Good morning, and welcome to this Conference Call for the Maersk Group's Second Quarter Results. My name is Søren Skou, and I'm the group CEO and CEO of Maersk Line. With me today is Trond Westlie, our group CFO. We'll walk you through the development of the quarter, and afterwards, we'll have a question and answer session with you. Before we get started, I wanna say that this morning we reported the result of a profit of just over $100 million. That's a decline from last year's second quarter of $1 billion. We made $1.1 billion last year. That is clearly not a satisfactory result for a group of our size.
It's equally clear that the reason for the result is, lower prices in all of our markets, be that, freight, container freight rates, oil prices, rig rates, charter rates in tankers and supply, and terminal rates. It meant that our turnover was down by $1.2 billion or 16% year-over-year. I also wanna say that we have done well on costs, and it's important to highlight that, despite the rough seas that we're in, we currently face and we are facing, we continue to be in a very strong financial position. We have an equity ratio of 55% and a liquidity buffer of more than $11 billion.
Now I'd like to turn to page number two and just draw your attention to the disclaimer on forward-looking statements, and I'd encourage you to read that and familiarize yourself with it. In terms of strategy update for the group. Overall, we see the group performing well relative to the industries that we're in. Pretty much all of our businesses are top quartile, and in some cases, they are leading the industry in terms of profitability in 2015. And we have achieved this strong position through operational performance, through utilization focused efforts on cutting costs, and in production efficiency in the oil business.
However, currently, we are challenged by market headwinds, as I started out talking about, in the form of low growth and excess capacity in most of our industries, and that has led to declining prices and declining revenue. It's in recognizing this development and the low growth and returns that the board of directors decided in June to initiate a process to develop and consider strategic and structural options for the Maersk Group. The purpose of that review is to ensure that we remain a strong, profitable, and financially viable group, and that we also develop new growth opportunities. We have said that we will communicate the progress on this strategic review by the end of the third quarter.
We have to, for that reason, postpone the Capital Markets Day that we had planned for the 22nd of September. I'm sure many of you would like us to answer questions about the progress on the strategic review, but we will have to wait until the end of the quarter to come out with a clear status report on how we're progressing with the strategic review. Until we have the outcome of the strategic review, we will continue with the strategy that we have and the strategic objectives. We want to grow our businesses. We want to achieve a 10% return on the invested capital over the cycle.
We also do reiterate today that, given the low interest rate development we have globally, we can be, in some cases, in a situation where we make investment decisions that on a standalone basis do not fully comply with the 10% return requirement. We continue to focus on having and want to have a strong capital structure, a high operating cash flow, and a cash flow conversion, and we want to continue to increase dividends per share over time, supported of course, by earnings growth. Now to the numbers. As I said, we reported the result this morning of a $118 million profit, a $134 million underlying, down from about $1.1 billion last year. The return on invested capital was 2%.
We continue to execute well on costs, but that has not been able to stop the deterioration of results. The main driver of the lower result is Maersk Line, which made a loss in the quarter, but every sector is down compared to last year. The only company of the main companies that have an improved result is Damco, which has made a slightly higher profit this quarter than last year. Free cash flow was $326 million, and cash flow from operating activities decreased in line with the revenue, decreased to $940 million. It was $1.8 billion last year.
We invested $614 million compared to $1.7 billion last year. Net interest-bearing debt went up by $1 billion, more or less in line with the dividend payments. I can say that we reiterate that we believe we have a strong financial position with an equity ratio of 55% and a significant liquidity reserve. That does give us options also in relation to our strategy review. Turning to Maersk Line. Maersk Line posted a loss, and this is certainly not something that we are proud of, $151 billion, $139 underlying. That means that the result was $638 million worse than last year. Clearly, driven by prices. Prices were down 24%.
The fact that we did well on costs, we took costs down 15%, did not mitigate the sharp drop in prices. We did grow 6.9% volume to 2.7 million FFE for the quarter. We believe that global market grew around 2%. We, for the second quarter in a row, took a bit of market share. In the first quarter, we had an EBIT margin gap to peers of around 8%. That was helped a lot by impairments made by some of our competitors. If we adjust for that, we were just around our 5% level for EBIT margin gap to the industry.
In terms of free cash flow, despite the deterioration of the results, we had only a small negative free cash flow, but driven by the fact that we didn't do much investments in the quarter. Just a few comments on cost in Maersk Line. Cost came in at $1,911 per FFE. That's the lowest level ever. And it's a pretty remarkable to be below $2,000 per FFE. If you look back on the graph that is on the chart here, you can see four years ago, in the second quarter of 2012, our cost came in at $3,100.
It has been a remarkable cost journey over the last four years to get to $1,900 level today. Bunker cost of course is a big part of it. We also saw a significant decline in bunker prices year-on-year, 42%. Of course that helped a lot, but we continued also our journey in terms of improving our bunker efficiency, which came down another 3% year-on-year.
The cost initiatives we announced in November last year in terms of reducing the size of the organization, they are progressing as planned, and we expect to deliver on the targets that we set out, $150 billion this year, $250 billion dollar reduction last year from the SG&A cost. Those were the highlights for Maersk Line, and now I'd like to turn over to Trond Westlie, who will take you through the rest of the businesses and the guidance.
Thank you, Søren, and a very good morning from me as well, ladies and gentlemen. I'll continue on slide eight in Maersk Oil. The Brent oil average for the quarter is $46, down 26% from last year. You can see that the revenue decline is only 19% from last year, so it's compensated by the entitlement production, specifically in Qatar. Entitlement production increases to 331,000 barrels a day on average during the quarter, and that's sort of good efficiency both in Qatar and specifically in the UK.
Compared to first quarter, we had a small downtime in the Danish sector, and as a result of having good operational uptime during the quarter in Denmark as well, that comes back to normalized levels, even though declining from last year. Very good development during the quarter on operating costs coming down from $632 million last year, down to $475 million, and that's a decline of 25%. That is also the reason why we actually increase our target for cost reduction up to between 25%-30% for the year. It's really a good traction on the efficiency in Maersk Oil on the efficiency side.
On exploration costs, we are lowering the efforts, and we see that this quarter is $47 million in costs, and we also see that it's gonna be lower than last year going forward. All in all, a very good result for the quarter. We see that the break-even costs for the quarter is around $42. That's why we also still guide on the $40-$45 for the year. The investment capital is $4.3 billion, and the return on invested capital is 12.1%, which we're very satisfied with as such, given the oil price.
The Qatar Al Shaheen, just, you know, to give you the effects, the sort of short-term effects, we see no reason for impairments because it's all under consideration in the contract, and there's no effect as a loss of the contract. We're basically not having a renewed contract from mid-2017. We do not see any effects on reserves and resources as such. APM Terminals. As we see, the return remains under pressure. The result for the quarter is $109 million, down from $159 million last year. The operational throughput increases about 2.6%. And if we take away the changes in the portfolio, the like-for-like is an increase of 0.2%.
The effects that drives this is, of course, that we are focused on some oil-dependent markets in West Africa, Russia, and also East South America. That drives some of the volumes, but also there has been some commercial effects of loss of volumes in the quarter that drives the development. It's basically what drives the decline in NOPAT. In all of our business units, there is a cost efficiency programs and saving initiatives in APMT going on. We see some of the effects of the difficult markets have been recouped as a result of effects of that cost savings. Just to be very clear on the returns, we're having a return on 5.8% this quarter.
If we then split in operating entities and and take away the development projects, we see a return on the operating units of approximately 8% or +8%. Going on to page 10 on Maersk Drilling. A very solid operational performance, very high uptime as the drilling has shown for a long period of time. We're talking about 98% and 99% for the different segments. So both high uptime and cost reductions is really what's assisting the underlying profit of $164 for the quarter. The market situation is, of course, difficult. We had one cancellation with Maersk Valiant. It's not affecting the numbers in the second quarter.
It will affect the numbers in the second half, and we see the effect of the second half in excess of $100 million. You have to bear in mind that that is just pre-writing earnings that would have come into 2017, so that the situation as such and the challenging market environment doesn't change as a result of this. The Maersk Highlander were acquired during the quarter at a good price of $190 million. It's a five year contract, and the revenue base is $420 million, so we believe it's a very good contract. We also are very aware of the counterpart, which is Maersk Oil on the Culzean Field. We have a good conversation with both parties on this.
As of now, we have five rigs idle, and we see that five new rigs are becoming idle the rest of the year, and that five rigs includes the Valiant. Going on to Shipping Services. In general, we see deteriorating markets. The results for the Shipping Services are $51 million, down from $109 million last year. In general, as deteriorating markets, we also see cost efficiencies and cost savings being done in all of the units within Shipping Services. If we go to Maersk Tankers having a result of $26 million, down from $39 million, it's very much driven by rate declines.
We see that both the refineries around the world as well as demand and also some of the stocks are high, and as a result of that, we saw a trend going downwards during the quarter. For Supply Services, underlying a loss of $8 million from a profit last year of $33 million. In addition to that, we have an impairment of $97 million during the quarter, which is very much driven from older vessels and the anticipation of the market situation medium term on those ships. All in all, a very difficult market on supply side, and also backlog is challenging so that we do foresee a challenging environment on supply side medium term. Svitzer fairly stable, delivering result of $23 million, down from $30 million.
Some integration startup cost in Americas that driving this number down because all the markets, both in Europe as well as in Australia, are doing well on the harbor towage side. Damco delivering 10 up from seven last year. It's continuous improvements program and improved processes as well as focus on customer service that actually continues to keep Damco in the black on $10 million. Going more to the financial side. We have seen and have registered that there are some questions about cash conversion and operating cash flow generation. We have just included this slide just to show you the historical trend on the cash conversion and the operating cash flow. All in all, I mean, historically, the cash conversion over time has been very good.
The underlying cash conversion from an EBITDA level is high, but of course, are affected by certain elements like we had in the first quarter, with some provisions being paid as a result of settlements and other things, that is sort of not averaging out the numbers. Going into the second quarter, we actually see that the cash flow conversion in the second quarter is on the standard level, and we see that the operating cash flow for the first half year, even though affected by some provision payments in first quarter, is as planned. Going then to page 13 on the strong financial position. Starting the quarter on a net debt of $10.7 billion and ending at $11.7 billion.
As Søren mentioned, we are basically the net change in that is the dividend payment in April. You can see that the EBITDA cumulatively is showing $1.9 billion coming in. Then the change in working capital taxes, financial items and investments is basically on a standard level. High equity ratio, sort of mid-50s%. Also, an increased or a stable ordinary dividend this year, but over time, as you see the trend line going forward. Coming to our debt structure, we do see limited refinancing needs for the next couple of years, and we have a high liquidity reserve.
All in all, the same applies even though the markets are challenging. We do see that we are in a very strong financial position with sufficient liquidity reserve to cater for difficult markets if they happen to prevail basically or continue. Going into the consolidated financial statements on page 14. I'm not gonna mention too many of the numbers. Revenue down 16%, down to short of $8.9 billion, basically driven by Maersk Oil oil price and Maersk Line freight rates. That is comprising the whole decline. There are some minor changes as well. EBITDA on $1.8 billion, as I said, countered by a lot of cost savings throughout the group. And that leaves us at an EBIT of $656 million.
Financial cost is higher than last year, mostly due to the effect of valuation of Danske Bank shares. We did have a gain last year. We don't have that gain. We have a small loss this year. That's basically taking the differences. Having said that, there are a lot of ups and downs in this number due to the effect of deterioration of some currency effects like Egypt, Angola, Nigeria, Venezuela and some of the more challenging countries to cover your currency exposures on. That leaves a profit before tax of $502. Tax level is the same as last year.
The reason for that the tax level is the same as last year is that we're making exactly the same amount of money in oil, and that's the high tax rates and the loss of EBITDA and also the EBIT number comes out of tonnage tax numbers from Maersk Line, and that's the reason why the tax level is at the level from last year, and leaving then a profit for the period of $118 million and an underlying profit of $134 million. As I said, cash flow from operations is close to a billion or $940 million. Some changes in working capital during the period, which is the normal way for the group as such.
Earnings per share $5.5 a share and the return on invested capital, which is low as a result of difficult markets, 2%. Going then to the guidance. We maintain our guidance for the group that we expect an underlying result significantly below last year. We are taking down the CapEx to $6 billion from previously $7 billion. As I said earlier, that is including the acquisitions of TCB and also, of course, the acquisition of Africa Oil in Maersk Oil. Other than that, no changes in the overall group guidance. Maersk Line reiterates the expectation of underlying result significantly below last year. The global demand we see at the same level of 1%-3%.
We don't expect it to grow more than that. When it comes to Maersk Oil, we now expect a positive underlying result versus previous years. We see a break-even result is still going to reach within the range of $40-$45. Maintain the entire production between 320,000 and 330,000 barrels a day for the year. As I alluded to during the review on Maersk Oil, we expect the exploration cost to be significantly below last year. When it comes to terminals, we now expect an underlying result significantly below 2015. We see a continuous pressure on the oil related countries and also some challenges relative to the market development of pricing. As a result of that, we have reduced the expectations on terminals.
Drilling on the other side, we have improved our expectations. That is due to the effect of the timing of the cancellation more than the general development of drilling. On shipping services, we reiterate the expectation of an underlying result significantly below 2015. As always, the sensitivity guidance is of importance, specifically when you see how the oil price as well as the freight rates is gonna affect our numbers going forward. You need to consider that. With that, I give the word back to Søren for the closing remarks.
Thank you, Trond. I'll make some brief closing remarks. Clearly, as I started out saying, we cannot be happy with the result. We cannot be happy with the fact that the results declines, revenue declines, and cash flow as a result also declines. There are a few highlights of the result though, and the one that I would like to point to is the fact that Maersk Oil makes $130 million in the second quarter, a 12% return. It means that we have been able to adjust cost in Maersk Oil to be profitable at the current oil prices. I think that's a great achievement and also relative to the oil industry, a quite competitive result.
The second highlight in the result is cost performance across all of the companies. As an example, Maersk Line unit cost down 15%, and at the same time, volumes are up well above market growth. With those few words, I'll now turn over to the operator for the Q&A. Thank you.
Thank you. We will now begin the question and answer session. This session will end no later than 10:40. 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. Not more than three questions from each speaker. There will be a small delay before the first question is announced. Our first question comes from the line of Casper Blom from ABG. Please go ahead, your line is open.
Thank you very much. I will try to take advantage of the fact that we now have the CEO of Maersk Line on the call and focus my questions on that area. My first question relates to your strong development in unit cost in Maersk Line. It's my impression that a lot of this has been driven by network changes and a high utilization. Could you give some sort of update on where you are in that development? Have we seen the most of the changes and is the utilization now sort of as high as it can be in the current environment? My second question relates to sort of the coming months, Q3 and Q4. Can we get any type of outlook, sort of where you see that heading?
We've seen some small increases in rates, but doesn't seem to be really, really sustainable. Also, would you expect to see any type of peak season this year? Finally, on the Capital Markets Day last year, you mentioned that you were expecting to see some sort of inventory rebuilding or at least stabilization in Europe, which could sort of give a helping hand to demand. Can you give an update on that situation, please? Thanks a lot.
First of all, on network and utilization, I mean, we grew volumes 6.9% in the quarter. We grew capacity 2.2%. Obviously that's in our industry quite a positive development. Our network is now almost as full as it can be. We are operating at very high utilization rates in the head haul trades, but also our round trip utilization is pretty high and as high as it's ever been. And that's of course because a big part of the growth that we've had during the quarter has been in backhaul trades. We will continue to drive cost out of the network.
We are in the middle of implementing a 2M network 3.0. We do regular reviews and also in the other North-South trades, we continue to upgrade or optimize on the network. That is of course only one part of the cost picture. For all of the variable costs, we have also seen significant improvements most notably on terminals cost. That's not great for APMT, but that industry is also impacted by lower growth and excess capacity. That means that we have better procurement opportunities in the terminal space. Terminal cost is our single largest cost item. That impacts a lot.
On the outlook for third quarter, I mean, you follow the indexes just as I do, and you've, I'm sure, noticed that the spot rates are up significantly out of China. Since March, we've seen more or less a quite clear trend of increasing rates. That has not really spilled over into results or average rates reported yet because of contract rates being reset at much lower levels this year, and also because of the way we recognize revenue. It has been a clear positive trend, in my view, driven by slightly higher market growth this year, but a much more disciplined capacity deployment across the industry.
Now we have entered peak season and rates have continued to go up. You know, we'll see what happens. We generally don't want to predict freight rates. That's very difficult to do. At least right now, there's positive momentum. Then in terms of the last question, I don't have a lot of data on that. I mean, growth has been stronger to Europe, much stronger this year than it was last year. I think maybe Trond can help me a little bit on this one.
Well, when it comes to the inventory build up and the sort of GDP development in Europe, I mean, it is low. Even though there you can discuss and show the difficult inventory measurement, I do think that we should be very careful on saying that. The expectation last year were that inventory had come down, and we were expecting it to flatten out and maybe rebuild. In general, what we see is basically a low growth in Europe. The Europe trade is not gonna sort of significantly help the growth as such.
That's very helpful. Thanks a lot, guys.
Our next question comes from the line of Christopher Combe from JP Morgan. Please go ahead. Your line is open.
Good morning, everyone. Just to follow up, can you comment a bit on utilization trends, especially since late June with the referendum vote in the UK, and if that's actually impacted from your perspective, ordering behavior from your clients? Turning to CapEx, can you please remind us where you have the most flexibility this year and also where the order book stands? I believe you have about 914,000 TEU vessels up for delivery in 2017. Can you remind us of the phasing of those deliveries and how you'll approach charter capacity between now and then? Lastly, in terms of your growth guidance, you're tracking well ahead of markets in the first half. Any reason to believe that you wouldn't continue down this path to the extent that you can maintain full utilization? Thanks.
Just to give you a start on the CapEx side, and then Søren can talk about the utilization and the growth. On the CapEx side, the element is we definitely have some flexibility in our CapEx as always during the course of the year. We do have also some programs going on both in terminals as well as in Maersk Oil. We are seeing both Culzean, Johan Sverdrup and other CapEx projects going on. I do think that there of course, I mean, we're guiding on $6 billion due to the fact that we believe that that's going to be the case.
When it comes to the phasing of the deliveries in 2017, I mean, they are starting to come in, sort of, I believe it's mid-year 2017 and then going on. I think we have 22 vessels being delivered, and overall in 2017, and that's a program that we had in our plan for our capacity planning as such. We don't see any change in the timing of those kind of phasings really. Over to you, Søren.
In terms of utilization and volume growth, I mean, we have as a strategic objective to grow at least in line with the market and in line with our leading competitors. Right now in the last, well, in the last six months, we have grown ahead of the markets, but probably not a lot ahead of our leading competitors. We see in the industry that it's consolidating and we see that, you know, the big carriers are growing more than the small. We want to make sure we maintain our leading position. In terms of utilization of our network, in the last 6 months, we have been able to grow volumes ahead of capacity.
That's, of course, the situation we will prefer to be in. I also have to say that with our current network utilization, our capacity deployment will probably have to grow slightly more in line with volume growth for the coming quarters. We do expect to end the year with growth above the market given our strong first half.
Clear. Thank you.
Our next question comes from the line of Finn Bjarke Petersen from Danske Bank. Please go ahead. Your line is open.
Yes, good morning. I will continue down Maersk Line and a few drilling questions as well. If we look at rate implementation or the effects of rate increases, you were talking a little about that we have seen very strong spot rates, and rates are continuing into the high season. How long does it take before we will see the results in your books? Second question on Maersk Line is other income per unit seems to be falling quite dramatically relative to last year. Do you have any comments on that? Finally, in drilling, you have superior material there, or your rigs are state of the art.
You have almost 10 out of operation at the end of the year. When do you expect that this market should turn around, and how long could you prevent having impairments? That was my question, thank you.
Thank you, Finn. Well, I'll start with the other income and the impairment discussion, and I'll leave the rates to Søren. When it comes to the other income, I do think that we have a general sort of saying to the market that it's around 10%, and it's around 10%. In general, I don't think. It is a decline from last year, and I do think that it is demurrage and detention. If you remember from last year in second quarter, we had fairly high income from demurrage and detention in the West Coast of Africa due to some strikes going on and things like that. There were certain elements that in addition to demurrage and detention, there are certain elements that also declined.
There is a decline, as you're rightfully saying, but it's more a change from a very high income into Q2 last year than sort of more the average this year.
Are we seeing in the second quarter is that an average per forty foot?
Well, I can only reiterate what we're telling you, that the other income is around the 10% level, and it varies somewhere up and somewhere down. That's sort of the rule of thumb, if you wanna, as we've said on that number. When it comes to the state of the art assets in drilling, we certainly agree on that statement. We also agree that we're very good operators and have a good uptime on this. When it comes to the impairment discussion, that's always, it's almost an art more than a science to find out how the future's gonna be and how that's gonna affect the accounting.
As of now, the evaluations that we do, and we have to bear in mind we're talking about assets that's gonna produce or be in operation for more than 30 years. The longevity of this means that we have to look at sort of what's happening in the market five years out and for another 25 years. As of now, we do not have any internal indication for impairments. Of course, if the market prevails and the long-term market is going to be lower than what we expect, we are coming into that discussion at some point. As of now, we don't see that happening.
If I could just add very briefly to the drilling discussion.
I mean, obviously, as I highlighted before, Maersk Oil has now in this quarter been profitable at a much lower oil price. Clearly, we believe that the oil companies will probably be successful in terms of driving cost out and have been successful over the last couple of years and will continue to drive cost out. That means that any recovery for the drilling industry will depend on the oil companies starting to become profitable again and therefore starting to be interested in investing in new activity. That we feel confident will happen. 11-12 years ago, when the oil price increased to $40-$45, you know, we were very profitable in our oil business.
Now it's a huge problem that the oil price have decreased to $40-$45. I'm confident that the oil companies will work through this and get costs down and start to have a business again, even at these levels. Now on container freight rates-
Just one question there. Any horizon to that prediction, Søren?
Not yet.
Okay. Thank you.
In terms of container freight rates, I think you said or alluded or suggested I said that the freight rates were strong, and that wasn't actually what I said. I said they have gone up. They're not strong yet. It will take a little while for container for increasing rates to show in our results for a number of reasons. There are really two drivers. One is the mix of business that we have. How much are we growing in our head haul, where the rates are highest? How much are we growing in our back haul, where the rates are low? Of course, also geographies matter. The inter trades where we actually have had a lot of growth.
Inter-Asia, inter-Europe, inter-Americas, they've grown faster than the rest of Maersk Line. There the rates are also lower. The second element is, of course, our contract coverage. This year we have reset annual contracts at much lower levels, both in Asia and Europe and in Pacific trades than last year. The Pacific season is first of May, as you know. In May we reset the whole Pacific at much lower rates. That has completely wiped out any gains from the spot market during the second quarter. Increasing spot rates will impact our results if they continue in a positive way, obviously, because they will also help us reset the quarterly contracts every quarter at higher levels.
It'll take a while.
Would it be right to say 3-6 months?
I don't think I can comment on that.
Okay. Thank you very much.
Our next question comes from the line of Dominic Sheridan from UBS. Please go ahead, your line is open.
Oh, hi there. Thanks for taking the question. Just probably a couple of financial ones, if I may, probably more for Trond. In terms of, I know you made the comment about the EBITDA to operating cash flow, conversion historically. With the exception of the provisions that we saw, and obviously to some degree the mix of the business now being towards more highly taxed area, is there anything else that you would be flagging up why it should be particularly different, the conversion of EBITDA to operating cash flow this year?
No, just the normal seasonal change. There are some variation, ups and downs, but, relative to our overall cash flow, not really. We do see the same trend line continues. As I said earlier, I mean, if we look at Maersk as a group and take the hypothesis of a break even result, we are looking at a number averaging out around $4.5 billion in operating cash flow, ranging from $4 billion-$5 billion in average. That's basically the story that we're gonna tell you going forward as well.
Sure. Just a second question on the CapEx commitments. Can you in terms of those commitments, I'm assuming some of them, like for instance, the new vessel orders will have some loans attached to them. Is that correct? In other words, you don't actually have to provide all of the CapEx yourself out of your internal resources. That some of it available via sort of new loans you'll be taking out. Is that correct?
Well, yeah, I don't want to comment on these exact elements. Of course, when we contract those assets or vessels and other things, of course, we are using export credit facilities and other types of facilities available to sign up. Whether we gonna use them or not is very much depending on the need and also the pricing of these elements. As I said, if you look at the maturity schedule on our debts and also look at the liquidity reserve we have from the committed off balance sheet revolvers, we don't see any short-term or medium-term or any needs as such relative to funding requirement looking at the group as a whole.
All in all, we don't see this as a challenge. Of course, if a bad market prevails over many years, then of course I might answer you in a different way, Dominic.
Yeah. Just one final question on all of this. This is a business question. I took with interest your comments on the returns obviously from CapEx now. I mean, how does that change the thinking generally within the group? I mean, I know in the past you've been very disciplined on looking at CapEx. I mean, the fact is you can't make 10% returns in some of these businesses that quickly. How does that change, you know, the mindsets, I suppose, and the way that the budgets are set at the moment? Thanks so much.
Dominic, I think the issue is here that we recognize the challenge on returns, the challenge on growth. That's why the board has decided to conduct this strategic review of our strategic options, both structurally and otherwise. I think we will not really be able to come with a lot of meaningful comments around this area before we are ready to communicate at the end of the second quarter.
Okay. Thank you very much.
Our next question comes from the line of Jörgen Piersma from Nordea Markets. Please go ahead. Your line is open. Jörgen Piersma from Nordea Markets, if you're muted, please unmute yourself. Your line is open for your questions.
Thank you very much. Just a couple of questions for me. First of all, I was wondering if it's possible to quantify the level of utilization in Maersk Line. When we're talking about around 90% of some sort of critical lane, previously, could you quantify if you are below or above the 90%? Continued on Maersk Line, could you give any comments on how you see the competitive landscape? This has been, other than what we can see in the rate indexes, moreover linked to the consolidation we've seen over the last six months.
My final question is on Maersk Oil, and that is, if you could give some comments on the breakeven level, if you take out Qatar, from how it looks today, will you still be able to reach a breakeven level in the range of $40-$45 per barrel? Thank you.
First of all, on Qatar, I mean the breakeven level in Qatar is not significantly below the breakeven level of Maersk Oil, so it's not a dramatic impact. On your second question, I'll have to ask you to repeat that again. It didn't come quite clearly through.
It was more on the lines of how you see the competitive landscape with the consolidation now taking place. Do you see more discipline from your most significant peers? Or haven't you seen any change in sort of competitive behavior?
Yes. Thank you. Okay. Well, clearly the industry is consolidating, and I would even go as far as calling it a wave of consolidation now that started with Hapag-Lloyd acquiring CSAV and now merging with UASC and, you know, the Chinese that have merged, CMA acquiring APL. And right now, of course, we have the situation in Korea, where both of the two Korean carriers are in financial restructuring, and in all likelihood that will lead to more consolidation. There's a clear consolidation wave in the industry in response to the poor results that many carriers have experienced, not just this year, but actually over the last five years.
Overall, we believe that's positive for the industry. We do think that there is a chance that the industry will, you know, significantly consolidate over the next decade. Obviously that's, you know, that's speculation. In terms of how people are acting with the, you know, how disciplined or which however way you put it in terms of capacity deployment, then we can only say that the number of ships that have been ordered this year is very low. We're certainly not in an industry where we need more ships, so I consider that also positive.
Each of the carriers are now, except for Maersk Line and MSC, going into a period where they have to adjust to new alliances, new vessel sharing agreements, and I'm sure that's gonna give some volatility in capacity in the coming months. That's as far as I can get to that.
On your question on utilization, we don't, as a result of us having several utilization measures, we don't wanna go out and give you guidance on one size of utilization measure as such. We have to abstain from that.
Thank you very much.
Our next question comes from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hi, this is Johan at Kepler Cheuvreux. One question for me remaining here. Going back to Maersk Line and the spot versus the contract rates there. You said after Q1, when we saw the contract rates being down quite dramatically, that focus going forward would now be to look at the spot market. How has that impacted you so far? If I remember it correctly, you historically said roughly half of volumes through the contract rates. What's sort of the ratio right now in Maersk Line, and how do you expect it to evolve in the second half of the year? Thanks.
The contract versus spot rate is not significantly different from that.
It's roughly 50/50 of your volumes?
Yes.
Are you expecting a shift there still?
At the end of the day, it depends also on our customers in terms of how much, you know, volume they want to sign up on fixed commitment from their side, versus how much they want to, you know, how much risk they want to take on freight rates. I don't think that Maersk Line is gonna change dramatically from, you know, a range of 50-50.
Okay. Thank you very much.
Our next question comes from the line of Marcus Bellander from Carnegie. Please go ahead. Your line is open.
Thank you. Three questions if I may. First, if you could say something about what kind of information you will provide at the end of September regarding the strategic update. Will it be a new date for the Capital Markets Day, or will you actually give us an indication of which direction Maersk will be going?
Second question relates to Maersk Line and the strong volume growth we saw there. Was that strong volume growth an effect of the sort of market or war for market share that was going on at the end of Q1 and beginning of Q2, or was it something else driving it? Third question regarding terminals. You mentioned some non-commercial effects or loss of volumes in Northwestern Europe and Egypt, for example. If you could add some color to that and explain what's going on in those regions. Thank you.
Okay. In terms of the strategy, we really cannot get closer to that. We are working on the options as we speak and engaging in the discussions internally. We are not ready to conclude on where this is gonna end at this point in time. We will communicate what we can by the end of the quarter. In terms of Maersk Line's volume growth of 6.9% and whether it's a part of a war for market share.
I mean, we have set out to grow in line with the market, and we have deployed capacity to grow in line with the market. As I said before, we grew capacity just over 2%. We have seen higher volume growth. We attribute that to a number of factors. Strong growth in our intra trades, excuse me, in Latin America and in Europe for that matter. We also have seen strong growth in our backhaul volumes.
There might also be market effects from the fact that the Korean carriers are in a restructuring mode and therefore I'm sure or we expect that some customers might have wanted to move their business away from them and that has benefited us. Of course, that's pure speculation on my part.
Thirdly, I mean, I do think that we have worked very hard in Maersk Line over the last few years to continue to upgrade our service levels, both the physical service levels in terms of geographic coverage and transit time and frequency and reliability and so on, but also the customer service in terms of the functionality and on our website and digital solutions and so on. We attribute the volume growth both to growth in certain markets, but equally as much to, you know, hopefully providing a good product that the customers are interested in buying.
When it comes to the loss of volumes in the terminals, we basically say that we have not been able to regain earlier lost services. Those lost services is basically coming out of renegotiation and as a result of alliances and VSAs and sort of changing the dynamics in the market. That's basically what we haven't been able to regain in basically the three areas of Latin America, Northwest Europe and Egypt, as you mentioned.
All right. That's very helpful. Thank you.
Our next question comes from the line of Lars Heindorff from SEB. Please go ahead.
Good morning. Lars Heindorff. A few questions from my part as well. I think I'll take them one at a time, if I may. Regarding Maersk Line, normally the third quarter is by far the biggest quarter for the carriers. I wanted just to sort of hear your thoughts about whether that would be the case this year, given the rate development that we've seen thus far going into the peak season, and whether you expect that the improvement that we've seen in rates if that will stick into the slack season when we get into October, November, December. That's the first one.
In terms of volume, I guess your answer, your question was whether the third quarter will be the biggest quarter in terms of volume, and we still expect to see, you know, a good third quarter volume-wise, and therefore it will in all likelihood be the biggest quarter volume-wise during the year. As I said before, you know, I'm not keen to project a lot about freight rates, but I can point to the fact that they have actually gone up consistently, spot rates over the last four, five months. You know, if we do get a strong third quarter as we then, you know, it's likely that they're not gonna drop, at least, but that's pure speculation.
All right. Thank you. Søren, regarding oil and gas, you are still maintaining your production guidance for the full year, despite being somewhat above for the first half. What is the reason why you maintain that guidance and what do you expect, which area do you expect to decline here in the second half in terms of production volumes?
Well, it's the usual elements coming into sort of maintenance seasons in the third quarter. It's also an element of what kind of oil price you expect on.
Specifically on the profit or the PSA agreements in Qatar. It's basically those two elements driving it.
Okay. The last one still regarding oil and gas. I mean, you've done a quite impressive job in terms of lowering your OpEx over the past year or so, and you also lowered your guidance for the full year. I'm just curious to find out what kind of OpEx we should expect and what kind of thoughts you have about cost structure in Maersk Oil when Qatar will be gone by the mid of next year. Will that significantly change the breakeven oil price, and then what's your thoughts about that?
Well, when it comes to what kind of OpEx we're looking at, we're basically both looking at sort of the hired in and the consultant part and the assistance that we get, but also on our internal structures. I think that we have closed down offices. We have looked at the amount of resources we have in all the different areas that we're doing business. When it comes to Qatar, it basically comes down to what Søren said, that the breakeven in Qatar is not that significantly different from the average. Of course, by losing Qatar, we need to take some actions relative to capacity and so forth, depending on how the development of other growth opportunities arises.
The likely effect is that there will be some consequences as of losing Qatar as well.
All right. Thank you.
Our next question comes from the line of Thijs Berkelder from ABN AMRO. Please go ahead, your line is open.
Okay, good morning. I have one question on Maersk Line on the effect of the annual contract rates. Can we see another effect in Q3 versus Q2? Second question on Maersk Line and APM Terminals. Maersk Line, of course, benefits from lower pricing in terminals. If I look at APM, I think price pressure is around 6%. From a Maersk Line perspective, what can we expect further in terms of pricing coming down in the terminal costs? Coming back on APM Terminals, do you see potential to indeed compensate that price pressure with cost savings? Those were my questions.
Yeah. In terms of annual contract rates, I mean, impacting the third quarter, the only thing I can say is that the Pacific rate season is May, you know, it resets at first of May, that's not all of the second quarter. That will have a negative impact, relatively speaking, in the third quarter because we're gonna get the full quarter effect. But of course, it will be mitigated by increasing spot rates. So I think it will be hard for me to come any closer than that. If we look at Maersk Line's cost development and the journey we have been on from $3,100 per FFE to $1,900 per FFE.
One of the last cost items to become deflationary, so to speak, has been the terminal cost. Because generally, terminal operators have been in good negotiating positions. Increasingly we see, let's say, more opportunities for procurement from the carrier side, both because the carriers consolidating, but also because there's too much excess capacity also on the terminal side now. Therefore, we do believe that terminal costs will become deflationary. For APMT, that has, of course, a negative impact. It has a positive impact for Maersk Line, but APMT is only about 25%, 30% of our spend in the terminal business. For the group, I think the overall benefit is positive.
What we do have internally in the group as a mitigating factor as well is that we can, you know, try to drive more Maersk Line volume to APMT terminals going forward.
Okay. Clear. Thanks.
Our next question comes from the line of Dan Togo from Handelsbanken. Please go ahead. Your line is open.
Yes, good morning. A few questions from my part as well regarding Maersk Line. You enter or you come out of first half for Maersk Line with a loss at the EBIT level. To reach profitability, do you rely on the cost initiatives that you introduced solely, or do you also need higher rates? In connection with that, the higher rates that we are seeing in the spot market at the moment, is that compensating for the high bunker costs we are also seeing? That was the first question.
I mean, for Maersk Line, we have as a core element in our strategy to be to have cost leadership. For us, that means that we need to continue to drive down costs. That's what we plan to do. There are, as we have also, I believe, illustrated at Capital Markets Day last year, you know, quite a toolbox that we can dig into in terms of continuing to reduce costs. I should say that we have exhausted all opportunities for reducing costs.
If we had said to ourselves four years ago that we were gonna go from $3,100- $1,900, you know, we wouldn't have believed ourselves, and nobody would believe it either. It just shows that we can continue, and there's lots of opportunities, digitization, just to mention one. With all that being said, clearly, for the profitability of Maersk Line to be restored to where we were in 2014, making more than or making double-digit returns on invested capital, it will be very helpful with some revenue increases or revenue per FFE increases. Of course, if it can come through price increases, that's helpful.
If not, then we're gonna have to figure out other ways to generate more revenue per TEU.
Do you see this higher spot rates as compensating for higher bunker costs? More than, so to say.
I mean, just to be clear, I mean, the spot, there's no bunker element in the spot prices. You know, the spot market is what supply and demand will get you at any given point in time, and it's completely independent of the oil price in both directions, actually. I mean, we have seen fuel price go up during the second quarter. Right now, it's actually come down again, somewhat. We expect that we'll continue to see the volatility from the oil price in our results. If there's a sustained increase or decrease, it will show clearly in our results with a certain time lag.
Okay. A question on 2M. I believe you previously, you know, communicated synergies from that of more than $200 million. Are you still seeing that feeding through, or is that more, so to say, difficult to achieve, in this low growth environment that we're in?
No, we continue to drive benefits out of 2M, and I believe when we announced that, we said we would have benefits of $350 million annualized. As we grow volume and grow the network, the benefits actually increase. I mean, we are right now in a process of implementing our third version of the 2M network that will take even further cost out and improve unit costs. If we end up doing you know, kind of like a small addition to or doing an addition to the 2M network with Hyundai Merchant Marine, then you know, we'll see even further benefits.
Okay, good. Then a final question. You mentioned, Søren, in your opening remarks that you have business areas that are leading within the industries. Could you point to which businesses you are seeing as leading and what measure you're using here, and also which ones are below at the moment? Thank you.
I do think that we have an overview of that done in our enclosures, because we say basically on page six on the appendix, where we basically have seven out of eight businesses deliver top quartile returns. Basically on the top quartile above WACC and top quartile performance, we have Drilling, Svitzer, Terminals, Tankers and Supply Service. When it comes to being top quartile performers, but not delivering return in 2015, it's Maersk Line and Maersk Oil. The only one not performing accordingly in 2015 is Damco. You have that on page 6 in the appendix.
Okay, thank you.
That was the last question for today, and I will now hand back to Søren for any final remarks.
Thank you very much. Thank you for good discussion. As I said in the beginning, we're not happy with the results and the declining most financial metrics. We believe we have done a decent job in terms of mitigating the negative market effects of lower prices in every single industry that we're in. And particularly in Maersk Oil, we are very pleased with the developments and the fact that we can be profitable at an oil price in the forties.
With that being said, clearly for us, still a lot of work to do, both in terms of running the day-to-day business in a very challenged environment, and also in terms of going through the strategic review that we are now doing. We look forward to being able to communicate around that to you at the end of this quarter. Thank you very much.