Good morning. This is Nils Andersen from A.P. Møller - Maersk, and I'm here with Trond Westlie, as usual, welcoming you to this morning call on the Q1 result of the group. While you go to slide number two and read the forward-looking statement reservations, I'll just give you an update of sort of my words on it. We feel we had a very good start to the year. It is, of course, just one quarter, so we shouldn't get carried away, but it's been a positive start with an increase in profits of 51% compared to last year. All the business units contributed to the progress except Maersk Drilling.
Maersk Drilling actually was at least in line with expectations, down $30 million, but that's due to the delivery of new rigs and the number of rig stays. The group is doing well across the board, and that gives us sufficient expectations for the rest of the year to uplift our guidance for the year to $4 billion. This is of course in line with the group's year result last year, more or less. Don't forget that we have divested that supermarket and our cash situation looks a little bit different. Starting on the presentation, I suggest we go to page number three, where you can see the figures.
The result is up from $790 million for continuing business last year to $1.207 billion this year. Very nice progress. If we exclude the one-offs, which has been reversal of impairments in Maersk Line mainly, then the result is up from $754 million - $1.135 billion. More or less along the same lines. We see a reduced free cash flow compared to last year. There are basically two reasons for that. First, we had some cash coming in from the Algerian settlement in the first quarter last year that did not impact the result, but there were cash flow from Algeria.
Secondly, we've increased investment compared to last year. But still a positive cash flow in the first quarter. If you go down to the bottom, you will see, as I said before, that the progress is well allocated across the businesses. This is the underlying profitability. Biggest increase in Maersk Line, even when you deduct the impairments reversal. Small progress in Maersk Oil, and APM Terminals continue many years good development, while Maersk Drilling goes down underlying with a little more than about $44 million, fully in line with expectations.
Services & Other Shipping is a little bit more of a mixed bag when we'll come to that later, but underlying, quite in line with plan, and progress. Looking at the, you can say the overall figures, it's also worth noting that our ROIC actually did reach 10% in the first quarter, in particular supported by the jump in the result in Maersk Line. We also want to highlight that our net debt is down to $9.3 billion, more than $2 billion compared to last year. This is mainly due to cash deposits on the deal with Dansk Supermarked, which we completed in April. That will be fully in the books at the end of this quarter we're in now.
We issue bonus shares decided at the general assembly. We gave out four bonus shares for each existing share, also during April. Going to page four, the Maersk Line results very strong progress even when you deduct the impairment reversal. Also a very nice free cash flow generation with $345 million, which reflects the very good earnings development. The cost base was reduced by $144 million. I'll come back to that in a minute, how it's done. Part of that is the reversal of impairment which is taken in here. The bunker price and bunker consumption is of course also very important.
This reduction in cost is also necessary to reduce the reduction in rates, which continue to put pressure on the business with a 5.1% reduction in the first quarter compared to the year before. We had a good volume development this quarter, possibly slightly better than, or better than, the market. This is not reflecting that we changed our strategy, so it's a little bit sort of unintended.
We did have very good development in the Asia-Europe, and not least the backhaul, Europe-Asia, reflecting the fact possibly that U.S. or Europe is becoming more competitive for exports, and that China is moving on its strategy to change its economy to become more focused on domestic consumption, which should lead and has led to higher imports. Relatively positive seen in a longer-term perspective. The fleet capacity only increased by 2.2%. This is less than the market and, of course, significantly less than the volume. We had a very good capacity utilization in the first quarter, which helped a lot to get to the good result. The P3, we've received the U.S. approval.
We still expect to receive the European and the Chinese approvals around the middle of the year. A number of other smaller jurisdictions could come later. We now expect to start the P3 cooperation up during the autumn of 2014, which is a delay compared to what we previously said. We're still optimistic to get all the approvals, not to create any misunderstandings. If we go to page five, you will see a little bit more work done on the cost reductions. You will see on the top of the slide, you'll see that we have over the years with some waves up and down a little bit depending on bunkers and other things.
We've had quite consistent downward development in the rates, which of course is positive, and which is the main reason why the business has become so relatively profitable compared to the rest of the industry. The total cost base, if you go to the lower part, the total cost base reduced by $144 million. As usual, bunker savings has been the main contributor. We also have two other good contributions. One is the net impairment reversal of $72 million. The other, the main part of that is redelivery of time charter vessels. We're saving on the cost of time charters.
We have one negative development, which is the terminal cost and the port expenses, and that is reflecting the increased business as well as a mix of trades. But overall, a good development. When you consider that we grew by more than 7%, we consider this development as very positive. Going to page six, we're into the oil business. A lso the oil business did well. We deliver exactly the same reported profit as last year. If you recall the first page, the underlying profit is actually a little bit up, which is reflecting two things.
Entitlement production increase of 7%, which was driven by good uptime in the U.K. in general, but also full production from Gryphon FPSO, which is now fully in operation, and also El Merk, which reached its plateau during the first quarter. This has been, you can say negative or the result has been negatively impacted compared to last year by the oil price, which is down from $112 - $108, but still quite a solid oil price compared to where we were when we published our expectations for the year back in February. Reserves and resources, and you'll come back to that in more detail, but reserves and resources developed quite well.
We were able to replace 79% of the reserves we produced during the year. Our resources increased by 8% to approximately 1.5 billion barrels, which we consider very good. You can say the reserve conversion is reflecting a lot of work going on to improve the yields and the utilization rates of existing reservoirs. The resources are reflecting that we are progressing on a number of projects and that appraisal drillings and a lot of other activities do yield upside in that area. I think we are relatively satisfied with that. We've had three exploration or appraisal wells drilled in Q1.
One successful appraisal well in our part of Johan Sverdrup, which of course is good because we know that will be developed. Two exploration wells in the U.S. and Norway, which found hydrocarbons, but which we deem to be uneconomic. We are not operating in Norway with Johan Sverdrup, but the concept selection has been made and that project has now moved into the FEED phase. Golden Eagle and Jack are developing according to plans, and we still expect first oil towards the end of 2014.
The large projects that we have on the way for delivery, you can say in a few years' time, are all in line with expectations progressing as according to plan. Now I'm back on the left side of it. If you look at where the entitlement is moving, share production is moving, how we have Qatar being stable, Denmark being almost stable, U.K. up significantly for the reasons I mentioned before. Algeria increasing a little bit, and Brazil slightly down with Kazakhstan being stable. You can say the main effect comes from the U.K., but that's fully in line with plan. Going to page seven, a little bit more update.
I'll not spend a lot of time on that, but you can see the update on the big projects. Generally, as I said before, in line with expectations. Qatar, FDP 2012, we built six wells now out of 51 to be drilled, and that will give us plateau production for another couple of years. In Denmark, we're progressing with the Tyra Southeast, and expect to start installation in the middle of this year. In Maersk, as I said, reach plateau in Q1. In Dunga, in Kazakhstan, you have not seen a lift in production, but we're actually drilling a large number of wells as we speak.
We do expect the production to increase as we go further into the year. I already commented on the 2014 projects. The long-term perspectives you'll see on the right progressing according to plan. They are still, of course, a long way out before we can really see the results of it. Maybe one comment to the last part we have invested in parts in additional shares in additional two blocks in Kurdistan, both being operated by Repsol. We're of course excited to see whether they will make more discoveries there.
The reserve and resource update on page eight, which I promised to come back to, basically repeating what I said before, 79% replacement of our 2P reserves. That of course means that they declined by 3%, but I think that is good. An increase in our 2P and 2C resources to almost 1.5 billion barrels. Also, coming back a bit to the comments we made over the last quarters of being disappointed with exploration results. The number of new discoveries in the last 18 months have been less than we expected and hoped for.
Actually if we see it in a little bit longer perspective, we're still in line with the industry average and then you can discuss whether that is good or bad. I think the industry is struggling a little bit on the exploration side at the moment. Maybe I should add that on the resources or the reserves, the reason why we see a decline is that we only include reserves for Qatar up to the end of 2017, when the present agreement runs out. That means that we will see a trend towards less reserves. In the rest of the business, actually the reserves have been stable.
With that, we'll go to APM Terminals. APM Terminals results continue to develop in a positive direction. This time, the jump is quite significant with 32% up compared to last year. A return on invested capital of 14%, which should be quite acceptable or very, very good in that business. We had 9% growth driven by, of course, general growth in the market, but also by more terminals coming operational, most importantly or notably the Santos terminal now being able to take full business. The EBITDA margin improved to 24%, and that's driven by operational efficiency and increased volumes as well. Also, invested capital increased to $6.2 billion.
We do continue that trend and expect it to continue. We are investing in expansions in Africa. We're investing in both expansions and new building of terminals in Latin America, and of course Maasvlakte is a major project. We also take action on the divestment side. Notably, we sold 50% of our stake in Port Elizabeth. It's still subject to regulatory approvals, but we don't foresee any problems here. Then we divested some minority stakes in APM Terminals in Callao, as well as in Zeebrugge Terminals in Belgium. The trends in APM Terminals are very positive and we're of course pleased with that.
In Maersk Drilling, as we flagged. Actually, already during 2013, and certainly at the beginning of the year, we expected, and still expect a decrease in the result for the year, arising from the fact that we take in six new rigs, with start-up costs, and waiting times and so on. We also have a high number of rig stays. We are now. We have received three, the first three rigs, which is very positive. That means that we're getting or keeping confident that Maersk Drilling will come well through this year, and will be able to increase its profitability, significantly next year, when all the rigs are hopefully in operation.
Not a lot to report on the contract signing, but we continue to have very good contract coverage for the business. That means that we have pretty good visibility for 2014 and to a certain extent, also for 2015. Not much more to add to Maersk Drilling. They still have three rigs to receive, and we still have two drill ships that will come in Q3 and Q4 that are open for business. Going to page 11, Services & Other Shipping. As a total, a good development in the underlying profit up from $60 million-$82 million. Maersk Supply Service was down compared to last year, mainly due to weak rates in the spot markets.
We do expect those rates to improve in the last three quarters. We're still optimistic that Maersk Supply Service will deliver a good result for the year. Maersk Tankers up compared to last year. This is partly driven by good VLCC rates and relatively good tanker rates during the cold season. We will have to see where we go in the coming quarters, but the tanker markets do not look very good at the moment. Some caution here. Damco is still in restructuring, posted a small negative result in the first quarter. We do expect to see positive effects of the restructuring in the second half of the year, probably mostly in the fourth quarter.
Svitzer developed positively compared to last year with a small increase of $3 million driven by salvage, but also good performance within the towage area in the Americas. That was what I had to say on the operation for now, and I'll pass over to Trond, who'll take you through the financial figures.
Thank you, Nils, and good morning from me as well to you, ladies and gentlemen. I'll go to slide number 12 on the performance. We did well the first quarter. As you can see, the group actually delivers 10% ROIC with an investment capital, invested capital of $53.6 billion. All in all, a very good quarter. We see that the drive on this is of course Maersk Line delivering 9%. If you look consecutively over the last four quarters, you see the trend line on Maersk Line coming along and also delivering very good margins to the rest of the market. We see now that Maersk Line have come into a more stable situation relative to the difficult market situation that we see going on.
Maersk Oil delivering nice high returns as they have done for a long period of time. We're still above the 20% level, so that is well done, as well as Nils said, seeing the production improving in the first quarter. Terminals also well established in the higher return level on 14%. All in all, that's the sort of the major driver for the group coming up to the 10%. We see that some of the business units coming slightly below 10% this quarter, like Maersk Supply Service having a difficult February and March. We see that there are of course some variations, but overall see a good high level on most of the business unit, and we see that that's the reason for the delivery of the 10%.
Going to slide number 13. On the upper left graph on the cash development during the quarter. We're starting off beginning of 2014 with $11.6 billion in net interest-bearing debt on EBITDA effect of $3 billion, working capital of $300 million, financial items of $100 million, paid taxes $800 million, and CapEx of $1.10 billion. That's net of sales. You have one specific element, and that is the $2.4 billion coming in from Dansk Supermarked.
We have Dansk Supermarked as held for sale, so we're not sort of consolidating the number as such. We are having a cash conversion, meaning that they actually deposit the cash with us, and that's the reason why we show the cash in our cash balance in this quarter. Those $2.4 billion is a part of the actual proceeds. Most of the cash proceeds come into the first quarter, and it's only $450 million that comes into the second quarter of the proceeds from the sales. That means that we're actually coming down to the $9.3 billion level on net interest bearing debt in the first quarter.
On portfolio management, upper right graph, selling off approximately $300 million of assets during the first quarter, not a significant number, but at least some efficiency sales have been done, and also partly the starting the delivery of the VLCCs. Bottom left, investments in growth, we see that the cash from operating activity was $1.8 to the right, and gross investments of $2.1. Since the free cash flow is almost zero, that's the reason for that is the $300 million in the sales proceeds that's coming.
The dividend that we have paid now in the second quarter, that's the 2013 graph on the bottom right slide, and that is after the bonus issue, DKK 280 a share. Going to the overall consolidated financial information, I'm just briefly gonna go through the numbers. Revenue of $11.7 billion, slightly up. Some ups and downs, not any major movements in any of the business units, slightly down due to the fact that we are actually reducing the fleet in tankers. EBITDA, a good development from last year, mostly driven by Maersk Line, but also a lot of other business unit contributing, but not in the same magnitude. Depreciation going down to $937 million.
The biggest reason for that is the reversal of impairment in Maersk Line. The reason for having a reversal of impairment in Maersk Line is that we had some ships placed for sale, held for sale, and we have reversed that decision and taken them into the network again. As a result of that, we had to reverse for accounting purposes the impairment on those ships. That leaves the EBIT of $2.237 million up from $1.863 million last year. Financial costs comes down with approximately $120 million. Well, three major reasons for that. One is that our interest expense is coming down. We do have more capitalized interest on the activities that we have under development.
In 2013, first quarter in 2013, we also had some negative currency effects that do not occur this quarter. To the tax, it's basically, oil is on the same tax level as last year with approximately $850-ish. The increase is actually coming from Maersk Line, which is a small increase in provision in one country that actually drives this. We end up in the profit for the period of continuing business of $1.13 billion, and our share of Dansk Supermarked is the same as last year, of $77 million, leaving us with a profit for the period of $1.207 billion.
On the bottom on this graph, the only number I would like to mention is that, of course, we see that it is an increase in our earnings per share as well, so we're actually up to $53 a share. All in all, a very good first quarter. Going to, 2014 outlook on page 15. The overall statement that we believe that, 2014 will be significantly above 2013, made predominantly impacted by the gain from Dansk Supermarked. The next sentence, we are saying that the underlying results is now expected to be around $4 billion, when excluding the discontinued operations, impairment losses, and the divestments gains. The cash flow statement is the same as previously.
For Maersk Line, we revise our expectations to be above 2013 results, driven by improved operational performance and utilization. We still maintain that the global demand is expected to grow by 4%-5%. Maersk Oil, we maintain that the result is gonna be below 2013, and that is based on an oil price of $104. We still expect the entitlement production to be above 240,000, and the exploration costs are now expected to be slightly below $1 billion. On APM Terminals, we maintain our expectations that the results will be above last year. On Maersk Drilling, we also maintain that the result will be below 2013 due to the planned yard stay and the high costs of startup of operation of six new rigs.
For Services & Other Shipping, we maintain that we expect a result above 2013. As always, this group's outlook for 2014 is of course subject to considerable uncertainty. With that, Nils, I leave the final remarks to you.
Well, thank you, Trond. Before we go into questions, I would just, and you can go to page 16, remind you, that 2014 is a year where we need to have a lot of focus on operations and not least on delivery on a number of projects if we want to be successful and not least prepare for the future. In terms of Maersk Line, the job continues to be maintain the difference in earnings to the market. We have, again, in Q1, been very successful on this. We have been more than 5%, probably closer to 10% above the industry average, which is very good. Also, making sure that we introduce the capacity from the Triple-E's into the market without disturbing global capacity.
We actually only increased the capacity in Q1 with 2.2%, with a growth of 7% and a market growth of somewhere around 4%-5%. I think we've done so far well on this, and we'll continue to focus on that. Maersk Oil, of course, the most important job of the organization is to make sure that we deliver the production that is expected, but also making sure that we deliver progress on the very important projects that we have running. The Al Shaheen development as well as the next project that needs to be developed in Al Shaheen. It is progress on Chissonga, Johan Sverdrup, and also on Culzean.
In the U.K., El Merk, actually we can consider done, as we are up and running full speed there. Then, still, the job is to deliver first oil in Golden Eagle and Jack towards the end of the year. It is not operated, but it is something that we consider very important. An important delivery to prepare for 2015. APM Terminals have a large number of projects. Here we mentioned the Maasvlakte, but they are in a number of expansions in Africa, and a number of new projects and expansions in Latin America that needs to go well. We have a lot of focus on that.
Of course, we will start up the most modern terminal in the world, Maasvlakte II, during the year as well. That is very important for them. Also continue to drive earnings to increase productivity, and as good as possible capacity utilization across the terminals. Maersk Drilling has in relation to its size probably the biggest challenge of all because they need to take six super large rigs into operation this year. We are happy that we got the first two, three rigs on the way to customers as we speak. Some of the uncertainty is out. Also some of the yard stays have been managed on time and on budget.
So far it looks well. We still of course have a job to do in order to get the two last drill ships on contract. As it looks now, this will not have an impact on 2014. The income from those rigs will be minimal under all circumstances. Continue the development in Services & Other Shipping. Here of course, the job of Morten Engelstoft, the new CEO of that business area, which we started up by January 1st, is to develop good and exciting strategies for the four somewhat small business units, so that we can see a good development long term, but also reaching the midterm objective of half a billion dollar in profit in 2016.
That was what we had to say. Thank you for listening patiently, and then we're ready for questions.
Yes. Thank you. We will now begin the question and answer session. The session will be around 14 minutes. If you have a question, please press star and then one on your touch tone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. Once again, I'll remind you, if you have a question for the speakers, please press star and then one on your touch tone phone. Our first question will come from Mr. Robert Jensen. Please go ahead, sir.
Good morning, Nils. Good morning, Trond. I've just got three questions, if I may. The first one regarding the guidance where obviously you've raised it from $3.6 billion to around $4 billion. Now, given that the only division to see a change in guidance was Maersk Line, doesn't that mean that you're now expecting Maersk Line NPAT to be around $1.9 billion for this year rather than the $1.5 billion previously? Or are there any other moving parts in the mix? The second question is just on the P3. You mentioned in the same day that the commencement of P3 operations is now expected to be in autumn.
Could you just provide some color on the reasons for that delay and any other updates in that respect? The final question is just on the balance sheet. As you discussed in the presentation, the net debt position continues to decline, and based on my numbers at least, I'm expecting net debt by the end of this year to be less than half of what it was at the end of 2012. Could you maybe just provide an update on what the latest thinking is regarding the balance sheet, and in particular, whether there's been any change in thinking since the last conference call that you hosted, concerning the potential for the cash returns to shareholders, either through share buybacks or special dividends? Thank you.
Well, thank you for the questions. If I start with the guidance, it is not only because of progress in Maersk Line that we upgrade our, lift our guidance, but also because we've had good results across the board during Q1. We see these results continuing, we think that we have de-risked the year a little bit in the first four months. The P3 delay, the reason is, we did expect to get the China and the European approvals before or around the middle of the year. We still expect that, but there are a number of other jurisdictions, smaller jurisdictions that we would like to have in place before we put the network in place.
They may take a little bit longer. That is, in short, the background for the delay. As we've also said previously, it will have no impact on 2014. We did not expect any positive effects from P3 in 2014 anyway. On the decline in net debt and dividends, there is no change to our thinking compared to last time. We have of course, as always, investment programs in place, and we foresee significant investments over the next years mainly in our four big businesses. Nothing will change as an effect of having less debt on the balance sheet. We're not going to spend the money lightly.
We have no news on any payouts to shareholders, except to say that of course, we lifted the dividend with DKK 200 at the general assembly.
Okay. That's helpful. Thank you, guys.
Our next question is coming from Mr. Lars Heindorff. Please go ahead, sir.
Yes. Good morning, gentlemen. A couple of questions for my part. Firstly, regarding Maersk Line. You continue to lower your cost base quite significantly, in particular the bunker consumption. I mean, if I understand it correctly, this is caused by ongoing fleet optimization. I'm curious to find out what kind of sort of capacity expansion or decline you are aiming for for the full year. That's one thing, and the other thing is that how that's gonna impact your bunker consumption going forward. That's my first question.
Okay. In terms of expectations for the capacity development during the year, we do expect, as a general rule, to grow in line with the market. We have had quite good growth in the first quarter with less growth in capacity. That's of course not sustainable forever. Expect our capacity to, with some swings in both directions, to increase with 4%-5% over the year.
Okay. Secondly, I mean, regarding the market, when I read the statement or at least part of the statement, I'm able to get through it at this point, your view about the trading condition is that there is a slight improvement. Is that correctly understood? Or, I mean, are you still afraid that most of your competitors are behaving in an irrational manner?
Well, we're not afraid. I think that's the wrong expression. We do expect the market to stay very competitive. If we see the last couple of years or maybe three years, and also the first quarter, we believe the industry is losing money. It is around break even or negative on EBIT level, so it's not a grand business. We don't expect that to change in any significant way during the rest of the year. Our focus will continue to be on improving and keeping our earnings margin gap to the competition.
A last question regarding Maersk Oil. You lower your guidance for exploration cost, and also the first quarter was actually a bit below what we've seen in previous quarters. Are there any, I mean, what's the reason for the change here, both in terms of the guidance and also the spend that you had in the first quarter? If this is something that we should expect going forward, the run rate here, or. Last but not least, maybe you can give us indication if there are any sort of particular areas which you have sort of been scaling down on exploration costs.
I would not like to comment on individual countries and so on, if that's your question. What we have done is following the results of the drilling campaign we had last year, of course, we have taken a breather. We've looked at all our prospects and tried to evaluate whether we have been too optimistic on some of them. If so, then we will have to do more analysis and making sure we don't drill things whether the success expectations are too low. You can say a certain amount of constant care is being exhibited here that we try to make sure we know what we're doing. We have... The temporary reduction in exploration is decided, but we don't expect any long-term trend changes.
The reduction that still fits into your aim of reaching 400,000 barrels?
Well, we actually do have quite a number of finds. What we find in a drilling campaign now will not materially impact unless you can do a quick tieback. Normally it would not significantly impact our 2020 vision.
Okay. Thank you.
Our next question is from Mr. Neil Glynn. Please go ahead, sir.
Good morning. If I could ask a couple, please. The first one on Maersk Line. The charter vessel number is down to 296 as of the first quarter. Can you give us a feel for how the number of charter vessels will develop from here? Can you return further vessels? The second question just on Maersk Drilling. You've obviously highlighted that the last two drillships remain uncontracted. Is it possible to help us understand more for 2015. W hat kind of a cost impact or a drag on earnings that might prove next year if they remain uncontracted? Thank you.
Thank you. I start by the TCs. We have delivered back mainly a number of old Panamaxes. Some have been scrapped. That is a trend that will continue. We can actually deliver a large number of vessels back within a very short period of time. But don't forget that we also need these vessels to carry out our business. If you look at the long-term trend, I guess we will gradually buy more modern vessels and thereby reduce the percentage of time charter in our fleet. We have far lower cost of capital than the people we do time charters with. I think that's a normal development.
We will also make sure we maintain a certain flexibility by being in short time charters. We could deliver back a lot, but we need to carry out the business. Your second question was?
Drilling. What's the cost of having or the impact of having two drillships open. Don't forget that the four of the six drillships we will be working in 2015, so that will have a positive impact. Of course, if you have a drillship that is not working and manned, it costs you probably somewhere between $100,000 and $200,000 a day in operational costs. That is not a place you would like to be. On the other hand, we have the best contract coverage in the industry, and it's probably not strategically a big problem for us to have a couple of drillships that are not contracted, being open for short-term opportunities.
Understood. If I could just follow on just on the cost side. Obviously the comps start getting a lot tougher into the second quarter, given your performance on Maersk Line costs last year. I guess you do still expect to eke out some cost savings, unit cost efficiencies through the rest of this year.
We will continue to work on cost savings and, I mean, there's no way around that. It's correct, your observation that the first quarter was easier comparisons compared to the remaining three quarters, not only for Maersk Line, but also for the total group.
Great. Thank you, Nils.
Our next question is from Mr. Douglas Hayes. Please go ahead, sir.
Yes. Good morning. A few questions, please. We'll take them one at a time. First, just on the reversals of the impairments in Maersk Line, what caused you to decide that you no longer wanted to sell the ships anymore? Did you need them in the network or could you not find a buyer or was there something else at play?
I guess a combination of the two. We're talking about two Panamaxes or three Panamaxes that we retrofitted to make them more economically viable in the Intra-Europe network. That's the long and the short of the story.
Okay, great. Thank you. Secondly, on the increase of your guidance for the liner business, can you just give us a little bit more detail into why, what drove that? I mean, what was better than expected from what you gave us at the full year results?
Well, better than expected was the growth. Also the rates were slightly better than we had feared. then we did manage to get the cost down. I think we were successful in the things that we wanted to do, but that was not fully visible at the beginning of the year.
Okay, great. Thanks. Finally, at what point do you need to think about reinvesting in the container shipping fleet again? You guys have been on hold following the, you know, the order of the Triple-E classes. I mean, do you need to think about coming to the market in the next year or two?
We're constantly looking into that and when we need capacity in order to fulfill our expectations to grow with the market, which we forecast to grow with 4%-5%, then we will look at placing orders. We don't have anything we can share with you at this point in time.
Okay. You don't feel the need, at least at this point, to start doing not a growth cycle, but a replacement cycle on the existing fleet?
No, I think you can say what we could do is having a replacement cycle on time charters. Most of our vessels are actually quite okay.
Okay. Very clear. Thank you very much.
Our next question is from Wei Xin Mao from JP Morgan. Please go ahead.
Thank you very much. Good morning, everyone. The first question for Maersk Line. How much visibility do you have for the rest of the year at the moment? Do you expect to see a normal seasonal pattern? Also, could you comment a little bit on what you see in terms of the trend for the stocking activities, please?
Yeah. We have some visibility one month into the future, and then that's basically it. It's very, very hard to see from where we are whether stocking up or down is happening. We try to reconcile shipping figures with GDP growth figures. That sometimes gives us a reason or gives us an indication, but I can't really share anything on the longer term development with you.
Okay. No problem. Secondly, are there any concerns regarding the holdings in global ports? Could the progress of the political environment lead to any potential strategic considerations there?
We at APM Terminals have ports all over the world. It's sort of almost a tradition that every year there's something going on in one of the countries where we operate ports. I think that is unavoidable. That's why we have a diversified portfolio. For us, for now, it is business as usual, and we don't expect that to change.
Okay. That's very helpful. Thank you very much.
Next question is from Bjarke Petersen from Carnegie. Please go ahead.
Yeah. Hello. A couple of questions. Firstly, to Maersk Line. Sorry to return to the upgraded Maersk Line, but looking at the performance in rates and volumes going into April and May, it seems that things has improved even further. Could you elaborate a bit on how much of this upgrade are based on what you have done, and how much is based on what you see going into Q2 and forward?
Well, I don't want to make that split, but we decided the upgrade with the supervisory board yesterday. Of course, we have some visibility into April, and that has been taken into account. At the moment, that's our best guess based on what we deliver in the first quarter and what we see.
Also staying at Maersk Line, the one-year contract or the contract you signed up for 2014, could you give a bit of flavor? Are they at a lower level than what you had on average, going into 2013?
Well, the rates are down on average in Q1 by 5%. We don't see anything that is sort of indicating a significant lift except from the normal general rate increases that we try to carry on in the market.
Super. Just a question to Maersk Oil. You continue to have a very strong development in your capture structure. Is it fair to assume that you might do more M&A within oil and gas? Now, you're bought into a couple of the blocks in Kurdistan. If something should come up in Johan Sverdrup or somewhere else, that you could be interested in boosting the pipeline by doing more M&A, and maybe slightly less exploration from scratch?
Yeah. I mean, there's no question that if you look back on the last years, we've been relying on exploration to build our reserve and resource base. I think the general way of doing business in the industry is mixing the two. I'll not exclude that we will do something on the M&A front. Of course, doing M&A, you need to make sure you do your best to evaluate the risks. M&A is not a risk-free activity, also not in oil and gas.
Drilling. In a scenario, let's say you're covered around 70% for next year, at current, Maersk Oil is not a client at Maersk Drilling. You have the opportunity of course that you have an internal client in the group. In a let's say worst case scenario, is it an option that you could on a short-term, medium-term contract, send some of the free available capacity to Maersk Oil?
It, I mean, it's of course something that can be looked into. The two businesses really work on an arm's length basis, and that's the way we want to maintain it. Maersk Oil will contract the rigs that are best for them, and Maersk Drilling will keep their super high-end rigs available for those who do difficult and demanding tasks around the world. In some cases, the two things match up and then we are happy to do business. The arm's length principle is very, very important to the group.
Many thanks for your help. Thank you.
Next question is from Mr. Alexia Dogani, please go ahead, sir.
Good morning. Two questions for me. First and foremost, your resources were up year-on-year substantially. Given the substandard 2013 exploration season, can you clarify how this came to be, and maybe it's a matter of definition of projects and so forth?
Yeah, it is. I mean, the way you do the resources is a little bit complicated, but when you do pre-development work, either shooting seismic or drilling or preparing the projects, getting them approved by the authorities and so on, you move through various phases. You get an upgrade in the resource base. It is reflecting the fact that all our projects like Johan Sverdrup, like Culzean, like Chissonga, the U.S. Gulf of Mexico Buckskin Jack one and two, and so on, that they actually move closer to production and closer to sanction, that you get this uplift.
I understand the confusion that you say, okay, last year, 12 months have not been successful in exploration, but often exploration finds do actually not enter into resources. A large part of it ends outside in prospective resources.
Great. That helps. The second question.
Maybe.
I know you've spoken.
Maybe I can add that we have a pretty detailed analysis going on each year of the reserves. We have a reserve committee, and everything we do is of course audited both by auditors and by a specialist external company.
Okay, great. My second question, I know you've talked about before on prioritizing returns rather than talking about reaching a particular production target. I was wondering if you're in a position to add more color to that with respect to spending. Obviously, the E&P industry has shifted focus on cost quite a bit. That's been a focus for all your businesses. If you can talk about it a bit from the Maersk Oil perspective and perhaps in light of the spending profile you've talked about on a go-forward basis, if there's any chance that you might be a bit more cautious on spending going forward.
I think we, as everybody else in the oil industry, will have to consider what to do given that the outlook for future oil prices has been reduced compared to a couple of years ago. Which makes projects that were great at that time maybe marginal today. You have to work very hard on cost, and you also have to be careful where you spend your exploration resources because I mean things like Arctic drilling that looked fantastic maybe at a point in time with higher oil price expectations can look very troubled now. Yes, we are looking at what's happening in the market.
Just, you can say it's essentially the same statement as the fact that what we previously said, prioritize returns over some volume target that we gave out some years ago as a vision. We will also prioritize now the expected future profitability of projects above the need to necessarily produce everything we have found.
Great. Thanks a lot. Appreciate it.
Our next question is from Mr. Dan Togo. Please go ahead, sir.
Morning, thank you. First on Maersk Line, I'd like to get back to what you see here, especially on rates, because one of your big precautions when you guided for the full year 2014 was the rate development, where you did see some risk. You mentioned though that the rates have developed a bit better than expected during Q1. Do you see less risk on rates from now on for the remaining part of 2014? That's my first question.
The reason why we lift our forecast for the year is mainly that we see rates slightly better. The cost savings we have achieved during the first quarter were in line with expectations. I think it's, I mean, you can say it's 5.2% decline in rates. Is that good or bad? I think it's still bad. Actually as it looks now, we expect this to be a little bit more stable than we had feared at the beginning of the year or just a few months ago.
Okay, thanks. On the cash flow, because I'm looking at the operational cash flow, it declines by some $50 million year-over-year. Still your EBITDA is up by more than $200 million. Are you tying more cash in working capital? Is there some explanation for this seasonality kick in here? You know, is this a trend we are going to see also in coming quarters?
Well, if we can just wind back to last year. We did have a project of improving the efficiency on the balance sheet, and we did have very high effects of that during the first two quarters of last year. The cash conversion the last two years were actually very good. Having said that, part of the increase in working capital tie-up is about $300 million this quarter. Most of that is actually coming from the volume increase in Maersk Line. We have some seasonal change and changes as a result of the tax payment and so forth. We don't see that trend to continue, and we still have focus on that capital tie-up.
It will be converted to cash in the coming quarters.
I would expect so.
Yeah. Right. On oil reserves, because your production last year was close to 90 million, and still, 2C reserves only declined some 20 million barrels. Clearly there's been an underlying addition here, and you also highlight that. Could you maybe elaborate a bit on that? Which geographies in particular is adding to reserves right now?
If I start by the one place where we have an automatic decline in reserves, that is, as I said before, Qatar. Because moving closer to 2017 and given the fact that we have not our reserves after 2017 included, we will see a decline here. The rest of the areas have basically on all. We don't give country by country forecast, by the way, so I can't give you all the details. Basically in the other areas, you can say work on enhanced oil recovery, working to squeeze out more barrels of the reservoirs. All the nitty-gritty work has meant that we've managed to keep reserves or fully replace the reserves we have produced, which I think is a good outcome.
Finally on terminals, that also showed strong development here in Q1, and especially on the EBIT margin.
May I add some, just add one thing to the reserves then, sorry. Also, when a project like Jack moves closer to production, of course, it becomes more reserve-like.
Finally, just on terminals, the EBITDA margin, how should we look at that going forward here in 2014? Is the high level here sustainable?
What we normally look at is actually not the EBITDA margin. We look at return on invested capital. I think, I mean, the 14% return is high. Would like to keep it there or grow it? I think given the fact that we're coming in with a lot of new projects, it would be a good achievement if we could keep it stable here and then have some good growth.
Thanks a lot and congrats.
Thank you.
Next question is from Mr. Frans Høyer. Please go ahead, sir.
Good morning. Thank you very much. Question to Line about the ability of Line to return a lot of vessels, TC vessels over the past several years. The fleet has come down significantly. I presume volumes haven't actually been impacted by this. The vessels have basically been in surplus. Is there a lot more to do along these lines in the next few years?
Thank you for the questions or the question. It really depends on our investment in own capacity, because at the moment we forecast the market to grow 4%-5%. We're not planning increased time charter activity. That means that we can basically scale it up or down if we decide to invest more or less in our own fleet. This is a purely financial and efficiency decision that we take on a rolling basis. As I said before, the capital cost of the charter partners that we have would generally be higher than ours, so long-term charters of vessels is not very likely that would enter into that.
On the other hand, if we have good vessels available at competitive prices, we will not necessarily step up, you can say, the handing back of those vessels. Don't expect it to grow. It will be a buffer where we'll be flexible. New sophisticated modern vessels will most likely be bought by ourselves. Any further questions?
Yes, we have our last question. It's coming from Gianmarco Bonacina from Equita. Please go ahead.
Yes, just two small remaining questions. One is on oil. I saw you reported in the quarter a $100 million decline in the depreciation versus the Q4, so $300 million versus $400 million, but the production grew. Can you give us an idea on how we should think about depreciation going forward? The other is in the terminal business, you sold some asets, Port Elizabeth and other terminals, Belgium. Can you give us an idea of the size of this operation, if they are material and could impact the results in the next couple of quarters? Thank you.
Well, when it comes to depreciation, the overall depreciation is basically, except for the impairment, if that was the question, we still remain at the level to be at sort of the fourth quarter level. We don't see any major changes to that.
On the terminals, it is relatively insignificant amounts of money for these three transactions. You're talking triple digit, but a low triple digit number. It's not significant, neither for the result nor for the cash flow.
Okay, thank you.
Of course, some transactions that we've done in the past have been very significant.
Okay.
If that was the last question, then I would like to thank you all for listening in. It's only been two months since we had the annual report. We thank you for having the patience to turn up again, and hope you'll be there and look forward to speaking to you in August when we come out with the second quarter results. Thank you very much and enjoy the rest of the day.