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Edited Transcript of MAERSK B.CO earnings conference call or presentation 15-Nov-19 10:00am GMT

Q3 2019 AP Moeller - Maersk A/S Earnings Call

Copenhagen Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of AP Moeller - Maersk A/S earnings conference call or presentation Friday, November 15, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carolina Dybeck Happe

A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board

* Soren Skou

A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board

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Conference Call Participants

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* David Kerstens

Jefferies LLC, Research Division - Equity Analyst

* Frans Hoyer

Handelsbanken Capital Markets AB, Research Division - Analyst

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Lars Heindorff

SEB, Research Division - Analyst

* Marcus Bellander

Nordea Markets, Research Division - Senior Analyst

* Mark John McVicar

Barclays Bank PLC, Research Division - Head of European Transportation Research

* Neil Glynn

Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator

* Robert John Joynson

Exane BNP Paribas, Research Division - Senior Transport Analyst

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Presentation

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [1]

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Good morning, everyone, and thank you all for listening to our earnings call for the third quarter of 2019. I'm Soren Skou, I'm the CEO, and I'm joined today by Carolina Dybeck Happe, our CFO.

Before I go into the details and the financial highlights of the quarter and the first 9 months, let me just give a few comments on the overall performance. In the third quarter, we've seen a slow global demand growth, only around 1.5%, which brings us to about 1.8% year-to-date, which is more or less in line with the forecast we had at the early part of the year of 1% to 3% growth. The weak growth is mainly driven by slower global economic growth, in particular within manufacturing and export orders, but it's also due to tough comparisons when we look at last year's data because, as you will recall, we had all of the pre-loading of goods into the U.S. that started in the third quarter because of the tariff that were to come on in the U.S. towards the end of last year.

Despite the decline in demand growth compared to previous years, we have managed to significantly improve our financial results this quarter due to the measures that we have taken internally to prepare for lower demand. We have focused on our costs. We have a strict focus on capacity and network capacity.

So the key message for us is that we are not -- we have not been very significantly impacted by the trade changes and the low growth and have been able to improve results in that environment. So I'm satisfied with the overall improvement in performance and certainly also when it looks at the development in cash flow.

With all that being said, we are still not where we need to be. Our return on invested capital target is 7.5%. This quarter, we had 6.4%. And we need to take more steps to improve both operationally and strategically to move forward in the coming quarters and years. But this is a good and important step on the way.

We continue to see market uncertainties looking ahead. But it's important to say that we will continue to focus on the measures that we can control to further improve our returns and at the same time, continue the transformation of the company, both in organic and inorganic growth.

And now let me go to the presentation. So in the third quarter, we had a good improvement in earnings and free cash flow and we improved EBITDA across all segments. Revenue declined slightly, but EBITDA increased 14% to $1.7 billion, and our EBITDA margin is now at 16.5%. That was mainly driven by improvements in Ocean and Terminals & Towage segments, with strong operational performance and increased utilization in both of those businesses.

Ocean delivered a strong operational performance this quarter, which led to an increase in the EBITDA of 13% and an EBITDA margin of 17.4%. We also saw solid growth -- or solid improvement in the Logistics & Services business, which improved the EBITDA by 20 -- by 34% but, of course, coming from a low base.

Our Terminals business also had a strong quarter and grew EBITDA 33% on the back of volume growth of 9.2%, which leads to high utilization and improved margins.

Cash flow from operations increased to $1.7 billion, and we had a cash conversion -- again, a strong cash conversion of 105%. Our free cash flow before lease payments thus improved to $1.5 billion compared to $1.2 billion in Q3 '18, excluding the sale of Total shares that we did then.

Return on invested capital, as I said, improved to 6.4% from a negative 0.2% last year in Q3 due to the improved financial performance and also because we did some reservations last year in Q3.

In Q3, we distributed a total of $363 million to the shareholders via share buybacks. And the second phase of our program that started in September will run until 28th of February 2020.

As announced on 21st of October, we now expect an EBITDA in the range of $5.4 billion to $5.8 billion for 2019. And we have also at this time announced our expectations for CapEx in the coming 2 years, 2020 to 2021, to an accumulated amount of $3 billion to $4 billion in total.

Now if we look at the first 9 months, we also see significant improvement in earnings and free cash flow, and we have here grown our top line slightly. EBITDA is up by $700 million or 20% to $4.2 billion from $3.5 billion last year. Operating cash flow is up 40% in the first 9 months compared to last year. And we reported overall a cash conversion of 103%.

Free cash flow before lease payments was $5.7 billion, positively impacted by the sale of Total shares and the improved operating performance.

We have reduced our net interest-bearing debt by 36% or $6.7 billion to $12.1 billion compared to the end of Q3 2018, supported by the cash proceeds from the sale of Total's shares, but also supported by a strong operating cash flow and low CapEx. To date, first 9 months, we have distributed almost $1 billion to our shareholders via ordinary dividends and share buybacks.

This leads me to an update on progress towards transforming our company to become the global integrator of container logistics. And as you know, we track 4 transportation metrics. Non-Ocean revenue growth grew 3.7%, adjusted for the closure of production facilities in MCI. And gross profit growth in Logistics & Services improved to 13.4%, positively impacted by the higher intermodal volumes and warehousing.

For the first 9 months, the cash return on invested capital is 9%. And for the third quarter, we came in at 13.4%. So very, very strong cash return on invested capital.

On the synergies, we take a target of $1 billion, and we are now at $1.1 billion between Hamburg Süd and the originally announced synergies from merging the Transport & Logistics businesses.

With that, I will now hand over to Carolina, who will cover the financial highlights.

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [2]

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Thank you, Soren. So turning to our financials for the third quarter.

We reported a slight decline in revenue of 0.9% with a flat Ocean, good growth in Logistics & Services and strong growth in Terminals & Towage, being offset by a decline in Manufacturing & Others, mainly due from exiting the dry container business and low demand.

Our continuous focus on improving profitability across the businesses led to a full 14% increase in EBITDA, and our EBITDA margin improved with a full 220 basis points to 16.5%. EBIT was also significantly up, $737 million in the quarter. Compared to a year ago, it was only $60 million. And now we have an EBIT margin of 7.3% compared to only 0.6% last year. Last year's EBIT was negatively impacted by impairments in Maersk Supply Services and our RORO business.

The underlying profit was $452 million compared to the $188 million a year ago. And this was then clearly driven by improved earnings and no impairments. And for the first 9 months of '19, the underlying profit is $517 million compared to a loss of $126 million last year.

Move to the next slide. Our strong commitment to capital discipline certainly continues. And for the third quarter, our gross CapEx was $343 million. And we maintain our CapEx guidance for the full year of $2.2 billion for '19. And as a reference point, this is significantly below the CapEx levels that we have seen because in '17, we were around $4 billion; '18, we were around $3.2 billion; and now around $2.2 billion. And we also now communicate a guidance for not only 2020, but also 2021. And here, we expect to have a CapEx for both years of $3 billion to $4 billion so basically, with an annual rate of $1.5 billion to $2 billion per annum.

And I would say, in the connection with giving this guidance for the next 2 years, we have also removed our wording around when we will order vessels next time. So we don't see that as sort of relevant now that we have a range instead. We will, of course, at some point, need to replenish our fleet to remain our competitive network. So therefore, new vessel orderings in the years to come will be to maintain the competitiveness, but not necessarily to grow our share in Ocean. We rather expect to grow in line with the market or slightly below in the next couple of years. And therefore, whatever new orderings we will do in the next 2 years will be captured within this accumulated CapEx guidance. So it is safe to say that CapEx discipline is still one of our highest priorities.

And a comment also that by the end of Q3 in 2019, our carryover was $1.9 billion. So that's down from $2.3 billion a year ago. And it's actually down -- it used to be a couple of billions higher the years before. Out of that $1.9 billion, $0.4 billion is related to 2020. And I would say that most of it is also related to terminals rather than vessels.

Next slide. High cash conversion also in Q3. So we have continued to make very good progress here, with our operating cash flow increasing 25% to $1.7 billion. The cash flow from operations was positively impacted by $127 million in improvement in working capital as well as, of course, the increase in EBITDA, and that led to a high cash conversion of 105%.

For the Q3 free cash flow, we had $1.5 billion, and that then reflected the improved earnings and the strong cash conversion and lower CapEx. Also, adjusted for capitalized leases, the free cash flow was $1 billion.

In this quarter, our total lease payments were around $450 million. That is a small increase from previous quarters. I mean there are seasonality movements in our lease payments. And in this quarter, I mean, we have chartered in capacity to cover for vessels going out of service due to scrubber retrofitting. But also due to peak season, we have more containers listing. Also, the charter rates are currently higher than in the previous 2 quarters, which, of course, impacts the lease payments as well.

Overall, we're very pleased with the free cash flow that we have generated in the first 9 months. And just as a reminder, though, our cash flow will be impacted in the fourth quarter of '19 with the preparations to IMO 2020, as Soren mentioned, and as we have said previously.

And with that, we move to the next slide. Good cash flow. That definitely decreases the net debt that you can see from this slide as well. You can see that within the quarter, we came down from $12.9 billion to $12.1 billion. But I think even more interesting is to compare it to a year ago, where we were on $18.7 billion. So a significant deleveraging of the balance sheet.

Move to the next slide, consolidated financial information. On this slide, we have the summarized numbers. We have touched most lines. I will comment on the financial costs, which we haven't spoken about. So in the third quarter, we had slightly lower compared to the third quarter of last year, but we do have a shift because we have lower financing costs in '19, of course, because of lower debt levels. But the comparison is skewed because in 2018, we had the dividend income from Total shares that ends in the financial net items so -- that we don't have in '19. So that's why it looks as if they're on the same level.

Moving on to the 9 months. Basically, the same thing here. We have talked about most fronts. So I will just comment on the financial costs. And here, you can see that also on 9 months, the financial net is on par with '18. And here is the same trend. So in '18, we had the Total dividend and -- which we don't have in '19, but we have obviously offset that with lower cost for debt since we have a lower debt level.

And with that, I will hand over to you, Soren, to cover the segments.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [3]

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Thank you. As we have highlighted many times in the last few quarters, our focus has been on improving the profitability in the Ocean segment after we last year had a very high revenue growth, mainly due to the acquisition of Hamburg Süd.

In this quarter, EBITDA improved by 13% compared to last year, and the EBITDA margin improved by almost 2 percentage points to 17.4%. This was driven by capacity management and strong operational performance. Simply put, in a low growth environment, if we design our network and the capacity deployed to a low growth scenario, then we retain high utilization and our unit cost improves. And what we have seen this quarter is the total cost decreased by 2.8% and unit cost at fixed bunker decreased by 3%.

I also want to say in the second quarter that we launched the Maersk Spot product on our website, which gained a lot of traction in Q3. And by the end of the quarter, 12% of our spot volumes now are booked on the Maersk Spot product. Maersk Spot allows us and our customers increased visibility of sailings, and it offers a loading guarantee at a fixed price upfront. So our customers, they can search and get competitive rates online 24/7. And the all-in price is calculated and fixed when the booking is confirmed, and it happens instantly. There's clearly a demand for that.

Now moving on. The average freight rates, they decreased in the quarter by 3.6%, and that might require some clarifications. On -- our average freight rates is, of course, based on the mix of the trades that we have in East-West, North-South and intra trades. And the intra trades have, as we disclosed, the lowest freight rates in total U.S. dollar.

Volumes grew 10% on the intra trades overall versus a total volume growth of 2% and by more. And we also grew on -- 4% on backhaul, which means that the average freight rates is impacted downwards by these 2 effects. Moreover, most of the growth in intra trades was in intra-Asia where we grew 15%, which has even lower freight rates than we see intra-Europe and intra-Americas, which dragged down the freight rates on overall intra routes. And this is really the explanation why our average freight rate did not increase along with the CCFI, which many uses as a proxy for our freight rates.

Total volumes were up 2.1%, especially driven by backhaul volumes, which increased 4%, 4.3%. Headhaul volumes increased only 1.2%. We estimate that global volumes grew around 1.5% in the quarter -- in the second quarter of 2019, down from around 2.7% -- in the third quarter and down from 2.7% last year.

North American trades were, of course, impacted by the trade tensions and continued slow growth in the U.S. private consumption, while Europe was on par. North-South volumes were driven by growth in Africa, while negative demand growth in Latin America continued.

Overall, we had a much more stable network compared to a year ago, and that enabled us to take more backhaul volumes, which is the main reason for the strong growth in backhaul volumes.

Now onto cost, which decreased a lot. And unit cost improved 3.3 percentage point. The -- it's pretty clear given the story on freight rates that the improvement in our operating results in Ocean is really very much driven by cost. Total handling costs decreased by 2.8% to $6 billion, about $200 million down, positively impacted by lower container handling costs, lower network costs and lower bunker costs, including bunker efficiency, which continued to improve due to network optimization.

Unit cost, as I said, was down by 3%. And total bunker cost decreased 15% as the bunker price declined 12%. And we continued to improve our bunker efficiency, leading to a decline in total bunker consumption of almost 4%, driven by improved network and higher reliability. That's actually an achievement that we're quite proud of.

Turning -- continuing on the bunker agenda. I would say that we believe we are well prepared for the implementation of IMO 2020. We are, of course, fast approaching January 1, 2020. It's only 6 more weeks to go, but we are ready. We will mainly comply by using low-sulfur fuel on our vessels. And scrubbers will be only one element of our strategy, covering around 10% of our fleet -- a little more than 10% of our fleet.

To ensure that we have sufficient supply of -- and at the right quality of the new fuel product, we have made agreements with Vopak in Rotterdam and other agents globally so that we are sure we can switch over and be compliant already from January 1. It means we are going to be switching over during the month of December. So we are confident we are operationally ready to comply fully with the regulations.

Additional cost from this, of course, is unknown at this point but could be as high as $2 billion. And we cannot bear this ourselves, so we have focused on structuring our contracts and spot rates so our customers will help us pay for this. We have been in dialogue with our customers and are meeting good understanding. We're introducing new bunker adjustment clauses already last year, and they will be applied to -- with the low-sulfur fuel from January 1, 2020.

For the spot rates, we have implemented an environmental fuel fee that is -- that will be applied from 1st of December, where we will start to buy the low-sulfur fuel. And we continue to, of course, work on getting our overall fuel consumption as low as possible, which is beneficial both for our costs, our customers and not least, the environment.

Moving on to Logistics & Services. We had a relatively negative development -- or revenue was negatively impacted by a decrease in volumes due to trade -- excuse me, I'm at the wrong place. Revenue grew 2.6%, positively impacted by increasing revenue in intermodal and warehousing and distribution, offset by a decline in our traditional air and sea freight forwarding business.

Gross profit was up 13%, driven mainly by high intermodal volumes and warehousing again. And EBITDA improved 34%, and we also improved margins to 5.8%. So also, when you look at the first 9 months of this year, we have improved EBITDA by more than 20% from $167 million to more than $200 million. We are coming, I recognize that, from quite a low base here, but I do believe that we are demonstrating meaningful progress, and I'm pleased with the trajectory.

Now moving on to what I started on before. Supply chain management revenue was negatively impacted by a decrease in volumes due to the trade tensions. And this was also reflected in slightly decreasing gross profits. Intermodal revenue however increased, higher volumes and better gross profit, driven both by the higher volumes and also a better geographical mix, but there was a negative from ForEx movements. Both volumes and margins decreased in air and sea freight forwarding, negatively impacted by the general weaker demand and strategic initiative in the forwarding business to exit a number of countries where we were not at scale.

Our EBIT conversion in Logistics & Services increased by 250 basis points to 17.5%, positively impacted by the increase in intermodal and the contribution from new warehousing facilities becoming operational end of 2018.

On Terminals & Towage, we reported a revenue increase of 5.8%. Gateway terminals were the -- contributed with increased revenue and EBITDA, and -- but our towage activity faced headwinds, mainly related to lower activities in high-margin areas and negative impact from development in foreign exchange rates.

EBITDA in gateway terminals increased 13%, driven by increased volumes, storage income and utilization. And our margin improved by 630 basis points to 31.8%. Obviously, this is something I'm quite pleased about. EBITDA in our towage activities declined 10%, driven by the higher operating and SG&A costs as well as headwinds on foreign exchange.

What is, I think, really positive in it, our terminal business, is that the throughput is growing 3 to 4x market growth, and it's driven not only by Maersk putting its own volumes onto the terminals. It's also growing a lot with external customers. We have also seen improvements in revenue per move, mainly driven by more volumes in North America, where prices are higher but -- and by more storage income in West Africa, and the fact that we are now well into the ramp-up of our new terminal in Moin, Costa Rica. Cost per move also increased, mainly driven by higher volumes in the high-cost terminals in the U.S. and some foreign exchange headwinds, but this was partly offset by increased utilization and cost savings across many terminals.

On Slide 22, we are now providing you with some new disclosures on our gateway terminals business. What you have here is the equity weighted share of EBITDA of all the entities that we have interest in, in our gateway terminals. And it's, in other words, the EBITDA that we hold in our own consolidated gateway terminals after the minorities and our share of EBITDA in JVs and associates.

The total equity weighted EBITDA of $371 million has increased 26% compared to last year, mainly driven by volume growth, including ramp-up of Moin, SG&A cost reductions and positive one-offs. The positive development since 2016 is mainly driven by a ramp-up of new terminals, volume growth, above-market growth for external customers and Maersk Line and stable costs and higher storage income.

In the last 12 months, the JV and associates have contributed $527 million to the total equity EBITDA -- equity weighted EBITDA of $1.3 billion and $163 million in net results.

The cash contribution in the last 12 months from dividend has been $179 million, which is the same as 34% of the EBITDA and is equal to a payout ratio of 110% of the net result. So I think it's important to underline here that the EBITDA that we actually have in the joint ventures and associates that we do not report actually turns into cash for us, not just a one-line profit consolidation.

Finally, let me end here before I hand over to Carolina on manufacturing.

Maersk Container Industry is in really good development despite the fact that we -- the business saw a decrease in revenue of 150 -- $250 million from $226 million because we have closed our dry container business and we also have closed one of our reefer factories. The EBITDA improved to $13 million from $5 million, which reflects the margins of the reefer business compared to the dry business in 2018.

And with that, I'll hand over to Carolina.

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [4]

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Thank you, Soren. So then I will end with the guidance for 2019.

And as announced on 21st of October, Maersk now expects an EBITDA in the range of $5.4 billion to $5.8 billion for 2019. That's to be compared with previously announced of around $5 billion. The organic volume growth in Ocean is expected to be in line with or slightly lower than the average market growth, which in itself is expected to be in the range of 1% to 2% for 2019. That's to be compared with the previously expected market growth of 1% to 3%. As we have said earlier, our focus is on profitability.

Guidance on gross CapEx is maintained at around $2.2 billion. We still expect a high cash conversion for 2019. And accumulated CapEx for '20 and '21 is expected to be $3 billion to $4 billion, which supports our continuous focus on keeping a strict CapEx discipline.

And with that, we will open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Robert Joynson from Exane.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [2]

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A few questions for me. First of all, on CapEx. You said that the guidance is $1.5 billion to $2 billion for each of 2020 and 2021. Now it seems reasonably unlikely at the moment that there will be any significant vessel orders for 2020 in particular. So if that is correct, and by all means, tell me if I'm wrong on that assumption, does that imply that you expect no significant vessel orders for 2021 as well? So that's the first question on CapEx.

The second one, just related to that, if there are no significant vessel orders, let's say, next year, I -- and I'm also assuming that CapEx on new terminals will decline next year, too, just given that some of the new terminals are now already up and running. I'm struggling a little bit as to how CapEx would be at the upper end of the guided range of $2 billion. I mean maybe could you just provide some detail on what a year of $2 billion CapEx would actually be comprised of if CapEx was at that level next year?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [3]

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Okay. Then on the CapEx guidance then. I would say that, first of all, we give this guidance for 2 years really to -- sort of as a framework so that you sort of feel that -- or we try to create confidence in you that we have an ability to remain really CapEx-disciplined and focusing on the cash flow. And that's why we have set the framework and not set specifically about the vessels. But I mean, that said, I would say that there are no intentions now to invest in any large vessels. You say, okay, so what could it be that you come into the upper part of the range, which, on average, is then -- you mean the difference between $1.5 billion to $2 billion. I think we have to take into consideration that we don't know how the markets will develop. So I mean that will be affected by sort of what the market does, but we have stayed then to say we will stay between $1.5 billion to $2 billion, and that is excluding acquisitions, though.

What we have said on CapEx in general is that, for Ocean, we have -- or in general, we have roughly a maintenance CapEx, which is around $1 billion. So you have the delta there basically to what we sort of need to keep a growing concern. On the Terminals side, we did have quite a lot of terminal investments this year, as you rightly say. And when you look at the carry of the $1.9 billion, I mean most of that is terminals, but it's not at the same level as it has been this year. So that's also correct.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [4]

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Okay. And then just on the Terminals business, I noticed there's some positive one-offs mentioned in the accounts. Could you maybe just kind of say what they were and how much that contributed to the EBITDA? And then just a follow-up question on the utilization rate in terminals. It's now up to 84%. When I've spoken to terminal operators over the years, they've pretty consistently said that they consider the optimal utilization rate in terms of profitability to be around the low to mid-80% range, which is obviously consistent with where you are now. So do you believe that the utilization rate is now optimal or maybe there is still further to go in terms of driving profitability within the Terminals business?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [5]

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Okay. So I'll answer the first one on the EBITDA. I would say that, yes, we do have one-offs, but they are not significant, and that's why we haven't quantified them. And the second question, I'll leave to Soren to how we improve.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [6]

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Yes. So we believe that we still have plenty of opportunity to improve our performance in the Terminals business. Obviously, when you run a terminal, you try to figure out what's the capacity, and there are really 3 drivers. There's the key haul, how much key do you have. There's the yard space and there's the gate that can be a bottleneck as well. And we are going into a phase where we're going to become much better at removing bottlenecks on our existing terminals. And I'm sure that we'll see our nameplate capacity go up in the coming years. We haven't been in this situation for a while. You will recall or you could see in the numbers, our utilization was in the 60s not that long ago. And when you have low utilization, you don't spend a lot of time working on your bottlenecks. That's what the situation we're going into now. And that's why we -- I'm sure we'll see plenty of investments in enlargement of gate facilities, adding cranes on existing facilities and so on to increase the nameplate capacity.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [7]

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Look, maybe if I can just push my luck with just one final question. The departure of the COO was announced a few days ago. I appreciate it's no doubt very early stage in terms of thinking about potential replacement, but just could you maybe just provide some indication on at this stage if your instinct is that you're looking at an internal or external candidate, potential time frames about the replacement and so on?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [8]

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Well, what I can say, Rob, that we're just spending a few weeks thinking about how to handle the situation. We have a very, very strong internal bench when it comes to core operations. I think this is probably where we are the strongest also, also demonstrated by the cost numbers that we deliver this quarter. So what I can say is I'm 100% confident that we are not going to drop the ball or lose momentum on our cost saving agenda. And then with that said, I'm sure we'll find a good solution on the organization soon.

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Operator [9]

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

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Lars Heindorff, SEB, Research Division - Analyst [10]

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A few questions from my side as well. Firstly, regarding your schedule reliability. It sounds like you got most things right here during the third quarter in terms of the Ocean performance and the schedule reliability. Could you maybe put some words on the reliability as we move into the fourth quarter, which is normally the slack season? And also, I mean, if you can improve that even further from the level where you are today. That's the first one.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [11]

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Yes. I mean we have been on an improvement path in terms of reliability of the network for quite a while. And I want to stress here that it's not because we got lucky, if you will. We have taken a number of measures to improve schedule reliability, most prominent in terms of how the network has been designed. We have implemented the sixth version of the 2M network this year to 6.0. And there, we have -- in many of the services, we've taken out ports. In some cases, we have added ships to the rotation. And all of that does -- that we have more buffer and therefore, also, ability to operate better within the schedule. And when we do that, we use less fuel for catch-up. We have less misconnections, if you will, at the hub ports, all of which cost us money. So that's where we are with that. And we have as an ambition to continue to lead the industry on schedule reliability. And while they are -- we're happy with the progress we have made so far, there are a couple of trades where we are not happy with where we are and where we need to use some of those tools that I just described to get to a higher level of reliability.

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Lars Heindorff, SEB, Research Division - Analyst [12]

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And then regarding the mix, you mentioned yourself at a very strong growth in intra-Asia. But we've seen some of your competitors going in the other direction, actually taking out capacity and losing volumes in some intra-Asia trades. Is that a deliberate strategy that you want to grow more there and less so on some of the other trades? And then maybe a few words on the competitive situation on Latin America.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [13]

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Well, I mean, the trade mix that we have is the result of a fairly deliberate strategy where we're trying to grow where we believe we can make a better margin and we're trying to hang on to or maybe even give up a little bit of share where we're not profitable. I think that's in the natural and normal way of managing a business and trying to maximize our results.

I believe that the EBIT -- EBITDA margin of 17.4% that we've delivered this quarter actually demonstrates that, that strategy is working out pretty well for us, where -- that we are able to grow results, improve margins. And actually, it looks like also grow volumes a little more than the 1.5% that we believe the market grew. So I think we are ministering this in a reasonable way.

And then you had a question to Latin America. Yes. And I mean, obviously, the Latin America market is impacted negatively by the economy in some of the big countries in Latin America, and it's a tough market. But with that being said, we are doing much better financially in Latin America this year than we did last year.

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Operator [14]

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And the next question comes from the line of Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [15]

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Just a question on this annual synergies, Hamburg Süd and Transport & Logistics. You mentioned you've accumulated synergies of $1.1 billion by the end of Q3. Could you remind me what the targeted number is and date? And then, I mean, in the quarter, looking at Ocean then, you did see the unit cost at fixed bunker drop by 2.3% year-over-year FX-adjusted. Are you still targeting this sort of 1% to 2% unit cost improvement going forward also when the Hamburg Süd synergy benefits are fully integrated and what looks to be also a sort of a slow growth scenario going forward? Is the 1% to 2% still possible in that scenario?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [16]

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Okay. So the first one was on the targeted synergies. So the target for the combined synergies was $1 billion by the year-end of '19, but we've actually overachieved that. So diligent as we are, we then therefore report it. So we are on $1.1 billion now. So that's $100 million more than we had originally in the plan.

The second one, to unit cost. Yes, we had a really good development of unit cost in the quarter. I think you need to look at this sort of maybe not on a quarter-by-quarter base, but look at the trend. And our expectation is to continue to improve our unit cost with 1% to 2%. And you can say that in a low growth scenario, there, it's more about improving the efficiency of the network and sort of working within a stable size network to improve the efficiency. While in a growth scenario, then you have sort of the leverage of the growth, but then you also have the complexity of adjusting to a network that is changing and larger.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [17]

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Excellent. And now you said you're above this $1 billion in target in synergy savings. Have you even higher ambitions going forward than this $1.1 billion you've achieved?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [18]

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We're not going to put this -- sort of we have this target and we have overachieved it. But of course, we're continuing to work on improvements in cost efficiency going forward. Also looking for where we are, we're still not where we want to be on returns. So we are working hard to find both synergies and cost savings in many places.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [19]

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Okay. And then just you mentioned you have 10% of your fleet fitted with scrubbers. Is that capacity-wise or number of ships? And is it your own ships or also including your leased fleet?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [20]

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Yes. Yes. Sorry, we kind of got distracted here. Your question was how -- what the 10% -- I mean it's of our total fleet. We operate 725 ships, and we will have a little more than 10% of those that are scrubber-fitted.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [21]

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Okay. But I suppose it's the bigger ships so probably a bit more of your capacity.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [22]

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Yes, it is. You're right about that.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [23]

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And going into next year, I think you mentioned about schedule reliability. Will that imply that you will, as you did this year, add some more ships into your network next year to improve the schedule reliability?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [24]

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The next opportunity we have for, if you will, redesigning our network will be in the spring of 2020. And it might very well be that there will be a few trades where we need to either add ships to the rotations or to take ports out. I don't know where we're going to end with that. We continue to have an ambition of operating just around 4 million TEU of capacity. We're not looking to grow the total deployed capacity of any -- with any significance.

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Operator [25]

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And the next question comes from the line of Neil Glynn from Crédit Suisse.

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [26]

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If I could ask 3 quick ones, please. The first one, just very quickly, on IMO 2020. Hapag mentioned yesterday that they expect the pass-through to be a lot swifter than would traditionally be the case with a more normal and lower fuel price uptick. Just interested, is that your sense given we're at the 11th hour and your -- I presume your fingers are very firmly on the pulse of customer expectations and agreeability?

Second question on Logistics & Services. There's obviously a few moving parts and clearly, you're doing a bit of portfolio clean-up in air and sea. Just interested in terms of what stage of that process are you at in air and sea. And if you could provide us with some insight in terms of the growth in intermodal and warehousing, how much of that is coming from pre-existing customers in those business lines versus new customers or customers that you're adding newly to those service lines?

And then the final question, as you continue to implement your digital and end-to-end strategies, how should we think about 2020 OpEx as well as CapEx in this context? Is there a step-up required? Or should the overall investment look quite similar to 2019 next year?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [27]

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On IMO 2020, we have a high confidence that we are going to be able to pass on the extra cost to our customers. We will start applying the environmental fuel surcharge on the spot bookings by 1st of December. And we are in the middle of the -- or not in the -- we are just starting on the contracting season, where we, of course, also will seek to get fuel increases, too.

On the L&S, on the Logistics & Services side, our results are being dragged down by the development in our air and sea freight forwarding, partly because we are reshaping the portfolio and getting out of unproductive or unprofitable countries and really focusing on -- focusing the business on where we have a chance to compete. And that restructuring of the air and sea business is not close to being done. That is something that we will work on in the next few quarters as well.

On the sales of products to our customers -- other Logistics & Services products to customers, I don't want to give more disclosures. But what I can say is that it's the core of our strategy that we sell more land-based Logistics & Services products to our 70,000 customers in Ocean. And we are seeing a lot of, if you will, positive feedback from our customers, that if we have a competitive and viable trucking solution or custom house brokerage solution or warehousing distribution solution, then they're happy to buy it from us. So it's really up to us in the coming quarters to expand our product road map, continue to improve our margins and become more competitive in this space.

And then in terms of digital OpEx, I think you should expect a cost level around the run rate we have right now also in the next 12 months.

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Operator [28]

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

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [29]

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Three questions from my side, please. First of all, on the bunker consumption. You highlighted that it further improved by almost 4% in the quarter. Can you share the outcome of the testing of the new fuels that you will burn from January 1? Will it have an impact on your fuel efficiency from January onwards? Or do you think you can further improve or at least maintain bunker consumption at the current level based on the new fuels?

Second question on the joint initiative with Vopak. What exactly does that initiative entail? And how will your bunker mix look from January onwards? How much will be 3.5%, 0.5%? And how much marine gas oil do you think you will need in your bunker mix?

And then maybe the final question on the capacity plans not to order any new vessels. To what extent is that strategy not to order any new vessels at this stage dependent on environmental legislation and your targets to be carbon neutral by 2050?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [30]

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So if I take them from the back. I mean there's -- the agenda in terms of getting to 0 carbon does not imply that we need to order any ships now for that purpose because basically, what we need to do in the next decade is to figure out what will -- what kind of fuel will the ships be burning in order -- what kind of fuel does the -- will the ship need to be burning in order to become carbon neutral. We are testing -- or we are going to work on 3 different fuel types, biogas, ammonia and alcohols, as an example of trying to get to that, but we are far away from making any decisions on how that's going to play out.

On the bunker mix, I mean, we -- our solution to -- or our plans for IMO 2020 consists of multiple elements. First of all, of course, we're going to have many ships that burn compliant fuel, if you will, so buying 0.5% low-sulfur fuel. Then we're going to have a number of ships that burn heavy sulfur fuel but will have scrubbers installed. And then we are also ourselves blending and manufacturing fuel so that we can make sure that we have the supply that we need at as low-cost as possible. So that's as much as I can disclose of in terms of how we are approaching this.

In terms of fuel efficiency of low-sulfur fuels versus high sulfur fuels, then we believe it will have -- be the same -- completely the same efficiency. We are -- our ship engines will burn low-sulfur fuel in the same way as they burn high-sulfur fuel without any kind of modifications.

The bunker consumption and the reduction in bunker consumption is driven by a lot of different behaviors, including the speed that we are designing the network for including how many ports we put in, the behavior of the captains and the tools that we have provided to captains with in order to sail as efficiently as possible and of course, new technology that we put on the ships that help us reduce power consumption onboard. So it's a wide range of initiatives that are contributing to these continued improvement in fuel efficiency.

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Operator [31]

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

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [32]

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Three questions, if I may. First, on the order backlog for container ships. The number of 23,000 TEU ships is increasing in the order backlog. Just wondering if you are concerned that you will have a cost disadvantage when those ships come to the market seeing as your ships are a little bit smaller or your largest ships are a little bit smaller.

Second question, your COO is leaving. News media suggests that he is going to one of your largest competitors. How big a risk is it to have one of your top lieutenants take the driver's seat at one of your biggest competitors? And how long a timeout does Søren Toft's contract stipulate that he take before he joins your competitor?

Third question on the unit costs. Down 2.3% year-on-year, excluding currency, if I am not mistaken. Just wondering how much of that is the mix shift you were talking about earlier and how much is actual savings if you could quantify that.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [33]

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Okay. On the potential cost disadvantage from people building 23,000 TEU ships, I think this will be completely negligible. I mean we already -- together with MSC, the 2M network, we have by far the biggest fleet of large ships. And so I really -- I think we have a competitive advantage on ship sizes, if you will. And I think what is important when you look at announcements of orders, and whether you're 18,000, 19,000, 20,000 or 23,000, I mean, all of these ships are basically 400 meter long and 59 meters wide. And you can adjust a little bit on the side heights and so on and maybe squeeze a few more containers on there, but I think it's -- we're -- it's very marginal. And in any event, you have to fill the ships to get all of the advantages. So there's also a utilization which -- I think we are very well placed when it comes to competitiveness of the fleet.

In terms of our COO leaving, as I said before, we have a very strong bench in operations and a very, very strong team. We have a solid plan. Most of the people that were -- the leaders -- the executive leaders in operations are people that have been with our company between 20 and 40 years. So we know what we're doing. We're not going to drop ball and we're not going to lose any momentum.

In terms of the unit cost performance, I'm not able to give you a number for how much is mix. And -- but my gut feeling would be very limited because we are -- the load and the discharge costs are the same. Whether it's intra-regional move or a long-haul move, the trucking costs on land are the same and so on. So I doubt it has much impact.

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Operator [34]

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And the next question comes from the line of Frans Hoyer from Handelsbanken.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [35]

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Two questions on Q4 and the transition to IMO 2020. I'm thinking about the -- any P&L impact over -- you're loading a lot of the expensive fuel now, but I assume it's not -- you're not going to start burning it and therefore, it won't have any P&L effect in Q4. That's one. And the other one, regarding the vessels that you need to charter in during Q4 to replace those that are out for scrubber fitting, do you see that affecting the costs in a discernible manner in Q4, please?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [36]

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Okay. So on the P&L impact, you are right. We are working now in Q4 to have the right fuel in the right places on the right vessels. So it's mainly a working capital effect that you will see in Q4. And when it comes to having to charter more because of the scrubbers, it's not going to be material on the P&L. There's some cost to that, of course, but it's not going to have a big effect.

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Operator [37]

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

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [38]

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Two questions of clarification on the CapEx and overall spend. Could you tell us, against the $1.5 billion to $2 billion CapEx guidance, what is the current depreciation charge? Because, obviously, you've got assets into leased versus owned. That's the first question.

And secondly, in terms of the run rate of lease payments, I think last year, it was around about $1 billion. Should we think of that as being a similar number going forward? Or is that going to move through time?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [39]

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Okay. Just further clarification. I would say that on the depreciation, it's -- well, we have what some would call the real depreciation is $3 billion. But all in, with IFRS 16, we're around $4.3 billion on annual depreciation. I'm sorry I didn't catch the second question.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [40]

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Sorry. So you're saying the real depreciation was $2 billion or $3 billion?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [41]

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No. $3 billion. $3 billion. And then you have including now, because you recalculate everything, now we're around $4.3 billion. And of course, you should compare that then with the new CapEx guidance, and that's what I'm saying, is that it's a significant deleveraging over the next couple of years as well on the net debt. But it's not including the M&A that we are planning to do.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [42]

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No. Sure, obviously. But just to clarify, so the $1.5 billion to $2 billion of fixed asset spend should be looked at against the $3 billion of what you just called real depreciation. And then we've got another $1 billion on top of that of lease payments from what were the old operating leases now capitalized, yes?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [43]

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Yes. Well, you could say like this, that if you look at -- we don't give guidance on the leases, but you should compare the CapEx with the depreciation excluding that. So that's right. $1.5 billion to $2 billion versus $3 billion. Regarding to the leases, I would say like this. In '18, we had $1.9 billion in leases. This year year-to-date, we're around $1.4 billion in leases, and that is quite a lot of terminals in that. So we're not giving any guidance for 2020 forwards on leases, but I would say that we're not planning on increasing it. And it's not sort of, again, where you move from CapEx to lease. So it is a sort of strict line on that.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [44]

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Sure. And so the obvious follow-on question is, how long do you think you can significantly underinvest against depreciation? I mean, essentially, you're shrinking parts of the asset base by $1 billion to $1.5 billion a year. How long is that sustainable? And how much of that is structural versus cyclical?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [45]

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I thought you guys would be happy with giving a 2-year CapEx guidance, but nothing is enough. So I'm not going to go further out than the 2 years on that.

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Operator [46]

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I'll now hand the word back to Soren.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division, Interim COO and Member of Management Board [47]

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Thank you all for your questions and at listening to our earnings call. I would like to leave you with just a few messages -- key messages that I think are the most important.

We continue to improve our profitability in the third quarter and reported a significant improvement also for the first 9 months of 2019, 20% up on EBITDA. We still need to improve further. We are not at our return target of 7.5%. So we are not -- clearly not done. But we do take some comfort in the fact that we delivered an improvement in results at a time where we certainly was not -- we were not getting a lot of help in the market from growth or from freight rates or anything like that.

Also, I want to leave you with a thought, again, that we are, again, delivering a pretty strong free cash flow story driven by better margins and higher cash conversion and very low CapEx. And that means that our balance sheet has significantly strengthened. Bank debt is now around $5 billion, and it was $15 billion just after we had acquired Hamburg Süd in December of '17. So that's a real positive. With this performance, we were, as you all know, able to upgrade our guidance range for this year to $5.4 billion to $5.8 billion, and that's really what we wanted to leave you with.

So thanks for listening, and have a nice day.