivered an EBIT of $900 million, representing a margin of 5.1%, increasing both year-on-year and sequentially. The higher profitability was driven in particular by stronger performance from the logistics and favorable rate development in air as well as operational efficiency gains across all products.

We also continue to strengthen our Logistics & Service business and have made strides in addressing the operational challenges in ground freight and warehousing that we have highlighted in previous quarters. Fundamentally, we are improving the cost position and the resilience of the business, and we'll continue to build upon this momentum towards our EBIT margin target of above 6%.

Looking closer at the performance of our product families on Slide 16, we see that the revenue managed by grew 6% to $624 million in the third quarter, driven by solid development of cold chain logistics and project logistics. Lead Logistics continued to drive profitable growth through enhanced operational efficiency, which resulted in an overall EBITA margin of 24.2%. Fulfilled by had another quarter of growth in all products, particularly in Warehousing and Last Mile, resulting in a revenue growth of 10% to $1.4 billion.

Despite increased revenue, the EBITA margin declined to minus 4.5% due to increased costs in refocusing the Ground Freight business on core activities. Driven by higher rates in air, LCL and together with higher volumes in First Mile, our transported by business delivered revenue of $1.9 billion, equivalent to a 13% growth year-on-year. As a result of the improved performance, EBITA margin increased to 8.4%.

Let's move on now to our Terminal business on Slide 17. The third quarter was another very strong 1 for terminals. The segment delivered record revenue of $1.2 billion, equivalent to a year-on-year revenue growth of 18%, supported by higher volumes, tariffs and storage revenue. Volumes increased 7.6% year-on-year, driven by significant growth in North America, particularly in Los Angeles and Port Elizabeth. As well as in Asia, Middle East, where our Mumbai terminal became fully operational again earlier this year. This offset the negative volume impact from the situation in the Red Sea. Successfully growing the top line while maintaining cost discipline, the EBIT margin increased to 28.6%, increasing year-on-year while keeping at a high level sequentially. Consequently, the return on invested capital increased to 13%.

Turning to the segment's EBITDA bridge on Slide 18. The components of profitability that you can see on the bridge, highlight the strength and the resilience of our Terminals business. While increased volumes had a negative -- a positive impact on profitability. The lion's share comes from the higher revenue per move, which increased 9.3% year-on-year, driven by higher tariffs, improved product mix and higher storage revenue. The higher revenue per move alone more than offsets the increased costs from inflation and currency headwinds. Terminals delivered an EBITDA of $424 million, equivalent to an EBITDA margin of 35.8% slightly up year-on-year, but lower than in Q2 2024.

This concludes the financial review of our segments, and we will continue with a Q&A session. Operator, please go ahead.

[Operator Instructions] Our first question comes from Alex Irving, Bernstein.

My question is on consolidation, please, in Logistics & Services. Do you deal to date been a bit more bolt-ons that you're recently in the running for a much larger target. Do you see larger deals are something that you have -- have to do and the capability to execute on and integrate?

Yes. Thanks, Alex. You were breaking up a little bit at the end. So if I don't answer everything fully just correct me or remind me if I'm missing something. So M&A will continue to be a part of the road map. We continue also to have a view that organic first is our approach to growing logistics. And that's why we're also quite satisfied to see growth coming back here with the 11% this quarter, and that hopefully, we'll continue to see progression in that vein. But we will continue to add some capabilities. Our view is that bolt-on is good for us, but maybe more towards the larger size rather than the too small because of the work that goes into doing such an integration, you might as well do it for something that is meaningful for the strategic progression of your business and the capabilities that you have.

The next question comes from Dan Togo Jensen, Carnegie.

Just maybe some flavor on your wording regarding distribution and possibly share buyback. You mentioned that you will review a reinitiation of share buybacks once Ocean markets settles. What do you mean by that? Is that when you have a full view of how this will pan out? Or is that when we see rates start to climb again and profitability, so to say restores. Some flavor here would be appreciated.

So indeed, I think a year ago, we were looking at Ocean coming down quite significantly for 2024, which led us to suspend the share buyback back in February. And we explicitly said at the time that we were suspending it. And we reminded, I think, everyone in the last quarter as well on our priorities of capital allocation. So the first 1 is effectively, as you mentioned, to see how Ocean will develop, and that is the main element. Then we will use the cash, obviously, to grow. We just talked about growth in logistics. We're also investing in terminals. And obviously, as you've seen investors in Ocean. So this is organic first growth, which is important. And maybe here and there some M&A. And then we'll obviously return cash.

So straight to your question, we have to spend on the program and then we look at the evolution on what we see looking forward. So that will be something when we form a more formal opinion on the development of the business for '25 onwards, we'll be able to have a better view on the excess cash and return this excess cash as we have done in the past. So we have, first of all, a dividend policy, which we'll always respect based on the profit of the year. And then we'll return excess cash by share buyback as we have done in the last few years. I mean if I remind everyone, I think since 2020, we distributed $9 billion cash. So we are not afraid of doing that, but we need the visibility on Ocean and then as well, priority to develop organic growth as well. So that's the context.

The next question comes from Cedar Ekblom, Morgan Stanley.

I've got a follow-up question on M&A, please. If we thought about an ideal asset that you would be looking at, would it be regionally focused? Would you prefer Europe or maybe a U.S. or Asian asset? Would you be thinking about warehousing rather than, say, road? And there's a lot of targets that are being mentioned at the moment. And I know you're not going to comment on target specifically, but I'd like to get a bit more understanding on the type of assets and the regional type of exposure that you'd be looking to bring into the business? And what you believe that strategic positive would be from that.

Yes. So I can tell you, in general, what we would be looking at is there is 3 lenses. The first 1 would be regional. We have most of the M&A activities we have had so far have had their base in North America and in Asia Pacific. So for us to reinforce the offering in Europe would make sense. We have also a lens that is through verticals. We are very focused, as you may know, both through our own business and our acquisitions on retail, lifestyle, FMCG, a lot of the consumer-facing verticals, and we will have an interest in moving more towards industrial verticals and then there may be also, as time goes specific capabilities or product lines that may be interesting that we don't have on offering today and that become important or that we see become very important for our customers. This is something like we have done with e-com, for instance, some years ago with pilot invisible and so there may be things in that direction.

The next question comes from Robert Joynson from BNP Paribas.

Question on the Gemini network, please, for which you have a reliability target of 90%. If we compare that figure with this year, for which both Maersk and Hapag have averaged around a low 50% range. It's obviously a huge improvement. Could you just talk us through the key moving parts that will enable 90% reliability to be achieved? And also, what action could be taken if reliability consistently proves to be much less than 90%.

Thank you for that because it is indeed something very important, and it is a step change when it comes to reliability compared to both what we have seen this year and what we have seen in the previous year. And the ambition is to be able to do that consistently as well. So not only in good times but to do that consistently. I think if I had to explain that in 3 levels. I would say the first thing is the modularization of the network. So the fact that instead of having 1 large network of connecting very long strings with a lot of port calls and so on, which it looks like a big spaghetti bowl of things that are very intertwined.

We have much, much more simple network with few port calls and cleaner rotations which means that if you have a disruption in 1 port it doesn't get transmitted into the network the way that it does today, but it gets contained into its module. And that's how you can reproduce a significant uplift in reliability. That's number one. Number two, is the complete integration between ships and terminals in the hubs and the fact that we have now invested in the last 3 years significantly in having complete co-location and harmonization of processes, technology and teams also organization between our hubs and our Ocean network, which means that we can ensure connectivity in the hubs with a level of quality that would be impossible if it wasn't in-house within the same team. So that's the second layer.

And then the third layer is a completely aligned operational philosophy with our partner in Gemini, which is focused on quality. And the common agreement that actually doing it right the first time with high quality is going to be cheaper than operating a network with this 50% reliability. So you put those 3 together and you have this significant uplift and also a lot more resilience on the product that you have. We have, in the past couple of years actually run a lot of tests before we got to the 90%.

So we did not go out with that number lightly, I would say, but I think for us, the real core now is to scale this up and to be able to verify. And then we'll have to see if there is anything that has not been tested and that we discover, then we will have to find the solutions on the way. But we feel pretty comfortable that -- I'm pretty confident that we have tested a lot of the things that we could think of in terms of resilience of the product.

Next question comes from Lars Heindorff from Nordea.

On the volume side in the Ocean part of the business. You've been growing roughly in line with the market in the first 2 quarters in the first half and then flattish volumes here in the first quarter. I'm just curious still, in light of your capacity plans of keeping total nominal capacity flattish around the 4.2 million to 4.4 million TEUs. What kind of growth are we looking at into in the fourth quarter and maybe next year? And also, if I can add just 1 small thing, if you can say anything about what you see in the market in terms of bookings right now?

Lars, let me start with the last part. I think the third quarter was very strong, and we see no indication of having the fourth quarter weakened. So this resilience that we see in market demand. That's why we could upgrade it also to the 6% for the year. That will continue at least through Chinese New Year. We have about -- through what we do in logistics on lead logistics. We have about a 3 months view, a pretty solid view on how volumes are going to develop on across ocean and air and that we feel pretty comfortable with after that. We'll talk about it again in a quarter.

So I think that's key. I want to just attract your attention to the fact that our capacity has increased actually. But this extra capacity has been absorbed in longer selling distances. And therefore, we simply did not have the amount of slack capacity that maybe some of our competitors had to cater for that unexpected strong demand on top of long sailing routes. The -- 1 of the reasons why I think we have been able to contain costs so well despite the longer selling distances is the asset utilization. So we have achieved this quarter the highest utilization ever. It's just around what we did in the best times in terms of market pressure during COVID. And that was the constraint simply that there was.

So whereas, in the first part of the year, we had enough slack to actually take on more volumes here. At the year-on-year comparison. We had a strong third quarter last year, did that we had to let go of some of the volumes. That allowed us also to make -- to be quite selective on how we wanted to spend our capacity, and that's why also the price increases that we've been able to achieve are quite significant. Going forward, you had also something going forward. I want to attract your attention on the fact that the transition to Gemini is actually allowing us not only to deliver the 90% that the previous question was talking about to our customers. But it allows us also to have a much more -- to increase the asset turns in our network, and that will free.

So the simple fact of moving to this modular network will mean that on the same size of fleet, we will be able to keep up with market growth for between 2 and 3 years and keep our share then for the next 2 to 3 years, depending exactly on how the market grows. So I think that's our primary focus right now is to be able to transport more volumes on the same amount of ship by having a network design that is simply better than what else is out there. Then we have our fleet renewal program. We can continue to work with that.

And then we have always the opportunity now that we have the ship starting to come in at a reasonable clip to be a bit opportunistic in -- to cater a bit for the vagaries of the market either to reduce a bit more if we think that this is warranted or to let it swell a little bit for a shorter period if we feel that this is warranted from a profitability perspective. But the core for us remains capital discipline, focus on cost and the move to quality. And then by doing that, we should be able to keep also our market position in the years to come.

The next question comes from Omar Nokta from Jefferies.

Just wanted to ask back on Gemini and the hub and spoke model. As we get closer to it, as you mentioned, we're 4 or 5 months away from it coming together, clearly, a major shift from how you've done business in the past and understanding you've run models and scenarios to prepare. But how do you see maybe the services coming together as we get into 2025, do you do a partial shift to hub and spoke full on shift initially? How do you think about that transition and what type of maybe perhaps disruption that could be underway in that interim period? And then how long do you think before it's up and running as you envision it?

Yes. So you're right. This is a pretty big undertaking. I just want to maybe remind you that in the course of the 10 years where we have been with 2M, we have redeployed our common network in 2M, probably 8x in the course of the 2 years. Not as radically different as what we're doing this time when we're both going to a different design model and a different partner. But I just want to say that these significant redesigns are something that we're used to do.

What we have to do here in this case is basically move straight into the Gemini network because it is such a big undertaking, you cannot take one mid-step, stay there for a few months and then take the next step. So you face basically the ships. We have a week where we agreed. This is the last week where we sell on 2M. And then the following week, it is the first week where we sell on Gemini and then the ships simply follow their rotations and complete their rotations like that. With respect to disruptions, I think it's going to be very minor because what this will mean is today, every service is a 7-day service. And as you move into the new rotation, you would certainly have maybe that a port the next ship, as you move from 1 to the other will come 9 days later or 4 days later, depending on how the rotations are done.

But on average, it's going to be pretty much the same and past that first week or 2 of transition then things get back to this weekly click, and that should be managed, at least that has been -- and from that perspective, it's similar to what we have done in the past. So we expect an orderly transition from 1 to the other and go straight into Gemini. It takes all in all, the longest services that we have, have a 13-week rotation. So until the last ship and the full cycle of the service is working on the same, you could say, network, then it takes about 13 weeks.

The next question comes from Ulrik Bak, SEB.

Also just a question from my side. So clearly, in Logistics & Services growth and the margin trend has been stronger than we've seen over the past several quarters. But how should we think about the sustainability of this trajectory? And the timing or phasing of the 6% EBIT margin target, would that already be something that we are looking at in Q4? Or is it more medium term that you expect to achieve that level?

Let me try to give a bit of color on this. I want to start by saying that while I'm very pleased with the sequential improvement, we are not -- I'm not satisfied with the absolute level yet. What pleases me about the improvement is that I think that whereas there is a little bit of unusual situation on air freight right now because of simply lack of the air space availability, more higher reliance on cargo freighters and in general, higher air freight rates out of China. There is a lot of the -- although the vast majority of the improvement is actually sustained improvement that are based on procurement efforts, productivity efforts, and asset utilization efforts.

The parts where we still -- and on all 3, we still have potential to do more and face more synergies. Patrick talked in his presentation about the fact that in contract logistics or in warehousing and distribution, what we call fulfilled by Maersk, which is the warehousing and the distribution we're still not at a margin that is satisfactory, and that's the main area that we have to continue to work on. The other 2, the transport stuff and the lead logistics part, I think, deliver probably something that is close to best-in-class, if not best-in-class.

But on our warehousing and distribution, we still have a bit of work to go, and that's what needs to get us above that 6% and keep us there. I'm going to say that I expect continued sequential improvement. But obviously, the more you get -- the higher you get, the more each percent is actually difficult to get. So I would not necessarily expect that this is going -- that we're going to cross the 6 in Q4. But somewhere between the 5.1 and the 6 is where we need to be able to bring in here in Q4, bearing any surprises. And then we continue on that trajectory afterwards. So there may be also, depending on seasonality and so on, it's not like every single quarter is going to be an addition. But I would expect that we have made a step change with respect to our margin in logistics. We have made a step change with respect to our growth in logistics. Now we need to anchor it and have consistency in the delivery in the coming quarter and travel the rest of the way on the profitability, especially in our warehousing and distribution.

The next question comes from Cristian Nedelcu, UBS.

Maybe a question on Gemini Alliance again. I guess you are in this context where we now have 4 alliances if I can call them so. How do you see the risk that you may need to price a bit more aggressively with Gemini at the beginning until the benefits of the hub and spoke model are proven and in the same time, this transition, should we think about it actually associated with higher cost per container in the first few quarters of Gemini until you bring the cost where you wanted to? And apologies, a very short one.

And you did speak about Schenker in the past where you are interested. I guess in the context of the GXO articles, it does seem to tick a lot of the boxes in terms of your logistics strategy. Can you make any comment there whatsoever.

So on GXO, we have chosen not to participate in the process. On Gemini, I think we will see -- we expect to see higher asset intensity right as we phase into the network, whether we achieve all the synergies in the first -- from the first week on, we'll have to see, but we expect clearly to see improvement on our production cost immediately as we transition into Gemini. I want to remind what I said before, it's going to take 13 weeks for us to effectuate this. So we will live from the middle from February when we start the transition and for 3 months in a hybrid world where you still have some of the new costs and some of the old costs.

And then after that, you will -- we will have a pure Gemini based network. I would say that I see at this stage, no reason why when we're selling a higher quality and higher reliability, we would have to discount or price more aggressively in order to sign up customers.

The next question comes from Jacob Lacks, Wolfe Research.

I guess 1 more on demand. It would be great to get your perspective on how sustainable the current strength is? And do you think this is any tariff or labor-related pull forward in it? Or is this truly underlying demand strength here?

So I look at 2 things. I look at, of course, demand and the visibility that we have. And then the important thing to look at is, of course, consumption data and inventory data. As far as we can see, inventory related to or inventory as a ratio to sales in the U.S. is still completely normal, actually probably a little bit on the low side compared to what you would expect, which leads us to conclude that there is not a lot of evidence of a large pull forward or something unsustainable in that. If consumption was to drop, then they may have consequences on how many goods are needed.

But at this stage, at least, what is coming into North America is supported by what is being consumed. In Europe, we see a somewhat similar picture when it comes to consumer-facing verticals, but we see a bit more inventory increase in some of the more industrial verticals. That's what I can give you. So I would say, for us, that would mean that it's not like we're seeing a big correction around the corner when you look at those indicators. Now other things can happen, but at least based on those indicators, that seems to be pretty sustainable and sustained.

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

So you mentioned that with the share buyback, you need more visibility on Ocean. What do you exactly mean by that? Is that around the Red Sea situation? Is it U.S. elections and tariffs? Because Vincent, your comments right now on demand seemed fairly good. So if you could clarify on that. And a bit related on that with Gemini, you've talked about reliability. Are you seeing customers willing to pay for that? And could we see the benefit of that come through in contracts for next year?

Muneeba, let me just start with the last part. I think when it comes to reliability right now, our first target is to deliver the proof points to customers and I think that's the first thing that we're going to have. I don't think you're going to be in a market that is as volatile as it is today with the many disruptions that there is. I don't think that customers will be willing to pay more for higher reliability without having seen what they're getting. So I think initially, we need to have a successful transition into Gemini. We need to deliver the quality in terms of production cost and production quality that we have promised.

And then at some point, we can see how much value that creates for customers and how we can take a participation in that, but that would be probably premature at this stage. On market demand, what matters is -- and I think there has been tariffs, different places for a while. What matters for us and our business is how much consumption there is. That's what matters. Because tariffs, they can be avoided by sourcing from different geographies and doing different things. What you cannot talk yourself out of is if the consumer does not buy the stuff that we transport, then there will be a need for less transport services.

But as long as the stuff gets sold, then there will be this. And I think with respect to the election, none of the candidate has a view that we just need to slow down economic activity, and we want people to be able to consume less. So however, the tools are going to be deployed once this time comes and whichever -- whoever wins and whatever tools they choose to deploy I think as long as the economy seems strong and that consumption is strong, there will be continued strong demand for container traffic.

And coming back to the first part of your question on the share buyback. I think what we highlighted, right, is that we didn't stop the share buyback, we suspended it, and we need to have a better clarity on how '25 will shape. We'll get that over the next few months as we typically go into contract negotiation season, we see the demand developing and the view we have for '25 evolving in the next few months. We'll be able to determine our view on what is the level of return to shareholders that we talk about. So we'll come back to that. I mean that's a normal process, and we'll have obviously a volatility of demand and rates and contract levels and so on to consider.

Next question comes from Daniel Lexia, JPMorgan.

Could you elaborate a little bit what you're seeing on supply. Obviously, last year, we were looking at a very different outcome for 2024. But obviously, the Red Sea diversion consumed a lot of the new deliveries that arrived. Would you say the schedules are now fully adjusted? And so incrementally, there is no additional consumption of new supply going through the Cape of Good Hope. And what are your views on the order book-to-fleet ratio having inflected again to 25%? Are we kind of in a worse situation now potentially positive, meaning peak within rates.

I think that's a really good point, and thank you for the question. Let me give you some perspective about what has happened. So it is true that for this year, a lot of the -- all of the capacity that has come has been absorbed in the longer sailing distances and that explains both the increases that we saw initially, but also why you've seen this normalization since July on prices. I actually think that when you look at the numbers and you have 2 things to consider. First of all, demand is also significantly stronger. So unless you expect that to reverse and negative growth, the whole base also has moved. And the fact that there is at least no sign of an inventory correction or a sharp decrease around the corner is maybe more optimistic than it was a year ago.

The second thing is that networks today are sailing at full speed. There is significant both cost and fuel consumption, environmental impact upside in taking a lot of the capacity that is going to come and plug it into slow steaming or lowering the speed, sorry, of the network. Finally -- or not finally, but also there has been for the last 5 years, virtually no scrapping, and there is a lot of ships that are either at nearing end of life or that have actually reached end of life and that are only hanging on because of the incredibly high freight rates that we have seen because at these freight rates, any ship can make money, but they are not competitive anymore.

And as this starts to correct itself, we are going to see, actually, if you look at historical standard, about 2% to 3% of capacity being scrapped every year, and that will significantly subtract to what is coming in the year to come. And then finally, I want also to say that every shipping line has the capacity to return a significant part of its tonnage to tonnage providers if that capacity is not needed or can be replaced by own capacity or new capacity coming out of the yards. So I think that when you look at higher demand, when you look at the levers that there is on the supply side, there is more volatility than ever. So things may go up or go down at times.

But there is a more benign long-term outlook if you have -- if these tools are being used than maybe what there was last year because a lot of that new capacity has arrived and has been basically phased in, and there is a bit more flexibility today than there was just a year ago.

And sorry, can I just take -- you're basically therefore suggesting that as long as the Red Sea diversions continue it will be difficult to go back to the kind of negative narrative we saw last year? Is that what you're suggesting?

I think that if you look at how skewed the -- so we have good visibilities on deliveries for the next 4, 5 years, and we know also what has come in the last 1.5 years. This was very skewed to basically the last part of '23, '24 and the beginning of '25. After that, there is a bit less tonnage coming in every year. And I think that the brunt of the phasing in of new tonnage has been dealt with, and there are irrespective of Red Sea -- no Red Sea there is more flexibility today for carriers to deal with supply effectively than there was a year ago.

The next question comes from Sathish Sivakumar from Citi.

My question is actually on the Warehousing. In your interim report actually you comment about warehousing vacancies have increased to 6.4% in the U.S. and it remains at 6% in Europe. What is it actually looks like in your portfolio? And also any comment around pipeline of capacity coming with the new portfolio.

I think I'm not totally sure we got it totally because it was fading off a bit. But I think in terms of Warehousing, we do have quite a good growth as far as the main element of the growth that we have seen as well in Q3. And we have 2 topics here. One is that we have another business, which is doing pretty well in terms of in Asia and so on, which is running well. While we have had some expansion of capacity, and we have had some empty capacity, which we talked about in the previous quarter, which we are progressively filling.

And that is certainly which has on the 1 hand, depress our margins looking backward, but looking forward is also what is explaining that the margin progressively are increasing as we are growing into those warehouses when they are being built by ourselves, but we're also releasing capacity which have been leased and therefore, we are working on both sides to adequate our supply and the demand that we have in warehousing. So overall, it is a good growth prospects. Growth per se is fundamentally given our structure and Vincent was alluding to it earlier on. It's very much focused on the U.S. and Asia growth. We have weaker footprint in Europe, and that takes a bit more time to fill. But this is why you see this step-wise approach in increase of profitability, and you will see it looking forward in the next few quarters as well when you look at the full field by Maersk.

So what is the current back end sea rates in your portfolio right now?

We don't disclose that, but I think it would be vastly different from region to region. So I think it is pretty good in Asia. In the U.S., we have a more and actually getting better and better in the U.S. We have certainly topics in Europe, which will take a few quarters to solve.

The next question comes from Petter Haugen. ABG Sundal Collier.

A question on your net debt or net cash, one should say. Looking forward and suspecting that things will be more normalized in 2025. What is you think the natural level of debt in Maersk at that point?

So indeed, it reverts back to the question of our strength of our balance sheet and what do we use it for. So ultimately, if you look at our policy, it is to be solid BBB or BBB+ that implies that we need to have a debt-to-EBITDA ratio of better than 1.5x. So we are obviously much better right now which implies that depending on our view on the next few quarters and in '25 in general, we'll look at all the possibilities to return cash. It's dividend but also share buyback. We will come back to that as we have more visibility, which we addressed earlier on. And typically, I would say we will not aim to be net debt positive, right? That is not where we should be.

So we will obviously -- depending on looking forward on the growth plans that we have as well be using this cash according to the policies and you'll have returns, and you'll have investments in organic growth and net of M&A. But the current position, which is pretty strong and then is almost back to where we were a year ago. It's certainly not the final target.

Today's last question comes from Marco Limite, Barclays.

I've got 1 follow-up question on share buyback and return to shareholders. I appreciate was it your answers just now on credit rating. But is there basically a buffer of cash that you want to keep for M&A or that's more kind of tactical depending on the opportunity that it comes. And maybe if I can just to squeeze in a second question, when you were mentioning that there is a lot of capacity out there that is approaching or has already approach useful life. Can you please quantify, if you will?

So I'll come back on the first part of your question. So I think determining the use of cash implies effectively having a view on the magnitude of Ocean, the evolution of Ocean for the next few years, which is what we said as well a year ago. Once we have a better view on that, it redefines a bit the level of excess cash that we have, which can be used as well for acquisition, as we said, acquisition is part of the growth. We have done that in the past, and we'll continue to do. However, our focus is organic first. And we certainly have a growth plan in terms of revenue and profitability in logistics, which is organic first.

And we will add, as Vincent was saying earlier in some areas, if there's something which makes a good return, right? So there will always be a view on comparing with what we are able to do on our own. And that will be an element of determining factor. We will come back on the quantification and the rhythm of returns as soon as we have a better view, which will be in the coming quarters.

Good. So thank you, everyone, for all your questions. I would like to make a few final remarks before wrapping up the call.

Overall, we saw strong business performance across all our segments as reflected in our financial results. But if not more important is the good underlying momentum we have shown so far in operational groundwork to improve the underlying quality of our business. To name a few examples, we are progressing on our EBIT margin improvement through the cost and productivity measures and on our operational challenges in Ground Freights and Warehousing in Logistics & Services.

In Ocean, we are actively preparing for the new Gemini network. We talked about it also a lot during the Q&A. In terminals, we saw another quarter of resilient earnings and are continuing our focus on operational excellence, which we roll out and replicate across our portfolio of gateway terminals. As communicated last week, we upgraded our guidance for the full year 2024 on the back of our strong results in Q3 and a strong market demand. Finally, we look forward to seeing many of you on our upcoming roadshows and investor conferences. Thank you for your attention, and see you soon.