Good morning, everyone, and thank you all for listening in to our earnings call for the Q1 of 2021. My name is Soren Skow. I'm the CEO of EPIMOLLO Maersk, and I'm joined here today by Patrick Jernie, our CFO. Now let me start by saying That this quarter, this is a quarter that I'm quite proud to present. We deliver multiple records.
It's the best quarter ever in Ocean. It's the best quarter ever in Logistics. It's the best quarter ever in Terminals, and it's also the best quarter ever in terms of net profit also for April Molymersk and by some margin. Excluding the A quarter where we sold Maersk Oil, the previous record from was from Q2 of 2010. And that result of $1,900,000,000 included Important contributions from Maersk Oil, Maersk Drilling, Maersk Tankers, Danske Bank and Danske Supermarket, companies that we do not own any longer.
So revenue grew 30 percent to $12,400,000,000 driven by higher demand in Ocean, higher demand in Logistics as well as in Terminals and of course, by significantly higher freight rates. Revenue was up 36% in Ocean, 42% in Logistics and 24% in Gateway Turbos. As a consequence, EBITDA more than doubled to $4,000,000,000 reflecting excuse me, and EBIT was up more than 5x to $3,100,000,000 mainly driven by Ocean but also supported by Good progress the good progress we have in Logistics and Services as well as at Gateway Terminals. Our net result in Q1 came in at at $2,700,000,000 just a little short of the $2,900,000,000 we made for all of 2020. Free cash flow was Strong, increased to $2,400,000,000 driven by increases in the cash flow from operations but also continued low CapEx.
As you all know, we upgraded our earnings forecast last week as we do now believe that the strong demand we experience will persist and the current supply chain issues that are driving up freight rates will continue well into the Q4 of the year. As we are also disclosing today, the upgrade is strongly supported by us having signed long term contracts that will impact positively compared to last year by more than $3,000,000,000 in 2021. We now expect a full year EBITDA between $13,000,000,000 $15,000,000,000 and EBIT between $9,000,000,000 and $11,000,000,000 and free cash flow of minimum $7,000,000,000 Following our strong balance sheet, current and future cash flows, the board has decided to accelerate the remaining share buy and I'll hand back relating to the sale of Maersk Oil so that it will be completed by September this year instead of March of 2022. We are also announcing that we will initiate a new share buyback in direct continuation of the current one in starting in October of approximately $5,000,000,000 to run over the next 2 years. The new share buyback represents More than 10% of our market cap and combined with our dividend policy, you should see this as a strong commitment to distributing excess cash and to shareholders.
Turning to Slide 5. We will go through this transformation Information dashboard for Q1 with our 4 new transformation metrics that we used to track the transformation and now, for the first time, disclose externally. I'm very pleased, first of all, with our organic revenue growth in Logistics and Terminals of 26% to 2.8 $1,000,000,000 For Logistics, this was is mainly a treat to strong volume growth in a number of our products, in Our supply chain volumes, contract logistics in our warehouse and distribution business in North America as well as land site Transportation. All grew volumes a lot, driven by higher penetration ratio to our existing Ocean customer. EBITA, so earnings after depreciation but before interest, tax and amortization, in Logistics and Services It was up 5x compared to last year, driven mainly by volume induced revenue growth as well as margin expansion.
To put this a little bit into perspective, we used to have a relatively small logistics business in Danmark Damko with quite weak margins. We now have built a Maersk Logistics business with a revenue run rate above $8,000,000,000 and an EBITDA margin of 10% and an EBIT margin well north of 6%. In other words, we are well on our way to building a profitable growth engine in Logistics and Services, and the strong organic growth in logistics is driven by cross selling to our oceans. As an indicator of our ability to cross sell, we are measuring the commercial synergies between Ocean and Logistics on the Logistics revenue growth from our top 200 ocean customers. In Q1, net revenue increased by 68% to almost 900,000,000 where 49 percentage points is from organic growth and the rest is from the acquisitions that we did last year.
High organic growth in logistics is, in our view, a solid proof point for our integrated strategy. And Growing with our largest and most demanding ocean customers is an even more important proof point. Compared to Q1 last year And full year 2020, we have increased the revenue share in LNS from our top 200 Ocean customers from around 37% up to now 40%, 40%, confirming that we can leverage commercial synergies and relationships with these customers for accelerated growth in logistics. In our Terminals business, revenue mainly increased due to higher volumes and storage income. We have now successfully I turned around our Terminals business and become a much better operator.
And we are leveraging the synergies with Ocean and are once again, therefore, delivering solid returns above 9% return on invested capital when we look at the Q1 on an annualized basis. Now moving to Slide 6. It is evident that we have continued the Positive trajectory on earnings that we have been on for a while also when it comes to debt reduction. But it's also clear that The trend has been accelerating in recent quarters, of course, impacted by the extraordinary market conditions that has been driving our freight rates to record levels. While the current very strong results are partly driven by market tailwinds in Ocean, The Q1 is our 11th quarter in a row with progress year on year, and we are now midway into our 12th quarter that will also show a year over year improvement.
We are building or building on a strong record track record, and we didn't just get lucky. Over the last 3 years, we have dealt with plenty of headwinds in terms of slow global trade growth, Geopolitical uncertainty, trade tensions between U. S. And China, IMO 2020 implementation and last year, a pandemic that caused volumes to drop sharply, particularly in the Q2. Despite all of these headwinds, we have made continuous progress, and we are better we are a better, more profitable and more resilient business today across Ocean Logistics and Terminals.
The work that we have done in Ocean to by establishing the 2M alliance, the acquisition of Hamburg Sud, the cost focus, the capital discipline, The digitization and the development of unique products is starting to pay dividends. I'm pleased that we have both been able to transform the company while at the same time increase earnings and reduce debt over the last 3 years. I look forward to the Capital Markets Day next week where we will talk through the next phase of the development of the company. And with this, I will hand over to Patrick, who will take you through the financials and the segments.
Good morning, Thor. Turning to Slide 8. We can see that profitability significantly improved As a net result, we reached SEK 2,700,000,000, which is, as mentioned earlier, the highest quarterly profit generated from operations ever. The improvement coming mainly from Ocean, with EBITDA almost tripling, but also with positive contribution from Logistics and Services and Terminals and Torch. Overall, our EBITDA increased by 166 percent, reaching $4,000,000,000 and the EBITDA margin reached 32.5% compared with 15.9% last year.
Consequently, EBIT increased more than 5x to SEK 3,100,000,000 compared to SEK 5.32,000,000 the year before, leading to an EBIT margin of 24.9 percent compared to 5.8% last year. The other positions had a fairly small impact on profitability. The lower depreciation and amortization impairments It was mainly driven by lower depreciations as a result of reassessing the useful lifetime of container assets from 12 to 15 years, and tax increased to EUR 150,000,000 from EUR 128,000,000 a year ago, primarily due to improved financial performance. When reflecting on the quarter, it is clear that the performance has been impacted by the pandemic and the subsequent demand surge leading to bottlenecks and capacity issues, thus continuing to distort the market conditions. We now expect that this situation could very well last into the Q4 of 2021.
Trying to put a figure on how this has impacted us, It is our best estimate that the net effect on volumes, costs and rates has increased operational profitability by around and EUR 2,000,000,000 this quarter alone. Now turning to Slide 9. Our cash flow from operations remained Extremely strong, almost tripling from last year to SEK 3,400,000,000 on the back of an increase in EBITDA of SEK 2,500,000,000 And despite of a deterioration of net working capital with EUR 450,000,000. Cash conversions was Ola Maersk. Still high at 85% compared to 80% last year.
Free cash flow in the quarter was SEK 2,400,000,000 after considering capitalized installments, gross CapEx, net financial expenses and dividends received and was used to repay debt and for the share buybacks. You may notice that the capitalized lease installments seem relatively high this quarter, and that is mainly driven by lease buyouts of EUR 265,000,000 Ocean, which was economically more advantageous. CapEx, on the other hand, remained low in Q1. To that effect, you will have noted that we have increased our CapEx guidance for the years 'twenty one and 'twenty two as we Our CapEx in logistics to sustain growth in the coming years, and we are also purchasing significantly more containers to alleviate the current bottlenecks, improve reliability and match the growth of our customers. From the free cash flow, we paid our dividends and repaid debt.
And our net interest bearing debt is now only SEK 7.7 and EUR 1,000,000,000. So considering that lease liabilities amount to EUR 8,400,000,000, we actually do have a net cash position of 696 $1,000,000 Given the continued strengthening of the balance sheet, current and future cash flow generation, The Board of Directors has decided to accelerate the current share buyback now to be completed by the end of September and then launch an additional SEK 5,000,000,000 share buyback to be executed over 2 years. Let's now turn on to Ocean with the business development was positive, and revenue in Ocean grew 31% on the back of Strong freight revenues with volumes increasing 5.7% as demand increased in all regions And freight rates increased 35%. This led to close of a tripling of the EBITDA from SEK 1,200,000,000 to SEK 3 point €4,000,000,000 and an EBITDA margin of 36.3%. EBIT correspondingly increased by €2,400,000,000 to $2,700,000,000 with an EBIT margin of 28.5%.
On Slide 11, we can see that the EBITDA Increase in Q1 was mainly driven by the extraordinary environment of capacity constraints and bottlenecking equipments, both containers and vessels and ports, which impacted rates significantly and contributed to a EUR 2,200,000,000 increase in EBITDA alone. Lower bunker costs and increased volumes also contributed positively in the quarter, but were partly offset by the higher cost of operations incurred as we try to manage the disruptions to maintain the flow of goods and help our customers. The container handling costs, therefore, increased by SEK 140,000,000 and the network cost and bunker consumption increased by 92,000,000 Please note that while bunker was still lower on a year on year view, it is significantly up since Q4, which implies a higher cost basis going forward. SG and A cost increased slightly by $24,000,000 and was mainly impacted. The other bucket as well was revenue recognition.
Driven by the increased rates throughout the quarter, the recognized freight rate was EUR 160,000,000 lower than the loaded freight rates, which means that we will have a positive spillover into Q2. This quarter, the effect on noncash Unrealized losses on hedges were small, but compared to an exceptional gain in Q1 last year related to the introduction of IMO 2020, The impact is negative $155,000,000 Turning to Slide 12. Our average freight rates Increased by 35% in the quarter, driven by demand surges, especially in China U. S. And China Europe trades, combining with bottlenecks across the supply chain.
Total volumes for the quarter increased by 5.7%, driven by headhaul increasing 8.3% as demand was strong, mainly out of Asia, while backhaul volumes was largely flat. Unit costs declined given our higher volumes and lower container costs and was positively impacted by the new depreciation rule on containers, which was only partly offset by the higher handling costs driven by the bottlenecks in the supply chains as well as negative foreign exchange impact. We're quite satisfied that we managed to keep costs under control despite of the supply chain challenges we are facing. In Q4, we continued to focus on facilitating our long term customer supply chain to meet their requirements, which added to increasing volumes from our long term contracts. We have now chosen to show you this level now in Q1 on Slide 13 As we now have a fundamentally different approach to the way we approach our service delivery to customers, and we are signing up significantly Ola Maersk.
By now, we have closed around 80% of our long term contracts for the year, and the remaining will be signed in the coming weeks. We have increased our contracting volumes by around 20%. So we will have roughly EUR 6,000,000 FFEs on long term contracts, and the additional effect on our financials for the full year of 2021 It's around $5.50 per FFE on our contracted volumes. This is a part of the reason for our earnings upgrade and our visibility for the second half. However, the guidance upgrade was also dependent on the current market condition and which will now look to remain well into Q4, whereas in February, we estimated it to normalize after Q1.
On top of the higher contracted volumes, we have also signed up more than 1,000,000 FFEs on a multiyear contracts, ensuring predictability and stability of our earnings and the service to our customers as well. On Slide 14, we turn our attention to Logistics and Services, which kept very positive momentum in revenue and reported a 42% increase to $2,000,000,000 The growth was both inorganic and inorganic and came from lead logistics, mainly from supply chain management Contract logistics, both organic and inorganic, through the acquisition of Performance Team and finally, through a significant increase in airfreight and Transportation, mainly due to the higher penetration ratio into existing ocean customers. Gross profit increased 67% with gross profit margin improving to 25% and EBITDA more than tripled to EUR 205,000,000. The increase in profitability was led by higher margins and volumes in Landside Transportation and increased profitability in contract logistics. The high growth rates validate our strategy of growing with our ocean customers and building up capabilities to cover more of our customers' logistics needs.
The next slide shows you the development of gross profit and EBIT conversion in our Logistics and Services segment, which has now shown a clear improvement in the last years. And we have a strong trend in the underlying EBIT and EBIT conversions, which we are very satisfied with. Our EBIT conversion improved in the quarter to 27%, continuing The nice constant progression of our EBIT conversion progressively reaching good industry levels. The acquisitions continued to contribute positively And as you see, our organic growth is also significant with 30% growth year on year as we are driving commercial synergies with Ocean and by our focus on improving margins further. Consequently, EBITDA margin progressed from 2.1% to 7 point and 5%.
From Q1, we have a new reporting structure in Logistics and Services, where we have split products and services and managed by Maersk, fulfilled by Maersk and transported by Maersk to reflect our progress in the integrated strategy. Overall, EBITA increased fivefold, as mentioned for the transformation slide. And therefore, the EBITA margin increased from 2.1% to 7.3%, driven by increases in all three product categories. Managed by Maersk includes integrated management solutions that enable customers to control or outsource part of their entire supply chain. By combining transport and fulfillment solution with digital platforms, we give end to end visibility, actionability and control.
Revenue increase in Managed by Maersk was driven by an increase in Lead Logistics, where Supply Chain Management volumes increased 42% due to strong performance in Asia Pacific and a tripling of custom services, both from the acquisition of KGH and from higher declarations due to Brexit. Fulfilled by Maersk includes integrated fulfillment solutions to improve customer consolidation and storage down to order level. Whether e commerce or cold storage, our solutions connect seamlessly to our transportation network, optimizing inventory flow and precision to deliver individual orders precisely and on time. Revenue in fulfilled by Maersk doubled compared to last year and was driven by contract logistics and a growing footprint from the acquisition of Performance Team. The growth in contract logistics is actually 38% organic 62% inorganic.
Transported by Maersk is the integrated transportation solutions that facilitate supply chain control across our assets. Our solutions are modular, providing customer end to end services with higher reliability, speed and accountability. Revenue in transported by Maersk was driven by a 39% increase in airfreight volumes from the strong Asia Pacific market And by Landside Transportation Intermodal, where volumes increased 20%, including rail transportation, mainly from higher penetration into existing Ocean customers. On Page 17, we turn to Terminals and Towage, where revenue increased by at 20% and EBITDA by 38%, driven by Gateways Terminals. Growth in Terminals was 24%, and EBITDA increased to 3 and the EBITDA margin increased by 6.6% to 35.3% as a result of higher volumes and higher storage income.
Swiss, our storage business, is still negatively impacted by COVID-nineteen and particularly by lower tanker and cruise activities. Despite the lower activity levels, Swiss Revenues remained flat and earnings declined slightly. Turning on to the next slide. We have visualized the effects from volumes, revenue and cost on EBITDA of Gateways Terminals. Volumes increased like for like by 5.6%, mainly driven by strong volume growth of 16% in North America and a 5% like for like growth in both Asia and Latin America.
As in our Ocean business, we also saw bottlenecks in our terminal business, especially in the U. S, which has led to a significant increase in storage income. This led to an increase in revenue per move of 11% to $2.98 At the same time, the cost level is also high in North America, and hence, the higher volumes in this region have led to a 1.5% increase in cost per move. Overall, the improved margin have led to our gateway terminals reaching a ROIC of 7.4%, which we're happy about after a number of years where they did not earn their cost of capital. Automating our terminals is an integrated part of our strategy of being a world class terminal operator, and we are happy to see that we are strongly progressing with our automation, our terminal in Los Angeles.
Turning to Manufacturing and Others. We reported a decrease in EBITDA, mainly due to Maersk Supply Service suffering from the tough environment in the oil industry, while Maersk container industry had another strong quarter with a strong revenue backlog and the order book close to full until Q3 this year. With that, I'll pass the word to Soren for the full year guidance.
Thank you, Patrick. We have already covered the full year guidance, but I I just want to leave with you that it's supported by higher growth, a contract portfolio and, of course, a continued Very strong demand that means that the bottlenecks in many places will remain in place for quite a while. Then let me say on the CapEx guidance that we now expect to be around $7,000,000,000 whereas previously was $4,500,000,000 to $5,500,000 This increase is mainly driven by the need for more container boxes, as Patrick has already alluded to due to strong demand and but there's also some money to facilitate organic growth in our logistics business. This is not this upgrade in the guidance is, therefore, not related to buying more a lot of new ships, and I want to make sure that, that is clear for everybody. With that, we are ready for questions.
Our first question is from Sam Bland from JPMorgan. Please go ahead.
Hi. Thanks for taking the question. I've got 2, please. I guess the first one would be, in terms of capital allocation and maybe Mike talk about this more next week, but Yes. We've seen some bolt on M and A across the group, but just wondering about the group's appetite to do something maybe a bit more material, particularly within the logistics M and A space, I guess both appetite and sort of ability to execute and integrate.
And I guess the next question sort of related to that is we can all see the order book growing. It looks to be maybe a more difficult supply and demand picture for 2023. Is that just a problem and it's difficult to do much about it? Or are there kind of things that you can do to try and Insulate the group from maybe that more difficult supply and demand backdrop in
the medium term. Thank you.
Yes, good morning, Sam. We have if I start on the latter question on the order book, I think what really matters for us It's how much capacity we deploy compared to the demand that we have. This is how we managed so well through 20 20, adjusting capacity to demand. It's not really that important how many ships that exist in the world. It's more How much are deployed, that matter.
Last year in the Q2, our demand dropped 15%. We took actually 20% out in terms of capacity and kept our pricing flat, and then we reintroduced the capacity when the customers need it. And that's the kind of Operating motors, we will continue on in the coming years. Obviously, the fact that we are signing longer more longer term contracts and that we are building, if you will, a more differentiated product portfolio that is more end to end, also is helping us build more stability into the business. In terms of acquisitions, we will discuss at length next week.
So I'd rather not go too much into that. We have a strong balance sheet, and we are at it's possible both to share excess cash with the shareholders but also to do a bit of M and A, but most of our focus in logistics will be on organic growth and acquiring these, if you will, capabilities as we can acquire special products or special geographies with smaller bolt on Acquisitions.
All right. Thanks very much.
And our next question is from Michael Rasmussen from Danske Bank. Please go ahead. Your line is open.
Thank you very much for taking my questions. Three questions from my side, please. First of all, on the logistics and services revenue within The top 200 Ocean customers. Can you talk a little bit about what do you actually target here? And also if you could comment on maybe some combined margin levels for these top 200 customers Buying kind of the one stop shop solution at you guys.
My second question is on contract rates. If you could talk a little bit about Differences in a 1 year contract versus a multiyear contract, what are we looking at here? And also, how large share of the 1,000,000 FFVs of the multiyear contracts are also buying into your logistics solution? And my final question is just a few comments on the volumes in your supply chain business. So ocean volumes were down by a little bit more than 5% sequentially, but it seems like both the supply chain Fly chain management volumes, the intermodal volumes and also the sea freight volumes were down somewhat more on a sequential basis.
Maybe can you discuss is Dampo a part of that? And if you could just kind of indicate whether you're actually losing Other clients, if you look outside of the top 200 ocean clients, which obviously are growing right now. Thank you very much.
Okay. I will start, and then I'll hand over and to Patrick. So we are signing an increasing amount of long term contracts that extends and out over a year. And as you also know, then we are signing contracts broadly following the calendar year for Asia Eurotrades and broadly following end of April to May when it comes to Pacific. So the numbers we disclose here today are really impact on a calendar basis.
The contract rates for the longer terms comes in 2 types. There are some that have fixed rates, and there are some that have index linked rates. And I'm not going to go into how much of what and so on because those are, We believe commercial sensitive things to disclose. And now Patrick on the LNS.
Yes.
So starting with your first question on the Now it's on again, right? Okay. Sorry for some problems here with the mics. Yes, so starting with your question on the L and S revenue. I think it's important to see that obviously, we'll I have plenty of time next week to talk you through our strategy and how we see the future development of LNS and also to better Related to what are we actually offering in that space and therefore, what is our perceived value add for our customers.
So we'll come back to that next week. Now when you look at the margin levels, I think it's to the underlying question in your ask, It's important to see that we are selling our logistics services as fully fledged services to our customer. There's no underlying Rebate or link between an Ocean service and LNS or Logik and Services Service we would give to our customer. We are actually providing fully fledged end to end solution and not really buying our way into LNS growth, right? Now on the on your third question, on the volume sequential volume evolution comparison Between Ocean, which was slightly down 5% and in L and S, I think you have to see that there's a seasonality factor there as well In the logistics revenue.
So actually, quarter on quarter, you don't see the underlying growth which actually happens in this business, But you will see as the year progress and as we compare quarter on quarter regularly throughout the quarters.
Great. Thank you so much. But Soren, if I could just follow-up. So just to understand this correct, the multiyear rates At somewhat of a discount versus if you enter a 1 year rate? Or is it kind of significant discount versus a 1 year rate?
Or what are we looking at here?
No, I did not say that at all. I said we have some contracts that have fixed rates for several years, and we have some contracts where the 1st year is at fixed rate, and then the 2nd year or 3rd year is at a is index linked.
Okay, great. Yes, the discount was my assumption on the following years. But okay, thank you so much.
And our next question is from Neil Glynn from Credit Suisse. Please go ahead.
Good morning. If I could ask 2, please. The first one with respect to Ocean. I think it was very helpful that you quantified the extraordinary market effect and Maersk. If I look at the seasonality since the reporting structure changed a few years ago, that would actually suggest EBITDA of And is that consistent with your thinking?
Or are you signaling something else with respect to that calculation? And then the second question with respect to CapEx and flexibility and free cash flow resilience. You've obviously upped CapEx For this year and next year, I'd love to understand, can you break down that SEK 7,000,000,000 into the fixed and MERSK. And potentially flexible aspects to give us some kind of understanding of what Flexner potentially is
So starting with your first question on Ocean. Clearly, it's as you rightly mentioned, it's an approximate impact, Right. So it is actually quite hard to tell to split the cold in hot water once you signed a contract, which was The effect of the current bottlenecks and what is the underlying strong demand for our services as well. Nevertheless, that's our best estimate, and we'll continue to report it because I think it's helpful to for you to see the impact. I wouldn't, however, take the extrapolation on the full year.
You have seasonality, which was quite different in this year. And you also have, I would say, just the underlying price evolution long term switch to more long term versus short term, which is So changing the profile of our profitability looking forward. So I would be cautious on extrapolating on a 1 on 1 basis. When you look at the CapEx, again, we'll come back a bit more in detail, I think, next week to provide A more granular view on our CapEx, but it is important to see, as you have seen, that we have started the year on a very disciplined basis. Our Q1 CapEx is very low, And we'll go on spending where we think it makes sense.
So if to your point or your question that if 2022 changes Brutally and we don't need those containers, then we wouldn't buy them either, right? I mean right now, we see a shortage. We see our customers needing To be relieved from those bottlenecks, the container turns are very low. And therefore, we need to have more containers to reestablish The reliability which we promised to our customers and why they chose us in the first place. So it is a commercial necessity right now, and it's really pulling forward the containers we would have Probably bought anyway in 2022 and 2023.
If we can restore Terns and reliability levels without using all of this need of container will obviously invest less. The other part is more structural. We will continue to grow in LNS and Enlogist Link Services, and we'll continue to expand there.
Great. Thank you, Patrick. And can I just check on container investment? What is the lead time? How many months in advance of delivery do you actually pull the trigger, sign on the dotted line?
Yes. I think typically, it goes quite fast. So within a quarter, you can get, I would say, the containers. Sometimes, it gets a bit tighter and therefore, maybe a little bit But within a quarter, typically, we get it delivered.
And our next question is from Satish Srivakumar from Citigroup. Please go ahead.
Thanks, Solon and Patrick. A couple of questions. So firstly, on the current booking window, especially on the Q2, if you could just Comment around what are you seeing at the booking levels are and orders that vary by trade lane. And secondly, more around on the multiyear contracts. I've just got a couple of questions related to that.
Is there any minimum volume commitment from your customers
So in Q2, the quarter we are in right now, we have Strong bookings and strong demand, and it certainly is supporting our guidance for the year. In terms of the contract volumes, what we are signing up is committed volumes, and our experience is that we have a very high percentage of fulfillment of those contracts at the end of the day. So the million FFE that we are reporting is committed volume that we fully expect to see next year.
And is it like signed by in terms of customer mix? Is it like, say, top 5 customers account for about 80% of that 1,000,000 FFE? How does it work?
Yes. So our contract portfolio is made up of our mainly of our largest 500 customers.
Okay. And I would say, yes, it's quite diverse customer mix, that's the way you should think of. It's not relied upon 1 or 2?
No, no, it's now quite diverse, yes.
Okay. And then that SEK 1,000,000 FFE is like an annualized run rate, right?
Yes, next year.
Okay. Thank you. Thanks very much.
And our next question is from Frans Heyer from Handelsbanken. Please go ahead.
Thanks very much. Again, a question on the non Ocean progress you are clearly making here. But it is still early days, and I was wondering if you might comment on the feedback you're getting from your key accounts that you are beginning
Well, they're voting with their wallet. I mean, growth of 68% In one quarter, I think it's a pretty good sign that actually our customers are quite keen to acquire or to buy integrated logistics service It's from us,
Frans. Yes. No, I agree. And but then again, on the other hand, it's Probably a very small fraction of their needs that they are allocating to you at this stage. So even if it's 68% is impressive, Ed?
I just want to get a feel for the momentum.
Yes, and we will certainly cover that next week. But what it implies is that the potential It's huge here for us, huge. This is something that we can grow into in the next many years.
Got it. A question on port congestion and how you see that unfolding. I believe it is a factor that is tying up Capacity in the market, even if it's only a few percent of global capacity, it's still Fleet capacity I'm talking about, it's still tying up some percentage points of the fleet. And how do you see that Dissolving over the next months
quarters? It will take a little while. I think what is going on right now globally, but particularly driven by the U. S. Market, is very strong demand from basic demand.
So because the U. S. Economy is doing so well and the Chinese, and for that matter, also the European Economies are expected to grow quite nicely this year. Then there's very strong basic demand. On top of that, we have an inventory replenishment cycle going on.
If you look to the U. S. And you look at inventory to sales ratios, they have never been as low as they are. And our customers are basically Trying to do 2 things at the same time: cater to strong basic demand because of all the stimulus packages and the savings, by the way, that has been going on over the last year and is now being consumed and at the same time, trying to replenish too low and that's really what's driving this very, very strong demand to the point where the ports are really not able to meet all the demand for discharge of ships, and then we get the bottlenecks.
And our next question is from David Kistens from Jefferies. Please go ahead.
Good morning, gentlemen. Three questions, please. First of all, on your full year 'twenty one EBITDA guidance, can you give an indication what kind of freight This assumption is baked into that guidance. I think based on my calculations, you're assuming a significant step down in the second half of the year First, the realized freight rate in the Q1. While you spot rates are currently still going up and you now also have the higher 10 specific contracts coming in, [SPEAKER CHRISTOPHER MOSKHA:] What's driving that expectation?
Then secondly, on the net financial position, How do you calculate how much room you have in the balance sheet available for share buybacks, sort of $5,000,000,000 I think previously, we were targeting to remain at least The investment grade, you have in the meantime had a rating upgrade from the rating agencies. What is the best way to calculate how much room there is in And then finally, on return on invested capital, I appreciate you now disclosed the invested Capital and EBIT levels by division, so we can nicely calculate the value creation in the different divisions. Do you still see a sustainable return of [SPEAKER JACQUES VAN DEN BROEK:] Leased 8.5% over the cycle after close to 10% last year and probably at least doubled that this year is 8.5% a normal return for the business. Thank you very much.
All right. Thanks, David. I'll take your questions in the order. I think On the guidance, first of all, I think we the guidance reflects our view on our best view on how the business will develop. And That's how we see it, and we'll not guide on the parameters of the guidance.
As we have said in the call, I think it's You have different parameters here. We see a strong Q2, which we have just alluded to. And then we have a higher share of long term rate Contracts as well, which gives us confidence that the additional earnings will come through and therefore make us less independent on or less dependent on the short term rate fluctuations. So that's the way you have to read this guidance. Then Then on the financial headroom, clearly, we have improved the financial headroom.
As you rightly mentioned, the rating agencies have Upgraded us with our BBB. And obviously, from the ratios, we are more than that, better than that. So that gives a bit of headroom. And this is why the Board of Directors has also seen that we can actually do all the different elements at the same time, which means return cash to shareholders to show our commitment but also invest in organic growth, which is an important and main contributor of our Growth and value generation and continue to do acquisitions and pay the normal dividend, which, by the way, will also be increased as net result is increased. So from that point of view, I think we are in a fortunate position where we can, over the years, do all those things at the same time.
And Some of all those aspects is considered in the determining that we have enough headroom to show a strong commitment to return shareholder value by [SPEAKER JEAN FRANCOIS VAN BOXMEER:] The share buyback we decided on. On the ROIC, yes, indeed, we give you now the granularity. So you see how the value generation Comes from the guidance itself is, I think, since 2016 at 7.5%, not 8.5%. And I'm sure we'll come back to those elements next week in our Capital Markets Day.
Okay. That's great. Thank you very much.
And our next question is from Carolina Doris from Morgan Stanley. Please go ahead.
Hi. Hello. Good morning, everyone. Two questions for me. On The second quarter, I do appreciate that it's a strong quarter for rates.
Can you comment on how The blockage of the Panama Canal will impact costs? Or should we expect something in line to the Q1? And second, when we think about specialties that are attractive for M and A, can you give us an idea of what type of business or regions you're looking at?
So I assume you were referring to the blockage of the Suez Canal. It was a little bit hard to hear exactly that. So obviously, what the blockage of the Suez Canal meant was that Our journey towards more reliable network was halted in its tracks for a while. We had a total of 50 ships sitting around this Suez Canal waiting for it to open up. That creates quite a mess in the network, and it will take a few months to restore the reliability and of the network of that consequence.
And unfortunately, it is what it is. But when the ships are sitting for a week in the Red Sea. Then obviously, they are missing somewhere else. And then we will I try to restore reliability as fast as we possibly can. We are deploying every ship that we have, and we also have chartered more ships in order to get back to reliability earlier.
And then on your second question, which was
our
M and A targets.
Oh, yes, M and A targets, exactly. Yes. So that, I think for good reasons, we cannot really disclose with any degree of detail. But we do plan to spend quite a lot of time next week at our Capital Markets Day to explain how we see Our business in logistics growing, and acquisitions will be part of that journey even if We will focus on organic growth.
Okay. Thank you.
And our next question is from Parash Jain from HSBC. Please go ahead.
Yes. Thank you. And I have two questions, if I may. First, on the long term contracts that you talked about. I just wanted to understand, when we talk about of the total 11 odd 1000000 long haul trade And when we look at your overall volume, it's around 13 odd 1000000, assuming 5% to 7% of volume growth this year.
Is it fair to say that which means 85%, roughly, percent of your overall volume are categorized as long haul? And does it mean that even in the backhaul, you entered into the long term contracts? And just in case, If you can share when we talk about the $5.50 per FFA increase, can you give any color on what sort of magnitude are we talking when it And with respect to Trans Pacific versus, let's say, Asia, Europe? And my second question is around congestion. And we understand that time to time there was shortage of equipment, equipment imbalance, congestion at port, congestion on the land side.
Where are we? I mean, where do you think is the strongest bottleneck? Is it the congestion at the port? Any color on that? And how do you think it will evolve Given your view that this may last for most of this year.
So I think you have it right on The long term contracts, about 85% of our volumes being long haul in the interregional trades in intra Asia, intra Europe, intra Americas, we don't We really do many contracts. This is more of a contract transactional type of market. We do sign Contracts, long term contracts, both back headhaul and backhaul, even if headhaul is the majority. And I'm not going to I don't want to disclose any further details on the rates. We're disclosing the $550,000,000 for the total portfolio because these differences will be the differences are significant, headhaul versus backhaul and also at which time in the season contracts were signed.
So I don't think that, that could be represented in a fair way. The congestion is really driven by port congestion and lack of capacity. So Both elements play a role, so meaning that our customers are some are finding it hard to actually book a slot on And at the same time, you have the added effects of, in some markets, still not too many containers. And you have the port congestion, which Ties up vessel capacity. So it's a multitude of factors that we believe, as said in our guidance, and will last for quite a while.
And our next question is from Robert Johnson from Exane BNP Paribas. Please go ahead.
Good morning, everybody. A couple of questions from me, please. The first one is just really a follow-up question on disruption. I appreciate there's been a few already. If we just look at this directionally, I we're seeing some data points that suggest that schedule reliability improved in March versus February, we're seeing delays of Los Angeles easing, and we're also seeing some data that container availability is improving.
So directionally, at least, does it feel that we may be past the worst in terms of general congestion and disruption? Or is it too early to say? And of course, you've now introduced some multiyear contracts as well. In that context, given that spot rates are currently so high, Is it fair to conclude that the focus is on maximizing profitability over the midterm rather than the short term? And maybe just on that theme, could you maybe just provide some more general color on how you think about the near term benefits Provided by the currently high spot rates versus the longer term benefits of improved customer loyalty and retention.
Thank you.
I would expect, Rob, that when you get the scheduled liability numbers for April, you will see the effect of Ever Given. And then the slight improvements that you have been seeing, they will that will be gone. We're going to be digging ourselves out of that hole for a little while, to be quite honest, literally speaking. In terms of short term versus medium term profitability, I mean for us, we are obviously about building an integrated container logistics business, sending end to end logistics services to our customers. And that strategy, we have also executed on during this time.
So our focus has not been to maximize short term income, which we would have done if we had just gone for the spot market. So we see this as an opportunity to build a portfolio of longer term business, create longer term partnership and relationships with our customers, and we are encouraged by how our customers are responding to these conversations about longer term Partnerships, and we are disclosing, as I already mentioned, the one metric for how we are able to cross sell logistics services to our contract customers, which is showing clearly that the development is positive for us.
Can I maybe just ask one follow-up question just on reporting? For each of the divisions, you stopped reporting Anything below the EBITDA line a few years ago, when you said at that point you wanted the divisions to focus on cash flow generation And therefore, stock reporting EBIT. Now you've reintroduced reporting at the EBIT level. Could you maybe just talk us through the rationale for that? Is it a case of Job done with respect to improve focus on cash flow generation or are there other factors at play?
Yes. No, absolutely. Let me comment on that. So a few years ago, the focus was more on EBITDA and Leading the cash up, I think that worked pretty well. As you can see, the balance sheet is now in a good condition.
Now moving forward, I think it's about Looking at profitability, recurrence of earnings, particularly when we go into logistics, you'll find that, obviously, most of the companies in that area measure their profitability in terms EBITA or EBITA before amortization. So we are moving to that area, which is why we focus on EBIT looking forward. And the same, I think, on the disclosure of EBIT and invested capital allows you to trace a bit the higher ROIC activities where we are moving into, Like and Logistics and Services and good performance as well on Terminals.
Hopefully. Thank you.
And our next question is from Muneebak Kayani from Bank of America. Please go ahead.
Yes. Just on long term rates. So at current levels then, how do they compare with spot rates? And How confident are you that customers will honor the contract prices if spot rates were to decline? And then secondly, your new guidance assumes the tight market conditions continue till the 4th quarter.
Could those really extend into next year as well? And how are you thinking about that?
Yes. Coming to your question on the difference between I think we are very confident that our customers will fulfill the contracts They have been signing, as we have mentioned. Just now, we are really building a different Business and relying on end to end and reliability of service with our customers.