Good morning, ladies and gentlemen. My name is Soren Skou. I'm the CEO of AP. Bollamersk, welcome to our Q2 earnings call 20 2018. As always, I would like to start by reminding you of our disclaimer on about forward looking statements.
Now, starting out with the highlights for the second quarter, I think we have a very clear headline that we are are pleased with the momentum we have on growth, but we're not pleased with our level of earnings We grew our business in Ocean. In total business by 24% during the quarter over last year, very much, of course, driven by the acquisition of Hamburg Sud but also growth across all of the businesses that we are and we are pleased about particular the growth we had in our non Ocean business, where our Terminalling Towage business and our logistics and service businesses starting to show good growth momentum. Our earnings, our EBITDA was negatively impacted significantly by the increase in oil price, which on a like for like basis added 260 $1,000,000 to our cost during the quarter due to a 28% increase in fuel prices. After a quite difficult first quarter this year where we had just taken delivery of Hamburg Sud in the in December of 2017, we had a negative development in our unit costs. We were able to, in the second, quarter, I believe I could take it, retake control of unit cost.
In Ocean, they were down by almost 6% since the first quarter. In the first quarter, we received a massive inflow of Hamburg Sud tonnage. We were tied to lots of vessel sharing agreements that severely limited our ability to scale our network. We were able to get started on that in the second quarter. And that has impacted our unit cost quite significantly.
We also have a positive effect from less interruptions of the network in the second quarter. Now turning to Hamburg Sud, we We believe that that integration is very much on track. We have delivered, synergies to the tune of 140 $1,000,000 so far year to date. And we report a pro form a EBITDA for Hamburg Sud of 155,000,000 dollars for the quarter. We believe that the acquisition of Hamburg Sud has been a very good acquisition that is that is delivering.
We still expect to deliver the $350,000,000 to $400,000,000 of synergies. And if you read the report very closely, you will see we have added a minimum to the guidance at this time. We had a very poor cost cash conversion in the quarter. Most of it driven by short term timing effects to tax payments and receivables. And we have seen already in July that these, situation is normalizing.
Of course, we do have a longer lasting impact from increasing bunker inventories, but we retain and reiterate our long term guidance of wanting to have a very high cash conversion. And we also believe we can deliver on that. CapEx remains a focus area for us or rather not spending any CapEx. We have not done any new vessel orders in the quarter as we have actually not done any new vessel orders except for 2 since 2016. Also, we have not invested in new, new major terminal projects and we, we will continue down this path until at least until 2020.
We currently operate just around 4,000,000 TEU of capacity. That will be plenty of capacity to take us through 2019. As we announced last week, we have downgraded our guidance for the year, and now expect an EBITDA in the range of 3.5000000000 to 4.2000000000 for 2018. The other big news this quarter or this quarterly report, of course, is that we have decided on a solution for Maersk Drilling. We will stock list the company on Copenhagen, NASDAQ Coben Hagen during 2019.
This is planned to be done in the form of a demerger. We're not planning to raise any capital. We have already financed the company. With about $1,500,000,000 of new non recourse debt. And that means that Mass Drilling will be able to go on to the Stock Exchange as one of the best capitalized companies in that industry and have lots of strategic options moving forward.
As I said, we're planning to do a demerger and by that, we mean we will plan to distribute all of the shares in the company to the shareholders in the proportion that the shareholders today own shares in APMolar Merck. We continue to look for solutions for Maersk Supply Service, but I also want to say that that companies operating in a very, very difficult industry right now where there are not many or that right now, no no very clear and obvious solutions for how to separate out mass drilling and mass supply service. As with mass drilling, we are looking really for for 3 elements when we consider options. 1 is that we want to make sure we create as much value for our shareholders as possible. 2 is that we want to make sure that what we separate out becomes part of a viable company or becomes a viable company and that has strategic opportunity and options And finally, we are also looking for, to finding solutions that are good for the employees and the headquarters here in Denmark.
Right now, it's difficult for us to predict the timing around mass supply service, but I have to also underline this is the smallest company in our oil and energy related portfolio and whether or not we are able to separate out mass supply in the near term will not really truly impact our our strategic agility and balance sheet. During July, we decided to sell part of the shares that we own in Total. When we signed the deal with Total, the shares were valued at Fall $4,950,000,000. We've seen a very impressive development in the share price as the oil price has improved. And we have decided now to sell about $1,200,000,000 worth of shares so that we retain a holding in Total with the current value of around $5,000,000,000 and the proceeds, of course, will be used to strengthen our financial flexibility.
We are reiterating today that we will plan to distribute to our shareholders, a material part of the value of the Total shares, the 5,000,000,000 to our shareholders through a share buyback program, through an extraordinary dividend or through a dividending out the actual shares. Or a combination thereof. And we said originally, we would do that in 2018, 2019. And we're now saying we will do that after the the distribution of the drilling shares in 2019. Now moving on to the numbers, very solid revenue growth, 24%.
We we came in at $9,500,000,000. It means that we in all likelihood it's going to get very close to $40,000,000,000 of turnover for our transport and logistic businesses this year. This is a major improvement over 20 16, when we started the journey of transforming the company, that year, we had just over $27,000,000,000 of turnover. And we lost about $500,000,000 in our transport and logistics businesses. We would have liked to see a lot more of the growth internal actually also hit the bottom line.
We're not seeing that, and we explained that basically by the increase in the oil price during the last year, which are going to cost us in this all cost us in the second quarter around $260,000,000 on a like for like basis. And for the year, probably somewhere north of $1,000,000,000 of extra fuel costs that we have to absorb this year. Now moving on to CapEx, we are, as I already said, continuing on the journey of reducing our CapEx. We are not making new significant CapEx commitments. As I've already said, most of the CapEx we are spending now are decisions that have been taken prior to 2016.
Our guidance remain for the year, $3,000,000,000 of CapEx, but I do want to highlight that we once we get to to the end of, 2019. So about a year and a half from now, we'll have almost no completed CapEx except for except for the commitments we have under certain terminal concessions in the long years. And that will give the company significant flexibility in terms of, of strategic agility. Now on cash flow, we have, we had a quarter we negatively impacted by our working capital. As I already said, we believe we these are mostly short term effects and that we will get back to a high cash conversion during the third third quarter.
And I believe I will leave it at that and then I will turn it over to my colleagues SunSoft, our Chief Operating Officer, to start the discussion on the segments. I will then be joined by my colleagues, John Toft, Vincent Clingerk, modern English Tuft and, CalCimics in explaining the specific segment results.
Thank you, Soren, and good day, everybody. Diving in specifically on Ocean, we grew our revenue, both including and excluding the contribution of Hamburg Sud. Obviously, as we have also reported, we have a significant impact by the higher oil price also more than offsetting the increase in freight rates. But we did also manage to grow other revenues especially so called demers extension, which is storage fees and also income from slot sales, mainly the agreement with the Q2 sorry, in Q1, we reported that we would launch various plans to improve, let's say, our fortunes on revenue and cost, and we have worked very hard on this during Q2 And we also believe we have achieved some progress, but clearly, we also believe that we have more to come. As announced, we would curtail our capacity, and we have done so.
But in the meantime, we have not given up volume or market share we have grown with the market, if not even a little bit above. Also reliability recover which was also something that we have put in as part of our plan. This helps delivering towards our customers. It's very much in the Maersk brand DNA and it has also assisted us in improving our variable cost. If we then dive in a little bit deeper in the cost improvements, then quarter 2 saw an improvement of nearly 6% at fixed bunker versus quarter 1.
That being said, quarter 2 over quarter 2, you can see that we actually do have a cost increase But we then when we then separate out the mix effects of Hamburg Sud and the exchange rates, we do get down to a quarter year on year improvement of about 1.4% within the 1% to 2% that we still believe that we can achieve for the year. It's very important to say also that the mix effect of Hamburg Sud last time around was a little bit higher and that obviously reflects that also here we are seeing progress in their cost base because they take a share of the synergies. The capacity curtailments that we've done and the general efficiency improvements that we've done has helped us deliver an improved efficiency it's true that bunker price and bunker cost increased, mainly due to the price, but we have now, this quarter again, dropped back down well below the 9 kilos per FFE mark. And now we're also giving a new disclosure on efficiency, which is so called grams fuel pair. Total TEU deployed times nautical miles, which is a measure that gives a little bit better indication and insights into the real efficiency of running the fleet Whereas the other one, both as efficiency and utilization asset intensity, we'll be disclosing this also in the quarters to come.
If we then, on the next page, look a little bit closer into capacity, then we said that in quarter 1 that we would start reducing our capacity, we would not order any new ships for the next minimum 12 months and we would keep our capacity constant. And we said last time with a downward trajectory short term We have reduced capacity nearly 2% quarter on quarter. Obviously, part of this is the improvements that we've done, part of this are the huge synergies, but we have also taken actions on certain trades services that we don't believe are contributing positively to to our business. So it's a combination of these things. We have further plans of this and hope to continue to improve this.
Obviously, that will also help utilization of the network. Let me then turn it over to Vincent Clark who will speak more about the freight rates.
Thank you, sir. Compared to last year, the freight rate were unfortunately slightly down. And compared to last quarter, it flat. And this is really despite the increases that Sam mentioned on the bunker price. Actually, if we exclude the positive effect from the higher rate that Hamburg Sud brought into the mix of AP monomersk.
The freight rates were down 5% compared to the same quarter last year. The delivery of new building capacities was heavily skewed towards the 1st part of the year and and we saw that impact the freight rates here during the second quarter. We were, however, successful at implementing an emerging bunker surcharge in June, which helped mitigating partly the rate slide that we saw at the beginning of the quarter and that will have more impact, more positive impact going forward. When we exclude Hamburg Sud, The volumes grew in line with the market around 4% which is also in line with the plan that we have set for this year. It should be noted on the table that the high increase in rates on the intra regional segment is due to should intra Americas or intra Latin America rates which have a high inline components and come in at a much higher gross level than the rates that we have on intra Asia on intra Europe.
So it's really a significant change in the composition of what makes that segment that is the cause for this. If we now turn our attention to logistics and services, revenue increased by 6.7 percent just shy of 1,000,000,000 and it were positively impacted by volume growth in supply chain management and in land haulage which are 2 which are segments of our logistics and services that are high strategic impact for us. Throughout the quarter, we managed to secure significant new customer wins on on supply chain management, especially. And we continue to roll out Twil, our digital, forward platform for SMEs in France, Malaysia and Thailand, which increases the scope that we can and the growth that we can expect from these initiatives. EBITDA was, however, negatively impacted by higher IT spend and the lower profitability on inland services where we were affected also by the higher fuel cost from our vendors.
We also had some timing of the maintenance in Star Air that had an impact this quarter. Continued improvement in cash conversion cycle resulted in a significantly improved working capital and positive cash flow development for Tamco something that we intend to continue here in the quarters to come. Gross profit improved by 4.5 by 4.9 percent to 1,000,000 positively impacted by the product mix supply chain management is a very profitable segment for us. And foreign exchange movements were actually immaterial this quarter. The margins in supply chain management increased by 8.9%, but we also saw a very positive development in our air and ocean, where we saw improvements in margin by 16% and 2.7% respectively.
The EBIT conversion, however, decreased to 8.5%, which is highly unsatisfactory. Logistics is a segment where we want to grow And for us to create a higher growth platform, we need to have some upfront investments into this growth, which is mainly being done through IT spend, but also hiring colleagues that bring in some of the capabilities that we need to generate that growth. That being said, we are working hard and have several cost initiatives to bring our cost base down. And to improve the profitability that we want to get out of these segments. We cannot be satisfied with an EBITDA margin in the low single digit and that will be a key focus area in the coming quarters to improve this number.
With this, I will hand it over to a modern angle soft for terminals and Towage.
Thank you, Vincent. Overall, we had a quite steady performance for terminals in Towage with both gateway terminals in APM Terminals and Towage in Switzerland, developing well compared to last year. Our EBITDA was up by 19% compared to last year and our CapEx across the two parts of the business was down by 25%. Our EBITDA margin increased to 21%. And in general, our results were boosted by a strong volume development, both for terminals and for Towage I'll give a few more details on that in just a moment.
Income from our joint ventures which is not included in our EBITDA increased by $19,000,000 to $51,000,000 will increase the contribution, especially coming from West Africa, Russia and the Latin American joint ventures. If I for a moment, compare Q2 EBITDA with Q1 EBITDA here for this year, then our results decreased by $18,000,000 for three reasons. Half was due to one off adjustments in each direction in the quarters. We also saw a 4% revenue per move decreased from Q1 to Q2, mainly due to rate of exchange and also a mix effect And finally, we saw higher operating cost in 2 of the projects under implementation compared to what we had in Q1. As mentioned, we saw a good increase in our volumes in Q2, both for terminals and Towage on financially consolidated terminals are the ones that we run and control.
We had a 10.6% growth approximately twice the growth in the market. And this was especially supported by a strong 20% increase in volumes from mass ocean, including Hamburg Sud, whilst other shipping line customers, by and large increase in line with the markets. The stronger volumes then had a significant, led to a significant increase in our utilization, which again led to a unit cost improvement of 7% for our financially consolidated terminals. And we have especially seen a strong volume development in Latin America. Our equity weighted terminals, so including our minority joint ventures actually saw a unit cost increase mainly due to the terminals in Far East Asia where most of our terminals are full and where cost inflation is high.
Revenue per move increased slightly across the portfolio. If we exclude for mix and And finally, I'll mention that our towage business in Switzerland continues to develop well with increasing volumes amongst others boosted by new projects becoming operational as an example in Bangladesh and also increased volumes and business in Latin America. And let me then give the word back to you. So
Yes, thank you, Martin. This is Anton Taft. Just very briefly on manufacturing and others, then what we can say is revenue was quarter on quarter up quite a bit, but that's really because we have, in this segment included mainly the bulk activities that we took over as part of the take over of Hamburg Sud. We can also say that we are working on finding, let's say, the best future solution for the bulk activity. So more will come on that in the near future.
When we then look at the main activity in this segment, MCI, then the result, the EBITDA is impacted by primarily the decision that we communicated in Q2 to close down the reefer factory in Chile. The reefer market is plagued by significant oversupply with also generally lower demand and we could not find a viable solution for the factory in Chile. We naturally regret it, but at the end of the day, this was and is the right decision. Then finally, what we can say is that for the rest of MCI's activities is going going well and we have concluded the largest ever third party deal for MCI this quarter and they are working hard on securing more. And then let me pass the word to Alex.
Thank you, Sean. And, let's turn to Maersk Drilling and Maersk Supply Service and Justin Maersk Drilling. I've just, repeat Sean's comments about the decision and the conclusion we reached to demers the company via a listing at the NASDAQ Copenhagen I just want to reiterate that we are listing a company that has one of the most modern and Yonkers fleets in the world with no new CapEx coming. We are listing a company with a leading operational performance and incredibly strong customer relationship. We are listing a company with a very strong financial position and conservative balance sheet and a secured gross debt of $1,500,000,000 and a company with innovative solution and a cost efficiency of efficient operation and a strategy in place to benefit from the future growth in the, in the drilling sector.
So we really think this is the best solution for our shareholders 2nd quarter, then the revenue increased slightly despite of the challenging market environment, and they managed to add another 1200 days $5,000,000 to the backlog in the quarter. Maersk Drilling also reported a positive free cash flow of 1,000,000 slightly impacted by a late payment that has since then been received. 66% and for 2019, more than 40% of the rig days is signed up, giving the company a revenue backlog of 2 $700,000,000, which is one of the highest backlogs in the industry. So EBITDA was still negatively impacted by several idle rigs and higher costs for the planned separation. However, it was also positively impacted by slightly more contracted days, a high operational uptime and general cost savings across the operations.
Turning to market conditions. EBITDA was negative $3,000,000 and the free cash flow was also negative due to delivery of 2 new buildings. One payment of 1 newbuilding was successfully delayed to 2019. As John said, we are still working on finding a solution from a supply service, but the market remains challenging. On the positive side, the strategy to diversify it business into new markets has progressed amongst others with the announcement of the partnership with Vistos, aiming at lowering the logistics and installation costs within sustainable wind turbine solutions.
And with us, those are a few words on my supply service. I'll hand it back to Son's call.
Yes, thank you. And I have already addressed guidance, so I won't repeat that, except to say that, we believe that the market is growing will grow 2% to 4% this year. 2nd quarter was in the very high end of that range. So, in terms of impact from from trade tensions, then, at least at this point, there's nothing, there's no impact on the ground and And then third quarter, we also started off with solid volumes. But at the end of the day, obviously, given all of the press coverage of trade tensions, tariff increases, trade wars and so on, if it were to materialize, it will have an impact on our industry.
So with that, I think we are ready for questions.
And the first question is from the line of Casper Blum from ABG. Please go ahead. Your line is open.
Thank you very much. First question goes to your, I can say, your guidance for the reminder of 2018. Can you talk a little bit about your expectations for, I can say, the freight rates or maybe more, how successful you expect to be in pushing through higher rates and potentially maintaining the bunker surcharges that have been installed so far. That's my first question. Please?
Well, Casper, we are not keen to guide on our guidance, but if you do the math on the back of an envelope, then you have to it's pretty clear we have to do better in the second half than we did in the first half in order to reach our guidance. Given what I also have said today, we do have a good line of sight to the third quarter. We are halfway through and we know that the freight rates will be higher.
Fair enough. The better start to or the solid start to Q3 that you've seen, To what extent do you think that is, I would say, inventory building or whatever you might call it ahead of the potential trade war and tariffs?
Hi Casper. Vincent here. So this is something that we're in close dialogue with our main customers. And in some, in some of the trades, we there could be an element of buildup ahead of sanctions. It has been very difficult so far to really get an aligned view from customers on what drives the numbers right now.
So think I will stay with the, with the guidance that, that Sean had that so far, we haven't really seen anything. I also want to remind you that really the this only affects the trans pacific at this stage, really between China and the U. S. The only major trade and it's a trade where we're underexposed to. So for us, it's still the majority of the business is not really engulfed into into any type of sanctions play.
Okay, thanks. Then just my last question, Costco was affected by a cyber attack in the U. S. Not that long ago, maybe not to the same degree as you were last week, but has there any been any sort of incidents where where you've been able to benefit a bit from that like your competitors benefited from your cyber attack last year?
So the cyber attack from, on Costco, as far as we understand, only hit their U. S. Operation. And I mean, we have a relatively small presence there, but also our network is has been full for a while. So we have not really seen any difference in our loadings because of what happened to Costco.
And next question is from the line of Robert Joyson from Exane BNP Paribas. Please go ahead. Your line is now open.
Good morning, everybody. I have three questions if I may. Firstly, on line, I noticed that the like for like volume growth improved from 2% in Q1 up to more than 6% in Q2. Which, of course, the opposite of a slowing volume trend that we see for market overall. Could you maybe just comment on what drove that improvement?
That's the first question. The second question on unit costs, it was good to see such a large improvement versus Q1. Which was obviously helped by the 2% reduction in capacity seen versus Q1. You already mentioned on the call that capacity should continue to decline. But could you just comment on whether it may be possible for reduction in capacity during Q3 could actually be greater than the reduction in capacity during Q2.
And the final question is on the total shares You said that a material part will be distributed to shareholders. Could you perhaps be a bit more specific about what is meant by a material parts?
Thank you, Robert. I will start with the Tel shares and then Vincent then turn toff will, will cover the questions to this performance in Ocean on cost and volumes So on to tells you, as what we're saying is that we still expect to pay out a material part of the value of the shares. The shares were worth $4,950,000,000 when we announced the transaction And the shares that we have left, so to speak, are still worth around $5,000,000,000. It's a material part of that amount we are talking about. I cannot give any more guidance, guidance than that.
Only to add, which I already mentioned before, that we will do this distribution after the distribution of the drilling shares in 2019. And then, Vincent, on volume growth?
Yes. So on the volumes, so there is some delay in the market statistics to know exactly what the volume growth is. And in some of the geographies in Africa and in Latin America, we don't always have exact, exact statistics before quite a few months. Our expectation, as Sun mentioned, is that, the growth that we expect for this year between 2% 4% will really be at the upper end of this in the second quarter. So we have a ex Hamburg should 4.3% in Maersk Line, which has had very little changes to its network and 2.2% on Hamburg Sud.
So we are actually growing slightly better than planned. I think the guidance Chan, at the last investor call was that we would be slightly below market. We think we are about doing as market because the disruption on the Maersk Line network has been very small. And also, we are performing better on customer retention than we had the expect as a result of the integration of Hamburg Sud.
And then, Robert, on capacity, what we can say is that also in Q3, we will continue to see, you could say, some of the efforts of what we have done as part of the Hamburg Sud synergies and as part of also reviewing the network and closing unprofitable trades We cannot give a number exactly what that will mean in Q3, but what we can say is that we expect to further improve but of course, not at a point where we're also starting to give up the markets here.
Could I just ask maybe one cheeky follow-up I you previously spoken about the potential to reduce mask line capacity down to 1,000,000 TEUs. And based on the date of it, but I see I think that Maersk Line's capacity is pretty much at 4,000,000 TEUs as of today. So should we conclude that those potentials do better than 4,000,000 TEUs now?
Well, we said, Robin, in Q1, I can actually repeat again here. That is that I said that short term, actually, we expect to go even further down, but the 4,000,000 was more kind of a a more mid range guidance for where we believe that you should see our capacity over the course of the next 12 months.
That's great. Thank you.
And the next question is from the line of Dan Togo from Carnegie. Please go ahead. Your line is now open.
Thank you. A few questions from me as well. Firstly, back to the rate question here, and you mentioned that the rates rates is expected to go up in second half. Is that compared to where we are today? Is it compared to the level in Q2 or compared to last year?
That's the first question.
Yes. So, so when we say, I think what Sun said was that if you look at if you look at the first half here, EBITDA and you look at the guidance, then you have to, you have to see that we need to do better in the second half to be there. And a lot of it will be, or some of it has to come with cost and some of it has to come from the rates. So it is over the Q2. And if you see actually, since April, the SCFI has increased by 20 percent.
So July over April was 20%. And if you look at from the lowest point to where it is today, it's close to 30%. So So not everything is, not everything is, is of course indexed on the SCFI, but it gives you an indication for what has happened. I also want to say that when we have a few increases to our long term contract, our ability to capture that is delayed. So we will see some of that also come through in the 2nd part of the year.
But I guess you also expect the usual seasonal pattern to be repeated this year that rates usually goes off after the peak season?
Yes. I think this is where I think some of the, I mean, our our plan calls for a very tight capacity management, Hassan just outlined, 4,000,000 TEU is a media range for the range for the coming 12 to 12 months, but we can take that further down here in the slack to support high utilization and decent prices.
Okay. That's exactly to bite you into my next question because I was wondering if you could get give some sort of indication how we should see your capacity development in coming quarters? Is that a reduction around these 2% as you manage here in Q2. Is that a fair assumption?
Well, as I hopefully explained, I mean, short term, we believe that we will be able to reduce the capacity even further. I mean, number 1, we haven't seen all the, you would say, annualized the full effects of the synergies and the inclusion of the Hamburg Sud Network in in Maersk Line, which really only took effect from April onwards, secondly, some VSA agreements that Hamburg Sud had did not buyer exactly on that date, but some expired a little bit later. Thirdly, we have taken decisions to actually also curtail some trades and close some trades that we don't feel could give a meaningful contribution to our
our results. So there will be
a further improvement in Q3, but obviously over the mid range, the GBP4 1,000,000 is kind of what we what we see as the right place that will both secure, that we can cater for the volumes that we have, at the same time, have a good stable capacity utilization.
Okay. And then on the unit cost, you mentioned in the reports that there are also some one off items in the unit cost, what brought the unit cost down Q on Q here in Q2 compared to Q2 to Q1. Could you specify how much of this reduction is one of, and because I can see in the slide, there's some FX related arguments there, but what is due to, sort of, say, is it deployment argument and what is due to, the one off effects?
Yes. So quarter on quarter, so Q2 versus Q1 unit cost was down 5.9% and the 1 offs was less than the percent.
Okay. And then a bit into the capital structure. Just two questions relating to that. Firstly, why not sell all to Tasias? Why stick to as a holding on to Tasias?
And then on the drilling demerger and the leveraging of drilling, what sort of metric are you using for deciding what kind of depth carrying capacity, you can have in drilling because $1,500,000,000 in debt as you mentioned yourself, it would be, quite comfortably financed. Why not more debt into drilling?
On the Total shares, then we continuously evaluate, how we create the most, how we secure the most value and Right now, we believe that, it makes sense for us to see what we have sold a part of the shares. They've increased a lot. And we have taken that and we, of course, continuously evaluate whether we should do that or we should hang on to them to tell also pays quite a significant dividend that is important. So that is an ongoing evaluation and for us. And in terms of mass drilling, it has been very important for us to make sure that the company has a viable future that it is well capitalized that the new management, the new board will have, strategic options.
And if we were to to leverage off the company, to the ceiling, then we would not, in our view, do the right thing for neither our shareholders who will get the shares, but nor for the company's viability or for the for that matter for the employees and so on. So it's a balance, but for us, it's been very important that Maersk Drilling is is a viable company so that it has a chance to become a successful company.
And next question is from the line of Neil Glynn from Credit Suisse. Please go ahead. Your line is now open.
Good morning. If I could also ask 3 questions, please. The first one on ex bunker cost visibility, the the quarterly trajectory I've seen from quite significant populations over the recent couple of years. I'm just interested as you bet in the network, the decisions you've made on capacity over the rest of the year. Are you more comfortable now in your ability to predict, unit costs on a quarterly basis going forward?
Second question, bunker consumption. It's been the lowest in a couple of years. If you look at it, as touched on, in terms of tonnage per forty foot equivalent. Is that a normal level that we should think about at least maintaining or maybe even improving going forward? And then the third question on logistics services, as touched on the EBITDA conversion level is clearly very low.
Understandable due to investments, but just interested in your thoughts to recover to say 2017 levels. Is this a medium term project as investments bear fruit or how should we think about that conversion ratio on the short and then the medium term?
So, if we take the first couple of questions on capacity and bunker, I believe it was, I mean, in terms of or sorry, unit cost and then bunker. When it comes to cost, I mean, we're not going to give any further guidance and what we have already done, which is the 1% to 2% at fixed or at fixed exchange rate and fixed bunker. We do, we do believe that, we have more things that we need to do, and that's hopefully all spills into the the coming quarters. On bunker efficiency, it's true that the levels have come down. We had a period where the quarter to quarter comparisons were really tough because we were comparing to a period before the big sale to and then with the big to AS and M.
And then there, we have to remember that we count the tons, but we don't count the volumes that they have. Now we have now it's better to compare. We have come down at a lower level. Do we believe we can improve it further? Yes, we do, but it will be over several quarters and not just a short sprint into the next quarter.
On logistics and services, obviously, I mean, it is a very high focus for us to attack our cost base here and bring it to something that we can be proud of. But we're we cannot guide on, at this time, on what time horizon this is going to play out with.
Understood. Thank you. If I could just follow-up. The first question was more, I'm not necessarily looking for more guidance on unit comp but just the internal visibility on how you actually manage cost development ex bunker it fair to say that that's improving following the recent decisions or do you not feel that there was any need for improvement in terms of how you actually managed those costs?
Yes, that's a that we can see clearly yes to visibility is improving and maybe just adding that, obviously, now we are 8 months into the acquisition of Hamburg Sud, the first few months there, we had to get everything together and get the visibility, right? We have that now. We have joined up the network. We have joined up the equipment pool. So now we can take real decisions, the best decisions across all the brands.
And the next question is from the line of Lars Heindoff from SEB. Please go ahead. Your line is now open.
Thank you. Also two questions from my side, please. Firstly, still regarding your capacity developments, which has been quite extraordinary here during the 1st part of the year. I'm just curious to find out what is the reason why you're reducing capacity at the speed that you've been doing? I mean, you've increasing capacity very, very significantly both in 2016 2017.
Is this a new strategy to grow less than the market? Or what's the reason for this huge movement in capacity this year?
Last turn toft. Well, you know, 1st of all, at the present moment, we are not really taken on any significant new vessels. We did that predominantly in 2017. Secondly, We were tied in the first quarter with taking on board all of the Hamburg Sud tonnage but still being locked up into the VSAs. And then as bunker prices have increased, we have also looked very critically at some of the trades and some of the services and decided where we don't believe that there's a viable path, but overall, We still believe that we can grow with the market as we have done in the quarter.
Okay. And then secondly, it's regarding Hampost's rates up. Clearly, I haven't done the full yet, but they are up year on year in the second quarter. I'm looking into the seasonality in to, I mean, in mass plan, obviously, we have the peak season in the third quarter where rates normally at least is higher. What is the seasonality in Hambo to expect, is it normal to see that rates in the 3rd quarter is higher compared to the 2nd quarter?
How is that playing out during the year?
Yes, Vincent here. The Hamburg should, the Hamburg should seasonality is not as pronounced as Maersk Line because they're slightly less exposed to the Far East and the East West trades, of course, in general, but there it's also even though less pronounced also towards the 3rd fourth quarter with higher volumes.
You now said volumes. So it was more interesting in the rates.
Well, they obviously operate in the same market environment as Maersk Line does. So corrected for their exposure to different trades and geographies, their rates will in sync with Maersk Line.
Okay. All right. Thank you very much.
And next question is from the line of Patrick Creuset from Goldman Sachs. Please go ahead. Your line is now open.
I've got 3 questions, please. 1 on liner, 1 on CapEx and 1 on terminal. So start on the line, I mean, first off, congrats. I think as far as I can see, you've made it back to the top of the lead table when it comes to margin in Q2. I think the question is, if you can quantify how much more incremental cost benefits you're going to get, particularly from the hand back of the charter fleet and also from Hamburg Sud synergies in the second half given you've been and running ahead of schedule, I think, on those synergies?
All
right. So if we start start with that. I mean, we have said and also guided slightly different that we believe we will now not reach, but minimum reach the synergies of Hamburg Sud, and they are by nature back end loaded, but we are weeping the NIM in a little bit faster and we hope, of course, eventually we can even even do better. In the second half, we obviously plan to benefit from the effort that we have done, no doubt, but we are also on some of the variable costs seeing a spillover of the higher fuel price into our some of the variable costs like feedering costs like intermodal cost and equally so on feedering costs, we are seeing a spillover of generally higher time charter rates than we have seen in Q1. But the focus is on making sure that we continue to drive benefits out from the improved picture we see right now.
Clarifying net net? And do you expect unit costs to be ex fuel to be down sequentially into hedge then?
We're not going to I mean, the guidance we've given previously is the guidance we've given previously stays and that is that we expect to reduce cost 1% to 2% fixed bunker net of FX for the year.
Okay. Secondly on CapEx? You've seen your presentation that you wouldn't place any new vessel orders until at least 2020 and also not invest in any new terminals. Then I look at your CapEx commitments, and I think they only stand at EUR 1,000,000,000 to EUR 23,000,000. So is it therefore fair assumption that maybe you could temporarily undershoots your medium term CapEx outlook of, I think, EUR 2,500,000,000 to EUR 3,000,000,000 per annum in 2019 2020?
Well, we will provide a new guidance for CapEx for 2019. Probably in connection with our full year result in February next year. What I do what you point to, which is also I think what I tried to say earlier, we have a lot of flexibility as we move on because we will be done with the 4 big construction projects we have ongoing in APMT and in in Morocco, in Abijan, in Ghana and in Maureen, and that, of course, will will significantly reduce CapEx in APMT. And then we have basically very few ships left still to be we delivered, I believe it's around 4 ships left. So that means we only really have to invest in CapEx to make sure we have the containers to grow with the market.
Overall, what you should expect is that we will be targeting a CapEx level that is more or less in line with our depreciation level over the cycle, which is 2.5.
Okay, clear. Just as follow-up on the CapEx, do you also anticipate any increased investments into retrofitting ahead of the IMO 2020 implementation?
We don't have any major plans at this this point, are you talking I assume you're talking about investing in scrubbers?
Yes, or LNG?
Well, I don't think it's feasible to to retrofit ships with LNG propulsion. So for us, it's really about scrubbers. We don't like the solution. I've spoken to that many, many times. We think that the sulfa should be taken out of the fuel at the refinery where you have the big process plant to do so and for us to build washing plants on 700 ships simply does not make any sense.
To me. But we may, we are experimenting with various things and we may also invest in a few scrubbers simply to understand the technology.
Okay. Thanks. Final one on terminals. You've earlier mentioned a few reasons for the weak margin performance in the second quarter. Can you just give us an idea of the and sequential margin evolution in the second half?
I mean, will you do you expect that some of these one off effects to wash out and perhaps also have stronger volumes? Thank you.
Thank you. So we'll I'll not guide specifically on second quarter per segment, but what I will say is that we have an EBIT margin gap to competition. And that is a gap that we seek to close gradually and one way of doing it is winning more business boosting utilization, reducing unit costs. And we have so far been able to grow well above the market, well above main competition. And certainly, we expect to be able to convert that higher volume and increased utilization to also better margins over time.
Fair enough.
And our final question for today comes from the line of Finn Biegelsen from Danske Bank. Please go ahead. Your line is now open.
2nd quarter 1st quarter was both some very, significant increase in working capital and net interest bearing debt in the second quarter. Could you guide a little bit about what is your target for cash conversion in the second quarter or for the full year?
So our guidance remains, Fin, that we want to have a high rate of cash cash conversion. And if you do and by that we mean 85% or better, if you do the simple math on our guidance and the CapEx so far, You can see we have spent $1,900,000,000 of CapEx so far this year if we deliver on CapEx guidance of 1,000,000,000, it means we will, we will deliver, we have to spend 1.1 in the remaining We also have, the guidance of an EBITDA of a 3.5to4.2 We have 1.5 in the first half. So if you deduct those numbers, you will see that we need to generate significant cash in the second half. I think that's as close as I can get to it.
So I I I read you a a significant reduction in your working capital. If we are talking about an 85% cash conversion full year?
I think I can disclose that the cash conversion was more than 100% in July, but that's that was the short term effects that hit us in the second quarter.
Okay. Thank you.
And that was our final question for today. I will now hand the call back to Soren.
Thank you very much for listening in to our earnings call for Q2 2018. For us, it's a call where we clearly wanted to get the message across that, while we are not satisfied with the absolute level of profitability we do see a number of positive aspects. 1st and foremost, our growth, which is very strong, which means that we now have grown our transport logistics businesses, almost 50% since 2016. And we are also taking note of good growth in the non Ocean part of the business, which is the part which we want to grow, disproportionately. We also believe that we are on the right track when it comes to taking control of our unit costs, driving network utilization and so on.
Hamburg Sud is on a good track. Company is doing really well and we are getting the synergies and we are providing, let's say, a very, very small, but still important upgrade in the synergies because we now say minimum 350 to 400 more will follow on that in the coming quarters. We are also pleased with the fact that we actually maintaining our market share now. So the customer retention in the Hamburg Sud is better than better than expected. So given the guidance we have provided, we We also, of course, have to improve results in the second half of the year, and that's what we're setting out to do now.
Thank you very much.