Maersk's financial results for 2019, released on Feb. 20, show improved EBITDA and free cash flow generation, despite sluggish demand and global container trade growth of only about 1.5%. Furthermore, the company is pursuing a transformation into a focused, integrated transport and logistics company, announcing its intention to acquire Performance Team, a U.S.-based warehousing and distribution company.

Here, S&P Global Ratings is responding to questions from investors regarding Maersk's 2019 results, guidance for 2020, and financial flexibility under the current rating, as well as near-term prospects for the container shipping industry.

Frequently Asked Questions

How do Maersk's 2019 results compare with your base case and guidelines for the 'BBB' rating?

Maersk's EBITDA and credit measures performance in 2019 meet our base-case forecast. Our adjusted EBITDA figure of $6 billion for the company including recurring dividends from equity investments of $0.3 billion, is slightly ahead of our previous estimate of $5.8 billion-$5.9 billion for 2019 (see "A.P. Moller - Maersk A/S 'BBB' Ratings Affirmed On Clarity About Financial Policy; Off Watch Neg; Outlook Stable," published May 28, 2019), while exceeding the $5.7 billion achieved in 2018. Solid EBITDA generation, combined with reduced capital expenditure (capex), translated into ample free operating cash flow (FOCF) largely absorbed by shareholder returns, while excess cash flows, boosted by cash proceeds from financial asset sales, were used to reduce adjusted debt to about $12.9 billion at year-end 2019. This level of earnings and FOCF, alongside Maersk's consistent prudent financial policy, was sufficient for the container liner's ratio of adjusted funds from operations (FFO) to debt to improve and meet our forecast of about 36% for 2019 compared with about 30% in 2018. This is below the 'BBB' rating threshold of 40%, but we believe that Maersk is on track to strengthen this ratio to above 40% in 2020.

Did Maersk's guidance prompt you to revise your base case for the company in 2020?

We view Maersk's guidance and industry outlook as largely credit rating neutral. The company's 2020 EBITDA guidance of about $5.5 billion (plus or minus 10%) is somewhat below the $5.7 billion it reported in 2019 and our base case. We still believe effective capacity management, efficient asset utilization, and improving cost performance will allow Maersk to achieve adjusted EBITDA of $6.2 billion-$6.3 billion in 2020 (including an estimated $0.2 billion of dividend from equity investments), which is slightly above the about $6 billion achieved in 2019 and at the higher end of the company's guidance range for 2020.

According to Maersk, its compliance with the new International Maritime Organization (IMO) 2020 regulation and recovery of higher fuel prices appear on track. Accordingly, we continue to assume Maersk will pass-through IMO 2020-related bunker-cost inflation via higher freight rates. We also factor in that coronavirus-related disruptions to trade flows and supply chains will start easing from April 2020.

As we expected, the company confirmed its plans to reduce capex to $3 billion-$4 billion in total in 2020-2021 from $2 billion in 2019, $3.2 billion in 2018, and $4 billion in 2017. This will boost the company's FOCF. In our view, Maersk's well-invested asset base allows for such a reduced level of capex. In addition, we believe Maersk will carry on with its disciplined and flexible shareholder returns, allocate excess cash flows to reduce net debt, and mitigate the impact of the potential increase in net debt if the Performance Team acquisition goes ahead as expected; the transaction is currently awaiting regulatory approvals. Combined, these factors should allow Maersk to gradually strengthen its credit measures, with adjusted FFO to debt improving sustainably beyond 40% from 2020.

How much new debt from acquisitions can Maersk incur and still maintain credit metrics consistent with the 'BBB' rating?

Generally speaking, it is difficult to quantify the financial headroom under our rating ratio guidelines for debt-funded acquisitions. This, in particular, is because of typically limited visibility on likely counterbalancing measures, such as EBITDA contribution or synergy gains from acquired companies. That said, the gap between our projected credit measures for 2020-2021 and our ratio thresholds for the rating, such as FFO to debt of at least 40%, indicates Maersk's headroom to incur acquisition-related debt under the ratio guidelines for the 'BBB' rating or to withstand unforeseen adverse trading conditions. In our base case, we assume Maersk's credit measures will keep improving, with adjusted FFO to debt reaching about 45% in 2020-2021 from about 36% in 2019. This, compared with our rating threshold of at least 40%, indicates about $1 billion of financial flexibility under the current rating for debt-funded acquisitions (before the Performance Team deal) or other discretionary spending (after expected share repurchases of $750 million in 2020), all other factors remaining unchanged and absent offsetting measures by Maersk. This points to ample headroom to accommodate the potential Performance Team acquisition, which has an enterprise value of $545 million (including IFRS 16 lease liabilities of around $225 million).

How sustainable is S&P Global Ratings' base case and what are the main hurdles for Maersk this year?

Our base-case forecast is susceptible to challenging and difficult-to-predict trading conditions. These are linked to cooling economic growth, global trade disputes weighing on cargo volumes, or to the recent coronavirus outbreak disrupting supply chains. Higher fuel prices, as the industry shifts to expensive low-sulfur-compliant fuel oil under IMO 2020, and the ability to fully recover bunker-cost inflation pose further challenges for Maersk this year. However, we understand that bunker adjustment factors (previously agreed with customers) and cost pass-through measures on spot markets have been successfully implemented in recent months. We also note that bunker prices have significantly decreased in recent weeks, which should provide some relief in times of pressured volumes. We factor into our forecast Maersk's continued tight rein on cost control, ability to pass-through fuel-cost inflation to customers, and disciplined discretionary spending, including most importantly the linking of shareholder returns to FOCF generation capacity. If any of these factors do not materialize, we would likely revise downward our base case for the company.

Does a balance between demand growth and supply growth in container shipping appear likely in 2020?

We believe supply conditions are increasingly favoring ocean carriers. With no incentive to place new large orders amid muted contracting activity since late 2015, the containership order book is at a historical low: currently only 10% of the total global fleet. Combined with funding constraints, more stringent regulation to cut sulfur emissions to 0.5% as of January 2020, and recent coronavirus-related disruptions (such as delays in newbuild ship deliveries, ship maintenance and repair works, and scrubber retrofits owing to staff absences and equipment/spare parts shortages in Chinese yards), this will likely support a demand-and-supply balance in the containership segment in 2020.

We believe containership supply growth will be muted this year, which is particularly important in times of sluggish demand growth. This will boost containership utilization levels and support freight rates. We note that the coronavirus outbreak was followed by a quick withdrawal of loops (sailings) from China, in addition to the large number of blank sailings during the winter slack season. We see this as a sign of reactive capacity management by container liners, which we would normally expect from an industry that has been through several rounds of consolidation in recent years. Notably, the market share of the top five container liners is now about 65%, up from 30% around 15 years ago.

Related Research

• Coronavirus To Inflict A Large, Temporary Blow To China's Economy, Feb. 7, 2020
• Full Analysis: A.P. Moller - Maersk A/S, Jan. 28, 2020
• A.P. Moller - Maersk A/S 'BBB' Ratings Affirmed On Clarity About Financial Policy; Off Watch Neg; Outlook Stable, May 28, 2019