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Edited Transcript of MAERSK B.CO earnings conference call or presentation 15-Aug-19 9:00am GMT

Q2 2019 AP Moeller - Maersk A/S Earnings Call

Copenhagen Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of AP Moeller - Maersk A/S earnings conference call or presentation Thursday, August 15, 2019 at 9:00:00am 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 and Member of Management Board

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Conference Call Participants

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* David Kerstens

Jefferies LLC, Research Division - Equity Analyst

* Finn Bjarke Petersen

Danske Bank Markets Equity Research - 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

* 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 and Member of Management Board [1]

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Good morning, everyone, and thank you for listening in to our earnings call today for the second quarter interim report 2019 for Maersk. My name is Soren Skou. I'm the CEO, and I am joined today by Carolina Dybeck Happe, our CFO.

Now before we move into the business-specific highlights, I would like to comment on the current trade environment. First, I want to make sure that it's clear that we don't believe that tariffs are good for the global economy, and we do not welcome them. But with that being said, the impact from the current U.S.-China tariffs and trade tensions on global trade has been quite manageable for us so far.

Overall, global container trade has increased around 2% in the first half of 2019. That puts it right in the middle of the 1% to 3% range that we laid out in our guidance at the start of the year and that's what we have been planning for when it comes to networking capacity and so on.

U.S. imports have slowed, yes, but so far, the drag from tariffs has been less than expected. U.S. imports from China is down around 7% in the first half, but Pacific trade overall grew 1%, and total imports in the -- to the U.S. grew 2.5% in the first half.

Also European-related trade where we are most exposed has seen strong volume growth in first half, around 5%, in part because of trade diversion resulting from the U.S.-China trade tensions.

The impact on tariffs -- on trade is being moderated by a number of factors. The most important probably is that consumer spending is what drives demand in our industry and consumer spending remains fairly robust in the U.S. supported by good labor markets and high consumer confidence.

But secondly, I also want to say that the goods that are impacted by the tariffs in U.S., they represent only around 4% of the U.S. consumer spending baskets.

We are also seeing a mitigation from exchange rates, a stronger dollar against the RMB reduces the impact of tariffs on the price of imported goods, and the dollar has weakened more than 10% against the -- the RMB has weakened more than 10% against the U.S. dollar since the mid-2018.

We also believe that both Chinese exporters and U.S. importers have absorbed some of the tariff costs to lower margins, and for sure, sourcing patterns are changing. Imports of goods to the U.S. from outside of China have increased, growing at close to double digits in first half. So new sourcing locations often entail higher freight rates and open up new opportunities for us to sell logistics and service offering.

And then, finally, there is quite some anecdotal evidence that tariffs are being circumvented to some extent by shipping stuff out of China to other destinations in Asia and then sending it on to the U.S.

Looking forward, the impact of the tariff hike that was -- to 25% on the first $250 billion, which was introduced in April 2019 and the latest 10% tariff on additional $300 billion of import to China remains uncertain not least because it seemed to have been modified just this week.

We -- if it all were to be implemented, we estimate it could reduce global trade growth by up to 1 percentage point for the next year, and as the IMF has pointed out, further escalation could cause the global economy to slow further and that, of course, will be negative for us.

It is understandable that there's a lot of focus on the U.S.-China trade tensions. However, I think it's also important to say that we should not lose sight of trade liberalization if it was being made elsewhere. WTO data now actually indicates that trade flows that are subject to liberalization are about 3 times as high right now than before the start of the trade tensions. So that's outpacing the restrictive measures in U.S-China trade. Over time, these measures will help mitigate the negative trade impact from the U.S.-China trade tensions.

There are 3 that I would like to mention. First of all, in 2017, WTO made a trade facilitation agreement to reduce nontariff barriers such as things that are customs related and so on. More than half of WTO members have now ratified this, and at the time it was said that it could reduce trade cost by more than 14% on average and boost global trade by $1 trillion per year.

It's also important to note that EU has made trade agreements with Vietnam, with Japan and with Canada and a deal with Mercosur is expected to -- and so including Brazil and Argentina is expected to be signed shortly.

And then in the Pacific, what is now called The Comprehensive and Progression Agreement for Trans-Pacific Partnership of 2018 (sic) [The Comprehensive and Progressive Agreement for Trans-Pacific Partnership], it covers 11 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. It accounts for 13.5% of global GDP and 500 million consumers where we have agreed -- or they have agreed to remove tariffs on goods and services and aim to remove also nontariff barriers. And China and the Philippines have indicated an interest in joining.

So that is -- those are some of the reasons for why the trade tensions have not impacted our business to the extent that many might have expected.

Now let me move on to the interim results, financial highlights. In the second quarter, we had a strong improvement in earnings and free cash flow and we grew the top line marginally. EBITDA was up 17% to $1.4 billion, reflecting a margin of 14.1% driven mainly by the Ocean business that reported higher margins both compared to Q2 '18 and to the first quarter of 2019. We delivered a strong operational performance in Ocean in the quarter driven by volume increase of 1.4%, unit cost reduction of 3.5% and average freight rates going up by 1.5%. Also, our Terminals business had a strong quarter with a volume growth of 8.5%, which leads to high utilization and improved margins.

The earnings -- improvement in earnings translated in a much -- into much better cash flow, and our operating cash flow was up 86% compared to the same quarter last year and also cash conversion was at 86%.

Our free cash flow before lease payments improved by $1 billion compared to Q2 of '18 to $750 million.

In the second quarter, we distributed just over $600 million to shareholders via dividends and share buybacks. And at the same time, we maintained a strong balance sheet with our investment-grade rating being reaffirmed by the rating agencies.

The return on invested capital improved to 3.1% from 0.1% in second quarter last year due to the improved financial performance.

And then let me end with this slide and saying our guidance around USD 5 billion including IFRS 16 effects for the financial year of 2019 is maintained and we will later in the presentation elaborate more on the outlook for the second half year.

Now when we look at the half year results, it's the same story. We had a little bit of -- more top line growth, $1.6 billion to $19.2 billion. EBITDA was up 24% to $2.6 billion, which is an improvement of exactly $500 million, reflecting a margin of 13.5%.

Operating cash flow also for the half year almost doubled with an increase of 95% compared to last year, and cash conversion came in at 102% while free cash flow before lease payments was positively impacted by the sale of Total shares and improved from negative $400 million last year to positive $4.2 billion.

We reduced our net interest-bearing debt from $7.6 billion to $12.9 billion compared to the end of Q2 '18 supported by cash proceeds from the sale of Total shares and strong operating cash flows.

Now let me move to Transformation. We have, as you're well aware, started to report on these 4 Transformation metrics. And I guess what I can say is that I'm quite -- we are quite pleased with 2 of them, developing 2 of them. Cash return on invested capital came in at 6.9%, that's up from a negative 1.4% last year. And we also are happy to say that we can declare victory in terms of harvesting synergies of $1 billion from the acquisition of Hamburg Süd and the integration of Logistics & Services at the end of this quarter, 6 months earlier than expected.

Our gross profit growth was reasonable in Logistics & Services at 4.9%, but of course, the base is very small here.

And then, finally, non-Ocean revenue actually slightly declined and when adjusted for sale of container factories, it grew by 2%. So this is an area where we, in the coming quarters, will aim to do better.

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

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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, and then turning to our financial highlights. Looking at our financial highlights for the second quarter of 2019, you can see from the slide that we reported improvement across all our financials compared to last year. We grew revenue by 0.6% with an increase in both Ocean and Terminals & Towage segment while Logistics & Services was on par. Our focus continues to be on improving profitability across the businesses and we can see this from the EBITDA improvement of 17% in the second quarter for 2019, and the EBITDA margin improved with a full 200 basis points to 14.1% from 12.1%.

EBIT also improved to over $400 million compared to only $65 million last year in the same quarter. And the EBIT margin is now 4.3% compared to 0.7% last year.

And the underlying profit is $134 million and you compare that to last year where we only had $15 million, and this despite higher net financial expenses, and that is related to no longer having dividends from the Total shares that we had in our books last year. So for the first half of 2019, underlying profit was $65 million compared to a loss of more than $300 million last year.

Next slide, looking at the CapEx. For the second quarter, gross CapEx spend was $445 million. And if we compare that to a year ago, this is basically half as compared to Q2 in '18, and we maintain our CapEx guidance of around $2.2 billion for 2019. And that is significantly below the CapEx level we saw in '17 and '18 with $3.2 billion and $4 billion, respectively.

Also important to keep track of is our contractual capital commitments, basically, CapEx that we have already committed ourselves to spend in the future. Today, after Q2, we have $1.9 billion in the books, and that is $1 billion less than a year ago. And to put in perspective, compared to 2 years ago, that book looked like $5.8 billion. So significantly lower level of committed CapEx. And the commitment we have is mainly related to terminal concessions. And I would like to reiterate that we have no plans of ordering any new large vessels until at least 2020. And I expect we can provide you with the CapEx guidance for 2021 after -- or in relation to our Q3 reporting.

Turning to the cash flow development then. Here, clearly, we have also made very good progress. If I look at the operating cash flow, it increased to $1.2 billion, so double where we were a year ago. The cash flow from operations was positively impacted by around $300 million in net working capital movement as well, of course, as the increase in EBITDA. And therefore, we had a really nice cash conversion of 86%.

And for the second quarter, the free cash flow was just shy of $750 million, which really reflects the improved earnings, a strong cash conversion and basically halved CapEx. And then we adjust for capitalized lease payments related to IFRS 16 and the free cash flow then ends on $0.4 billion-plus.

We are very pleased with the free cash flow we generated both in Q1 and Q2. Our cash flow will be impacted in the second half, though, of preparations towards IMO 2020 as we have said previously. And that is really because we are starting to buy more expensive fuel towards the end of the third quarter and in the fourth quarter so that will impact our working capital, but it will -- well, I would say it hits our working capital this year, but not really the cost base since we will not start to burn the fuel until, well, late December and then next year.

Next slide then looking at debt. The net interest-bearing debt was $12.9 billion, so basically flat from the quarter before. So we had good free cash flow and then we -- in the same quarter, we paid the annual dividend, the share buybacks and had some more capital lease obligations.

I would say an important measure, though, is year-over-year and last year we were over $20 billion in debt; and year-end, we were $15 billion. So you can see that we have significantly deleveraged our company.

And also good news, Standard & Poor's lifted their outlook on our credit rating and confirmed BBB with stable outlook now in the second quarter.

Consolidated financial income, well, here, on this slide, we have summarized all the financial KPIs and I have touched most of them so I'll just comment then on the financial costs. And in the second quarter, they increased slightly compared to second quarter a year ago. And -- well, we had lower financing cost now because we have significantly lower debt level, but last year we had the Total shares and the dividend that we received from them comes into this line in financial items.

And if we take the next slide, the same goes for first half. I've touched most of the KPIs and basically same comment also on the financial costs here, that they are slightly higher compared to last year, although we have lower debt. So we have lower interest, but on the other hand, we have no dividends this year from the Total share as expected.

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 and Member of Management Board [3]

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Yes. Thank you, and I'll start with Ocean. We grew a lot last year with the acquisition of Hamburg Süd, and as we have earlier said also at the first quarter earnings call that we are focusing this year on improving profitability in Ocean. In the second quarter, both revenue and profitability grew, EBITDA improved by 25% compared to Q2 of '18. And the margin improved -- EBITDA margin improved by 260 basis points to 14.9%.

This improvement was driven both by higher volumes, increases in freight rates, and very importantly, by improved unit costs as the total -- our total cost base was on par even with higher loaded volumes and an increase in VSA bookings.

In the second quarter, we launched the Maersk Spot product, which is a digital product that has a fixed commitment on both sides. And this is with an all-in price fixed at time of booking, and this is an important step in the digital journey of the company.

We also continue to prepare for the low-sulfur fuel regulation starting in January. We are -- we have worked hard and very successfully in terms of getting fuel adjustment clauses into all contracts. We are right now at a 90% coverage from that. And on the fuel supply side, we are testing some scrubber technology. We are making supply contracts for low-sulfur fuel and we believe generally -- and we are reducing fuel consumption very importantly to mitigate the extra cost. So we believe we are well prepared at this point in time.

Now on freight rates. Freight rates increased 1.5% driven by continued focus on improving margins combined with a good recovery on fuel. Our average freight rate is, of course, an average of the trade mix we have between East-West, North-South and intra and where the intra trades have the lowest freight rates in total amount. Volumes grew 5.4% in intra trades, which means our average freight rate is impacted downwards.

We also did grow 14% in intra-Asia, which has lower freight rates than we see in intra-Europe and intra-America, which further dragged down the freight rates on the overall intra routes. This is also part of the explanation why our average freight rate did not increase as much as the CCFI, which many use as a proxy for our freight rates.

Total volumes increased 1.4%, especially driven by backhaul volumes, which increased 3%. Headhaul volumes increased about 0.6%. We estimate for the quarter that global container volumes had grown around 2%, down from around 4% last year. That means that we are now in this quarter growing largely in line with the market.

North American trades were, of course, impacted by trade tensions and modest growth in the U.S. private consumption. And Europe was positively impacted by higher demand for refrigerated goods.

In North-South, volume was driven as a mixed bag. Growth in Africa and West Central Asia, but declines in Latin America and Oceania mainly due to weak market demand.

We did also in the second quarter see good and positive effects from the reorganization that we did at the beginning of the year focusing also on moving pricing out regionally, which, in combination with strong network operations, led to higher volumes. We had a more stable network in the quarter and that enabled us to take more backhaul volumes, which is the main reason for the strong backhaul volume growth.

Now on costs. Total operating costs were unchanged, as I already said, and we saw a higher number of slots bought by VSA partners. Higher network costs from slot charter expenses were partly offset by lower container handling costs and ForEx -- FX impact.

Container handling costs were positively impacted by lower positioning costs due to higher backhaul volumes, lower terminal costs and overall more stable network.

Unit cost at fix bunker improved 3.5% following higher volumes, network improvements and FX impact. For the half year, unit cost has improved 2%. This is in line with our ambition to reduce unit cost by 1% to 2% per year.

Bunker cost was unchanged despite an increase in the bunker price of 8.5%. This improve -- the fact that we could keep the cost steady was that we were able to improve bunker consumption with 7.5 -- or our bunker consumption declined by 7.5% due to improved network and higher reliability, so much better fuel efficiency.

Moving on to Logistics & Services. Revenue was on par, positively impacted by increasing revenue in one of the [strategic] important segments for supply chain management, but this was offset by declining revenue in sea and air freight.

Gross profit improved by almost 5%, positively impacted by high intermodal warehousing and customhouse brokerage profits, and EBITDA improved by $9 million.

At the beginning of the year, we merged the organization for commercial both for Logistics and Ocean and this is on track and progressing as planned.

Now I move on to supply chain management in particular. Volumes in supply chain management increased slightly. Gross profit decreased by $2 million mainly impacted by FX and that meant margins declined slightly.

Intermodal revenue was on par, positively impacted by increasing volumes and geographical mix, negatively impacted by FX. Both volumes and margins decreased in air and sea freight forwarding, negatively impacted by weaker demand but also decisions we have made to exit certain countries. Our EBIT conversion ratio was stable at around 9.3%.

On Terminals & Towage, we reported a revenue increase of 13% with gateway terminals contributing with increased revenue and EBITDA. While our Towage activity faced headwinds mainly related to lower activities in high-margin areas and negative impact from the development in FX.

EBITDA in gateway terminals increased 11% driven by increased volumes, storage income and utilization, but it was partly offset by some one-off items leading to a slightly lower margin. The one-off items, and I want to be very clear here, were a number of things such as some rebate schemes we had to provide for congestion in Port Elizabeth in New York and some electricity issues we had in Moin and a few other things, and I want to be very clear in saying that we expect to improve margins in the second half with the higher utilization we now have on our terminal network.

We are moving forward with the construction on the remaining 3 terminal projects we have as planned. Tema in Ghana will become operational in June -- or did become operational in June and will be officially opened later this year. And Vado in Italy we expect opening towards the very end of 2019.

Now digging a little deeper into Terminals. We are quite pleased with the volume development. Throughput increased 6.4% in the second quarter of '19. External customers actually grew 7.6% and Ocean grew 4.1%, which I think is a good testament to the competitiveness of APMT.

Revenue per move increased 7.4%, reflecting higher volumes in North America and revenue from storage in West Africa and the ramp-up in Moin, while cost per move increased only 4.7% driven mainly by higher volumes in high-cost terminals. This was partly offset by increased utilization, which increased a full 9 percentage points to 79%, driven by the strong volume growth, capacity growth and some capacity reductions in North America and ramp-up in Moin.

Also, our harbor towage activities measured on number of tug jobs grew just about 2% with high activity in Americas and Asia, Middle East and Africa and with some lower volumes in Europe and Australia. Despite this, earnings declined mainly impacted by lower activities in high-margin areas, some one-off items and FX partly offset by volume increases.

And then I'll finish this section with Manufacturing. We -- Maersk Container Industry reported a decline in revenues from $249 million to $132 million. It was purely impacted by the fact that we have exited the dry container business and also had lower revenue from the reefer business after the closure of the reefer factory in Chile. The EBITDA improved, however, to $16 million from negative $6 million. However, we have to say that in second quarter of 2018, we had a restructuring cost of $18 million in the numbers from the closing of the factory in Chile.

In Maersk Supply, revenue was on par at $70 million, but EBITDA proved to $5 million from a negative $3 million, reflecting somewhat higher rates in subsea vessel segment -- Subsea Supply Vessel segment.

And with that, I'll hand over to Carolina who will talk about the guidance.

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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. Yes, then to the guidance for 2019. In A.P. Møller - Maersk, we expect to still have an EBITDA of around $5 billion for 2019. The organic volume growth in Ocean is still expected to be in line with the estimated average market growth of 1% to 3% for 2019. But bear in mind, our focus is profitability.

We expect to see lower rates in the second half of '19 compared to the second half of '18 due to the strong development we saw last year partly driven by an implementation of the emergency bunker fuel surcharges. So we expect on a year-on-year basis that costs will be lower in the second half of '19 in Ocean.

As highlighted earlier by Soren, the market development in the first half year has been in line with our expectations. But of course, we still see the outlook continues to be subject to considerable uncertainties due to weaker macroeconomic conditions and other external factors.

Please remember, and as you can see from the sensitivity table on this slide, the volatility related to changes in freight rates continues to be high and impacts EBITDA by $700 million if average freight rates increased by $100 per FFE, basically around 5% deviation equivalent.

Guidance on gross CapEx is maintained at around $2.2 billion. We still expect a high cash conversion in 2019 as well.

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) And the first question is from Mark McVicar from Barclays.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [2]

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Two questions, really. First of all, your return on invested capital at just over 3% annualized is obviously still a long way below the 7.5% target. What do you think has to happen from here to get you up to and achieving that target across the cycle?

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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. So we start with the first question then on ROIC. Yes, we are on 3% now and 3.1%, and of course, compared to 0 last year, we are happy with the improvement but not satisfied. I think that's also why we have added the cash ROIC measurement to our Transformation KPIs where you can see that we're almost on 7% compared to a negative -- minus 1.5% last year. So I mean the practical of it is we still have a big Ocean business, so that needs to continue to perform and we need to keep the capital discipline in the Ocean. And we need to continue to develop the Terminals & Towage, I would say, in the same direction as now. And then we want to add the L&S part, which sort of gets our Ocean customers to love us a little bit more and be more stable and therefore also get the return in that part, and that is not as CapEx intense as the other part of the business. So I mean those are our main ways forward and that is how we see our road coming to our targeted 7.5%.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [4]

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And do you see the buildup of Logistics as involving some quite sizable acquisitions? Or do you think it's just going to be a series of further small bolt-ons?

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

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Well, I would say that considering the size of our Ocean business and we want -- us wanting to have a more balanced picture, I would say we will have a serial of small acquisitions, but also over time a couple of medium ones, as expected.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [6]

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Okay. And my second question was on CapEx, obviously, you're running at $2.2 billion this year against that pre-IFRS 16 D&A charge of about $3 billion. How long do you think you can keep it under that sort of replacement level if that's the best way to describe it? And if you took a kind of 5-year view, where do you think it would stand against depreciation?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [7]

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Well, I would say the guidance that we have is for this year, and as of next quarter, we will be able to say more about 2020. But of course, my strong intention is that we continue on a good trajectory when it comes to CapEx. And I think after that, we will take it as it comes so I don't want to give an over-the-cycle view on that.

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

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Maybe I could just add that there's a reason for why we have this cash return on invested capital as one of our Transformation metrics: because that will force a lot of CapEx discipline.

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Operator [9]

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Next question is from Lars Heindorff from SEB.

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

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Also a question regarding the non-Ocean part. You mentioned in the presentation that you have been -- or seen a reduction in volumes both in sea and air. But as far as I can see, you've also seen quite a bit of reduction in the yield both in Ocean and in air. I'm just wondering how -- or what is the reason for this because this is a trend that has been going on now for a number of quarters and doesn't really coincide with what we see from some of the other freight haulers out there. That's the first one.

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

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What's going on in Damco freight forwarding right now is that we are cleaning up the portfolio of business as we have separated out the company and that has some negative consequences on the P&L. But it's something that is important that we do.

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

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Okay. But the impact is still not visible on the conversion ratio.

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

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We have also -- I think we have also taken some various step provisions and things like that, that are impacting the numbers.

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Lars Heindorff, SEB, Research Division - Analyst [14]

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Okay. The second one is regarding the Ocean part. If we take the nominal capacity that you have reported by the end of the quarter, it's up by 2.1% compared to Q2 last year. But since the end of Q2, as far as I can see, you have continued to ramp up and is now at a run rate which is actually well above 4%. Most of that increase, as far as I can see still, is caused by you taking in more charter capacity. Could you elaborate a little bit about sort of your capacity plans? You have previously stated that you want to keep capacity flat, which probably means that you need to get rid of some capacity that needs to -- you need to obtain that target for the full year, and how you think about that increasing capacity and the impact into Q3 and Q4.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division and Member of Management Board [15]

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Yes. We have said and still absolutely also mean that we want to be around 4 million TEU of deployed capacity. Right now, we have invested -- or we are needing some extra tonnage because we have a number of ships out in shipyards for retrofitting of scrubbers and we also have invested a little more in slow steaming -- invested a little more capacity in slow steaming this year that's why the number, the absolute number, is a little bit up. But we absolutely want to remain disciplined on capacity and have -- stick to our guidance of around 4 million TEU of deployed capacity because it helps us drive utilization up and unit cost down. So there's no change in that.

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Lars Heindorff, SEB, Research Division - Analyst [16]

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Okay. And then the last one is still a little bit maybe regarding the capacity developments because I assume that part of the reason for the very significant improvement in the bunker efficiency that we have seen in the last 2 quarters is probably caused by the reduction that we have seen in chartered capacity, which means you have more investments normally larger and more efficient in terms of fuel. But the ramp-up that we have seen now here in terms of chartered capacity, how will that impact your efficiency on bunker and also on the cost here going into the second half?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division and Member of Management Board [17]

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We expect to continue to improve fuel efficiency. There are many actually levers to that, that are important. One is, of course, speed of the network. And in the past couple of quarters, we have been able to significantly improve the stability or reliability of the network, and that means that we are -- when the ships are on time, they spend less periods where they have to speed up in order to meet port days or deadlines and that's very good for fuel efficiency. There's also, of course, a structural speed reduction with slow steaming that also improves fuel efficiency. But there are many, many factors that go into this and we manage, of course, also the charter ships as much as we possibly can, doing everything we can to make sure that they don't use more fuel than what is needed.

So this is a good handful of different levers that we are applying to improve fuel efficiency. And it's even more important as 2020 is looming because the best thing we can due in terms of mitigating the impact of that is, of course, just to use less fuel.

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Operator [18]

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Next question is from David Kerstens from Jefferies.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [19]

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First question on your cash return program of $1.5 billion, when would you feel comfortable to lift that number closer to the original target of $5 billion now that your balance sheet has deleveraged quite substantially and your free cash flow is strongly improving and also with a credit rating outlook that is now stable? That's my first question, please. Is it mainly because of the uncertainty around IMO 2020 that you keep it at a relatively lower rate for the moment?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [20]

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Well, I would stick sort of to the answer I said in the last quarter. We will come back with that. We will execute on the existing program, which we have said is up to $1.5 billion within maximum 15 months and within that time frame. But obviously towards the end of it, we will come back with more information on possible further steps.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [21]

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Understood. And then the second question, maybe can you quantify the working capital impact that you anticipate in the second half of the year from the higher-priced bunker purchases?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [22]

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I was going to say I wish I could, but I don't know what the price would be on the bunker, so I can't. But I mean we see big spreads and we see things changing. But what it really will be, I mean, that will be at the day when we actually buy it. This is such a big change. We don't want to speculate in it and can't. But we are prepared for it and we are also both sort of operationally prepared for it, but we're also prepared for it that it will take up some of our working capital capacity.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [23]

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Okay. Maybe a final question, if I may, on TradeLens. I think you reported during the quarter the increasing acceptance among your peers and you're now covering well over 50% of global capacity. When do you see the benefits of this initiative coming through? Or is it mainly benefits for your customers? Or will it also eventually lead to higher volumes similar to what you pointed out in your introduction early in the call?

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

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Yes, we are building, if you will, the platform and the network, the ecosystem on the TradeLens platform. It was a very important to get commitment from some of the largest carriers in the world to join the platform because without the data from the carriers, the platform will not be interesting for the customers. So now towards the rest of this year, we'll do the work to actually get these carriers onboard. We will have around 60% of global capacity on the network then -- on the platform. We are, at the same time, building the platform with landside participants, container terminals, container truckers, railroads and so on so that we get as much of a network covering as many participants as possible.

The concept for TradeLens is that the shippers will be the customers of TradeLens, so the revenue model will be that shippers will be paying for access to all the data on the shipments. And we have today around 8 customers, all of them big name companies that, of course, are pilot customers and are interested in the platform because they think it can help them manage their supply chain, improve visibility, make it more efficient and so on.

So that's where we are. We are building towards TradeLens becoming a business in its own right as, if you will, an Internet of trade.

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Operator [25]

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Next question is from Finn Bjarke Petersen from Danske Bank.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [26]

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Congratulations with the strong results for the quarter. I just want you to talk a little bit on guidance. You are guiding more or less a flat result first half, second half. Normally, we will see a stronger second half. Could you elaborate a little bit on how you see the high season develop and the reason for the flat guidance?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [27]

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Well, thank you for the congratulations. As to our guidance, well, we have maintained the guidance on around $5 billion. And if I look at the second half of '18, we had very strong improvements in the freight rates and the financials compared to the first half of the year, like you say, and therefore we do have pretty tough comps to beat. And I would say the public freight rates indexes have not really shown that strength in July versus last year. And also last year, we were really positively affected by this emergency bunker surcharge really coming into effect in the second half. So I mean there is a possibility that the freight rates in the second half of '19 will be lower than they were second half of '18, right?

And then we have the macroeconomic environments. Well, it didn't improve in Q2 and we continue to see significant uncertainties even coming into the peak season.

And then we have, of course, IMO 2020, which we will also -- well, it's a question mark, I would say. But I would say, in general, consumer confidence remains high, but, well, business confidence has continued to weaken and especially in the manufacturing sector as well.

Bunker price fluctuations, well, you have seen it, so I would say the bunker price is down but the fluctuations remain high and it's very difficult for us to predict.

So with that and also the IMO including the fact that, that would have sort of on us, we still stick to our guidance for the full year.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [28]

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And then just one question regarding the Q2. I understand there is a currency effect. Could you give us just what's that in U.S. dollars?

And the second, to the Q2 result, if you would say is that a result that reflecting that all stars was aligned in your favor in the quarter? Or how would you describe the second quarter performance?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [29]

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First, on your FX question. The effect -- or the FX effect on the U.S. dollar mainly on EBITDA was really insignificant, so that didn't have a big effect on us.

And I would say for the second quarter, I mean, we improved what we could control and we improved that in a good way. So I don't think we can say that, that is all the stars in the right direction.

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

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Yes, maybe I can just add here, Finn, that we have all throughout this year we have been planning for a low growth type of scenario. We said early in the year we expected market to grow 1% to 3% and we said we are not going to grow our capacity. Our ambition is to grow more or less in line with the market for the year.

And if you look at what happened in the second quarter, most of the improvement in my view is factors we have controlled ourselves. Freight rates went up by 1.5%, that's nice, but unit cost came down by 3.5% and we got our commercial performance back in line with market growth. So we have been very focused on profitability and what we can do to improve that ourselves.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [31]

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And then just one thing on the backhaul. The improvement in backhaul is, of course, important for the -- for unit cost reduction as well as it first give you more units and less cost to repositioning. How do you see backhaul develop in the second quarter of the year -- or second half of the year, sorry?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division and Member of Management Board [32]

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We expect to see a similar development, I would say. I mean, the network and the stability and reliability of the network is a big factor, yes. As we become more reliable, we also have more opportunity to load in the backhaul trades. If we are behind schedule, if you will, we have -- we generally will try to get out of port as quickly as possible to get back to the headhaul rates. So the operator -- the network is operating at very high reliability now. We have regained our spot at kind of the top of the industry leagues when it comes to reliability, and we will continue to do what we can to drive further reliability in the coming quarters.

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Operator [33]

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Next question is from Robert Joynson from Exane BNP Paribas.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [34]

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The first question for me on the CapEx outlook. You've confirmed once again today that there won't be any large vessel orders until 2020 at the earliest. But of course, 2020 is now only 4 months away, and based on your previous comments regarding capital discipline, it would appear relatively unlikely, I would say, that a large vessel order will be placed during 2020 specifically. But to help us think about the timing of the next large vessel order, could you maybe just provide some color on what would need to happen for Maersk to decide that it does need to make a large new vessel order?

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Carolina Dybeck Happe, A.P. Møller - Mærsk A/S - EVP, CFO & Member of Management Board [35]

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Yes, I will agree with your comment that even if we give the guidance after Q3 for next year because we are doing the business plan for that period, it appears relatively unlikely that we will invest in larger vessels and big terminal concessions. And I mean that -- how that would turn out in the years come after that will, of course, have to do with how the development is of global trading containers. But we will continue our focus on profitability.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [36]

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Okay. And second question, which I guess is slightly related to that one. Just in terms of the unit cost improvement, which was good to see today, it was obviously driven by improved volume certainly versus Q1. You've talked about maintaining the deployed capacity at around 4 million TEUs. Just to help us think about operational gearing, could you just maybe provide some color on how much additional volume could be handled while keeping the capacity at around 4 million TEUs whilst also maintaining the high level of reliability that you're now seeing?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division and Member of Management Board [37]

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Robert, it's really, really hard because this is really at the core of how you design the networks and which trades that you're focused on. Obviously, the more long-haul trades we have, the less volumes we can load on 4 million TEU of capacity and vice versa. And we believe we have opportunity for continuing to grow in line with the market for a while with the 4 million TEU capacity. That doesn't mean that we will grow exactly in line with the market in every single trade. It could very well be that there are trades where we will say, here, we don't have a competitive position or we don't think we can be profitable. So why worry about our market share here and then let's focus in other trades. So it's very, very hard to answer the question in a meaningful way. But we are committed to being very disciplined in terms of capacity deployment.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [38]

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Maybe just to focus on a slightly shorter-term perspective. I mean if we look, let's say, just into 2020, would a deployed capacity of 4 million TEUs be a reasonable assumption for us to make for 2020?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division and Member of Management Board [39]

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Yes.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [40]

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Okay. And then final question just on IT expenses and headcount actually. There was an interesting article in (inaudible) last month, which included comments from Maersk's Chief Technology Officer. So he was saying that Maersk currently has 3,000 IT employees. But in 18 months, he expects that number could be 4,500 to 5,000.

So 2 questions on that. First of all, do those numbers sound reasonable to yourselves? And second question is when Maersk is hiring in IT at the moment, to what extent of the headcount additions comprised of contractors rather than permanent employees?

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

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Yes. And actually your last -- I would say, your last sentence is sort of the answer to that question. We have, in total, around 6,000 people working in IT but half of them are contracted. And what Adam talks about is a shift of that and having more of that sort of working directly for us in the more strategic areas and the important areas and then keep a healthy balance of contractors for the rest.

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Operator [42]

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And our final question comes from the line of Marcus Bellander from Nordea.

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [43]

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First question is regarding other income in Maersk Ocean. It was quite a bit lower in Q2 than in Q1 and I know it can be volatile, but I think this is one of the biggest swings we've ever seen. Is there anything structural there? Or is it just natural quarterly variations?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division and Member of Management Board [44]

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There's nothing structural. It's volatility in demurrage and detention income. It's really hard to predict.

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [45]

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Okay. And the second question concerns your growth in backhaul rates. In the last couple or few quarters, you've talked about having essentially shed backhaul volumes because you found the cost of repositioning container is too high, but now you're growing backhaul volumes quite a bit more than headhaul volumes. Is that a new strategic decision so to speak? Or is it just that the market growth has been on that backhaul for some reason?

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division and Member of Management Board [46]

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No, it is -- it's what I said before that the -- when our network becomes more reliable and stable, we have more opportunity for loading backhaul volumes. And obviously, if we can do that, we achieve 2 things: we get rid of positioning cost and we do get some freight income as well. So we like to do that. But if the network is not stable, we are often not able to do with. So it's a reflection more of how our network operates that we are able to take these opportunities than it's a reflection of market growth in backhaul markets, if you will.

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Operator [47]

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That was our final question, so I'll hand the call back to the speakers for any closing comments. Please go ahead.

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Soren Skou, A.P. Møller - Mærsk A/S - CEO, CEO of Transport & Logistics Division and Member of Management Board [48]

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Thank you. Yes, and I'll just end by saying that in the second quarter, we continued to improve profitability. We now have had 4 quarters where we have been able to improve profitability, and EBITDA is up basically 25% for the first half of the year, which we are pleased with.

We still need to improve further margins. As we already discussed on the call, we had 3.1% return on invested capital. That's a big step-up from last year, but less than halfway to where we want to go, so there's plenty of work to do.

We are happy with our cash performance. We are happy with the delevering of the company and the fact that we are able -- we have started to share proceeds from the energy separations with the demerger of Maersk Drilling and the start of our share buyback program. And of course, that's driven by better margins and proven by a high cash conversion and so on.

In Ocean, of course, we were able to improve unit cost by 3.5%, which is good and in line with our ambition of getting unit cost down 1% to 2% every year.

And then, finally, also a positive for this quarter was the synergy target of $1 billion being reached.

So with that, I'll say thank you for listening, and have a nice day.