A.P. Møller – Mærsk A/S (AMKAF) CEO Søren Skou on Q4 2019 Results – Earnings Call Transcript

A.P. Møller – Mærsk A/S (OTCPK:AMKAF) Q4 2019 Earnings Conference Call February 20, 2020 5:00 AM ET

Company Participants

Søren Skou – Chief Executive Officer

Carolina Dybeck Happe – Chief Financial Officer

Conference Call Participants

Dan Togo – Carnegie

Mark McVicar – Barclays

Lars Heindorff – SEB

David Kerstens – Jefferies

Sam Bland – JPMorgan

Marcus Bellander – Nordea

Tobias Sittig – MainFirst

Frans Hoyer – Handelsbanken

Søren Skou

Good morning, everyone, and welcome to this earnings call for A.P. Moller – Maersk for 2019 and the fourth quarter. My name is Søren Skou. I’m the CEO of A.P. A.P. Moller – Maersk, and I’m joined here today by Carolina Dybeck Happe, our CFO. Before I dive into the details on the fourth quarter and the full year performance, I would like to spend a few minutes on two topics that I think are on many people’s mind these days.

The first one is the outbreak of the coronavirus or COVID-19, as it’s formally called in China. We are obviously following this very closely. It’s difficult at this point to get a full sense of the full impact on economic trade. But it seems inevitable that Q1 will be significantly impacted by the fact that the Chinese New Year holiday has been extended and many other containment measures that are put in place.

Chinese factories have been closed for a full extra week in relation to Chinese New Year, which means that for one more week, there will be limited production in China. Factories are slowly returning to production. But also large cities have remained in lockdown, in particular in the Hubei province. So we estimate right now that factories in China are operating at 50% to 60% of capacity. That will be ramping up to around 90% of capacity by the first week of March.

Currently, the external consensus is that the outbreak will peak over the coming weeks. And data suggests that, that is true. The numbers for newly infected cases on a daily basis have been coming down over the last three weeks. So that seems to be the trend that we are on. And that means that we could expect a trajectory similar to the one experienced during SARS with – but with a larger magnitude, of course, because China’s impact on global supply chain is just much bigger today and the China’s role in the global economy is much bigger.

But that would imply a so-called V-shaped crash and recovery, which means that we would have a very weak Chinese exports in – from February, and that we know for sure, also a quite weak March and then hopefully a strong rebound into April, May, June. Obviously, there’s still a lot of uncertainties in this. And this prognosis certainly implies that there will be no new outbreaks and certainly no big outbreaks in other countries outside China. So the next two to three weeks will really tell us what track we are on.

It’s almost given that Q1 will be impacted, as I said. The long-term impact will, therefore, really depend on how long the outbreak lasts. As a response to the low exports from China, we have canceled more than 50 sailings post – in addition to what we would normally do for Chinese New Year. And we continue to manage our capacity in an agile way to meet demand.

In a given year, the total volume out of China, Hong Kong and Taiwan is around or slightly less than 30% of our total volume. And it means, of course, that the Chinese business is very material for us. But it also means that we have around 70% – or more than 70% of our business that is not directly related to China.

Now the second topic I want to talk briefly about is cash because I’m surprised about how little many of the analyst reports that I read focus on cash. They focus – mainly focus a lot on price-to-book value. But I can assure you that we focus on cash. And the one element in this quarter and actually the full year also in 2019 that we are most happy about is the cash return. After we acquired Hamburg Sud in December of 2017, we had more than $20 billion – more than $21 billion of net interest-bearing debt after – including the IFRS 16 effects.

At the end of the 2019, as you will see in the report, that number is $11.7 billion. So in other words, we have deleveraged by around, in round numbers, $10 billion over the last two years while we have also been paying dividends and running a share buyback program. We delivered 9.3% cash return last year, 10.4% in the fourth quarter, driven by a combination of the earnings improvements, a continued high cash conversion and lower CapEx.

We’re not guiding on cash return on invested capital for 2020 or 2021. But we are guiding on earnings. And we are guiding on a high cash conversion, and we are guiding on CapEx for the two years out. So it’s fairly simple to do the math. Our ambition is to continue to improve earnings, deliver high cash conversion and deliver CapEx in line with guidance.

Now with that, let’s move into the financial highlights for Q4. When we look at Q4 2019, I’m overall satisfied with the developments we have seen. We realized quite low growth in Q4. But this was largely expected as Q4 2018 was impacted by the front-loading of U.S. goods from China in anticipation of tariffs to be imposed in January of 2019. That had a high positive effect across Ocean, terminals and logistics. So when we compare this quarter’s performance with last year, it’s up against a really high and difficult comp.

Therefore, I’m happy that we were able to continue to improve our earnings and cash flow conversion in Q4 2019 despite a revenue decline of actually of 5.5%. And it is because we are focused on protecting our margins and creating a strong cash flow. And we see the effects of that in the financial performance. We continue to improve our EBITDA margin. It increased almost a full percentage point to 15.1% and EBITDA improved slightly to $1.5 billion.

In Ocean, the EBITDA margin was stable as we protected margins through capacity management, and we saw positive effects from lower fuel costs due to a combination of declining fuel prices and continued improvements in fuel efficiency. In Logistics & Services, we increased gross profits by 14% despite declining revenue and the EBITDA margin also increased slightly. In gateway terminals, we are quite pleased with the result. EBITDA margin improved significantly, mainly due to the fact that we have now ramped up the Moin terminal in Costa Rica and also we have much lower construction costs.

When it comes to cash flow, as we just discussed, we continued the strong trend of cash conversion. And this was achieved despite a significant buildup of inventories ahead of the IMO 2020, landing the free cash flow after capital lease payments of $0.7 billion. Our full year guidance for the coming year is an EBITDA of around $5.5 billion, continued high cash flow conversion and unchanged CapEx guidance compared to what we have already stated. And we will go into more details on the outlook later in the presentation.

When we look for the full year, it’s a very similar story, as we have just talked about for the fourth quarter. We improved earnings and profitability across all segments on a stable or small revenue decline in line with the priorities we laid out at the beginning of the year after 2018, having grown the top line significantly, including the acquisition of Hamburg Sud.

EBITDA was up 14% and margin improved 2 percentage points, led by increases pretty much across all segments. With an EBITDA of $5.7 billion in 2019, we ended the year in the high end of the guidance range of $5.4 billion to $5.8 billion that we gave back in October last year. EBITDA in Ocean was improved by 15%, mainly due to our focus on capacity management, commercial decisions and low fuel costs.

Logistics & Services improved gross profit almost 9% to $1.2 billion with an improved gross profit margin in every quarter throughout the year. And if you look at EBITDA, we improved 25% for the year. Gateway terminals improved EBITDA by 17%, mainly due to the ramp-up of Moin, as I already stated, and stable operating costs and lower construction costs.

Cash flow. Strong cash conversion, 104% for the year. Operating cash flow of $5.9 billion. Equally important, we improved – we reported a free cash flow after CapEx lease payments and before the sale of Total shares of $2.4 billion, which compared to only $102 million in 2018. This is, as I’ve stated clearly now twice, something we are quite happy with. Finally, I would like to highlight that we reduced our net interest-bearing debt by $3.3 billion compared to last year and is now $11.7 billion. This has strengthened our balance sheet, given us a stronger starting point to execute on the strategy and the challenges that we will face in 2020. And as you will probably have noticed, we have already decided yesterday to use a little bit of our firepower to acquire an American company. I’ll get back to that.

Based on the underlying results, the strong free cash flow and the sale of Total shares, the Board will propose a dividend of DKK 150 per share, of which half is a result of the underlying profit and half in line with our dividend policy and half is from the proceed of the Total shares. As stated earlier, when we finalized the current share buyback – when we have finalized the current share buyback program, the Board of Directors will evaluate the capital structure again with the intention to distribute additional cash to shareholders. And obviously, the strong cash performance will inform that decision.

Now moving on to transformation. I have already talked about cash return on invested capital, so I’ll skip that. But I want to start on return on invested capital. We improved return on invested capital to 3.1%. So obviously, while we are pleased with progress, we are not where we need to be and we need to continue to drive our returns on invested capital up towards our target of 7.5% in the coming years. We need to continue to focus on profitability, high cash conversion and staying CapEx disciplined, which will be the drivers behind not only return on invested capital but also cash return on invested capital.

Non-Ocean revenue increased slightly on a full year basis as strong revenue growth in our terminals is more or less offset by declines in freight forwarding in the Logistics & Services segment. It was heavily impacted also when we look at Q4 at the front-loading of the volumes in 2018.

Gross profit for Logistics & Services grew 8.7% for the year, positively impacted by growth in particular in intermodal and warehousing and distribution and the acquisition of Vandegrift last year. And as I mentioned, we saw good improvements in the gross profit margin throughout the year. Finally, we managed to deliver another $100 million of synergies in Q4, which has led us to total synergies from the acquisition of Hamburg Sud and the integration of the company to $1.2 billion, which is well ahead of our target. This will also be the last time we report this number as we will call any incremental improvements from now on as part of daily business.

When we talk transformation, I think it’s also worth highlighting that we did further reorganize the company last year, both at the beginning and the year – and at the end of the year, where we adjusted our headquarter in Copenhagen, The Hague and Hamburg to better match the company structure and to fund the transformation in the coming years. And we, of course, also have announced a new management team set up to accelerate the strategy execution. We look much forward to welcoming our new CFO, Patrick Jany, in – on the 1st of May. Last night, we announced the acquisition of Performance Team. It’s an important building block in the development of the company, and I’ll get back to that.

In 2020, we will also be reporting transformation metrics. We will make some slight changes. We will continue to focus on cash return on invested capital. And we will also have a metric on revenue growth in inland logistics and our infrastructure businesses and then we will have a focus – a metric that focus on earnings growth in inland logistics. More to follow on that.

Now moving on to the Performance Team acquisition. We have, as you are very well aware, a strategy that talks about where we want to grow our land-based businesses, becoming a global integrator of container logistics so that we can help our customers connect and simplify their global supply chains. We have, in the past years, worked on improving customer experience through various channels. And we have further improved customer satisfaction. The next phase for us is really to innovate the existing products within Ocean, and we are doing a lot with our Spot product there. And we need to sell more landside logistics products to our existing customers to be able to help our customers on every way – every step of the journey as we have simplified portrayed here.

This will happen both organically and inorganically. And as an example, we did the Performance Team transaction yesterday. We are quite happy with this acquisition. It’s a well-established premium player within the warehousing and distribution business in the U.S., strong operational capabilities as far as we can judge with fulfillment service and transportation to customer warehouses and stores. And there’s a strong fit with our current business.

Performance Team have 24 warehousing sites and we have 22 in North America. So in total, well above 40 warehousing facilities covering 1.4 million square meters of space. And we will have a warehousing business – combined warehousing business with a turnover of close to $1 billion in the U.S. going forward. Performance Team is a company with a strong financial track record, a good revenue growth track record of 17% per year over the last four years and the company has an EBITDA of around $90 million when we include the IFRS 16 effects.

Enterprise value of the transaction, including lease liabilities, is $545 million. And we expect to close the deal early in Q2 2020. The acquisition of Performance Team is not included in our guidance for 2020.

Now I’ll hand over to Carolina, who will cover the financials.

Carolina Dybeck Happe

Thank you, Soren. And good morning. Turning to our financials for the fourth quarter 2019. We reported a decline in revenue of 5.5% with decreases in all segments. And that is due to the higher revenue in Q4 2018, which was mainly led by the front-loading from China to U.S. ahead of the anticipated tariffs. But our continued focus on improving profitability across the businesses led to an increase in EBITDA, even with the top line down 5.5% and therefore, an improvement of 90 basis points EBITDA margin to 15.1%.

EBIT was $342 million compared to $277 million a year before. That also meant that the margin to 3.5% from 2.7%. And that also includes impairments and write-downs of $79 million. Our reported result was a loss of $61 million because that was negatively affected by restructuring costs of $75 million, impairments of $79 million and one-off tax items totaling $73 million, which I will come back to.

The underlying profit was $29 million compared to $65 million last year. And the decline was mainly caused by the higher tax paid this year. For the full year, we reported an underlying profit of $546 million compared to a loss of $61 million last year. And the improvement is mainly caused by the focus on profitability and cost management in all segments.

If we move to the next slide, strong commitment to remain capital disciplined. Well, we show it in the numbers as well. Our gross CapEx for the fourth quarter was $469 million, which means we ended the full year at $2 billion, so in the lower end of our guidance of around $2.2 billion, which is significantly below the level – the CapEx level both in 2017 and in 2018. For 2020 and 2021, we still guide for the accumulated CapEx excluding acquisitions to be in the range of $3 billion to $4 billion, which means that, on average, $1.5 billion to $2 billion per annual, so even lower than where we ended 2019. The contractual CapEx commitments are now down to $1.7 billion by the end of the year. And that is down from $2.4 billion by the end of 2018. Roughly $600 million of that we expect to happen in 2020 and the other is even further out.

Move to the next slide, high cash conversion in the fourth quarter 2019. I would say this is a beautiful slide. And you have gotten used to seeing this slide each quarter this year with a very similar trend. So we have continued the strong development in our cash flow generation with a cash conversion ratio of 105%, and that despite being negatively impacted by the increased inventories. And we have flagged for this because to prepare for the new low sulfur regulations that came into act in January this year, the IMO 2020, we have had to build up fuel inventories in the fourth quarter and therefore, increased our inventories of around $300 million due to that. So with that, we were very satisfied to have a cash conversion of over 100% despite the headwinds then from the fuel inventories. Free cash flow after lease payments was $668 million and reflects the strong cash conversion and lower CapEx.

The next slide sort of sums up the whole year and the results of our efforts. And I will come back here to what Soren said in his introduction. This has been clearly a high focus and an area which we have been able to impact ourselves. So for the year, we’ve had a cash conversion of 104% compared to 89% in 2018. And that means that cash flow from operations increased 33% to $5.9 billion.

This, coupled with the CapEx being 37% lower than last year, led to free cash flow of $2.4 billion in 2019 compared to $100 million in 2018. And this is after leases and excluding the impact – the very positive impact of the sale of the Total shares in both years. So that’s development that we are very proud of and confirms that even in an environment that has been relatively weak, we are able to generate strong free cash flow based on our disciplined capital approach. Free cash flow, including the sale of the Total shares, was $6.8 billion this year and to be compared to $5.1 billion last year.

The next slide then shows the net interest-bearing debt. So with good cash flow, of course, that has a good effect on our balance sheet as well. So the net interest-bearing debt decreased further in the quarter to $11.7 billion and positively affected, of course, by the improved earnings, tailwinds from net working capital. And that, I will say, despite the buildup of inventories for fuel. And when you compare our net debt with the level it was a year ago, it has declined $3.3 billion from $15 billion. And as Soren mentioned, a couple of years ago, we were $21 billion, so significant deleverage of the company.

And at the same time, I think it’s worth noting that we have also, during the year, distributed $1.2 billion cash to our shareholders through dividend and our share buyback program. Next slide shows our consolidated financial information. I have touched most of the lines. So I’ll only comment on the ones that we haven’t talked about. First one is then the financial costs. So in Q4 2019, they decreased slightly compared to Q 2018.

But we had lower financing cost in Q4 2019, of course, because of the lower debt level. But last year, we received dividends from Total. And that really lowered our financial net in Q4 2018, which we didn’t have in 2019. So on a full year basis, the dividends from Total were actually $238 million to be compared to $2 billion this year.

The other part to touch on is tax. Our tax payments are significantly higher in this quarter compared to last year. And part of the reason for that is the increase in a provision of $45 million for an old tax claim and the reassessment of a deferred tax asset of $28 million. So therefore, you can say that the underlying tax, if you will, is closer to $218 million compared to the $191 million. And with that, I will hand over to Soren, who will take you through the segments.

Søren Skou

Thank you, Carolina. As we have highlighted all through 2019, our focus has really been on improving the profitability in the Ocean segment after last year – or after 2018, where we had very high revenue growth, mainly due to the acquisition of Hamburg Sud. As we have now stated a number of times the comp here in Q4 is tough with a very strong Q4 2018. And we reported in Ocean a 4.8% decline in EBITDA with largely flat margins. And we were able to do that due to the strong focus on capacity and the right cargo mix and it’s also positively impacted by lower fuel cost. Total cost decreased 4.1%. But since our volumes declined, the unit cost at fixed import bunker increased slightly.

And then we were able to gain lots of traction in our Maersk Spot product, which is now accounting for 24% of all of our spot volumes by the end of the year. Now in the fourth quarter, we had a small decline in freight rates, about 0.4% , as we have been very careful in our cargo selection, and we have been running very tight capacity management to protect profitability and margins.

Freight rates declined mainly in the interregional trades and was further impacted by the lower fuel price and ForEx improvements. And this was only partly offset by higher freight rates in Asia, Europe. Adjusted for bunker fuel, the average freight rates actually increased 3.3% in the quarter. Our volumes declined 1.8% due to the high comp, but also because it was an incredibly weak quarter. And we believe that probably when all the numbers are in for Q1 that we will actually have a decline in volumes quite similar in the market, quite similar to what we have experienced. When we move on to cost, as I said, operating cost declined 4.1% , driven by lower network and bunker costs.

Our bunker efficiency continued to be improved, which is key for us going into 2020 with the expected more expensive fuel. And unit costs, while they increased slightly in the quarter, on a full year basis, the unit cost at fixed bunker decreased 1.7%, which is within our ambition of – actually, it’s in the higher end of our ambition of reducing unit cost between 1% to 2% per year. So we’re quite satisfied with that. Now moving on to IMO 2020. And I’ll give you, if you will, a first status update on the implementation. We are two months into the year. And what I can say is that the switchover to low sulfur fuel was very successful.

We didn’t have any operational problems. Our fleet is now fully compliant with the sulfur cap with the vast majority of vessels using low sulfur fuels. And currently, only a limited number of vessels have scrubbers installed due to delays at the yards and the situation in China. And I think those delays are probably going to become even longer. We have, through our blending, tolling and storage initiatives, been able to ensure both availability and high-quality low-sulfur fuels to our fleet to ensure that we have reliability and also, we believe, lower cost.

As you can see from the graph to the right, we have witnessed high volatility in fuel prices both within the different products and regionally, which has led to announced tariff increases to be effective 1st of March based on monthly review of the bunker adjustment clauses and our environmental fuel fees.

We will continue to focus on fuel efficiency to reduce consumption and the environmental impact. And we are also targeting a full pass-through of the higher fuel cost. Now turning to Logistics & Services. We reported a revenue decline of 9.4% in the quarter. It was impacted by really the Q4 2018, but also our freight forwarding – lower freight forwarding volumes. Our profits – our profitability increased. Gross profit increased as did the gross– or excuse me, gross profit and gross profit margin improved.

And that’s really been our focus, also improving profitability here, driven by intermodal, warehousing and distribution and the acquisition of Vandegrift. EBITDA increased 33% for the quarter. But in 2018, we had a negative effect from restructuring costs and one side – one-off maintenance costs in Star Air. The gross profit margin improved to 22% due to improved margins in intermodal as our focus on profitability led us to reduce presence in the less profitable regions.

We have continued growth in warehousing and distribution and custom house brokerage, which has also impacted us positively. Despite the positive development in gross profits, our EBIT conversion was negative 22%, which is impacted by impairments, restructuring and integration costs. And this, of course, needs to improve significantly in 2020. In Terminals & Towage, our revenue declined 11%, but EBITDA increased 10% and the EBITDA margin improved a full 6.2 percentage point as gateway terminals and Svitzer improved EBITDA significantly compared to last year.

Gateway improved margins significantly to 31.4%, mainly driven by the ramp-up in Moin, lower cost and lower construction costs as less terminals are under construction. And we’re really pleased and satisfied with the performance in gateway terminals. Also, Svitzer improved their earnings mainly due to higher activity. Turning to the next slide. Volumes declined 1.7% on a like-for-like basis in terminals, but – which was mainly due to the front-loading in Q4 2018. Our revenue per move increased slightly.

And the cost per move decreased by more than 5%, which has, therefore, led to our margins to improve significantly. Our cost per move is lower as we had congestion costs in Los Angeles in 2018 as well as our overall cost base has improved as we have fewer terminals under construction, which helps the margins. Now on this slide, we show the equity weighted earnings before interest, tax and depreciation for our gateway terminals, both with the consolidated and with the – our share of the JVs and the Ocean.

It’s improved 40% compared to Q4 2018. And that now gives us a last 12 months’ EBITDA in our terminals business of $1.3 billion. This is a significant progress that we have delivered. And while we do not consolidate the minorities and the joint ventures, they do provide us with real cash flow.

And cash contribution last year was almost $200 million with a payout ratio of the results of almost 100%. Also in Manufacturing & Others, we saw healthy earnings increase with Maersk Container Industry having higher margins due to the exit of the dry business and Maersk Supply Service also had higher rates and better utilization compared to last year. So now let me hand back to Carolina to go through the guidance.

Carolina Dybeck Happe

Maersk expects an EBITDA of around $5.5 billion before restructuring and integration. As always, when we say around, it implies a range of plus/minus 10%. The organic volume growth in Ocean is expected to be in line or slightly lower than the average market growth. And that is expected to be in the range of 1% to 3% for 2020. The accumulated guidance on gross CapEx, excluding acquisitions for 2020 and 2021, is still expected to be accumulated $3 billion to $4 billion. A high cash conversion is also expected for both years.

This year, we are facing extraordinarily high uncertainties due to the coronavirus but also the IMO 2020 and macroeconomic conditions. We foresee that we will have a weak start of the year as the Chinese factories were closed for longer in connection with the Chinese New Year activities. And that we have factored into our guidance. As always, we have included a sensitivity table here, where container freight rates are the largest volatility driver of our earnings. $100 change on average for the year changes our EBITDA with $1.3 billion. And with this, we open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Dan Togo from Carnegie.

Dan Togo

A couple of questions. Firstly, on the guidance, you guide at the midpoint for $300 million lower EBITDA in 2020. And I guess we can basically isolate that to Ocean. Is it solely the coronavirus that causes this sort of, say, lower guidance? Or are there other factors at play we should be aware of?

Carolina Dybeck Happe

First, I would just like to say that the guidance is – the midpoint is $200 million lower than 2019. Our guidance takes everything into consideration that we cancel and we try to do our best to estimate what that effect would be. So it has sort of the effects of corona, IMO and also the macro trends into it. And we use that to the best of our knowledge. What it is not including is, for example, the acquisition.

Søren Skou

And maybe I can just add that actually coronavirus impacts all of our businesses. We also have a terminals business in China. And we also have a significant logistics business and warehousing business in China. So it’s not just Ocean.

Dan Togo

Can we in any way get a bit more feeling of the impact, where you see it? You mentioned, Soren, previously if you followed SARS, then you will – or the trajectory from that, you will start to get a pickup in April. If that is sort of, say, the scenario we are looking at, what could be the possible impacts, let’s say, for your Ocean business? I guess because initially you have been sort of, of course, lower volumes but also the blank sailings you are mentioning, more than 50 right now. I guess that is a pretty changeable cost as it is right now.

Søren Skou

I don’t think we can give more guidance to our guidance. I mean there is a scenario unfolding now that looks like a V-shaped recovery. But as I also started out saying there’s not the kind of visibility that we would like to have and there’s still plenty of risk out there. So the $5.5 billion is our best estimate, given what we know today.

Dan Togo

Okay. Then just a final question, a bit more tangible, I guess, on fuel consumption. With the delays we’re seeing now on scrubber deliveries, et cetera, can you give some more flavor on your fuel consumption, how it will be split between high and low sulfur, start year and end year? Thank you.

Søren Skou

Yes. So we have – we’re using three types of fuel, right? So we are using 0.1% in the ECA zones and we have done that for many years. Then we – that’s about 10% of our consumption. Then we have a high-sulfur fuel, which we can use in the ships that have scrubbers. And then we have low-sulfur fuel. And I’d say we are probably in 10% for 0.1%, 10% for high sulfur and the remaining 80% is low-sulfur fuel.

Dan Togo

That’s, I guess, right now. And how will it be by end year?

Søren Skou

By end year, we would expect that the high sulfur fuel will have increased from 10% to 25%.

Operator

And the next question comes from the line of Mark McVicar from Barclays. Please go ahead.

Mark McVicar

So two questions. First of all, to follow on from the first question, can you give us an idea of the order of magnitude of what you’ve included in the guidance for COVID-19? Is it $200 million, $400 million? In other words, if that wasn’t there, where would the guidance be?

Søren Skou

Mark, I don’t think we’re going to get much closer to that. All I can say is if we hadn’t had the coronavirus, we would have had a higher guidance.

Mark McVicar

Yes, sure. But I was just trying to understand the order of magnitude that you put in there, but okay, if you’re not disclosing. My second question is slightly longer term. Obviously, you delivered 3.1% return on invested capital last year and the target is 7.5% across the cycle, obviously. With all the different things you’re doing both organic and inorganic, what sort of time line should we be thinking about for you to be able to get there in, let’s say, normal market conditions? Is it a 2-year plan? Is it a 5-year plan? Are you going to take longer than that? Where do you think the thinking is on that at the moment?

Søren Skou

Well, we have not disclosed our longer-term plans. But obviously, we have ambitions to get to 7.5% within a foreseeable future. And I’d probably say that, that foreseeable future should be within the next three years.

Operator

And the next question comes from the line of Lars Heindorff from SEB. Please go ahead.

Lars Heindorff

A question regarding IMO 2020. You mentioned during your presentation that you are aiming for full pass-through of the increase in the bunker cost. I don’t know if you could put a few words on the development and the negotiations and the share pass-through that you have experienced so far in the contracts that you have negotiated.

Søren Skou

So we are pretty much halfway through, if you will, the contract negotiations for the – but if I start with the spot volumes, which is around half, well, you can see if you study, I know that you do, the Shanghai freight index, then freight rates have gone up substantially since basically 1st of October last year. So at least up to Chinese New Year, we had recovery for fuel cost increases. And halfway through on the contracting season, it’s – I think what we will say is so far, so good. But obviously, we also have the other half still to negotiate. And that would be negotiated in a weak environment post Chinese New Year, so we’ll see how that goes. But basically, so far, so good.

Lars Heindorff

Okay. And I know, just to follow-up on that, have you been able to – I mean, to pass that on without giving any concessions on the base rate, basically?

Søren Skou

Yes. I think we’re basically – as I tried to say, we’re basically on plan for now. But we are only halfway through the contracting negotiation season.

Lars Heindorff

Okay. And then regarding Ocean, if I understand, just the communication that you’ve done earlier, correctly you expect to keep this year capacity – this nominal capacity largely flat. You said earlier here in the presentation that you still aim to reduce Ocean unit cost by 1% to 2% yearly. Does that mean that we should expect to see total cost and now, of course, excluding bunkers, in Ocean for 2020 to be below the level of 2019, again assuming roughly flattish capacity?

Søren Skou

Yes. I think it’s really hard to give an estimate on cost right now, given all the stuff that is going on in this quarter with the coronavirus. So all I want to say is that we continue to have, as an ambition, in an all things equal – all-else-equal scenario that we reduce our unit cost at fixed bunker by 1% to 2%.

Lars Heindorff

Okay. All right, thank you.

Operator

And the next question comes from the line of David Kerstens from Jefferies. Please go ahead.

David Kerstens

Good morning, everybody. Two questions, please. First of all, on the volume guidance of 1% to 3%, that seems somewhat faster than the 1% to 2% you were guiding for in 2019. Does it mean you have not incorporated any adverse volume impact from the coronavirus into the volume guidance? And you said you had to cancel 50 sailings. Do you have enough capacity to add 50 sailings in the V-shaped recovery that you’re expecting from April onwards?

And then secondly, on the bunker surcharges, I understand you will increase the surcharge by $50 to $100 from March 1. But in the meantime, we’ve seen the low sulfur prices come down by 16%. How long will you be able to maintain this benefit from the lower low sulfur fuel prices before you have to pass this through to your customers? Thank you very much.

Søren Skou

Yes. In terms of capacity, we do have as an ambition to stay – to have a network with a deployed capacity of just around 4 million TEU as an average for the year. Right now, we have less than 4 million TEU at the port because many ships are idling. And we may have to have a quarter where we actually go above our capacity guidance, if you will, if we need the capacity to serve our customers and then we will just source the capacity from the charter market. And now the second part of your question, yes, bunker. So what happens after 1st of March, exactly? I think we will see. I don’t have any visibility to that right now.

David Kerstens

Okay. But is there already an agreed date that the surcharges will be adjusted again? Or is this a one-off on March 1 with an increase in the surcharge?

Søren Skou

So this is a monthly review that we do.

David Kerstens

Okay, thank you very much.

Operator

And the next question comes from the line of Sam Bland from JPMorgan. Please go ahead.

Sam Bland

Good morning. Two questions for me, please. Just give a little bit more detail on the nature of this V-shaped recovery that you’re expecting. Is it that the sort of upturn on the V happens from basically April onwards? And do you think you just basically revert back to normal volume? Or is it actually kind of above normal volume for a time because you’re catching up on some of the lost volume from the first quarter?

The second question is just get a bit of comment on what you might expect for – across the market scrubber retrofits through the year. In particular, do you foresee any problems when maybe the proportion of ships under retrofit starts to reduce towards the end of this year and basically effective capacity starts accelerating? Just wondering how – do you think the market can manage that effectively? Thanks.

Søren Skou

Yes. So I want to be a little bit cautious about how much I expect a V-shaped catch-up. That is what the trend looks like right now. But I want to emphasize that there are plenty of risks. But if we continue in the coming weeks with the decline and eventually no new cases being reported every day, then we are likely to see a V-shaped catch-up. And by that, we do – we mean that we will have a really, really weak February with very little manufacturing in China. Also, a very difficult March because we – while we expect factories to be able to operate at 98% capacity by 2nd of March, then there will still be quite some time before volumes actually make it through to us, so to speak, to be exported.

But we do believe that there will be some catch-up in April, May, June time frame, where there will be, if you will, excess exports out of China if we end up in a V-shaped recovery. And I’m saying this because obviously, inventories are being run down, both of finished goods and semi-finished goods around the world. China’s role in global supply chains is much bigger today than it was when the SARS epidemic happened more than 15 years ago. So today, many manufacturers in Southeast Asia, they rely on parts or raw materials or semi-finished goods from China into their manufacturing. So we will see. If we end up with a V- shaped recovery, then we will see, if you will, an overshooting in the indices in the latter part of Q2. Yes. And you had a question on the…

Sam Bland

Okay. Any comment on those scrubber fittings?

Søren Skou

Well, obviously what is going on right now is that the shipyards are delayed. They were already delayed before as such with the retrofitting of scrubbers. And now of course, they are getting even more delays as also shipyards have been closed down and have the same slow ramp-up after Chinese New Year as every other manufacturing sector. And to begin with, we had quite some optimistic, if you will, estimates of how quickly a scrubber could be retrofitted on to a ship, so we expect the whole retrofitting program to be delayed and extended.

Operator

And the next question comes from the line of Marcus Bellander from Nordea. Please go ahead.

Marcus Bellander

Two questions, if I may. The first one regarding your acquisition of Performance Team, it looks like a good one, attractive multiples. But you’re not disclosing EBIT to net profit. So it’s not the full disclosure, if you will. So I’m wondering if you could disclose EBIT to net profit for Performance Team? And I’m also wondering if there’s any big CapEx commitments or any, I don’t know, underfunded pension schemes or anything that could sort of inflate the enterprise value there?

Søren Skou

So we don’t want to disclose any more financial numbers, except to say that we don’t have any – there are no big CapEx or things like that looming anytime soon.

Marcus Bellander

Okay, great. And the second question, you talked quite a bit about your cash return on invested capital. And it’s very good obviously at the moment. But you are also – your CapEx is also quite a bit below your depreciation. I’m just wondering long term, what is sort of a sustainable CapEx level? Is it above depreciation? Is it slightly below depreciation? Because ships are less expensive today than they were when you acquired most of your ships. If you could add some color on that, please?

Carolina Dybeck Happe

Well, actually, in this industry, low growth is helping. But when you talk about the CapEx versus depreciation, what we have said is that if you take the guidance for the next two years, on average, is $1.5 billion to $2 billion per year, right, excluding acquisitions. So that’s a bit on the terminals, but mainly on the Ocean side. And we have estimated that the sort of replenishment CapEx that is needed is around $1 billion per year. So of course, that is the level that we will continue to have. But that also gives you the numbers showing that we can have a sustainable cash generation for quite a few years going forward, keeping this approach.

Marcus Bellander

And sorry, just a follow-up, does that $1 billion include new ships? Or does that mean you’re letting the fleet age?

Carolina Dybeck Happe

No. You have $1 billion that you spend on, you can say, replenishment and keeping. And that, of course, over time, includes having to change the older ships.

Marcus Bellander

All right, understood. Thank you.

Operator

And the next question comes from the line of Tobias Sittig from MainFirst. Please go ahead.

Tobias Sittig

Yes. Three questions for me, please. Firstly, on leases, could you comment how much of leasing principal repayments we should expect for 2020? And also whether your lease liabilities are expected to go up like they did in 2019? Secondly, on working capital and the $300 million you mentioned on IMO 2020, are you expecting that to swing back or swing back in part because the fuel costs are higher, so your inventory level will be slightly higher, but some of that may swing back during the year?

And lastly, you booked, I think, $104 million restructuring costs and around $70 million in the fourth quarter. Does that cover the head office restructuring that you’re doing? Or is there more to come? How do you look at restructuring costs in 2020, please? Thank you.

Carolina Dybeck Happe

Okay. So if we start with the leasing, we had $1.4 billion in the P&L on the depreciation side and $1.8 billion in cash. And I would say that is sort of – we will not go above that level in 2020. That will probably be similar to that. When it comes to restructuring, yes, we have a chart for that. And yes, that is also including the adjustments that we have made both head office here and in a couple of other places. We don’t have any big restructuring programs planned, then we would have talked about them. But of course, during the year, we will continue to evaluate and see what we can do. And just as we work on unit cost, it is also our responsibility to make sure that the overall costume, so to speak, fits. But nothing big that we have now.

Tobias Sittig

Okay. Just a ballpark number on restructuring costs?

Carolina Dybeck Happe

No.

Tobias Sittig

Okay. And the working capital?

Carolina Dybeck Happe

Yes. I would say that I was positively surprised by the not-so-high increase in working capital on IMO. It was around $300 million. And we see some of that coming back now. But then of course, you have to take into consideration with the prices and the volatility of the prices on raw material. So that will be sort of combined with that.

Tobias Sittig

Okay, thank you.

Operator

And the next question comes from the line of [indiscernible] from Jefferies. Please go ahead.

Unidentified Analyst

Thanks for taking my questions. I think on this outlook, I mean, I fully realize that it’s quite uncertain at the moment. But maybe you could give us some context on how we should think about as this thing develops. What are the puts and takes that could make you reduce or increase guidance around that? That’s number one. Number two, we’re talking about a very, very weak February. Could you quantify that in volume terms?

And number three, obviously across the industry, you’ve had a number of blank sailings that’s been announced that kept freight rates high. But what hasn’t seemed to be talked about a lot is the impact that’s going to have on your OpEx because obviously you do have still a decent amount of OpEx. And how should we think about that for Q1 and then Q2 and the potential impact on EBITDA as these blank sailings still incur costs? Thank you.

Søren Skou

So I think what will be important for our guidance or for our result this year is really what happens with the coronavirus. And obviously, if the V-shaped or even a U-shaped recovery does not happen because new cases start to appear elsewhere, perhaps even in countries that have, if you will, less ability to deal with it, then it will impact the global economic growth. And that’s the main risk that we are worried about. If we do end up in V-shaped or a U-shaped type of recovery, then I think the likelihood is, and that’s also what you can see in our guidance, that we will have, okay, quite a weak start to the year, but hopefully – and then have a stronger Q3 and Q4 as everybody tries to catch up on inventories and so on.

So I think the – that’s the corona. And the other thing that will impact our results this year will obviously the successful or not implementation of our IMO 2020 strategy, where we both are working very hard on mitigating the cost impact as much as we can but also passing on whatever cost impact there is on to our customers. So those are the really two things to, I believe, think of. Many macroeconomic data actually were quite positive in the – or positive in the beginning of the year, pointing in the right direction. Obviously, we will have to see what that looks like once we have a more clear picture when it comes to, in particular, the coronavirus.

Unidentified Analyst

And in terms of quantifying your comment about very weak February and how the blank sailings will impact your OpEx and ultimately EBITDA?

Søren Skou

I really – I’m a little bit worried about talking about February because you always have to see the first quarter as a full quarter because we have the positive impact, if you will, of the runup to Chinese New Year. And then we always have a big dropoff in the following weeks. We had a normal, if you will, runup to Chinese New Year. And now I think we’re still only at the 20th of February. So we don’t have visibility to how February is going to end. So it’s frankly it’s too early.

And I have to say – and I think as far as impact of the blank sailings, obviously we – when ships are idle, we’re not spending time – spending money on fuel cost. We’re not spending money on port and canal expenses and so on. But we are still depreciating and paying charter to the ships that we have on charter. So we will not be able to mitigate on a 1:1 basis the loss of volume with cost. So it will have an increased negative effect for us in the short term.

Unidentified Analyst

Okay. Thank you.

Operator

And the last question comes from the line of Frans Hoyer from Handelsbanken. Please go ahead.

Frans Hoyer

Thank you very much. Two questions. One, regarding your thinking on passing low sulfur costs through to rates, as far as the spot volumes is concerned, what is your thinking there? What do you do in guidance in terms of either reflecting some safety margin on that? Or do you assume full pass-through? I understand that is your aim. But how is it reflected in guidance?

Second question is regarding the vessels in inflow or outflow scrubber fittings and the replacement with less efficient vessels. What has the P&L effect been in Q4 of this? And I understand that a number of the vessels are already switched now and fitted with scrubbers. How many do you have left? By when will you be through this cycle and therefore see your costs recover maybe after that? Thank you.

Søren Skou

On the rate question into the guidance, I mean I think basically the way we try to handle that is to say that we are guiding around $5.5 billion. And that’s a plus/minus 10% variation of that. And we believe the different scenarios we see also for our spot rates can be contained within that range. On scrubbers, all I can say is that we currently have around 30 ships that are fitted with scrubbers. And I can also say that the – we believe the rest of the program will be delayed. And the visibility frankly right now is not that good because it’s not clear that shipyards can actually deliver what they promised right now.

Frans Hoyer

And we’re looking at another 30 or 40 to be fitted. Is that right?

Søren Skou

Yes. We have said 10% of our fleet. So we are operating a little more than 700 ships.

Frans Hoyer

All right, thanks.

Søren Skou

Good. Thank you. Then thank you all for your questions and interest. Let me round off by saying or just concluding that – summarizing that, we believe that what we can be happy about was that we were in quite a weak market both in Q4 and the year as such, we were able to improve results on declining revenues. We had a strong cash flow. We have deleveraged the company. And we now stand, if you will, with a much stronger balance sheet at the beginning of 2020 than we had at the beginning of 2019, helping us to deal with both the challenges that we are obviously facing right now with the coronavirus and the low growth but also to execute on the strategy to become a global integrator of container logistics. So with that, thank you, and have a good day.

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