In the autumn of 2016, A.P. Moller - Maersk announced a new strategy and embarked on a multi-dimensional transformation that would change not only our company but also our industry.
At the time, we were challenged by declining revenue, low profitability, weak cash flow and high financial leverage. This combined with low and volatile oil prices, as well as low and volatile container freight rates exposed the conglomerate to high risk.
We decided to transform A.P. Moller - Maersk from being a conglomerate with diversified business interests in oil, oil services, shipping and logistics to a global leader in container logistics, building on our strong position in container shipping, ports and container-based landside logistics.
Our vision is to build a company that delivers true end-to-end logistics solutions that help our Ocean customers manage their global supply chains, while leveraging the opportunities of digital technology to significantly improve the customer experience and how we run the company.
The aim of the transformation of A.P. Moller - Maersk is to set the company on a new profitable growth trajectory to maximise shareholder value, while delivering on our purpose of enabling cost competitive, simple and sustainable global trade. With that we embarked on an ambitious and fundamental transformation that would not only change the company, but also challenge and change the entire industry.
Solid progress driven by the strategy
Looking back on 2019, we passed several milestones of our ambitious transformation, including the successful listing of Maersk Drilling, which marks the completion of the separation of the energy businesses. We completed the integration of Hamburg Süd and the reorganisation of the company from the conglomerate structure of the past, to the integrated and focused company structure of the future.
Despite a backdrop of weak trade growth, ongoing trade tensions and geopolitical uncertainty in many markets in 2019, the execution of our strategy has allowed us to deliver improved financial performance, while making meaningful progress on our transformation.
At the 2019 Annual General Meeting, we announced four metrics to track progress on our strategic transformation:
- Cash return on invested capital (CROIC) increased to 9.3% in 2019 from 2.8% in 2018 due to our improved earnings and strong focus on capital discipline and free cash flow. This key measure indicates generation of free cash flow from the invested capital through earnings, cash conversion and capital discipline.
- Non-Ocean revenue increased by 0.1% when adjusted for the closure of the dry factories in Maersk Container Industry, compared to a growth of 6.3% in 2018. This was led by strong growth in gateway terminals, only partly offset by a small decline in Logistics & Services due to extraordinary high vol-umes in Q4 2018 and a decline in Manufacturing & Others.
- Gross profit in Logistics & Services increased by 8.9% in 2019 led by the growth in inland services, intermodal, warehouse and distribution and custom house brokerage. This was a solid improvement, however, gross profit comes from a low level and we need to accelerate growth further in the years to come.
Finally, we achieved our synergy target on the Hamburg Süd integration and through the integration of the transport and logistics parts of our business by June 2019. By year-end 2019, the total synergies achieved reached USD 1.2bn, mainly from closer collaboration between our liner businesses and terminals as well as procurement and network synergies.
The execution of our strategy has allowed us to deliver improved financial performance, while making meaningful progress on our transformation.
In addition to the transformation progress, we improved the financial performance of the company. Net underlying result for continuing operations grew by USD 607m to USD 546m. Operating earnings (EBITDA) grew by USD 715m to USD 5.7bn with the EBITDA margin improving to 14.7%. As a result of the stronger earnings and cash flow, we strengthened our balance sheet further with continued focus on capital discipline and free cash flow, thus reducing net interest-bearing debt by USD 3.3bn.
The improved financial performance was achieved through a combination of strong cost control, a solid network in Ocean and increased collaboration between our terminals and liner operations. Finally, improved earnings and volumes in strategic parts of our logistics offerings in warehouse and distri-bution, custom house brokerage and inland services contributed to the overall improvement.
Safety remains a topic of vital concern. Sadly, in 2019 three of our colleagues and two contractors lost their lives while working for A.P. Moller - Maersk. We will continue to do our utmost to ensure a safe and secure work environment for our employees. In 2019, we launched our new safety approach, which focuses on leadership accountability, capacity for safe operations, and safety culture. We remain committed to improving our safety record and will not be satisfied until we reach our ambition of zero fatalities.
Simpler and better customer experience
A cornerstone of our strategy is to significantly simplify the customer experience and increase customer value. In 2019, we managed to significantly improve customer satisfaction levels as we made customer interactions more seamless, offered more value-added services and repositioned our strong brand.
We control key assets in the physical value chain, which gives us a competitive edge. We are the only end-to-end logistics provider that owns a global container liner network, a global terminal network and a sizeable share of warehouses. By integrating our operations and assets with technology, we can continuously offer new products to our customers and better meet their individual supply chain needs.
To deliver on customer requirements of transparency and predictability, we launched a new product, Maersk Spot, in May 2019. Maersk Spot offers fixed prices and a loading guarantee and was immediately well received with a strong market adoption accounting for 24% of volume by year-end 2019.
In container logistics, speed and cost efficiency remain key customer concerns. We stay focused on offering easy-to-use self-service solutions that enable our customers to quickly help themselves, primarily through Maersk.com. Our website has become one of the world’s largest B2B transactional web-sites, conducting more than USD 20bn per year in business.
A step change was made in early 2019 when we combined the sales forces of our land-based Logistics & Services products and our Ocean segment under the A.P. Moller - Maersk brand. Going to market as one sales force enables fully integrated value propositions and much simpler interactions to the benefit of our customers.
Good leadership, strong talent and the right combination of current and new capa-bilities are key to ensuring that all activities stay focused on our customers and on our strategic priorities. It is embedded in the strong A.P. Moller - Maersk culture to take care of today, while actively preparing for tomorrow.
Frontrunning a technology shift in the industry
Among industries, container logistics has not been an early adopter of new technologies. One of the main challenges in the industry is too many and too complex paper-based processes and lack of common industry standards for data flow. As the global leader of container logistics, A.P. Moller - Maersk is taking the lead to digitally transform core processes in the industry.
TradeLens, a digital platform developed jointly by IBM and Maersk in 2018, is one example where blockchain technology allows increased transparency and more efficient information exchange saving time and costs for all players across the industry.
TradeLens is processing over 10 million discrete shipping events and thousands of documents each week. This provides shippers, carriers, freight for-warders, customs officials, port authorities and inland service providers with a common view of transactions and enables users to collaborate more effi-ciently with real-time access to shipping data.
Another aspect of the digital transformation is optimising utilisation of our assets. One example is in terminals, where we are introducing semi-automated operations at Pier 400, Los Angeles – the largest container terminal in North America. The aim is to increase efficiency and safety, and to reduce emissions. When the project is finished, truckers will see their entry/exit times at the terminal go down from 105 minutes to 35 minutes.
2020 – continuing to perform while we transform
Focus remains on developing our end-to-end offering through an even stronger Ocean product while expanding and scaling our logistics and services portfolio. The growth in logistics will be supported by the acquisition of the USA based company Performance Team with strong capabilities within warehousing fulfilment services, e-commerce, inland transportation and distribution services. Also, we are committed to securing long-term profitability in our terminals business and continue the strong developments from 2019.
Cost leadership is imperative in a competitive market with uncertainties.
To further fund the transformation, we continually improve our operating results while delivering strong free cash flow and reducing investments in the Ocean business. We continue to reduce CAPEX spend, with CAPEX guidance lowered to an accumulated USD 3-4bn over the coming two years.
The year 2020 will be marked by new regulations on sulphur emissions (IMO 2020) that went into effect on 1 January. We fully support the industry move towards low sulphur fuel to reduce pollution. We are well prepared to comply while mitigating the increased fuel expenses by lowering our bunker consumption and passing on the additional cost to customers.
Good leadership, strong talent and the right combination of current and new capabilities are key to ensure that all activities stay focused on our customers and on our strategic priorities. It is embedded in the strong A.P. Moller - Maersk culture to take care of today, while actively preparing for to-morrow.
The outlook ahead is for low economic growth and low demand growth for seaborne goods. We plan accordingly and maintain flat capacity to support utilisation and low cost.
Committed to enabling cost-competitive, simple and sustainable global trade
Only through a level playing field for global trade can we enable exporters to sell their products around the world, and importers to source from the most competitive suppliers, no matter where they are located. Global trade creates jobs, economic growth and consumption opportunities that raise the quality of life.
As the world’s largest operator of container vessels, we have a responsibility to pioneer when it comes to climate change. We continue to reduce our CO₂ emissions and work towards reaching carbon neutrality in our Ocean segment by 2050. On the operational side, we have reduced our bunker consumption by 6.7% since 2018, and our CO₂ efficiency has improved by 5.2%.
Good corporate governance remains a high priority, and in 2019 the Board of Directors added new members with the election of Bernard L. Bot and Marc Engel, bringing in supplementary capabilities in finance and logistics.
By the end of 2019, we took one step further in the integration of the business structure. Changes were made in the Executive Board with Vincent Clerc being appointed CEO of Ocean & Logistics and Henriette Hallberg Thygesen joining as CEO of Fleet & Strategic Brands. Furthermore, it was announced on 12 February 2020, that Patrick Jany will take up the position as CFO and member of the Executive Board from 1 May 2020.
These structural changes allow for even closer collaboration that will strengthen our execution power.
By integrating our operations and assets with technology, we can offer new products and value propositions to our customers and better meet their individual supply chain needs.
Thank you for your continued supportWith the progress demonstrated in 2019 we have completed the first phase of our transformation. We remain committed to becoming an integrated transport and logistics company, delivering a higher return to our shareholders, while enabling global trade in an affordable, simple and sustainable way.
On behalf of the Board of Directors and the management team, we would like to extend our sincere gratitude to all our employees around the globe for their continued passion, efforts and dedication to A.P. Moller - Maersk who’s loyalty and contributions have enabled our unique position and is the foundation for our future.
Jim Hagemann Snabe