Good morning. This is Nils Andersen speaking. I'm here together with Trond Westlie and would like to welcome you to this morning briefing. It's of course after a good first half, quite a regrettable occasion that we, due to a very weak peak season, poor results in September in Maersk Line and low rates expected for the rest of the year, have decided that we'll have to adjust our forecast for the year down. I would like to underline that we are, what we're talking about is a reduction caused by Maersk Line. All the other business units are trading in line with expectations.
All business units, of course, including Maersk Line, are profitable in Q3. Let me give you a little bit more detail before we pass on to question and answers. What we're doing today is we are adjusting our expectation for 2015 down from an underlying result around $4 billion to an underlying result around $3.4 billion. The background for that is that we have to reduce our expectation for Maersk Line from a result above $2.2 billion to a result around $1.6 billion. I think this is basically the very easy to explain.
We gave sensitivity guidance for the second half of 2015 in connection with the half year saying that a freight rate reduction of $100 per FEU would give a negative impact around $ half a billion dollars and a volume reduction compared to plans of 100,000 FEUs would have a negative impact of around $0.1 billion. That is the background for this reduction. Just to give you a little bit background to the rate development. The rate per FEU, the average rate in Q3, is in Maersk Line $2,163, which is slightly more than $500 below last year.
A hundred dollars, as said in the guidance here, is not really a very big sum, even when you consider that of course also bunker prices have reduced. We have seen a significant drop in rates, and the rate situation in the market now is very challenging for everybody. Our volume went up a little bit to 2.427 million FEUs, up from 2.4 last year in the third quarter. There's a marginal increase, but less than we had hoped for, reflecting the weak peak season. Of course, we regret that we have to do this, but just to give you some preliminary numbers there in the statement as well.
The preliminary result for Q3 is a profit of $778 million, which is approximately half of what it was last year. The underlying result is $662 million, which is approximately also half of what it was last year. This is slightly worse than we expected. It's still a respectable result given the circumstances, but it is slightly worse than we expected at the half year, in particular, because September has been weak and weaker than we expected in Maersk Line. We have taken some steps to improve the situation.
The situation is most affected or worse in Asia to Europe, where the poor volume development is being, you can say, compounded by deliveries of lots of new capacity in. We have taken in October some steps to reduce our capacity there. We've merged the two strings AE3 and AE15, which basically takes out a string or downscale of nine 5,500 TEU vessels. We've also closed our ME5 service from Middle East to Europe, which takes about 16% of the sort of West Central Africa and Europe service out of our network. We've done some things, but it will not be enough to have a real impact for the rest of the year.
We'll reduce costs somewhat, but we don't believe this will be enough to improve the rate situation for the rest of the years and for the rest of the year, and that is why we've taken these steps or this step. This was basically what I wanted to say. We of course will still deliver a good, strong profit in historical perspective at $3.4 billion. But the situation in the fourth quarter looks challenging and also the third quarter was a bit below our expectations. With that, I would end my sort of introduction and be ready to answer questions from you. Thank you.
Thank you. It is now time for the question and answer session, so if you have a question, please press zero one. We will start with Stig Frederiksen from Nordea Markets. Please go ahead, Stig.
Good morning, gentlemen. A couple of questions from here. First of all, if you could give some kind of indication, what had happened with the cost story in Maersk Line, how should we look at that when we see that what have happened with the volumes? My second question, of course, is, could you elaborate a bit about the contract base? I know you're not gonna give any guidance for next year, of course, but looking at the contract base and how we should think rollover of rates into next year, what is your take on that? Thank you.
Yeah. I think that's two very good questions. I would like to underline that we come back, we make another conference on the sixth of November, so we'll come back with more details. We had to come out the moment we got the numbers right according to Danish legislation. We had to come out with this message this morning. We will have to dig a little bit deeper in order to understand the cost situation. Of course, at the moment it looks brilliant because of the lower bunker rates, but we would like to have some time to analyze that a little bit more in detail, and we'll come back on the sixth of November.
In terms of the contract base, of course, this is unfortunate, because the low rates coincide with renegotiations of contracts. I would, however, say it's not the first time we've experienced that, so I wouldn't overemphasize the importance of that. It's an irritant, but we'll have to overcome that and of course we need to, and the industry needs, better rates for 2016.
Thank you very much for your help.
Our next question comes from Chris Combe from J.P. Morgan. Please go ahead.
Hi. Good morning. I just had a follow-up on that question about rates into next year. In this kind of situation, would you expect to see a greater shift towards spot, given an assumed hesitancy to lock in rates at these levels? What kind of levers do you have at your disposal to address this kind of environment?
Yeah. I think it's a good question. Søren already last year said that we would consider a greater movement towards spot, and we've taken some steps also to reduce our contract coverage a bit. Of course, we cannot take loss-making contracts. If the present rate level means that we can't get contracts that are profitable, we will per se drift into a situation where we are more on spot. As I said before, it's early days, and we will have to see how we grapple with this situation. It's clearly not sustainable. All the shipping companies will be strongly impacted by it, and we'll see how it impacts rates next year.
Don't forget that we've seen a couple of quarters with low rates in a row before, and usually it is followed by some kind of recovery. I don't think we should overdramatize the situation. We are not giving any guidance for next year, and we'll be much smarter in three good months.
Just one question on demand from the market perspective. Assuming you still grew ahead of market with 1% growth, can you give us some idea of how you see the market developing in September and then during the peak season? Does it change your view that Europe should see some sort of restocking if this type of trend continues?
Yeah. It's actually what we're seeing in general is a slowdown in global GDP growth. I think we have seen a downgrade in IMF figures and our feeling is that it could be on a downward trend, but that remains to be seen. We don't know whether we've grown ahead of the market yet. That's also not so important when the rate levels are where they are now.
Thank you.
Our next question comes from Lars Heindorff from SEB. Please go ahead.
Yes, good morning, and a couple of questions from me. Regarding, I mean, last time we talked, it was in connection with the capital market and then before the half year results where you said that you wanna grow in line with the markets, and you expected a bit more discipline in the second half of this year. I'm just trying to get a feeling for what have actually changed. Is it the demand side that has been weaker than expected, or is it that the lack of discipline that have caused this sort of poor peak season?
The main problems are, although in the last weeks also rates have come down on the Pacific, but the main problem has been in Asia-Europe. Asia-Europe has been the trade lane. Of course, it's our most important trade lane, let's start with that. It's also been the trade lane where the most big vessel capacity has been added over the last months. That compounded by very poor growth in the trade is what is basically impacting the situation on that trade route. Of course, if you look at the European GDP figures, they actually don't look too bad.
There seem to be a small pickup, but don't forget that it's on the back of big relative devaluation between the euro from the euro to the renminbi and euro/dollar as well. We're seeing a Europe that is becoming more competitive, and maybe that is impacting trade negatively. Anyway, we can see that is the negative trade. We don't see any super positive development anywhere else. We'll come back and update you more on that on November. We see a slowing global economy, and we are of course concerned about it, but the main reason for the rate drop for us is the Asia/Europe situation.
The second question is regarding sort of more fundamental, I mean, you've been guiding for 8.5%-12% ROIC in Maersk Line longer term. Is this sort of something that will change that longer term view or is this the new normal, so to speak, that we should expect to see that the returns in the liner business will be lower?
We are not at this point in time changing anything in our strategy on or on our guidance. This is a morning call that we because we according to Danish law have to issue this statement. We don't see any sort of general negatives apart from the fact that the market at the moment is depressed. We've seen that many times before in container shipping when a lot of new capacity hits a market that is not developing as expected. We assume this is something that will resolve itself, but of course we have to go into deeper analysis to understand whether this means long term slower growth or whether it's just a bump on the road in trade, global trade.
Okay. Last one. I mean, given the increased spot share, which of course is natural when rates are as low as they are, how much visibility in terms of the contract structure do you have? I mean, is this one, two, three, four months or something like that?
Well, it's a quite bad connection, but the contract, I mean, of course we have visibility to what we contract for the coming months. That is essentially what we know for certain. Anything else is assumptions, and I think we've made our assumption, which is that the prices will not recover this year, and next year is a new game.
Okay. Thank you very much.
Our next question comes from Robert Joynson from Nomura. Please go ahead.
Good morning, gentlemen. Just two questions from me. First of all, if we think about the supply demand balance within the container shipping industry, we've seen the supply situation during the past few years benefit significantly from slow steaming. With fuel prices so low at the moment, do you think there's potential for vessels to slow down further or is it possible that vessel speeds could even increase going forward? The second question, I'll give it to you now. The guidance obviously implies $400 million underlying profit for Maersk Line for the second half of this year. Just based on the comments that you were making earlier, should we take from that that the weighting of that profit is quite heavily skewed to Q3 rather than Q4? Thank you.
I assume you're talking about Maersk Line in with the 400 and it will be skewed towards Q3 with the present rates. Q4 will. We still expect it to be profitable, but we expect it to be less profitable than Q3. The other question was?
Yeah, slow steaming. There is of course a risk that people will start speeding up ships at a point in time when we assume bunker prices stay low, but it doesn't make a lot of sense because you still, I mean, bunkers are still a significant part of our cost. There is an increased focus on the environment and a very, very important element in this whole slowing down of the networks is that actually port stays have been longer because the ships are upgraded in size. That's not something that we worry too much about. I can't exclude that it will happen in isolated trades. I can say we don't have any plans to speed up. We don't think it would be good for neither networks nor reliability, nor the cost situation.
That's very helpful. Thank you.
Our next question comes from Dan Togo from Handelsbanken. Please go ahead.
Yes. Good morning. Thank you. Can you talk a bit about your utilization on the fleet? I mean, you increased volumes in Q3 by around 1%. How much did you expand the fleet the past year? Can you also talk about it vis-à-vis Q2? How was utilization in Q2 versus Q3?
Yeah. Dan, we would like to come back on these detailed questions when we come to the sixth of November. We will also have Søren Skou here to talk somewhat about the plans for what will be going on going forward. I suggest we wait with that. We have a pretty good utilization rate. We're very competitive in cost. You can say our disadvantage is that we are very strong on the Asia Europe trade, which is at the moment having a tough time.
Thank you. Just one follow-up on the discussion before. It's you argued, for instance, on the Capital Markets Day, part of the reason for sort of say weak volume environment right now is partly related to some destocking. But it seems like destocking is not a big part of the argument for why markets are so weak right now. It's more a currency issue. How do you view that?
We don't know. I can't answer you the detail of that now. We can give you maybe a little bit more information on the sixth. We know positively that there has been destocking in Europe in the first half this year. We'll have to analyze the figures somewhat in more detail before we comment on the third quarter. Destocking and currency could very well be related because, of course, if you sit in Europe and want to buy goods from China, you will experience a very significant price increase in euros, unless you see price reductions in China. It's not unrelated issues actually.
Okay. Thank you.
Our next question comes from Marcus Bellander from Carnegie. Please go ahead.
Yes. One question, please. How does the weakness in Maersk Line affect your thinking when it comes to the other parts of the business? Specifically, does it reduce your appetite for acquisitions in Maersk Oil?
The answer is no, not at this point. We do look at acquisition opportunities in Maersk Oil. The financial situation of the group is very, very strong. Also, I mean, even if we lose half a billion dollars in the last second half compared to our expectations, our cash flow is still almost $8 billion. It's. There's no need to change our plans for now. Of course, every negative or positive event in the business will lead to us analyzing the situation. We're financially strong enough to do what is right for the business, and that's what we're planning to do.
Thank you.
Our next question comes from Finn Bjarke Pedersen from Danske Bank. Please go ahead.
Yes, good morning. Two questions. The first one is, the adjustment that you do to the network currently. Could you say something about how that affect your cost? That's one question. Secondly, it seems like you have some sales gains in the third quarter to the tune of around $120 when you're guiding for an underlying $662. Could you say something about where these sales gains or what the difference between the group result and the underlying result is in Q3? Thank you.
Yeah. Thank you for the question. We will come back with more details on that when we publish the accounts. I mean, it's just $120 million, so there's nothing dramatic there. But I do think we completed actually Esvagt in Q3. So that could be a main element. But that is guessing. We'll come back with more details on that when we publish.
Thank you.
Our next question comes from Casper Blom from ABG. Please go ahead.
Yeah. Thanks a lot. Nils, if you were sort of to make a scenario where things were to get better in the container business, in the light of the weak demand we have today, what would it take? Is it merely price discipline, or are there other things that the liners can do? Then secondly, you mentioned that you're doing these adjustments to the network with the AE3 and AE15 merger. Could you comment a bit on what you're doing with these vessels? Because I assume that the vessels are not just disappearing. Thank you.
No. as it's done in October, so the main assumption now is that we just lay them up and or give them back to the time charter owners. In general, what needs to improve is, of course, that people needs to adjust their capacity, the offered capacity to demand. I can tell you, if you, like us, sail around with a reasonable utilization of the fleet and you take the right network decisions, it will be tough. If you continue to sail with too large a network, it will be very painful. Therefore, I think the present rates is a very strong incentive for everybody to reduce their networks. That is what needs to happen.
It doesn't make any sense to sail with a lot of overcapacity in a market where you, even if you get the freight, don't make any money on it.
Thanks.
Our next question comes from Frans Høyer from Jyske Bank. Please go ahead.
Good morning. Thank you. When I look at your revised guidance for Line, I make it around 8% return on invested capital for 2015. I was just wondering, do you then still believe your margin premium versus average peers is going to hold at around the 5% mark?
We will have to also, that's one of the detailed questions I can't answer right now. We'll have to look into that. There are of course two things that impact us negatively this quarter compared to the average of the industry. One is that the main price situation has taken place in Europe, which is where we are a leader and where we overweight. The other is that the bunker prices are very, very low. One of our advantages have been that we are more fuel efficient and more environmental than the average of the industry. There are a couple of negative impacts there. We will come back with more details on that later.
Okay. Thank you very much.
I think we're ready for the last question.
Okay, our last question of the day comes from Jonathan Larsen from Børsen. Please go ahead.
Okay, thank you so much. Hi, Nils. Can you elaborate a little bit more about the initiatives you have taken to adjust Maersk Line's network accordingly? I mean, are you going to cancel some of the routes from Asia to Europe or maybe reduce the numbers of employees in Maersk Line?
We're not going to come out with a lot of details apart from what I just gave. That we have merged two services, taking out 9 vessels of 5,500 TEUs. We are closing down one service from the Middle East to Europe. That's basically what we've done so far. Of course, we will continue to push on cost, but I have nothing concretely I can tell you today.
Okay. Thank you.
All right. Thank you very much. Thank you for listening in at short notice. I hope we answered the questions. Really, for me, the main message is here that things are still well in the A.P. Moller - Maersk Group. We're pleased with the development in most businesses. Given the circumstances we're competing under, very low oil prices and very low container rates. We also, all things taking into account, think that $3.4 billion is a respectable result, and it's a result and a cash flow and resulting cash flow that gives us all the opportunities to maintain our plans for investments and continue looking optimistically into the future. We'll give you more details on the sixth of November. Of course, we hope to over deliver on our promise. This is the situation, unfortunately, as it looks right now. Thank you for listening in and have a good day.