Good morning, everybody. Welcome to A.P. Møller - Mærsk results announcement for 2017. My name is Søren Skou. I'm the CEO. I'm joined here today by Claus Hemmingsen, our Vice CEO and head of our Energy division, Jakob Stausholm, our CFO, Vincent Clerc, our chief commercial officer, and Søren Toft, our chief operating officer. Let me start by providing you with an overview, and then we'll go into the details. First of all, I would like to start by saying that 2017 was a year where we made solid progress on our strategic journey. We sold Maersk Oil. We sold Maersk Tankers. We sold the remaining part of our stake in Dansk Supermarked Group. We sold Mercosul, a Brazilian domestic carrier, and we acquired Hamburg Süd.
In total, around $14 billion worth of M&A transactions. With Maersk Oil and Maersk Tankers, the company will lose around 5 and a half billion dollars worth of turnover. With the acquisition of Hamburg Süd, we are getting more or less the same amount of turnover. We have now reclassified both Maersk Drilling and Maersk Supply Service as businesses held for sale. We are working hard to find solutions for how to separate Maersk Drilling and Maersk Supply during 2018. We expect to close the Maersk Oil transaction as previously announced this quarter.
As far as our Hamburg Süd transaction, you all know it closed on 1st of December, and we are on track with the integration. We are reconfirming our targets for synergies of $350 million-$400 million by next year. We have progressed on the integration of our transport and logistics businesses. We are today disclosing that we believe we captured just over $100 million of synergies last year towards our target of $600 million by 2019. Finally, we have also made significant progress on our digital transformation.
Many of you were present at our Capital Markets Day last year, where we provided with a lot of details on our plans for digital transformation. When you join us, hopefully, in 11 days at our Capital Markets Day this year, you will see a number of specific digital products that we have actually launched and are gaining traction with the customers. In terms of our financial results, I have to say it's a coin with two sides. We have made and delivered solid improvements in the underlying results in 2017 compared to a weak 2016. We grew revenue by $3.7 billion to $31 billion.
Our T&L businesses made a NOPAT of $1 billion, up from $100 million in 2016. We grew operating cash flow by well over $1 billion and therefore made you know good improvements. We were not able to deliver on the guidance that we set out at this time last year of making more than a $1 billion improvement in Maersk Line. Mainly because of the cyberattack that we had in June and impacting the third quarter quite a lot, by $250 million-$300 million. Other than that, we were pretty much on plan.
When that is being said, we also have to recognize that the absolute level of profitability is not where we want it to be. We cannot be satisfied with that, and we could also not be satisfied with our relative level of performance. We do believe that we in 2018 will do better, and that's why we are guiding higher results in 2018 than we had in 2017. Finally, on the financials, in my view, the fourth quarter had a couple of positive elements that I would like to highlight. First of all, Maersk Line grew volumes by 3.6%. That is probably in line or slightly better with the market growth.
I take that as a sign that there is no negative long-term impact from the cyberattack from our customers, so that's good. I also want to highlight that Maersk Line in the fourth quarter, we were able to deliver unit cost at $1,913 per FFE, which is very close to the all-time low level we reached in 2016. A very strong improvement of more than 6% over the third quarter, where our unit costs were impacted by the cyberattack. With those few words of introduction, I would like to hand over to Jakob Stausholm, who will take you through the key numbers.
Thank you. As Søren said, when a company goes through significant changes, so does the accounts. Just to recap, to be sure we look at the same numbers. In Q3, we took Maersk Drilling, Maersk Oil, and Maersk Tankers to the line of discontinued businesses. Here in Q4, we have taken Maersk Supply Service to discontinued businesses. We have closed the deal of Maersk Tankers and Dansk Supermarked during Q4, and hence, they are out of our accounts. Now in my view, it actually should provide more clarity now because it basically means that the continued businesses is our transport and logistic business, all the way down to NOPAT. Of course, the financial items relates to all parts of A.P.
A.P. Møller - Mærsk, something that should go down significantly when we finalize the journey of separation of Energy. Moving on to chart number seven. If we look at the revenue or the profit and loss here, as Søren already have said, we are growing the top line. One of the challenges to really look at the numbers here is that we have one month of Hamburg Süd result in. Q4 year-on-year goes up by 16%. If you exclude the acquisitive impact from Hamburg Süd, it goes up by 8%. We are growing the top line, and we are. That is a combination of growth across the businesses and specifically to higher freight rates in Maersk Line.
Now, if you look at EBITDA, where our main focus is, then it's up by 45%. Looks good, but have to admit it is from a low point in Q4 2016. If you look at the reported profit and loss and the underlying profit, happy to see that we don't have too many special items here in the quarter. We do have, though, a few pluses and minuses and we're disclosing that in our results that we have integration costs to the tune of $59 million from Hamburg Süd, but we also had a gain on the sale of Mercosul and a few other gains. Overall, it basically nets out. Moving on to the next page of our cash flow.
We had a strong cash flow in the fourth quarter. I have, though, to say to remind you of what I said on the third call, third quarter call that I think I asked you not to look too much into the Q3 cash flow because it was heavily impacted by the cyberattack. The good news is that we have got back our DSO, our receivable levels in Maersk Line in Q4, and that has led to a fairly strong cash flow in Maersk Line in the fourth quarter. Our day sales outstanding in Maersk Line is now back at or below the pre-cyber attack levels.
If you look at our cash capital expenditure, it is a very high number, but that's of course mainly due to the fact that we bought Hamburg Süd. That has an impact of $4.2 billion. Then opposite to that, we sold Dansk Supermarked $0.9 billion. You can basically say out of the $4.4 billion, $3.1 billion is related to those two transactions. The underlying capital expenditure is $0.9 billion. It's at a high number, high level. We did receive two new major vessels in the fourth quarter.
If you look at the free cash flow, if you just adjust for the two major transactions, Hamburg Süd and Dansk Supermarked, then actually in the fourth quarter, we had a positive cash flow to the tune of $0.2 billion for our continuing businesses. Moving on to page number nine. If we look at our net debt, you will see that it naturally went up due to the acquisition of Hamburg Süd from the third quarter to the fourth quarter. We hit a level of $14.9 billion. That is obviously going to go down and fairly quickly because we do expect Maersk Oil to close soon, and that in itself will have a significant impact at the overall level.
We also expect other structural solutions to further reduce the overall debt of A.P. Møller - Mærsk. We do recognize the tough market conditions and our overall profitability, so capital discipline is critical to us. Although we had high levels of CapEx in 2017, mainly related to years back's investment decisions of new vessels and new terminals, you can see that we keep on reducing the contractual commitments. At the end of the year, it stood at $3.9 billion. We have reduced it every quarter, the last four or five quarters, and we have reduced it by $1.5 billion compared to end of last year.
We will dive deeper into capital expenditure and provide you an update at the upcoming Capital Markets Day. Moving on, page 10. I didn't intend to talk about it, but here you see the consolidated accounts and you see the total accounts both from continuing operation and discontinued operations. We obviously recognize, Søren said that as well, that the profitability, our ROIC is still too low, but we are, and I think all the measures shows that we are on a recovery journey, and that hasn't stopped yet. Moving on to page 11. When you look at the full year numbers, we have to first go back to how did we guide?
We did guide that the T&L businesses, which are now the continuing businesses, would have a NOPAT around $1 billion. In fact, we clarified the guidance from beginning of the year, we said above $1 billion, and at the end of Q3, we said around $1 billion. NOPAT is, if you look deeper into the account, $1,015. You could argue we in a way met both guidance. We still believe it was right to change it to around $1 billion. When you see the lower number here, it's because it includes financial items, and it's financial items for the whole of A.P. Møller - Mærsk, of course. Our focus is very much on EBITDA and on operating cash flow.
As you can see, we had EBITDA up to the tune of $2.5 billion in 2016. We improved it by 1 billion to $3.5 billion here in 2017, and that is what Søren will come back to, which we will guide upon for 2018. The operating cash flow, we improved even more. We improved it from 1.3 to 2.6, so an improvement of $1.3 billion. I would like to highlight that I think this is quite a good result given the fact that we actually grew our business quite a lot during 2017, and therefore it can, when you have growth, be difficult to have such a high cash conversion.
Let's dive deeper into each part of our business and I'd like to hand over to Vincent Clerc.
Thank you, Jakob. I think on Maersk Line, we also ended up with an improvement on the underlying, in line with the guidance and especially a recovery on the volumes, which as Søren mentioned, leads us to believe that there will be no longer term impact for the cyberattack that we faced in the Q3. The volumes were up about 3.6%. Not all statistics for the markets are out, but we expect the market to grow a little slower in the fourth quarter than it did in the beginning of the year, and we expect that growth to land around 3%.
Encouraging also our growth in the head haul was 5.2%, which we also believe to be slightly above what the market has been doing overall. Unfortunately, though, the rates have had some impact in the course of the year from Q2, which was the highest point of the rate recovery. We've seen rate decreases in the different segments, especially on East-West, where we have observed a $214 decrease since the second quarter. It's a decrease on the second quarter, but the rates are still 7.2% up year-over-year.
Basically, the trend that we see is that due to this deceleration of the market growth, there has been some temporary pressure in the fourth quarter on freight rates as utilization levels have decreased slightly in the market. Our numbers are slightly different because we had the cyberattack in Q3 and have had a return to higher utilization, but this is not what we expect to have seen across the market. Compounding though, the impact of the decrease in freight rate on our result has been an increase in bunker costs that we have faced over the period.
Our cost per FFE has increased about $60 year-on-year because of the increase in bunker price, and this is net of the impact of slot sales. Obviously, as we've talked about the last couple of quarters, our growth in capacity exceeds our growth in volumes, not because of a reduction in utilization, but because of an increased level of net slot sales to HMM and Hamburg Süd for at least the 2 months of the quarter. If we net this out, we get to a bunker increase per FFE in the low $60s, and that has had, of course, an adverse impact on our profitability and is one of the challenges we are dealing with here going forward.
The capacity increase, I mentioned it, is still driven primarily by the impact of the slot sales to Hamburg Süd and HMM, but has otherwise been in line with the volume growth that we have seen in the fourth quarter. Year-on-year, we are actually closing on utilization that is similar on headhaul as what we had a year ago.
Now I think we'll pass it on to Søren Toft for a description on what's happening to our costs.
Thank you, Vincent. Adding a few things on the cost line, then what we can say is that our costs rebounded from a very poor Q3 2017. Q4 2017, we're now at the same level as the record 2016 quarter four. Obviously in between quarter four 2016 and quarter four 2017, the rate of exchange hasn't exactly helped us. The excess variable costs that we observed in quarter three due to cyber are basically out of the system again. Q4, we are back down to the lower level. We have seen an improved utilization. We are seeing some pressure on the time charter rates, mainly as a result of the idle fleet being low.
We see that positively because a low charter fleet hopefully means that you know capacity is not easy to come by and that will help our efforts to drive revenue growth. Our fuel efficiency I know we reported as Vincent Clerc said on a kilo per FFE including capacity deployed for third parties. If we deduct that from the numbers actually our fuel efficiency in quarter four was lower than the corresponding quarter four in 2016 slightly below the 900 kilo per FFE level. We take some comfort in that too.
We are investing money in SG&A to drive our IT and digital agenda, but obviously medium to long term, the essence is that that leads to better customer satisfaction and also better efficiency, for us, hence the investments. Reliability-wise, we rebounded from a very poor quarter four, and Maersk Line is back up in near the top quartile for the fourth quarter. We are seeing, as per the normal, seasonality, adverse weather here in the wintertime, but we have firm plans in place to stay a very reliable carrier in the industry.
Overall, we can say that 2017 was a missed year on cost, but we have in no way given up or lost our belief, by the way, of being able to reduce unit cost and quarter four 2017 helps our confidence in that direction. If we go to the next slide, then Søren Skou already referred to it, but just a few more details on Hamburg Süd. We added Hamburg Süd first of December 2017 as another member of the Maersk family. We are taking over a very well-run company and a company that is serving their clients very well. You can see that we are now here presenting unaudited internal management accounts for the year 2017.
What I wanna highlight is obviously the revenue based on the IFRS principles of $5.4 billion and also an EBITDA of $554 million. Actually, from an underlying level, EBITDA is close to $600 million when we back in the integration cost that we have spent. We believe that we are taking over a strong company, and we also are heartened by the fact that in the trades where Hamburg Süd are very active, we are seeing better market fundamentals for the coming year. The integration of Hamburg Süd is proceeding as per plan.
We are reconfirming the $350 million-$400 million synergies by the end of 2019, and we believe we have realized very good progress to date. We have recently, two weeks ago, announced the first combined network between Asia and West Coast Latin America, where we combine the fortunes of the two companies, providing customers really with an unrivaled product, but also a product that obviously supports our synergy case. Overall, we are excited by this addition, but obviously in 2018, we're gonna spend a lot of our efforts in making sure that the integration is a success so that we hopefully by the end of 2018 can report a successful outcome of taking over Hamburg Süd.
Yeah, let's move on to page 17 on APM Terminals. If you look at the numbers, there are many similarities between 2016 and 2017. APM Terminals is a stable business. I think if we dive a little bit deeper down, there are a couple of important highlights. It was a difficult starting point, the beginning of last year. If you look carefully at the earnings, the underlying profit, then every quarter, APMT has actually delivered a little better result, improved every quarter. Although EBITDA overall in 2017 is lower than in 2016, then you can actually see that the operating cash flow is higher. There is a good cash generation from APM Terminals.
If you try to dive a little bit deeper around that, I think we need to start looking at the commercial traction, where, as I said, the starting point was difficult from the beginning, but APM Terminals have actually been quite successful of winning, being competitive in the market and winning new business with third parties.
On top of that, we can see that collaboration between Maersk Line and APMT pays off in the form of the results of APM Terminals. Good commercial traction. If you go to page 18, you can also see that APMT has been on an increased growth trajectory during the year, with volume growth of 6.8% in Q4 and a full year growth of 6.5%. Growing slightly above market and actually quite significant increase from 4.2% in Q2 to 6.5% in Q3 to 6.8% in Q4. This is a very important first step on the journey for APMT to reduce its unit cost.
You will see that the unit cost is flat in 2017 versus 2016, but APMT is on a journey moving towards reducing the unit cost. It is important for terminals that we are entering into 2018 with good volume growth. Let me move on and quickly go through the smaller businesses in Transport and Logistics. Damco, it can be said, in short words, it was a difficult, unsatisfactory year, but the positive things about Damco is that it is growing quite significantly, growing its top line. It's winning business. But there's no doubt that the cyber impact has been by far hardest in Damco than any other places in A.P. Møller - Mærsk. Therefore, the recovery has also taken longer than in other units.
The very, very negative cash flow is obviously unsatisfactory, but is largely due to an increase in the days' sales outstanding. That's where the focus is right now about collecting that. It should lead to a reversal in cash flow here in 2018. Moving on to Svitzer. I mean, we're quite proud of the results. I think it's excellent result from Svitzer. They tick the boxes. If you look at it, the quarterly results year-over-year, the yearly results year-over-year are up on all metrics. Top line is growing, EBITDA is growing, operating cash flow is growing, and they are now reaching a satisfactory return on invested capital around 8%.
What you don't see on chart 20 is that the capital expenditure has also been reduced, so there is now a good positive free cash flow from Svitzer. Moving on to page 21 with Maersk Container Industry, it's actually quite a significant turnaround there. We had some ideas of that we could do something, but the impact is exceeding our expectations. It's a combination of synergies, better run business, and also a better market. Revenue is twice as big as previous years, and EBITDA is up $118 million. You basically turned return on invested capital from -13% to +13%. The trick now is to not so much about there's no further turnaround, but to keep Maersk Container Industry as a profitable industry.
Let me now hand over to Claus and for the energy businesses.
Thank you, Jakob, let me make a few comments on the energy businesses. Undoubtedly, the markets on Maersk Drilling and Maersk Supply Service have been tough also in 2017. However, we did see the oil price improving throughout the year, and we did see our oil company customers making profits. We also saw an increase in tender activity during the year, which continued into the fourth quarter. I think it's noteworthy that Maersk Drilling successfully signed four new contracts during the fourth quarter, adding 3,867 rig days and no less than $873 million to the backlog. Maersk Drilling reported a net profit of $98 million, which was positively impacted by the reversal of depreciation as we moved it as discontinued business.
However, it was also negatively impacted by rigs being idle and the day rates being lower. The free cash flow in fourth quarter amounted to $234 million, which was also impacted by the sale of the Egyptian Drilling Company, which came in at $100 million. If we move to slide 24, not a lot of comments to add to that, but it was gratifying to see Maersk Drilling coming out of the fourth quarter with a revenue backlog of $3.3 billion and a contract coverage of no less than 63% of 2018.
You will also note the high uptime, and you will note that we took delivery of the last rig in the new building program, so we have seen the final elements of large CapEx in Maersk Drilling. Turning to page 25, Maersk Supply Service reported a net loss of $200 million, also negatively impacted by impairments of $180 million towards the end of the year. The market conditions continue to be difficult. On the positive side, we also see from Maersk Supply Service successfully adding new contracts to the backlog, and they also successfully continue to make inroads in their new strategy to expand their service offerings, including, for instance, into the decommissioning space.
Although still tough, some traction on the commercial side. Let me just add one comment on Maersk Oil. Søren already mentioned it, that we expect the transaction to close in the first quarter. I just want to remind you that we are still exposed to the oil business, and you will probably have taken note of the Total shares having increased in value so that we at this stage are $450 million ahead of the closing of the value when we signed the deal. Then my final comment, as usual, is that we will get back to you as soon as we know something from Maersk Drilling and Maersk Supply Service. We do expect to find structural solutions in 2018.
However, we will announce those as we land them. Thank you, and then over to you, Søren.
Thank you, Claus. Before we take questions, just briefly on guidance. As I'm sure most of you have noticed by now, we have decided to guide on one bottom line only. We're doing that because we are quickly moving towards becoming a focused and an integrated global container logistics company, being one company, so to speak. Therefore, we believe it's right to guide on EBITDA. We will provide you with more color on this and on financial disclosures in general when we meet at the Capital Markets Day on the twentieth of February.
Guidance for next year is to result in the underlying profit above 2017, and we expect to deliver an EBITDA in the range of $4 billion-$5 billion against $3.5 billion in 2017. With that, we complete our presentation, and we'll be ready to take questions.
Thank you. We will now begin the question and answer session. The session will end no later than twelve. If you have a question, please press zero one on your telephone keypad, and you'll enter a queue. After you are announced, please ask your question, and there'll be a small delay before the first question is announced. The first question comes from the line of Jørgen Bruaset from Nordea Markets. Please go ahead, your line is open.
Thank you very much. A few questions from my side. First question is on the guidance for 2018. Could you please try to give us some knowledge on the base assumptions for the guidance for 2018. I'm guessing that you won't give us the full bridge, as you will say that for the CMD. Just your thoughts on what to expect, at least on global demand for 2018 would be very helpful. Thank you.
Jørgen, it's Jakob. Yeah, thanks for the question. This is, of course, the first time we are guiding on EBITDA. I think it's some very simple math. First of all, I would say we guide in a wide range. It is hugely complex to give a narrow guidance for the year here just before we have finalized the annual contract negotiations and Chinese New Year. We are hugely exposed to our liner business that has volatility. If you look at it, we made three and a half billion dollars of EBITDA last year. We have today disclosed, for the first time ever, financials for Hamburg Süd. You will see that there is EBITDA, pro forma EBITDA of $550 million, and then there's a little bit of restructuring.
There's almost $600 million of EBITDA from Hamburg Süd. You add that, you get to just above $4 billion. We say $4-$5 billion. You could, of course, say we had a cyberattack, that's another $300 billion. We really feel that it is the right way of thinking. We want to improve the business, but we also have to be honest about the fact that there are volatility here. We have a number of measures in place why we think the business will do better this year. At this stage, we keep the wide range. For me, there are three things. There are last year's result, Hamburg Süd addition, and the cyber impact.
Of course, in 2018, Søren alluded to it many times, we are working hard on integrating, and that means that we will benefit of getting more synergies from T&L integration and of course, synergies from Hamburg Süd.
Okay, thank you. Just following up on that. You've guided for the $350 million-$400 million in synergies from Hamburg Süd in 2019. Should we expect to see some of that materializing already in 2018? That's the first question. Also, you've realized $100 million in T&L synergies in 2017. Is that sort of the level you were expecting to be at in 18 months going into the new strategy? Should we assume that the sort of remaining synergies from T&L is linear, or is it going to be more back-end loaded, as suggested by the 2017 level? Thank you.
I think in terms of synergies, we have in total almost $1 billion or so, yeah, $1 billion by 2019 between $600 million on T&L and $350-$400 million on Hamburg Süd. Obviously, we expect and hope and will work very hard towards you know delivering a good part of that during this year.
We will have on the Hamburg Süd synergies. We will have some back-end loading because a number of the things that we will be doing will result in, let's say, severance cost and you know, when we redeploy the networks, there will be cost with that. We are hoping to make good progress on both the T&L integration synergies and the Hamburg Süd synergies this year.
Okay. Thank you. Just a final short one to follow up on that. With respect to Hamburg Süd outlook for 2018, maybe you could give some color on sort of the north-south versus east-west dynamics you're seeing in the market at the moment.
Yes. So far, as you can see also from the data, the part of the business that has been most affected by the rate decreases that we have seen has actually been the east-west trades, and we have seen a more sustained recovery on the north-south, and especially in the trades where Hamburg Süd is active. I think Søren Toft also mentioned the fact that the underlying health in the trades where Hamburg Süd has been most active is also where we're seeing the best market conditions, and we expect that to continue in 2018.
It's fair to assume a higher run rate for Hamburg Süd than Maersk Line organically, year-on-year in 2018 versus 2017?
I think we have to go through the integration of the networks, look also at what retention issues we will run into as we redeploy the assets and realize the synergies before we can conclude on that.
Okay. Thank you very much.
Next question comes from the line of Robert Joynson from Exane. Please go ahead. Your line is open.
Good morning, everybody. A couple of questions on Maersk Line, if I may. First of all, on the unit cost, you said in the accounts that a key focus for 2018 will be to reduce the unit cost on an ex bunker basis further. Could you maybe just provide some color on what will drive that in terms of improved utilization rates or benefits from new deliveries, et cetera, and also maybe quantify what type of percentage reduction may be possible? And then just on pricing, the volume rebound in Q4 that Maersk Line saw versus Q3 was obviously very good. I think it's fair to say that the development in freight rates versus Q3 was maybe slightly worse than the market overall.
Would it be fair to conclude that some of the volume gain in Q4 came from a bit of help from pricing, or is that not correct?
Søren Toft, if I start with the questions on cost. We still believe, as I said, that we can continue to drive down our cost base. For 2018, we still believe to be able to do that on a like-for-like 1%-2%. We still have a number of initiatives on optimizing the network, both as a result of the new deliveries, but we also continue to remain and become creative finding new ways of combining the networks. Obviously, we're gonna have the benefits from Hamburg Süd, or part benefits in 2018, even though the implementation only really starts from April onwards, so the big effect comes from 2019. We are continuing to drive hard on procurement. We are continuing to find ways to become more fuel efficient, both in terms of current means, but also applying new technologies. We are using the entire width of the toolbox also for this year.
On the pricing, we obviously the contracts haven't moved throughout the year, and the adjustments that we have seen it's just a factor also of how exposed you are to some of the short-term contracts. I mentioned that. It was primarily pronounced in the East-West trades, and there we have seen year-on-year the fact that the SCFI is down 17% on Europe and 24% on the Pacific. We monitor very closely every week on how our prices jibe compared to what the indices say and whatever other market intel we can have.
At least from all the data points that we have, the rebound that we saw on volumes has not been caused by more aggressive pricing behavior, but simply by having customers come back with the support that we've been lacking during the third quarter as a result of cyber.
Okay, thank you. Then maybe just one final question. During 2017, there was obviously a lot of problems at various hubs such as Algeciras and Tangier Med. Can you just comment on and update with respect to that, please?
Yeah, this is Søren Toft here. We are doing better in our hubs, both because we don't have the same type of disruptions, but because we have also instigated certain measures of making sure we don't overload our hubs because they are an integrated part of our global delivery network. We're getting new assets delivered in Tanger Med, 8 cranes that can fit the largest ships in the trade. That's also gonna help our efficiency, and we believe we have a future agreement in Spain that's gonna create both stability and higher productivity for the future.
Thank you.
Next question comes from the line of Lars Hyndorf from SEB. Please go ahead. Your line is open.
Yes, thank you very much. Also a couple of questions regarding Maersk Line. Firstly, regarding your capacity. As far as I can see from some of the databases that we subscribe to, your capacity in nominal terms continue to increase from Q4 into Q1. Question regarding your, you know, strategy there post the Chinese New Year, and also if you believe that you can continue to improve utilization sequentially from Q4 into Q1. That's the first one. Secondly, regarding other revenue, as you call it, in Maersk Line. If my math serves me right, then you've had roughly $700 million, or you said, I think in the report you write $2.4 billion in other revenue in Maersk Line in 2017.
Could you give us any indication about the magnitude of decline, going into 2018 now that the VSA with Hamburg Süd obviously has expired? I assume that will decline. Then lastly, a question regarding your debt capacity. When all these transactions are done, what kind of debt capacity you believe you will have in T&L?
If I start, Søren Toft, with the capacity question last then. First of all, if you look at Q4, over Q4 we have grown our deployed capacity by 10.8%. About 6% of that is going to these third party slot sales, mainly HMM, Hamburg Süd, and also quite a lot on the West Coast of Latin America. We have grown our head haul volumes as per Vincent Clerc a little bit more than 5%, so we believe we have done, you know, relatively better and certainly a lot better than in Q3. Going forward, we'll put a bit more color on the capacity development when we get to the capital markets day.
For sure, we are planning to, first of all, keep capacity growth disciplined. We have, of course, when you measure year-on-year, a significant growth because we bought Hamburg Süd, but the intention is that we grow capacity slightly below the level of growing volumes.
All right. Thank you.
Yeah, the debt capacity, Lars, a couple of words around that. In a way, we're in a very fortunate situation, but I can't provide you all the answers because we still have a couple of deals to be structured in Energy. If you think about it, we have said very clearly we want to remain being investment grade as a new transport and logistics company. We have the means to create it because when we close the deal with Maersk Oil, then we receive some cash that will reduce our debt, but we also receive some Total shares. We've been very explicit about it that subject to investment grade, we will distribute out to shareholders.
We don't want a too well-consolidated balance sheet, but we want a strong balance sheet that is investment grade. You have a kind of an adjustment factor here. We will elaborate a bit more on it on Capital Markets Day, but obviously the only wise things, at least seen from my perspective for the company, is to continue not taking final decisions on those matters until we have the structural solutions in place, at least for one more, if not two more, of the remaining energy businesses, so that we have the buffer while we have the uncertainty.
Okay. The second question was regarding the what I call, or you call other revenue, which was up $300 million, which I assume is partly caused by the VSA with Hamburg Süd which will obviously expire. It would be nice if you give us at least some feeling for what you expect in terms of other revenue going into 2018. How much that will be down, which I assume it will be.
Yeah. When you look at the combined business, we expect that to be more or less flat. It's true that Hamburg Süd will fall out, but that was a smaller part of what we had done. The majority was actually for HMM, and the agreement with them is still running into this year. Here we also expect that they will grow their volumes in line with the market and therefore the slot income will also grow in line with the market.
Okay. All right. Thank you very much.
Next question comes from the line of Kasper Blom from ABG. Please go ahead, your line is open.
Thank you very much. You talk quite a lot about these higher bunker costs, but not very much about potentially recovering these. I know that it's maybe difficult to separate bunker costs from the total freight rate, but what is your sort of view on recovering these higher bunker costs with, you know, when speaking to clients? Secondly, you of course also mentioned that the contract negotiations on the Asia-Europe routes have not been finalized yet, but could you give any sort of kind of color on how this is developing? Vincent has said a little bit in the press earlier, but maybe an update on that. Thank you.
Yes. We are Vincent here. We are about a little bit over halfway into the renewal of our contracts so far. It's maybe too early, sorry, not too easy, but too early to really have a postmortem on how much we're getting. Obviously the bunker recovery is very important. On what we have signed up so far, across all geographies, we are signing up contracts with increases in rates.
In excess of what increases we have faced in bunker. On that part of the business, which is about half of what we do, or just under half of what we do, we can see that we are able to recoup that. The other half of the business is in the short term. There it's the negotiation is more of an all-in price where bunker plays a factor, but the overall asset utilization across the different trades plays a bigger role. There it's a bit more a negotiation on a week by week or month by month basis. The numbers that are.
The information that I just shared are on an overall basis. You asked specifically about Asia Europe, and I mentioned also earlier on that some of the decreases we have seen since quarter two are affecting primarily the East West trades. Of course, if you look specifically at Asia Europe, then the situation is a bit tougher towards customers. I think overall, we're still able to renegotiate contracts with increase in Europe as well.
Okay. Just to be absolutely sure I understand here, when you looked at the overall business, were you saying that you were getting rates that were not only covering your higher bunker costs but also higher sort of underlying, or was that a misunderstanding from our side?
On a global basis, if we look at the contracts that we're signing up, we're signing them up with increases that are slightly above or that are above what we're seeing of bunker increase, yes. It's important to remember that it is only half the business that we're talking about here. The other half moves independently from that.
Okay. That's very clear. My other question is just regarding Hamburg Süd. There is a mention that you have some PPAs here in the quarter affecting the EBIT line. Could you quantify that and maybe also talk a little bit about what to expect here in 2018 on those, how can you call it, extraordinary cost lines?
I think there are full disclosures in the annual report. I'll ask you to look at page 23. It's fairly technical. I think that's one of the reasons as well, why it makes a lot of sense, even more sense to look at the EBITDA line. Because obviously when you make an acquisition, and we're not recording a lot of goodwill, so we do a lot of depreciations. That's why you might see that there's quite a bit of difference between the EBITDA and the EBIT line. I suggest the best thing is probably just to look at page 23.
I would argue we spend quite some time researching this, that we have very extensive disclosures when it comes to explaining about the standalone performance of Hamburg Süd and how we account for it.
Thanks a lot. Sorry, I haven't had a chance to read through the whole thing yet. Thanks.
Next question comes from the line of Edward Stanford from HSBC. Please go ahead. Your line is open.
Good morning, everybody. Three questions, please. In no particular order. First of all, you mentioned that the reliability of Maersk Line is improving post the cyberattack. Are you able to give some flavor of where it is relative to pre-cyberattack levels? Well, also, when you think about returning value, is it too early to consider whether there is merit in considering a proportional consolidation of the equity in relation to the shrinking of the business? Finally, can you talk perhaps about remind us what the cost of achieving the synergies might be? Thank you.
Yeah, this is Frans. Could you just repeat the question on returning value? I'm not sure we fully understood.
Yes, sorry. If you return value with a proportional reduction in the shareholdings, the outstanding number of shares issued, given that you've shrunk the business quite considerably, I just wonder whether that was a consideration, which is sometimes done with return of capital to shareholders.
Okay, thank you.
Yeah, Jakob here. Let me just start with that one. I mean, what we're really trying to do here, we have to be a little bit sequential when it comes to providing value to the shareholders. We have taken the decision to separate the energy businesses. Right now, we're really trying to structure deals that meets the criteria of optimizing shareholder value and having a sufficient reduction in debt so it works for us. Now, how we then gonna distribute first of all depends on some individual deals, and it depends on how the totality will look like. It's simply too early. We will try to come up with distribution mechanism that are as efficient for all shareholders as possible. As I said earlier, we wanna be investment grade, but nothing more.
That means that if there are surplus, it will be distributed to shareholders. That's also the intent of the message we have set around the Total shares. The quick answer on reliability is basically that we measure our fortunes in an external index called Sea-Intelligence, where the top 20 carriers are being ranked.
During the cyber attack, Maersk Line and all the Maersk Line related brands fell very much towards the bottom of this. It's something we were of course not proud of, but something that is squarely related to a cyber attack and the difficulties we had in the hubs. In the fourth quarter, we are back up into the bottom range of the top quartile. As I said earlier, we're still working on relative and nominal improvements despite the next couple of months will all be challenged due to the weather.
Thank you. Just the final question, if you could remind me the any cost of achieving the synergies with Hamburg Süd and elsewhere, if you please?
What we are disclosing, $350 million-$400 million in 2019, that's the net number after the cost.
Okay.
Next question comes from the line of Dan Togo from Handelsbanken Capital Markets. Please go ahead, your line is open.
Yes, hello, a few questions as well here. I'd like to get back to Hamburg Süd. First of all, the impact on volumes and rates in Q4. I know it's only December, but at least to get some flavor on that. Then also on the seasonality in Hamburg Süd, a small deficit in December. How should we see the seasonality in Hamburg Süd throughout 2018? That's the first question.
Let me just take that one, then. I think we have one month of impact of Hamburg Süd in our Q4. Frankly, it doesn't provide us with any significant meaningful data to answer the question. I think for 2018, we're adding with adding the Hamburg Süd volume, we do expect some retention loss or some cargo loss as we add the two companies together. Our ambition for this year is to grow the combined business of Hamburg Süd and Maersk Line and all of the brands, probably slightly below overall market growth for 2018.
Okay. A question on the synergies from integrating TML. You communicate $100 million here in 2017. Can you provide some color on which business units? I know you just want to communicate on TML as a whole, but we are still making estimates below. Can you provide some color on which business units that has impacted primarily and how that will pan out, so to say, in 2018 as well? Thanks.
Yes. Certainly the first part, you probably need to revisit your models at some stage, then. I think where we're saying $100 million in a way is a little bit lower than what we'd have expected, because as Søren said, we need to get to the $600 million in 2019. We need to make good progress in this year. One of the reasons for that is it's a net number. There is a lot of good things going on between Maersk Line and APMT. We're not disclosing what hits the one bottom line or the other bottom line, but we have actually very cautiously offset and put in negative synergies. The $100 million is a net number because there are negative synergies from the hub disruptions in Algeciras, Tanjung Pelepas, et cetera.
We have talked about that throughout the year, and we have offset that in the calculation. Had we not had that, we would have achieved much more synergies.
That was actually my next question, because can you quantify in any way the disruption at Pelepas and Algeciras, how much that has impacted numbers in 2017 in any way? Because I guess that's also part of the bridge to EBITDA in 2018.
You got it, but it's a net number, and I think that we're not disclosing it specifically, but you now know that it is deducted in the $100 million. If we do well on this, of course we'll do well on synergies, this year.
Understood. Then just one final question to Claus on the drilling side. The new contracts you've been out and signed here in the course of Q4, what levels are they at? Are these contracts profitable or is it just so to say cost covering costs?
Well, thank you. We don't disclose the particular levels of the contracts. I can tell you that, as you probably know, it's one big contract in deep water and one big contract in the Norwegian sector. They're both positively contributing, but we don't disclose further details.
Okay, thank you.
Our final question comes from the line of Neil Glynn from Credit Suisse. Please go ahead, your line is open.
Good morning. Thank you for squeezing me on. 3 quick questions, please. The first one for Vincent Clerc, maybe. Just interested, when you talk to customers, clearly higher fuel costs are central to the conversation. Just interested, can you give us some comfort as to what kind of recognition do you see from customers that the industry has more bargaining power now? Or do you think we need to wait 12 months for the rest of the M&A deals to conclude for that to become a bit more evident? The second question, the terminals unit costs are clearly a focus in terms of bringing them down, downwards. I think it was Jakob Stausholm that mentioned the importance of volume growth. Clearly that story is very important to Maersk Line's unit costs too.
I'm just interested to what extent absolute costs can be taken out, or does this just rely on volume growth? The final question, the synergies of $100 million, I think very, very well explained. Can we get a breakdown as to what the key moving parts or the key contributors to that $100 million are? Or if not, what is the biggest chunk of that $100 million on a net basis? Thank you.
Yeah, if I start, maybe, Vincent Clerc here. If I start with the first part of your questions. Clearly, this is the reduction in number of global carriers is something that is taking an increasing part of the conversations that we have with the customers for two reasons. I think one is that the products that we provide are actually much bigger, go more deeper, and are better than they were before. It gives also a different level of conversations. The other one is, of course, they have fewer alternatives.
They do realize that how long it's going to take and how many deals it's going to take before you can start to see a very different game or a different level of volatility. I cannot tell you at this stage. I can just say that this is an important part of the conversations we're having with customers right now and certainly something that they proactively engage on.
On your question on cost, yes, utilization is part of the toolbox. Last year we disclosed at the Capital Markets Day that we are running the network in the low 90s% on utilization. Obviously, it's not only gonna come from there because we also need to run a reliable network. There'll both be utilization improvements helping us, but all kinds of other things in the toolbox. Just finally, obviously, absolute levels will go up in 2018 as we're adding Hamburg Süd. The trick here is, of course, to grow cost below the revenue line.
Yeah. On the synergies, I don't think we'll go further in our disclosures. We are very careful about recording synergies in the right way, but it's not, and you know, this is not a perfect number. It cannot be, and that's why to give you too much details on that would not be right. It is a net number. In a way, we're basically doing exactly what we said at Capital Markets Day. If you look at, there is a chart that shows the various components. We also said that the cost synergies would be the first part to reap, and the revenue synergies will be back-loaded. The only thing that, so to say, has not gone entirely to plan is improvements in hubs.
You could also say that we have further potential in SG&A, which is another category that we are pursuing here in 2018.
Thank you.
On that note, let me thank all of you for participating. We hope to see all of you at our Capital Markets Day on the twentieth this month, where we will hopefully provide you with a lot of interesting data. With that, have a nice weekend all. Thank you.