AFRICA HALL J2 Conversation with Soren Toft

Sure, thank you. And thank you for having me. Let's jump right into it. As you said, we have a long and proud history in Africa. We've been here for more than 50 years, and we absolutely see the future of Africa right in front of us. Secondly, Bolloré has in their own history built an amazing company. When the family owner behind it decided that they were going to potentially part with it, we said we can't let such a great asset go by the wayside. We think we would be a great owner to stand on the shoulders of the great company they have built and really develop it into the future. They are a very recognized player in Africa, they've been here a long time. We are a growth company, we have a lot of ships on order, we have a lot of appetite for growth. Africa is a growing continent as we've heard over the last day and a half. Population is growing dramatically. I think this is a fabulous combination.

Well, in fact we've been spending money, that's correct. But our biggest thrust for the future is really the organic growth we're having. The number of ships we have on order is really to propel our organic growth. But it's true, we've gone through a year and a half to two years of good fortunes for our industry, finally I would say after a couple of decades living off very meager returns while having to invest billions every year just to keep the ships afloat, so to speak. What we have done is said, 'We're going to continue the organic growth path, but now that we've had better fortunes, there are a few interesting assets to pick up — assets that fit our strategy.' We are a shipping company, that's our core and it will always be our core. But around it we are building a number of associated and related businesses. We are already in terminals today through our company TiL. Bolloré brings another 22 concessions to the family, so we thought that was a perfect match for us.

For sure the biggest piece in Bolloré Africa Logistics are the terminals. We've also heard over the past day or so that infrastructure in Africa is critical. So we come from saying we're going to take these additional pieces of infrastructure over, but we're not going to stop there. We're going to keep developing them. They are very important for our network, our network of ships, the services we offer, the lines we produce. For Africa, we've also heard in the last day that infrastructure is absolutely critical, starting with terminal infrastructure but also the further hinterland infrastructure as the population grows.

Well, we're not going to be able to tell you what. I know you never tell us much because you're MSC, so you always keep us hanging. Well, we're a private company and we will remain a private company. But what I will tell you is what we have spent for the company. The DNA of our company is to grow, and therefore the DNA of what we are doing is to advance and further propel Bolloré Africa. This is a fantastic organization with a fantastic brand and great people. We're going to add 20,000 new family members to MSC, so I also have my mindset in making sure they feel comfortable and at home so they can continue their growth journey. We're going to keep the company separate, we're going to keep it with a separate brand — it won't be the Bolloré brand because that belongs to the Bolloré family obviously. We're coming out in the not too distant future with a new brand.

When you go through a process like this, you go through a due diligence process and you weigh in everything that you see. I think we've had a very good dialogue with the Bolloré family about all of this. We have structured the agreement in a way that if there are any bad surprises — which I don't think there will be — but if there are, we have an agreed mechanism to sort it out.

I'm not worrying about much. We know that in a portfolio there will always be good things and bad things. In our own portfolio of terminals or in our liner services, some routes are better than others. Times go up and down. This will be the same here. But our mindset is really to develop and grow the business. I'm convinced we can do that. What we can bring to Bolloré is a new dimension in the sense that we come from the ocean side. Our services will be able to go to the terminals of Bolloré, and we will be able to develop those terminals even more as we expand our shipping network.

My first comment to you would be, don't believe all the analysts are saying. But that being said, yes of course we had a couple of good years. But I think it's also important to take the context. We had definitely one or two decades where it was not that great, and at the same time we kept investing billions every year just to stay where we are. It requires billions of dollars of investments. So I wouldn't say that we have deserved it, but I certainly think, number one, we play a pivotal role in world trade. Our industry connects consumers and producers, makes trade happen, brings people out of prosperity. If you want this industry to keep investing in the future, we also have to earn a living.

For years it was a fragmented industry. You had 20, 30 players. Secondly, supply and demand seemed to rule the waves, and there was an excess of supply. Now that equation has turned. In the meantime, the industry has consolidated and there are alliances out there. It's still, compared to other industries, a relatively fragmented industry in the sense that top seven accounts for 80% of capacity. That's not unusual if you look into other industries. But it was so fragmented way back and it was so reliant on supply and demand that that was the real cause, I think, of why it was not the greatest industry. On the other hand, it was an industry in those years that grew a lot in the 80s and 90s. Global container shipping was growing 10% per year, so you could say the growth was kind of overshadowing the fact that the returns weren't fantastic.

Let me tell you my story. I decided to join this wonderful company in late 2019 but had to take an annual sabbatical as I was leaving one of the large competitors of MSC. I was sitting literally on my couch — because there was also COVID in Denmark in those days — and I was watching how Maersk dropped and I was thinking, 'Oh geez, Soren, what have you done? What is it that you have signed up for? You may be in for a really tough time. You may have to come and rescue the pieces or whatever else.' So I was a little bit in that frame of mind. But then what very quickly happened — and I think it's fascinating — first of all, we kept the supply chains going. Our seafarers, I think, are some of the real unsung heroes of this world. They kept working all through these things with massive restrictions, kept trade flowing. Imagine what a pandemic with lockdowns would have been if you couldn't even order your basic amenities, let alone order things online. We made sure the supply chains kept flowing. Then what happened was that as COVID over the summer subdued a little bit, a lot of the consumption that goes to services went to physical goods. Container demand started to pick up dramatically in the fourth quarter and into the first quarter of 2021, really fueled by the American consumer. Everybody needed the fifth television, everybody needed a home renovation, everybody needed a new kitchen. Of course, it was also fueled by the fact that governments pumped billions and billions of dollars into the economy — something we are maybe now seeing a bit of a flip side on in terms of the inflation that's going on in the world.

Indeed. Firstly, I think we have seen that the first quarter of this year has a slight reduction in terms of demand year on year. We have to be careful comparing year on year because the first quarter of 2021 was really a boom. So there's still, I would say, pretty good demand, but year on year it has gone down. We of course worry about what we see on inflation and interest rates and so on. Our hope is that we have some kind of a soft landing, if you can say so, where there's still a bit of growth in the world. Secondly, we are a global company. We are used to the fact that maybe one part of the world is doing well, another is doing less well. Of course, we are agile in the sense that we will move our assets around to where the opportunities are. Recently we moved a lot of assets to the U.S. Who knows, I hope we can move even more assets to Africa.

I can say I'm a big African believer. I'm a big African believer because I think the demographics speak for themselves. We all know that this continent will go from 1.3 billion people to more than 2 billion people in 30 years. All of these people want and deserve the same life that the rest of us have, meaning GDP per capita is bound to grow. I'm sure it'll be choppy, I'm sure it'll be bouncy up and down, but if you have the long view — 20, 30 years — I'm convinced Africa is the continent of the future.

I will tell you the truth: we are not so sophisticated that we are making plans for what's happening in 15 or 20 years. Hopefully you can bear with that. But I would say Africa has all the ingredients to do that, and I think Africa is becoming very much aware of the fact that they can go from just exporting commodities to taking those commodities and making them gradually into more finished goods.

No, it's not really the plan. To tell you the truth, the supply chain is immense and we are covering some elements very deeply, but there are many elements we're not covering. Freight forwarders are very important and large customers to us. We don't intend to compete with them. They account for maybe half of our business, so going into a fight with half of our customers would not be very wise, if you ask me. So we're going to keep a very good relationship with them, keep growing with them, and I'm sure they will also adapt to the future with digitization. Secondly, we operate in partnerships all over the world. The DNA of our company, built by the Aponte family, is a company with organic growth but also a company that's used to working with partners. We will continue to do that. There are many things we're not the best at, and for that we need great partners.

Immediately we saw that demand stopped completely to and from Ukraine. That was the first reality. Those containers came off our ships and we had to find a way to deploy ships in a better way. We have also seen a sharp reduction in import and export out of Russia. We for sure sympathize a lot with the Ukrainian people. This is a very tough battle for them. We are trying to support our own people, our seafarers, in the best possible way we can. We have done a lot and will continue to do that as a responsible company and also as a family business. I hope that NATO finds a way to open up certain corridors. We will be the first to step in and offer our services, offer our containers, establish the transport corridor so that things can move. As a matter of detail, right now we are actually resuming some of our exports and imports from Ukraine. We have built a new corridor via an Italian port where we're offering rail services so that we can still keep part of the economy flowing.

It's been challenging. We didn't have all the answers in the beginning because we had to see what was going to happen. Was it an all-out war covering all of Ukraine? It seems it's kind of moved into certain regions. We have a very competent organization there. Many of them we have had to relocate on their wish to adjacent countries, but they are still operating our business there — what is left — keeping in contact with customers. We have simply tried, as we always try, to be very agile, entrepreneurial, and say, 'Where's an opportunity?' A country in such need deserves that we are there providing supply chain corridors for them.

The real challenge with decarbonization is not the ships or the engines — all the technologies are available. The real challenge for all of us running ships — cruise, cargo, bulk — is the availability of fuel, the availability of green fuel. That is why we have said all along that it's very important that we operate in partnerships. Nobody can solve this on their own. A shipping company is a fuel user, not a fuel producer. We have been pushing very hard that we have global R&D that can tackle this problem. Right now the talks about an R&D fund worth $5 billion; we have said we're willing to up the ante to $10 or $15 billion if that's what it takes so that we find the right global solutions. Fuel is the issue. Secondly, this will be a transition because fuel availability dictates that we can't just switch all in one, two, three, or four years. That is one of the reasons — including on our cruise vessels — that we have gone for LNG, because acknowledging it's a transition lasting 15, 20, 25 years also means we should do what we can in the interim to reduce. What can we do in the interim? We can go to LNG because that already reduces CO2 emissions by 20%, takes out black carbon which is very bad for the melting of the ice cap. LNG minus 20% becomes 25, 30, 35%. Secondly, we need to continue to drive energy efficiency. That is vital in the interim period. There are many technologies we can deploy. One example: we have invested in an air lubrication system on 30 of our new buildings. We're basically building a blanket of bubbles underneath the ship, which takes 4 or 5% off the emissions. So there are many things we can do. It's not just about the very big goal at the end of the rainbow that comes maybe in 2050, or hopefully before.

The new rules coming into effect next year — EEXI, CII — will demand certain shifts in the tonnage because there will be ships that simply won't be able to pass the threshold. It's a progressively increasing threshold that starts in '23 but gets worse in '24, '25, '26. The way we have looked at it: number one, we need to replace old assets at end of life. We need to replace a number of chartered ships because we prefer to run predominantly our own fleet. We need to be compliant to the new rules. CII probably means we will have to reduce speed. For now, because green fuels are not available in the quantities we need, the only answer is either to slow down and add ships or to remove ports. But of course if you remove ports, you still need to fill your assets in a responsible way. That's what we've looked at. We still expect there will be growth in the world. The world goes up and down — we've had a very positive spell, maybe we will have a spell now that is a little less positive, but over time I'm sure trade will grow.

We are seeing the back end of what is supply and demand. Freight charges reflect supply and demand. For a long time it was driven by oversupply, so freight charges were low and customers were pushing us for lower and lower charges. The flip side is that once you get an excess of demand and a lack of supply, freight charges go up. Is that realistic? We had such a huge shock that knocked supply-demand dynamics. Over time it will normalize again, and that means freight charges will probably not be at the current level for the very long term. But it's also a fact — speaking to numerous customers — that some commodities are very sensitive to freight rates, no doubt, but there are many commodities that are not. The classic example I give is a pair of sneakers: the freight charge was normally about 10 cents per pair, retailing for $120 in the shop. Now maybe the freight charge is 30 or 40 cents a pair. I don't think that's going to change the retail price in the shop. So it's a very diverse picture. But of course some commodities are suffering from high freight charges.

I came from a stock-listed company with a majority family owner, so there was also a relatively long perspective. But it's probably fair to say that when you're really private, the perspective becomes even longer. The ability to look at trends not on a 5-10 year scale but on a 20-30 year scale — that's one difference. Secondly, agility in decision-making is not always a given in a family company, for sure, but what I've experienced is that the agility to make decisions is a competitive edge. Of course you need to be close to your business. I think that's very important. Operating at 50,000 feet, you become removed. In our business, you have to be close, you need to be involved. As a family, they are involved — very involved. I tell you the truth, since you're asking me: it's actually a blessing. Coming in on the back of 52 years with pure family leadership, I don't think it would have been advisable for the family to exit and a new CEO to enter. I would any day of the week argue for this, but of course it's a progressive change for both parties — for them and for me. Succession planning is important.

I think by hiring me, they have answered your question.

Let's not rival LA — that would be my first recommendation. Why not? But let's do better than LA. That would be my recommendation, and I'm convinced we can do better than LA. I'm convinced those ports will come to Africa. If you look at the developments in the last 10 years, we have gone from basically having no ports handling what we would call a 13,000-14,000 TEU vessel — a vessel with a draft of about 14-15 meters, 366 meters long — to today we are close to having 7 to 10 ports that can do that. This development will continue. We see it as our role not only to grow our business and make money but to develop the infrastructure that the world needs and the infrastructure that Africa needs. We are certainly on a pathway to do that because it will also grow our shipping business.

Thanks to you. It's fantastic. Thank you.