Good morning, and welcome to A.P. Møller - Mærsk A/S's Q3 earnings call. This is Søren Skou speaking. I'm joined here today by our CFO, Jakob Stausholm, and our Vice CEO and Head of our Energy Division, Claus Hemmingsen, as well as the Chief Commercial Officer in Maersk Line, Vincent Clerc, and the Chief Operating Officer in Maersk Line, Søren Toft. As usual, I invite you to take note about the forward-looking statements. The third quarter of 2017 was in all likelihood one of the busiest quarters that this company has ever seen, with multiple moving parts. I would like to start with the strategic and macro picture. We made in the quarter significant progress towards becoming a focused container shipping, ports, and logistics company.
First, we entered into an agreement with Total S.A. for the sale of Maersk Oil for $7.45 billion, $2.5 billion in cash, and the remaining $4.75 billion in shares in Total. We expect to close that transaction in the first quarter of 2018. Since the announcement in August, the value of the shares is up more than $600 million. Secondly, we also sold Maersk Tankers to A.P. Møller Holding for $1.2 billion of cash, plus an upside model, in September. Thirdly, we have this morning announced the sale of our remaining 19% in Dansk Supermarked Group for the equivalent of about $860 million, which is in our view, an attractive sales price. Fourth, we continue to see strong fundamentals in container shipping.
We are positively surprised about demand growth, and we upgrade our growth expectations to 4%-5% for this year. Capacity is growing about 3% this year. The idle fleet has been absorbed and supply growth broadly looks manageable in the coming years, even if bumps on the road can be expected in some quarters in 2018, where there will be many deliveries. Fifth, we have made significant progress on the closing of Hamburg Süd. We have cleared the transaction in 18 jurisdictions at this point and have three remaining, and we remain confident that we will close the transaction during this quarter. Given the macro-outlook , we believe that the acquisition of Hamburg Süd was reasonably well timed and look very much forward to getting it closed and starting on the integration.
In the best case, however, we will close at the end of this month, at the end of November, on the same day as we had scheduled to have our Capital Markets Day. Under the circumstances, we have therefore decided to postpone our Capital Markets Day to twentieth of February next year, as we do not believe having a Capital Markets Day without being able to provide detailed insight into Hamburg Süd makes a lot of sense. Now let me move to the performance in the quarter, and I'll focus my comments on Maersk Line, which I expect will be on most people's mind this morning. The overall headline for Maersk Line is that we cannot be satisfied with our performance in the third quarter of 2017.
As you're well aware, we had a cyberattack that impacted the business severely in July and into August, mainly in Maersk Line and Damco. The cyberattack caused volume and revenue loss, as well as additional cost, and we have altogether estimated this impact to be in the range $250-$300 million. When looking beyond the cyberattack, we are not happy with the development in unit costs, driven mainly by the lower network utilization, but also increasing fuel cost in the quarter. Bunker cost increased 11% from the beginning of the quarter to the end of the quarter.
We deployed on average 10.7% more capacity year-on-year, half of which was related to slot sales to Hamburg Süd and HMM, 25% which was related to cleaning up after the cyberattack, and the remaining 25% to cater for expected volumes that never materialized. We are also not happy with the development in volume growth. We had negative volume growth in the quarter with this, in a quarter with solid 5% global demand growth. Adjusting for cyber loss, we would have had a flat development in volumes. Now of course, because of cyber, it's hard to separate the hot and the cold water, so to speak, when looking at the performance in the quarter. We could frankly have explained everything in the quarter with the cyberattack and ripples from that.
As a management team, we believe we can do a better job than we did in the third quarter, and we are confident that we will be restoring our operational performance to best in class for our industry over the coming quarters. When all that is said and done, I do also think it's fair to say that Maersk Line grew volume, grew revenue almost $800 million in the quarter year-on-year. We are clearly making progress towards more sustainable earnings, moving out of the price war scenario that dramatically hit the industry in 2015 and 2016 and led to consolidation and bankruptcy and one bankruptcy in the industry. Maersk Line delivered an OPAT of $211 million and an EBIT margin that exceeds the competitors that have so far reported Q3, also after the cyberattack.
In the second quarter, our EBIT margin came out, EBIT margin gap to the industry came out at 2.5%. Our absolute EBIT margin in that quarter was second only to CMA for the industry. We believe we are making progress. Had we not had the cyber attack, Maersk Line would have made or delivered an OPAT in the range of $450 million-$500 million for the quarter, consistent with almost 10% return on the invested capital. Now let me finish with the guidance.
Spot rates they dropped almost 20% during the quarter, and in combination with an increase in fuel price, we've decided to adjust downwards our guidance for the year in Maersk Line to an improvement of $1 billion instead of more than $1 billion. Even though rates have come up somewhat again here in November, after the October holidays in China, we're not sure we can deliver the original guidance and hence the downgrade. Now I'll hand over to Jakob Stausholm, who will discuss the numbers in further detail.
Yeah, thank you and good morning to all. As Søren said, it has been a quarter of massive changes in the company, and that also reflects in the accounts. We have taken three businesses to discontinued businesses, Maersk Oil, Maersk Tankers, and Maersk Drilling. Therefore, you have to look very carefully when you look into the accounts and when you make comparables. If we go to page 6 and look at revenue and earnings, we looked at our continuing businesses here. What you can see here, you see a positive development on almost all measures here. Revenue is up significantly, so is EBITDA, and so is the underlying profit that we fortunately have turned from negative to positive.
The reported earnings is somewhat down as we had to take a couple of impairments in APMT. I'll revert on that. Moving on to the next page. Page seven on cash flow. First of all, I would caution you of using cash flow this quarter too much for looking at performance. Because when you look at the operating cash flow, then of course, the cyber attack has an impact on the cash flow from the lower OPAT, as we have guided you. But there is, of course, temporary working capital elements related to a cyberattack. We were somewhat slow on invoicing, and therefore, our debtor days has gone up. It's temporary, it'll come back, and therefore, I'll just caution you against using Q3 too much for measures of performance.
What you can look at, though, is the capital expenditure, and that's something we are monitoring very tightly. It was, in a way, a big quarter for Maersk. We received 5 new major vessels versus none the year before. We also got quite a few, quite a number of new containers, and we received 1 new vessel in Maersk Supply Service. It was a quarter of significant capital expenditure. If we go to the next page and try to dive a little bit deeper into debt and capital expenditures, then you'll see that part is actually moving in the right direction.
The cash flow was negative in the quarter, and therefore, net interest-bearing debt went up from $11.6 billion to $12.5 billion for the total A.P. Møller - Mærsk. Here, we don't split between continued and discontinued businesses. That is, of course, a corporate item. If you look on the right side and look at the capital commitments, and that is for our continuing business, so we have restated that, you will see that we continues to reduce our total commitments. If you look at the amount we have now, $4.8 billion in total commitments. It's $4.1 billion in transport and logistics, and it's $0.7 billion in supply services.
Both of those numbers are actually down 24% compared to nine months ago at the beginning of the year. You can see our capital discipline is happening. We are getting delivery of earlier made commitments, and we are not making new material commitments. If we move to the next page on consolidated financial information, that's where we now have a slightly different new profit and loss statement, where we split between continuing operations and discontinued operations. As I said earlier, we have three businesses classified as discontinued. Maersk Tankers, where we have not only announced the sale, but we have actually here in October as well effectuated the sale, so it's not our business anymore. Therefore, there are barely any P&L impact.
Maersk Oil, we are still awaiting closing, and we know we have a major accounting gain waiting, but that will first come when we close. Opposite to the accounting gain in Maersk Oil, we have taken an accounting loss here in the quarter for Maersk Drilling. When we reclassified that, we had to make a fair value assessment, and the fair value assessment, which is very much aligned with the market's consensus view, is well below our book value, and therefore, we had an impairment of $1.75 billion. There's a couple of things outside the accounts as well. We will receive for the sale of Maersk Oil both cash and Total shares.
As of today, the Total shares are actually worth $0.6 billion more than at the time of announcement back in August. Let me move on to transport and logistics, and not trying to repeat what Søren already have said. We want to dive into the individual parts of transport and logistics. Overall, we have a transport and logistics top line that grew by 14% mainly due to higher freight rates in Maersk Line. The underlying NOPAT are 4-5 times higher than last year, albeit from a historical low. The cyberattack ended up in the high end of the range we gave last time, so $250 million-$300 million, primarily in Maersk Line, but quite significantly on the accounts of Damco as well.
Hamburg Süd is progressing as planned, and the synergy case that we have announced earlier is intact, with synergies anticipated to be in the range of $350 million-$400 million in 2019. Let's dive deeper now, going to Maersk Line. I'll hand over to Vincent Clerc.
Thank you, Jakob. As we mentioned, Maersk Line posted a $333 million improvement for the quarter to $211 million. This performance was driven mainly by higher freight rates because our volumes were actually down 2.4% year-on-year. The freight rate were driven by the strong fundamentals that Søren mentioned, with a 5% growth on demand and only a 3% growth in total nominal supply. The activation of idle fleet added actually 3% to the supply in the quarter. Towards the end of the quarter, we had to recognize some erosion in the freight rates that we were achieving, leading or going into the October holidays in China.
The quarter was also heavily impacted by the cyberattack, which took the form both of lower volumes as customers diverted some of their bookings during the initial phase of the cyberattack away from Maersk, and also higher costs as we had to hire some extra vessels to take care of contingencies around the cargo as we recovered from the cyberattack. The market fundamentals were strong enough to support a 14% year-on-year rate recovery here in the quarter, with all trades both on north, south, east, west, and intraregional showing improvement. East-west showed the highest progression on the back of strong demand both in North America and in Europe, and also some discipline on the deployment of capacity in those trades.
They were also the trades that were most heavily impacted last year by the price wars that was ongoing at the time. Volumes, on the other side, dropped by 2.5% with backhaul, our return leg being especially heavily impacted with an 8.8% drop in volumes. This is attributable, to a large extent, to the cyberattack, but also fell short of the plans that we were targeting towards the end of the quarter. I will now hand over to Søren Toft, our COO, for talking on our cost performance.
Thank you, Vincent. Good day, everybody. Flipping to slide 14, just a couple of additional comments in addition to what shared by Søren Skou. First of all, our operations were significantly hampered in the third quarter by the cyberattack, and we are certainly not pleased with what we were able to deliver to the clients, and we're working very hard on restoring reliability of the network. In addition to the comments on capacity, let me also say that the development on our fuel efficiency developed adversely, again, mainly attributable to the fact that we have sold slots to HMM and Hamburg Süd, where we account for the kilos, but we don't account for the FFE's, but of course, we get slot charter income.
In terms of our unit cost overall, flipping to slide 15, that increased quarter-on-quarter with $76 per FFE, mainly attributable to the drop in utilization on the head haul, but also attributable to the overall drop in volumes as unit cost is impacted both by head haul volumes, but also by the absence of the backhaul volumes. In addition to that, we have seen higher terminal cost, higher positioning cost, higher SG&A cost, all three related to the cyberattack. We are working very diligently on getting back on track on our cost performance and our reliability performance, and we believe we'll make progress in the quarters to come. Let me hand over to Jakob, who will say a few words about APM Terminals and the other businesses.
Yeah. Thank you. APM Terminals delivered a stable result in the third quarter. The highlight was and that is really a first important step for recovery in APM Terminals and executing on our new strategy, is that the volume was up. The volume was up by 6.5% in the quarter and that is kind of the first path towards a lower unit cost. You still don't see it in the unit cost but the volume increases stems both from increases in Maersk Line, as according to our strategy, we are trying to put more volumes to APMT, but we also had increases in third-party volumes.
The satisfactory stable performance of terminals is somewhat overshadowed in the quarter by some impairments and it really is a reflection of a new management team that have very carefully reviewed every single terminal. Unfortunately, we had a couple in the second quarter, and we have a couple here now. We have been through a very rigorous exercise. I don't hope there will be more. We'll do testing every quarter, but really, we have done everything we can to try to have the right valuation of each terminals for the future. This quarter, there was impairments in total of $374 million.
If we then move on to Damco, on page 18, I would say the same as I cautioned on cash flow, let's not use this quarter too much to judge the performance of Damco, because Damco was probably the part of our business that was hardest hit by the cyberattack. It is heartening to see that revenue grew by 8%. Obviously, when you look at profitability, they were really hard hit by the cyberattack. I think I'll leave my comments here, and I will move on to Svitzer, which performed very well in the quarter. There was revenue growth, there was significant earnings growth, and their return on invested capital exceeded 10%. A good, stable development in Svitzer.
If you turn to the next business, Maersk Container Industry, there you see that the significant turnaround that we have seen in previous quarters has somewhat stuck. Revenue is almost double of the revenue last year. We see a positive cash flow and a double-digit return on invested capital. Obviously, it also reflects a period where Maersk Line has had to acquire quite a few containers. It is a good case showing that close cooperation between Maersk Line and Maersk Container Industry is for the benefit of the shareholder, proving our case of moving our T&L business closer together. Let me stop here and hand over to Claus for the energy businesses.
Thank you, Jakob. Just a few highlights here. We are now one year into the separation efforts that we announced in September last year. The highlights of the quarter is obviously, as Søren already mentioned, that we agreed with Total S.A. to divest Maersk Oil to them at $7.45 billion, $2.5 billion in cash or debt, and $4.95 billion in Total S.A. shares. We are progressing as planned in respect of governmental and authority approvals, and closing is expected in first quarter 2018. The other highlight was the divestment of Maersk Tankers to A.P. Møller Holding at $1.18 billion, and as Søren mentioned, closing already took place on the 10th of October. A few comments on Maersk Supply Service on page 22.
The market continues to be characterized by oversupply and relatively low demand, and Maersk Supply Service revenue declined compared to same quarter last year due to declining rates and also, several legacy contracts expiring. Maersk Supply Service has divested 12 vessels now over the past year for recycling, and they have started to take delivery of new buildings, which increases the standards and capabilities of the anchor handling subsea construction fleet in Maersk Supply Service. Maersk Supply Service has successfully added contracts and revenue actually in third quarter, thereby increasing the backlog, albeit still at relatively low rates. In terms of discontinued operations, as already mentioned, we have previously stated that we aim to have structured solutions in place for all oil and oil-related businesses within 2018.
As we believe we will be able to determine a viable solution for Maersk Drilling within the timeframe, we decided to reclassify Maersk Drilling as a discontinued operation. In this connection, we took an impairment of the assets of $1.75 billion. If we turn to page 24, we can see that, due to the impairment, Maersk Drilling reported a loss of $1.699 billion. However, the underlying profit was $31 million compared to $340 million same quarter last year. However, let me remind you that third quarter last year was extraordinary due to a termination fee received with a profit element of $210 million for Maersk Valiant.
If we turn to page 25, Maersk Drilling generated a positive cash flow from operations actually of $183 million and a free cash flow of $165 million. This was helped by efficient operations with an uptime of 98% for both jackups and floaters. Furthermore, the cost efficiency continues to support the result with 7% lower cost compared to third quarter last year. The market is still challenged, but we see signs of improving tender activities, and Maersk Drilling added more than 14 months backlog during the third quarter. Two rigs came on contract from warm stacking, and one more rig is prepared to come on contract in quarter four. That leaves the coverage at this point for 2018 at 52% for the jackups and 48% for the floaters.
That's the comments on Maersk Drilling. Let me just say here, before the question comes, that in terms of finding a solution, we will obviously, as always, inform the market as soon as something concrete is to be informed about. I will hand over for the guidance page. Søren.
Thank you, Claus, and I'll make it very brief. We now expect a positive underlying profit for 2017, and that compares to a loss last year of $546 million. As I've said, we are expecting an underlying profit in transport and logistics of around $1 billion and in Maersk Line an improvement around $1 billion compared to last year. For energy, after all of the discontinuing operations in oil, tankers, and drilling, we expect an underlying loss of around $100 million. With that's the end of our presentation, and we will now answer questions. Thank you.
Thank you. We will now begin the question-and-answer session. If you have a question, please press zero then one on your telephone keypad and you will enter a queue. After you are announced, please ask your question. There will be a small delay before the first question is announced, and this session will end no later than twelve. The first question comes from the line of Finn Bjarke Pedersen from Danske Bank. Please go ahead. Your line is open.
Yes, good morning. Regarding Maersk Line cyber attack, you're saying it's in the high end, around the $300 million in the third quarter. You're obviously losing quite significant volumes, and your rates are weaker. You are saying there's no problem, we should just expect you to come back on production and make the normal returns that you had before. Could you take me through how long it would take, and how would you actually come back on the cost side as well?
Yes, Vincent here. The recovery has been gradual throughout the third quarter. We got into the fourth quarter, I would say, with a support from customers in terms of volume in line with what we would have seen without the impact of cyber attack. With respect to costs, there may be some lingering effects that we are still working on. I would say from a revenue perspective, we should see a normalized fourth quarter. From a cost perspective, it will normalize in the course of the fourth quarter.
Just to follow up, you're saying that volumes going into the fourth quarter is on market level. That means 5% growth?
We'll have to see what the market growth is at the end of the quarter.
You're increasing your expectations as well for the market growth to 4%-5%. I would take that if you say volumes are in line with what you could expect from the market, it has to be around 5%. Coming back to the cost, a quite significant increase in your unit cost. How do you bring that back to the normal level?
This is Søren Toft here. I think first of all, in a quarter where the market fundamentals are strong, and we also expect it to grow in line with those fundamentals, and we end up losing 2.5% volume quarter-on-quarter, obviously that's the main explanation. What Vincent Clerc said, getting volumes back on track with the plan, that is really the main reason. The second explanation is that we carried cost in the third quarter over and above what we normally carry to run our efficient and daily operations. Those costs we expect, and we are already seeing that they will phase out over the course of the fourth quarter. You have one little data point.
You can see our reliability in September is already improving, and we expect it will improve over the coming months as well. When we are more reliable, we will also sail the network at lower cost.
Normal production in Q1 next year?
Yes. That's what we expect.
Okay. Thank you.
Next question is from the line of Robert Joynson from Exane BNP Paribas. Please go ahead. Your line is open.
Good morning, gentlemen. A few questions on Maersk Line, if I may. First of all, on the reported freight rate, which was down by 1% versus Q2, could you please try to quantify the impact that the cyber attack had on that number? Secondly, on the other revenue, it was good to see it up so strongly versus Q2, which I know was driven by the Hyundai and Hamburg Süd VSAs.
Should we assume other revenue to be maintained at close to the Q3 level going forward? Final question, just on the Hamburg Süd closure. Could you just explain why you're confident that the three outstanding geographies will approve the deal by the end of the year? Thank you.
If I start, Søren Toft here with the latter question, then we are going through the motions with the remaining jurisdictions. We expect still, as we have said so far, and as what was reiterated by Jakob Stausholm, that we'll close the transaction during Q4. We'll obviously issue press releases and the likes when we get the next jurisdictions across the goal line. Maybe just, if I take the comment on other revenue, then the question around will it remain stable for the coming quarters? The short answer is no, in the sense that part of the slot sales that we do today is to Hamburg Süd, that will, upon closing, be converted into our own revenue.
For the part of the slot sale, that will go down. Obviously the question is whether HMM will be buying more space in the coming quarters. For now, you'll see a slight reduction over the coming quarters.
Vincent Clerc here. For the freight rate development quarter-on-quarter, I mean, they have been impacted by two things. First is in the course of July and the beginning of August, we were not able to participate in the spot market, which was pretty high at that time, to the extent that we normally were. That has had some impact on our average rate. As we mentioned also, towards the end of the quarter, we had to recognize a weakening rate picture as we were going into the October holidays in China. That also had an impact on how the average rate developed.
Was there some element there of prices being maybe a little bit more favorable to customers to lessen the impact of the cyber attack from their perspective?
I think what you have is with the activation of the idle capacity, you ended up towards the end of the quarter having actually 6% extra capacity. You had 3% coming from new deliveries and 3% coming from activation of idle capacity. You ended up towards the end of the quarter having actually a supply that was growing slightly ahead of demand, and you saw some correction of the big rate increases that we had had in the second and the beginning of the third quarter. I think that's really what has been happening here towards the end of the third quarter.
Okay, thank you.
Next question is from the line of Lars Heindorff from SEB. Please go ahead, your line is open.
Thank you. Also a few questions regarding Maersk Line. Firstly, regarding the capacity, I think you mentioned that you believe that you'll be back to normal production in Q1. Capacity increased quite significantly in the third quarter. Is that also going to be the case then in Q4, and you will hold on to the same kind of capacity as you've been going out of Q3 with into Q4 as well?
This is Søren Toft here. Lars, the answer to that is yes. Basically, half of the capacity increase is HMM, and the other half is more or less equivalent to what we believe the market should be growing. We will, of course, I should, you know, underline that, we will, of course, continuously try to optimize capacity. There are some of the capacity that we had in the third quarter, really around the cyber attack, that we will not be needing. In the main lines, yes, it'll be at the same level.
We should expect to see that as we go into 2018, a fairly significant decline in the share of time chartered capacity if you go back to normal production in 2018.
Well, we are gonna take delivery over the course of the next 12 months of another 6 second generation Triple-E and another 5 14,000 TEU vessels. It's correct, we will continue to adjust our time chartered capacity to be in line with basically our own demand growth and what the market will be growing. We still have that valve very much intact.
Okay. Regarding the rates, north/south rates declining sequentially, which is actually a little bit of surprise to me, maybe not to you. We have seen improvement in some of the north/south, at least some of the data points that we get on a weekly basis from various sources. Can you just explain, I mean, the trend during the third quarter in the north/south rate development, and then this is something you believe will continue into the fourth quarter?
Just, Vincent here. Obviously the North/South is a collection of different independent geographies. What we have seen is especially towards the end of the third quarter rates into Africa had recovered to a pre-crisis level. Actually, they were about as high as we have seen them for many years. We saw an injection of capacity in some of the trades that led to rate corrections especially in Africa. That has had an impact given our large exposure to Africa.
Okay. Last, not least, as a more sort of a household question here. The write-down and impairment in terminals. I maybe haven't been reading the whole report, to be honest. Can you explain me both the actual impairment and also the impairment related to some of the joint ventures, what exactly that is?
Yes, Lars. Jakob here. It is in total $374 million. Some are in joint ventures, some are in the main business. You can actually see it in the consolidated account, the negative part you have in joint ventures. But we don't disclose what terminals exactly we are impairing.
Okay. All right, thank you.
Next question comes from the line of Jørgen Bruaset from Nordea Markets. Please go ahead, your line is open.
Thank you very much. Two questions from my side, both related to Maersk Line. First of all, when you look at unit cost, I think you previously communicated that sort of your average run rate on decline in unit cost should be 1%-2% per year. Should we expect that for 2018, or should it be a higher cost potential given that you have some easy comps from 2017? That's the first question.
Well, this is Søren Skou here. I'll take that question on behalf of our Chief Operating Officer and confirm that we continue to expect that we can reduce unit cost, and that our ambition is to reduce unit cost by 1-2 percentage points at fixed bunker. We are getting in 2018 substantial addition of new ships. We are expecting, probably even more importantly, to get our performance in terms of reliability and volume performance back on track. Of course, while again here it will become hard to separate the hot and the cold water. We are also expecting, of course, that the addition of Hamburg Süd will have significant positive impact on our unit cost.
Okay, thank you. Just to follow on that, are you able to break down or sort of isolate the effect on unit cost just by the phasing of the new vessels coming into the fleet?
No, we would not be able to do that. Sorry.
Okay, thank you. My second question is, you mentioned that you see some bumps on the road for 2018, with regards to supply. Could you just elaborate a bit on your thoughts on the supply/demand going into 2018?
Yeah. I think we can just say that, I think we can expect to have about, somewhere between 5% and 6% of new capacity, delivered. It's kind of, as far as we can see, bunching together a little bit in the second and third quarter. Of course, you know, many things can happen and ships can certainly be postponed and delayed without us being able to see that. That's all that I meant with the comment around possible bumps. I do think that I want to reiterate that overall, supply and demand, fundamentals look good.
I mean, we have broad-based strong economic growth in the world, in the U.S . In particular, but certainly also in Europe and in the form of the BRIC countries. We've seen strong growth in China and India and even Russia and Brazil that have been hard hit by the lower commodity prices, you know, are showing good growth as we speak. That's really the underlying reason for why we are optimistic on demand, and we see the supply picture as reasonable.
Okay, thank you. Just finally on scrapping, should we expect that scrapping should continue to come up on the back of more capacity being entered into the market? Or do you think that the run rate we've seen so far in the second half of 2017 is sort of the baseline for what we should expect next year? Thank you.
We expect scrapping will continue at this level. Obviously, it also depends a little bit what happens to the fuel price. If that continues to develop as it has done recently, obviously the case for scrapping changes, but we would expect it to continue in the same level, which is approximately 500,000-600,000 TEUs per year.
Excellent. Thank you so much.
Yeah.
Next question comes from the line of Dan Togo from Handelsbanken Capital Markets. Please go ahead, your line is open.
Yes, thank you. Just to start with one question on terminals. You mentioned that terminals is also impacted negatively from the cyberattack, and you mentioned an increase to $170 per move in the quarter. Can you elaborate a bit on what would that have been, so to say, without the cyberattack?
Well, this is Søren here. We had significant downtime in our new fully automated terminal in Rotterdam as a consequence of the cyberattack. Actually, a number of operated terminals had most of them very short-lived, but still three, four, five days of period where they were unable to either move containers through the gates or otherwise operate the terminal. We were hard hit in New York and L.A., which are both terminals with very high costs to begin with.
Just reverting to the deliveries you are taking on in 2018. Do you have any flexibility? I know you have had a few postponed here in 2017, but does that go for the 2018 as well, if so to speak, fundamentals turn for the worse?
Søren Toft here. Well, we have a delivery plan agreed with the yard, but how can I say, I mean, if we find that fundamentals are different, then we'll surely take up the dialogue with the yard if there's a need to do so. As we've also stated previously, we do have in excess of 800,000 TEU of chartered capacity on liquid contracts, so 12 months or shorter. We have other levers than just postponing new deliveries.
Okay. Just also a question here on the unit costs as well here, or on the cost side I would rather say, because are there any, so to say, absolute increases in the cost base? I think, for instance of intermodal costs in connection with increasing oil prices, et cetera. Maybe also on the terminal side. Are you seeing an underlying fundamental inflation in the cost base, absolutely?
Well, we are, as we've said previously, still working on making sure our cost base remains deflationary. Sure, there are a couple of things on feeder costs and so on that are fluctuating a little bit with the fuel price. We are working on curbing that and making sure that we continue to drive down costs for the coming quarters.
Then just a final question, if I may here on, I know annual contract negotiations are coming up, for Asia Europe. Are you finding good arguments, for another increase in annual contracts, for 2018 as the world is looking right now?
We always have good arguments. Whether they carry the increase at the end of the tender is always the big question. That's a bit too early to talk about because we are really in the very early stage of the tender season.
I understand. Thank you.
Next question comes from the line of Christopher Combe from J.P. Morgan. Please go ahead, your line is open. Christopher Combe from J.P. Morgan, your line is open. Please feel free to ask your question. Okay. The next question is from Casper Blom from ABG Sundal Collier. Please go ahead, your line is open.
Thanks a lot. A couple of questions from my side also. First, regarding your balance sheet, there's a little bit of increase in the debt level here. Can you just confirm that that doesn't impact your expectations regarding paying out proceeds from the Total deal? And maybe also a little bit in connection with that, if you could talk a little bit about CapEx expectations for 2018 and 2019 on the back of the rather low commitments that you have right now. That's the first part of my question.
Thank you. I can confirm that we have given a very open-ended statement, but on how to distribute the proceeds from the Maersk Oil deal with a clear intention of distributing as much as possible. The balance sheet, the increase in the debt, I mentioned that to you. We had a negative cash flow, partly because of a lot of deliveries, which also reduces future CapEx commitments and a temporary increase in working capital. I don't think you should deduct anything from what the balance sheet shows here, end of third quarter. We are on track on that. We're not giving new guidance.
We will do that early next year when it comes to CapEx. Obviously, our flexibility goes up by the day.
Okay. Fair enough. Just a little follow-up on the unit cost question that Jørgen had. When trying to estimate unit cost for 2018, looking aside from bunker cost, should we really use 2016 as the base and then include 2%-4% improvement rather than the usual 1%-2%?
Søren Toft here. I guess I can't delegate this question. What you should look at is that we're gonna come back on the right volume levels. When we do that, you should certainly expect that we come back at the right run rate. 2006 was maybe an outstanding year in terms of really having all through the year a perfect utilization. We are, of course, optimizing for utilization, but also for overall profitability. 2016 is not a bad start.
Thank you.
Next question is from the line of Edward Stanford from HSBC. Please go ahead, your line is open.
Good morning, everybody. Two questions, please. First of all, just coming back on the question of CapEx and the committed CapEx. Should one expect an amount for things like maintenance CapEx over and above that number each year? And if so, do you have any indications of what that might be? Secondly, when there's been obviously your alliance partners has ordered quite a lot of new ships for a few years' time. Does that impact how the alliance plans its capacity? Does that have any implications for how you might react to those additions? Thank you.
I think, unfortunately we're not giving new guidance. I mean, we are, as a management team, totally committed to continue the capital discipline that we introduced last year. As I showed you very clearly, our future commitment goes down by the day. We're in a good position to be capital efficient, but we're not giving guidance right now. We will do that early next year. We have no immediate plans of ordering ships, and I think we will not say anything further. We're getting the ships that we need for now.
Perhaps just one supplementary question. You've obviously written down drilling now, and you wrote down the tankers business before you sold them. At what point do you have to consider the whole carrying value of the supply services division, if at all?
We're considering that every quarter. We did make a write-down in the fourth quarter account, you might recall. It's actually in the books at a fairly low level. We're continuously monitoring that.
Thank you.
Could you repeat the first part of your question? We were not sure we fully understood that.
No, I think you answered. I was really asking whether you felt the value of Supply Service was appropriate.
The original first part, the part about alliances and capacity.
Well, I mean, clearly you presumably have conversations with your alliance partner about future capacity plans, and presumably you were aware of their intention to order new vessels. I just wonder whether that, how that balance plays out with the alliance planning in the next couple of years.
Well, Søren Toft here. You could say we plan capacity based on our own requirements. Obviously we have dialogue on this, but at the end of the day, MSC's requirements and requirements for additional capacity is a thing that they can freely decide. Obviously we take our requirements and their requirements into account when we plan the future capacity. That's really the dialogue that's going on. There you will see that we are putting more competitive vessels in the 19,000-20,000 TEU segments.
Thank you.
Next question is from the line of Frans Høyer from Jyske Bank. Please go ahead, your line is open.
Thanks very much. Coming back to the non-freight revenues that line with an increase sequentially of $250 million or so, I just wanted to understand a little more how that sequential increase could be so big given that the vessel sharing agreements with Hamburg Süd and Hyundai were also in place in Q2.
Yeah, this is Søren Toft here. They were partly in place in Q2. They got implemented during the course of Q2, so you have a buildup between Q2 and Q3. That's the simple answer.
Understood. Thank you. Second question is regarding the strategy for recovering your volumes at Maersk Line in the fourth quarter. Is it going to be driven by the recovery in service quality, or are there other levers that you will bring to bear on that subject?
I think there's different parts for that. The first part is that actually a lot of the volumes have already recovered. Customers with whom we have contracts and so on may have diverted some bookings during the height of the cyberattack, but they moved them back as soon as we recovered, and they need our service to continue to maintain their supply chain. That part is already in place.
Some of the rest will come from the stabilization also of the network and the gain that we as we return back to our normal reliability and quality, then it's easier for us to get the customers back on track where there is still a tail where that we need to get back on our network.
Okay. Thanks very much.
Next question is from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead, your line is open.
Yes, thank you. I was just wondering about this write-down in drilling, taking down your invested capital to around $4.7 billion or so in that business today. We heard news sources that you had been in discussions divesting this business for around $4 billion. Is this asset write-down as an effect of discussions that you have ongoing with potential buyers, or are you just looking at where the market valuations are in non-peers and similar? Any input on that would be interesting.
Yes. It's pure accounting. We don't comment on rumors. The accounting is actually pretty simple, and that is that it's now 12 months ago that we said within 24 months we will have structural solutions in place. Accounting-wise, if you are confident that within the next 12 months you'll find a structural solution, you should classify it as held for sale. When you classify it as held for sale, you have to make a fair value assessment. That's what we have done, and that has led to the impairment.
Okay, thank you. Going back to the unit cost then in Maersk Line, you mentioned this. You have the bunker costs, but you don't have the volumes because you have basically sold the slots which you account for through revenues rather than volumes. Can you give an indication on sort of these volumes from Hamburg Süd or HMM to make it a bit more easy for us to do the numbers next year when obviously the Hamburg Süd volumes will be there rather than the VSAs? Thank you.
We're not gonna, and we are not disclosing those details. Sorry about that.
Okay. Just about CapEx. You have said you will not start ordering any big-ticket anytime soon and for new ships for Maersk Line. When is sort of a normal replacement cycle expected to need to commence in the Maersk Line business in your view? Is that two years out or three years, or how do you see it?
This is Søren Skou here. I think it's very important for us to reiterate what we have said continuously and starting at our capital markets day last year that we want to be extremely disciplined with CapEx in the coming years. It's a fundamental part of our strategy to actually well, not surprisingly, but to actually deliver a free cashflow every year. I think you should take note of the fact that we are depreciating in Maersk Line in the neighborhood of $1.8 billion-$2 billion.
That is, you should also take note of the fact that actually, if you look over the last 5-6 years, the invested capital in Maersk Line have been just around $20 billion. That means that basically we are investing more or less in line with depreciation over a long time period. We don't see us, you know, changing that dramatically, of course, excluding the acquisition of Hamburg Süd.
Okay. Thank you very much.
Next question comes from Marcus Bellander from Carnegie. Please go ahead. Your line is open.
Thank you. Three questions, if I may. First, other revenue in Maersk Line. You said in conjunction with the cyberattack that you would waive detention and demurrage fees for the first two weeks of July. Could you quantify that impact?
Yeah, we have waived, it's true, our demurrage and per diem charges for the first two weeks of July. We don't really disclose the details of these amounts.
Okay. Second question. Reported freight rate was down 1% or 2% year-on-year. If I look at the sort of recognized freight rate, so reported revenue divided by volumes, it's actually up about 3% quarter-on-quarter. It just seems like there's an unusually big difference there. Some headwind quarter-on-quarter on reported line and pretty significant tailwind on the recognized line, so to speak. If you could comment on the dynamics there.
Yeah. As I mentioned, we saw some decrease of the rates towards the second part of the third quarter as capacity was adjusted actually higher than what demand was warranting. That's actually what you're seeing in the delta between loaded and recognized freight.
Okay, it's just that lag effect.
Yes.
Okay. Thank you. Last question regarding the possibility to postpone deliveries of new ships. What's the sort of contractual flexibility there? If you wanna postpone deliveries, are you completely at the mercy of shipyards? And if so, are they less eager to allow for postponements now that they are struggling more than ever, perhaps?
It's Søren Toft here. Sorry to be boring, but we're not disclosing our contractual engagements with the yards.
Okay. Can't blame a guy for trying. Thank you.
Today's last question comes from the line of Christopher Combe from JPMorgan. Please go ahead. Your line is open.
Hello, all. Apologies earlier. We had a fire drill here. Had to abandon my phone. Just two quick ones. Looking at your guidance for market growth in the fourth quarter, it seems to imply 3%-4% growth. Could you elaborate a bit upon that number and what gives you confidence in that level, given the very tough comparison? Then second, in light of what you said in terms of correcting unit cost performance as volumes get back to normal levels, does that imply that you'll be taking back some share or lost ground from the third quarter, quite possibly near term? Thanks.
Vincent here. For the volumes, I think you have also to look at how our market share has developed during the course of the year. Whether we go to the full extent of market growth, given the fact that we were already lagging a little bit, this growth that was higher than what we expected in the second quarter, that is something that we'll have to see in the coming weeks. We expect the volumes to come back on what we see as our basic trend line prior to cyberattack.
Yeah.
Okay, great. With respect to the market growth, that looks pretty robust at 2%-4% implied. Can you comment a bit on how you see inventory levels developing? I think last time, you spoke, you mentioned perhaps some inventory build. Any color on that front?
Yeah, I don't think we should elaborate. I mean, the world economy is growing very well. We probably had a little bit of tailwind on the stock side. At the beginning of the year, we are trying to be a bit conservative for the opposite in the fourth quarter, but it's. We will see.
Thank you.
That was the last question of today. Please go ahead, speakers.
Yes, thank you. That means that we will close the session here. I just wanna say that, reiterate again that we believe we have made very significant progress on our strategic agenda of becoming a focused container shipping and ports and logistics company, separating out the energy businesses and closing eventually of Hamburg Süd. We have, we believe, reasonably good market fundamentals in container shipping or good market fundamentals. We are expecting continued improvements. We have a quarter now in Q3, which was weak, both caused by a cyberattack, but also other weak in terms of our own performance. I wanna emphasize that it's mainly factors under our control, such as capacity deployment and cost takeout.
We, as a management team, believe we can do a better job in the coming years. Overall, we feel good about the development of the business. We're clearly moving towards more sustainable earnings overall. With that being said, thank you for joining. We look forward to seeing you at our Capital Markets Day, which will now be on the twentieth of February. Thank you.