A.P. Møller - Mærsk A/S (MAERSKB) Earnings Call Transcript & Summary

Hello, everyone, and welcome to this Reuters newsmaker event. My name is Jacob Gronholt-Pedersen, and I am the Chief Correspondent for Reuters in Denmark. I'm very pleased to have Chief Executive of A.P. Møller - Mærsk, Soren Skou, with us today. Welcome, Soren.

Thank you. Thanks for having me.

I would like to remind to all the viewers out there that it's possible to ask questions in the chat, so I'll try and put a couple of those in during our conversation.

Soren, I'd like to kick off with a very present topic in relation to the damage on the gas pipelines in the Baltic Sea. Now the concern is, of course, that this damage to maritime infrastructure will escalate. So I was hoping you had any thoughts on what this could mean for maritime traffic and if it escalates and if you're doing anything to increase safety.

Yes. So officially, given the 3 or 4 explosions that we have seen, there are areas of the Baltic Sea we now have to navigate around in the very short term, and it's quite easy for the ships to do that. So the short-term impact for shipping is not really significant in any sense. The broader and more concerning perspective for all of us, of course, is how these things can happen and whether it will escalate from here.

Are you doing anything to, at this point, to increase safety and for your seafarers?

No, no. We are following the recommendations in terms of navigation that we are getting from the Danish and Swedish authorities, making sure that we leave plenty of space between the ships and these areas where gas is coming out of the ground, so to speak.

Okay, okay. So I'd like to move to the big issue of congestion in global shipping. We know about the continued problems with bottlenecks at ports as a result of the pandemic. Lately, freight rates have started to come down, and so the surge in consumer spending that we saw after the lockdowns seem to have come to a halt. And so Soren, maybe you could give us the status of how this situation is looking from your side, both at sea and at land and in ports, of course, with regards to bottlenecks?

Yes. Clearly, when we go back to the beginning -- or late 2020 or beginning of 2021 where everything really took off from a demand and congestion point of view, we had a [indiscernible] effect of, on the 1 hand, sharply increasing demand for goods, for products around the world, partly driven by lots of financial stimuli into the economy. And at the same time, supply of labor was constrained because of the pandemic because people are actually being ill or being restricted from going to work. So we have that double effect of both more demand and less supply. Right now, it's working in the other direction. So we have significantly less demand, particularly for durable goods where many have already made their purchases and they don't need another flat screen or another washing machine or another new couch. And at the same time, we see labor coming back because there are no restrictions. With that being said, of course, we still have congestion in the global supply chains. We still see areas where we have ships waiting outside ports, lack of labor. We've had some strike action in particular in Europe. So the situation is not normalized yet but it's clearly getting better. And for us, that's really a good thing that we are starting to be able to offer a better service to our customers.

Okay. We already have 1 question in this -- in relation to this from a viewer so regarding freight rates, are they -- so spot rates, that is are they falling faster than you expected? And do you have any thoughts on when spot rates will stabilize?

I think we've said all the time that we expect that the normalization when it were to come, to come relatively rapidly. But because we would have this effect of both a drop in demand and also a release of capacity from congestion. And so exactly the opposite of what happened in early 2021, we're now seeing where we have less demand and more supply. So that means that we will have a relatively rapid normalization, if you will, of freight rates. We don't see anything inverse to change the view we have for this year in terms of how we have guided our -- the development in results. We also don't see any view to change the guidance or the perspectives we provided at our Capital Markets Day in 2021, where we said we expect our Ocean business to also, across the cycle, to make a return, an EBIT margin return of more than [ 6.5% ].

Okay. And with regard to activity levels and volumes headed into the big Christmas season, how is that compared to normal years?

Yes. So I already talked about durable goods, where we clearly see demand globally being down, driven probably not so much by recession or inflation but more from the fact that there was an over-demand during the pandemic, where many of us were not able to travel and spend money on services and we all upgraded our house in different ways. Of course, you don't do that every year. So that will mean -- have an impact on durable goods. But clearly, we see the impact also in Europe and also, to some degree, in the U.S. of the recession, meaning that the consumers are not able to buy quite the same amount of things as before because of increasing prices. And in Europe, of course, we can add to that, that the consumer confidence is probably quite negatively influenced by the war that is going on, on our doorsteps. So weakening demand and on top of that, we have the recession threat.

Okay. So volumes headed into the Christmas season are lower than a normal year, would you say?

Yes. We've had the cyclical -- the normal cyclicality of our business. Our global trade has been -- almost has been suspended for the last couple of years because we have been buying products at -- in large volumes at times of the year where we don't normally do. And that has meant perhaps that the Christmas trade then is less than what it had been. And I suspect also we will have quite a, if you will, modest pickup in terms of Christmas trade this year.

Okay. So you're talking about a normalization, and you and I discussed this before at previous press conferences. At this point, with the worsening economic situation, does it look more like a hard landing now than just a normalization?

For Mærsk, we expect to continue to see a modest development or weak demand on the Ocean side, but we also continue to grow very rapidly on the landside logistics side. As you know, we -- our Logistics business has grown more than [ 38% ] organically in the last 6 quarters in a row, and I think the seventh quarter is probably in the making on that. And that's really because the pandemic has changed the way most of our customers think about their supply chains. They want much more integrated solutions, much more end-to-end, much more control. And that's really what we are providing. So I don't see a hard landing in that respect. To the contrary, we expect to continue to see lots of growth on the Logistics side. Also if -- and decoupled, if you will, from global trade growth on our -- for us, but obviously, volumes in Ocean will be flat or even declining probably this year.

Okay, okay, okay. So can you quantify the -- what you expect in the drop in global container demand this year?

I believe we had our last quarter expected somewhere plus/minus 1% in global demand, and that's also what we continue to see.

Okay, okay. And obviously, fuel costs have risen and that is something you would normally pass on to the customer. But are you doing any -- are you trying to save costs on shipping fuel?

So for our business, we have a very large share of our, if you will, book of business in Ocean being on contract based, and all of our contracts have fuel adjustment clauses. So our exposure to rising or falling, for that matter, fuel cost is not that significant anymore. But obviously, we continue to drive very hard in terms of fuel efficiency. We've been working on fuel efficiency in Mærsk since 2008 in a very dedicated and disciplined way. Today, we're using around 43% less fuel per container we shipped that we did in 2008. And that, we believe, has potential to grow to 60% by 2030 by continuing to work with fuel efficiency, new equipment, new ways of operating, better decisions, better design of our network and so on. So the whole fuel agenda, it's not only about moving to green fuels and -- it's also about just limiting the amount of fuel that we use. That also makes sense when we get to the green fuels because every ton of fuel is quite costly.

Okay, okay. So excuse my ignorance about how containers have moved around. But are we also considering the bottlenecks at ports? Are we at a point where it makes sense for ships to go slower in order to save fuel? Is that what's happening now?

Clearly, I expect that ship speeds is going to come down. Actually, the -- in the last year, while we have had lots of congestion in global supply chains, the ships have been going all out speed-wise in order to, if you will, catch up as many delays as possible. As things normalize, we should also expect the ships to come down to normal cruise speeds. This is really important for our fuel efficiency because as you well know, the fuel consumption is not a linear curve with speed. It's exponential. And the last few knots of speed really adds to the fuel consumption. So for us to continue the journey on fuel efficiency, we need to get the speed of the ships down to the, if you will, the optimal level.

Okay, so that's already happening. Okay, okay. We have another question from the audience. As Mærsk is investing, as we know, in becoming an end-to-end supplier -- supply chain service provider, and says not all past such similar attempts have been successful. So the question is what's changed?

First of all, I think that the market has changed. The demand for end-to-end logistics solutions for integrated logistics has clearly gone up. That's why I believe we are growing so fast on the landside logistics. The second thing that has changed has been that we actually set out on this journey, this integrated logistics journey back at the end of 2016. And in those years -- in the years that have passed since then, we have grown our capability in terms of the people we have. We have grown our capabilities when it comes to our tech platforms. We have made a number of acquisitions that really have fit into the integrated vision. And then the customers have really responded well. We expect to probably be close to $15 billion of revenue in Logistics this year, and that would be more than 30% organic growth compared to last year when we did just under $10 billion, so a massive increase. We have, of course, also added some acquisitions but we see lots and lots of demand. The pandemic has meant that our customers are reconsidering their global supply chains. They are thinking about how much inventory they have and where it is. Obviously, the simplest way to make supply chains more resilient. That's by having more inventory. They are thinking about how many suppliers they have and where they are located, which are -- meaning that many of our customers saying, we cannot just rely on 1 supplier and certainly, we cannot just rely on 1 country. So many, many -- for that specifically means many are moving part of their production out of China. That complicates and fragments supply chains and actually makes it even more important that you have a good logistics provider that can help you keep control of your supply chain. Most of our customers also have to think now in terms of omnichannel supply chains so that they can both fulfill, if you will, goods to physical stores and to the consumers directly. All these things together means that our customers see the need for integrated logistics, and that's really the growth that we are tapping into. I think we can take quite some pride in the growth we have seen in Logistics, not just from a top line point of view, but we have actually also, in the last 6 quarters, had EBIT margins above 6%, in line with our targets. So the growth is not coming at the expense of profitability.

Okay, thank you for that. So moving on to the next question of topic of inflation. Now that's, of course, a new reality to most of us. And 1 thing is how customers react to high inflation, buying less in stores, which, of course, impacts your business. But for your company specifically, I'd like to ask about wage inflation. How big an issue is this for a global company like Mærsk? Would you say this is one of your biggest headwinds at the moment?

So clearly, if you look at our company, we, this year, will be -- probably be around $80 billion or north of $80 billion of turnover. We -- our salary sum is around $6 billion, so less than 10% of our total cost is salary. Of course, we're quite an asset-intensive company, and that's why in the big scheme of things, salaries is less than 10%. But with that being said, obviously, salary inflation is also -- will also impact our margins. And therefore, it's something that we work very diligently with and trying to figure out how can we counter, if you will, the salary increases with improvements in productivity. And the productivity improvements we have quite a lot around, if you will, new tech platforms that help us automate the work, whether that's in Logistics or whether that's in the ports. That's really what we are, I think, pretty much any business can do. We're going to have to pay higher salaries when there's higher inflation. I think that's the only thing we can do. There's, in many markets, tight labor situation. And even if that improves a little bit with inflation, I think we will still, for the right talent, have to pay quite competitive salaries and they will go up with inflation. They will go up because of inflation, I don't think they will go up with inflation. And the only thing we can do as a business is try to figure out, how can we match that growth in salaries with inflation -- excuse me, with productivity enhancements and efficiency drivers?

So some companies have done various things. Some of -- the favorite seems to be onetime bonuses rather than permanent wage increases. Is that something you're doing as well?

We follow our normal cycle for salary adjustments, which has -- that everybody that works for Mærsk is quite familiar with. So the next time we need to consider salaries increases would be in the first quarter. And we will try to land that in a good way for our employees but certainly also for us. We need to stay competitive also. That's why we have as much focus as we have on efficiency drives and productivity to try to match the salary increases.

Okay. I think I remember, recall, was it last year, you gave employees sort of an extra-large Christmas and New Year bonus. Are you doing anything this year to basically help staff through costly rising energy bills and so forth?

So I think it's too early. It's true that in the last 2 years, actually, because of the pandemic and all the extra work that our colleagues have had to do globally, we have provided everybody in the company with an extraordinary Christmas bonus. We have not yet considered what we will do -- what, if anything, we will do this year. But I don't think there's a company out there that does not think about what does this inflation mean for us and try to make some sensible choices in the coming months as they are normal -- in line with their normal salary adjustment cycles.

Okay. And those salary increases, you're confident you can pass those on to your customers? Or will you also feel this in your...

So certain parts of our business actually do have, if you will, CPI inflation mechanisms or adjustments in their contracts, particularly in the ports business, parts of the Logistics business that is very people-intensive. But again, it's not our objective to increase prices to the customer because of salary. I mean, I really would like us to try to mitigate as much as we possibly can by becoming more productive, deploying more technology, more automation. And then I'm sure we'll work it out 1 way or the other.

Has it become more difficult to find, to hire talent this year because of -- partly because of the high inflation and the market situation?

I think we've had, in the last few years, actually quite tight labor markets in many countries around the world. And certainly, for some of the areas where we have been hiring a lot, particularly in technology or software engineers and software architects and data scientists, but also in Logistics, where we have been growing so much and have been adding more than 5,000 people just in the last year. So there's been a relatively tight labor market. I also have to say though that we are able to attract people to Mærsk. We, of course, do pay a competitive package, but even more importantly, I think a lot of people like what we do, like the purpose of the company, the international nature and so on. So we are able to attract people, and we have also thankfully been able to retain a lot of people. We have not, in Mærsk, at least not yet, really seen this so-called great resignation. Our attrition levels are pretty much as they've always been. So right now, we feel relatively good about the situation, but recognizing it is a tight market out there and we need to be competitive. And then we need to offer a really good challenging job to our new colleagues, jobs that help develop them and make them better.

Okay. There's 1 more question from the audience. So in your pursuit of end-to-end services, is the M&A strategy to acquire targets at a premium to ensure you scale up quickly? So in other words, are you overpaying for targets?

Well, we have done, I think, 2 handful of acquisitions by now in the Logistics space. And I think we have done so -- made a number of quite successful acquisitions. As we are building up in this space, pretty much all of the acquisitions we have made, the -- we have been looking for companies that what we call good companies. So what do I mean by that? Well, companies that are profitable, that have good leadership, that have good facilities if that's relevant, good [ check ] platforms, if that's relevant. But most importantly, have good products that we immediately can take and sell to our customers in Ocean. So the way we are paying for the acquisition premium has been to supercharge the growth of the companies we acquire by selling their products not to the company's -- acquired companies' customers but also to the 70,000 customers we have in Mærsk in our Ocean business. And some of the companies that we have acquired early on, they are now 2 or 3x the size they were when we acquired them. So that's how we have been, if you will, driving commercial synergies. And of course, as we build up our Logistics business, we will also increasingly be able to drive cost synergies as we acquire companies also going forward.

Okay, okay. But again, you also -- I mean, you put it back in 2016 when you made this decision to make it an integrated company. You put yourself in a situation where you didn't have a choice but to grow quickly, right? So I mean, do you understand that the concern from people looking on from outside?

Yes, sure. But I mean, just the first acquisition we made was actually Hamburg Süd. We've paid more than $3 billion for Hamburg Süd in 2017. And we had all the money back in 3.5 years, so that was a very successful acquisition. And then we have done all of the 2 handfuls of acquisitions in the Logistics space. And we're still delivering, if you will, quite -- we're growing really, really fast, more than 30% organically. And then we add the acquisitions on top of that. And we are doing -- delivering that growth at very healthy margins above 6%. So I mean, you can always discuss, are you paying a little bit too much? I don't know. But what I'm looking at is the overall business, how is that performing? And then it's important to say that where we are in our journey, we would rather pay a little bit too much for a good company with good products, with good leadership, good people, good technology because that allows us to take the products of that company and sell them to our Ocean clients as opposed to buying a turnaround case where we have to do a lot of work just to get that company up to speed, even if we could get it cheaper. So we'd rather pay a little bit higher and get a good company and accelerate the growth of that company as opposed to try to make a cheap deal and then have to work a lot with the company afterwards.

Okay, okay. I'd like to move quickly on to asking you about the green transition. But we have another question that seems to be very popular, and it says, how valuable will participation in the 2M Alliance be going forward if growth interests differ from MSC?

We have had what is now 5, 6, 7 -- 6 years of collaboration with 2M in -- with MSC and 2M, and that alliance has generated lots of value for us. And I'm sure it will continue to deliver value for us because combining the network, first of all, it gives us a lot of cost savings in terms of being able to offer a much bigger network at lower cost. But it also gives us operating flexibility in terms of the agility when it comes to adjusting capacity and so on. Whether 1 is slightly bigger than the other in that, I don't think, really matters a lot to the value that is being driven by the combination of our fleets.

Okay. So moving on to the green transition. You took -- back in 2018, you took a decision to achieve net 0 emissions by 2050. I think that was moved forward to 2040 later. So it looked like a bold move at the time. But of course, the green transition has since gained lots of traction. The question is, what's happening now? We all know about the economic uncertainties. I saw Qatar's Energy Minister today, he said that the growing economic burden had fizzled the euphoria over the green transition. So the big question is whether your customers are still buying into carbon neutrality proposition.

Yes. I mean, I think this train has left the station probably quite a long time ago. In 2018, we set out to become carbon-neutral in 2050. We didn't have much of a plan for how to actually do that, neither from a technical pathway point of view nor from a customer buy-in point of view. But we thought it was important to make that ambition or set that target and really then get to work on it. By the January of this year, we decided to increase the ambition by moving the target to 2040. But actually, even more importantly, set concrete targets for 2030 because -- which means that every decision we make now, investment-wise, will have to be seen in the light, will it help us become more carbon-neutral by 2030? We have seen -- in this period, we figured out how to do the carbon neutrality on the ships, the technical pathway moving to green methanol as a fuel, and we have invested in the first ships that can use that kind of fuel, and we will have those delivered by the middle of this decade in 3 years, 2 years. And then every ship that we invest in from now will be able to run on green methanol. At the same time, we have launched a -- the carbon neutrality -- carbon-neutral shipping product. We call it ECO Delivery based on biodiesel, and that product is growing exponentially. It's probably going to be 2% of our volumes this year that will move a [indiscernible] delivery product. And I really see lots of customer demand. In fact, more than 2/3 of our customers today have set their own science-based targets to become carbon-neutral somewhere between 2030 and 2050, depending on what kind of company it is. And in order for our customers to deliver on their targets, they need to be able to buy carbon-neutral products. That's why we have it on the shelves, and we see plenty of customer demand even at a time where they have to pay a green premium in order to get carbon neutrality.

Okay. But I still -- I guess you still have to get that to 100% because what looks like a good proposition for a big brand to be able to say that this shoe is carbon-neutral, it may not be the case for many other companies that are just looking to ship goods from A to B as cheaply as possible. So I mean, the question is, could it be that there's less willingness to go green as many companies just struggle to pay the energy bills?

Yes. So I think there are a couple of things at play here. One is, of course, brands have a different view than some suppliers or people say like, non-branded goods. But this development can take different forms. I mean, 1 thing is, of course, that the fuel price continues to stay very high, the oil price stays very high. That has closed the gap quite significantly to the -- for the green fuels. So the increase in the oil price that we have seen in the last -- during this year, that's the same net effect as a carbon tax. So that narrows the gap, makes the extra cost for green fuel much smaller. Secondly, the greenfield industry is going to scale. And that, I'm sure, will bring down cost as well to narrow the gap to regular fuel. And then finally, I think a reason to believe that in global shipping, there could be a carbon tax at some point towards the end of this decade, at least the ambition levels in the IMO for green transition and carbon neutrality, we believe, are going up. So we think we have plenty of customers that want to scale with us on this journey in this decade. What happens in 2030, to get to 100% by 2040, obviously, we have to have parity on the fuel price but they can happen in different ways. Just a higher oil price or a carbon tax or whatever, we'll have to see. The point is, for me, when I talk to our customers, green transition is clearly on the agenda. Lots of people have set targets. Lots of people want to be able to recruit good talent out there. And for most large companies, that also means having a progressive attitude towards the green transition.

Okay. I think we only have 1 or 2 minutes left. But on the green fuel market, you've made a partnership with Egypt, and it looks like you may yourself going invest in production of green fuels. And how do you see the future green fuel market look like? And where do you plan to and who do you want to buy this green fuel from and where?

Yes. So clearly, Mærsk is not looking to become, if you will, a fuel producer at scale. I mean, we are a global integrated logistics company and that's how we see ourselves in the future. But it's also very clear that we -- there's a role to be played in terms of being a midwife of a new green fuel industry and we're playing that role in a couple of ways. First of all, we are prepared to sign offtake -- long-term offtake agreements with people that will produce [ green fuel ] for us, and that enables such projects to be financed, both equity-wise and get production going. And then we are considering whether there are areas where we also need to invest a little bit of our own money in order to get [indiscernible] off the ground. But again, it's not our objective to become a fuel company and it's -- we would prefer others to take on that role, particularly those that are selling us fuel today. But until they do so, we are trying to help things along by being, as I said, a midwife for new green fuels industry.

Okay. Soren, I think we've reached the end of our time frame here, so I'd like to say thank you very much for joining us today. And thanks to all the viewers and listeners out there. We'll say goodbye and see you next time.

Thank you, Jacob. Thanks for having me.