Ladies and gentlemen, welcome to the A.P. Moller - Maersk Interim Report second quarter 2012. Today I'm pleased to present the Group CEO, Mr. Nils Smedegaard Andersen, and Group CFO, Mr. Trond Westlie. For the first part of this call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Speakers, please begin.
Can you hear me well?
There is a slight echo.
Technical problems at this end. Okay. Ladies and gentlemen, welcome to this interim teleconference on our results for the first half of 2012. With me as the presenter said, I have Trond Westlie, our CFO, and myself, and I'm Nils Smedegaard Andersen, the CEO of the group. We start as usual. I hope you've downloaded the presentation. We start as usual with taking some reservations to our forward-looking statements. While you read that, maybe I'll give you the overall take what we take from these results.
It's been a relatively eventless quarter, but we did promise at the end of Q1 to take Maersk Line back into profitable territory, and we've done that with a profit of slightly above $200 million. It's a first step in the right direction for Maersk Line. In general, making a $1 billion profit at times where the shipping industry is facing a lot of challenges, we consider that a pretty good result. We're satisfied with it given the fact that there are no extraordinary movements in the quarter. We'll go into more details now, and the group financial highlights on page four. If you can go there.
The profit of the group in Q2 was $965 million compared to a result of $1.6 billion last year. The difference here is that we had extraordinary income from the sale of Netto UK, and that makes up for the difference. Otherwise, the result development is flat, which we consider pretty good given the fact that we have declining oil production, and we are in a turnaround phase with Maersk Line. Maersk Line's profit was $227 million against a small loss last year. Maersk Oil's profit was $468 million against a profit of almost $700 million last year. We'll come back to that of course in a minute.
This is the expected decline in oil production that takes its toll on the results, and it's totally as expected. The return on invested capital for the group was down from 14% to 8.8%. The majority of this movement is caused by the sale of Netto UK last year. We are trading more or less in line with the last year figures in general. We had a cash flow from operating activities of $1.6 billion. This was slightly below last year, $1.8 billion, but still a very healthy cash flow in a time where shipping is definitely facing challenges. We upped our investments a little bit compared to last year for $2.1 billion.
That means that we've had a negative cash flow in the quarter. The net interest-bearing debt was $16.6 billion compared to a level of a little below $12 billion last year, and we'll come back to that later in the presentation how those figures have arisen. We've been following the successful rate increases of Maersk Line in the first half, as well as the cost reduction plan that we have embarked on. We have decided to upgrade our forecast for Maersk Line to a modest profit for the year. That also leads us to an upgrade for the group as a whole.
We're now guiding towards a result which is slightly above last year's level, which was $3.4 billion. If you go to slide five, we'll talk a little bit about the group strategy. I'll not repeat the profits and ROIC figures, but important in this quarter is that Maersk Line turned profit making. It's one of the four pillars of the group. Of course we need to make good returns and profits in this area. This is what we have worked on and will continue to work on in the coming quarters.
The first step, or the most visible step that we've taken to reduce costs has also been an attempt to make the Maersk Line more market-focused and has led to a reorganization of the headquarters, reducing 400 positions. Maersk Oil's profit was as expected affected by the declining production share. We are now in a phase where we have, in addition to continuing exploration activities, we have to start working hard on making plans for execution of projects on the reserves that we have identified, or resources that we've found during the last years in our successful exploration activities.
APM Terminals' profit is unchanged. We have a 7% growth and are embarking on more projects. APM Terminals is giving a good return, and is a good and important part of the group. Maersk Drilling had a stable result. Major rig contracts were signed, which we take as a good sign of customer interest in our business, and the new, very modern rigs we've ordered. We continued our reduction efforts on our FPSO and LNG businesses. We completed the sale of Peregrino in July.
It doesn't impact the second quarter figures. We now successfully divested the Australian FPSO at the end of last year, LNG vessels this year, and Maersk Peregrino, the second large FPSO, also this year. We are progressing on our strategy. If we take the activities on Maersk Line, which is, as always, the most volatile part of the business, we continue to have a good volume development in spite of weak global trade development.
This is a consequence of the gains in market share we had during the second half of the year. As you may recall, we've said to the market, we don't want to increase our market share from the present level or from the level we had at the end of last year. Actually, in the second quarter this year, we hit exactly the same market share as we hit in Q4 in 2011.
As we gain market share during the second half, that explains the strong volume growth we see here. This will flatten out. We, in principle, in the fourth quarter should just grow with the market. We expect to have good solid growth also in the third quarter. We've seen rate increases compared to last year, not dramatic, but we have seen an average rate increase of 4%.
Which still doesn't bring the industry into profitable or even a situation where we give an acceptable return on our investments, but it is sufficient to turn the business marginally profitable. We also have seen a unit cost decline of 1% when we exclude the effects of the bunker price increases. This is also to be regarded as first step. We'll have to work much more on reducing both overhead and operational cost over the coming quarters, but it is pointing in the right direction.
Then as I mentioned before, the restructuring of the headquarters of 400 people will impact costs and also closeness to market over the coming quarters. We continue, and we've noticed similar moves with the competitors to reduce capacity somewhat through slow steaming, vessel-sharing agreements, and other measures. This is less costly. It's saving fuel, and it is less costly than laying up vessels, so it's probably a good model.
You'll see on the bottom part of this chart, you'll see the development in rates, that we are now above the levels that we saw in 2011, but still significantly below the levels that we saw in 2010. We'll of course work hard to get closer to those rate levels. Our rate increases have been less than you will have seen in percentage terms, than you will have seen if you follow various spot rates indexes, but that's the usual pattern.
We have more contracted volumes than our competitors and therefore going up our rates increases slower. Fortunately, also in the past, we have seen that they also go down more slowly than our competitors. Not that we expect rate declines, needless to say. Moving to the next slide. We talk a little bit about Maersk Oil. Here, of course, the main impact is the reduction of share in production. It's driven by lower share in Qatar, as well as maturing fields in Denmark and the U.K.
The drop in production in the U.K., of course, has been accentuated by the downtime we're seeing now, both on Gryphon and what we saw in the first quarter on Janice, which, fortunately, came back on stream in April this year. Nothing much to add. You've seen that the biggest drop is coming out of Qatar with 28% to 114,000 barrels a day.
This drop will continue, so that we, for the rest of the year, expect around 100,000 barrels of oil equivalents per day from Qatar. A consequence of the settlement with the Algerian government on the tax issue is that we will, over the coming 12 months or nine months from now, receive additional oil as payment of the compensation. We have taken the refund into the P&L in the first quarter on the tax. Of course, we are pleased to see that we now actually get to lift the oil. We will have a cash effect during the remainder of the year, next year, from that business.
On top of the fact that we also increased production in Algeria slightly. We have lower exploration costs than we had expected in the quarter, $199 million. Given the fact that we will end the year, or expect to end the year with more than $1 billion of exploration costs, this is slightly below trend. Of course it is difficult to hit the exact average in every quarter.
We completed five exploration appraisal wells in Q2, so the drilling level actually continues to be quite high. We've also made a minor acquisition, the 30% in Dumbarton and Lochranza, where we already were active. We expect that transaction to be concluded in the second half.
Also relevant for the second half is the fact that the Nordsøfonden will enter into DUC as a shareholder with a 20% share. It starts in July and will have effect from the second quarter, but not on the profits. This will remain neutral for the business. If you go to Maersk Drilling, I think maybe I should add here that the guidance for the year is about 265,000 barrels of oil per day. It is slightly below what we have produced in the second quarter. On APM Terminals, on page seven, the business continues to develop well.
We had a 7% growth in volumes driven by new terminals and good development in West Africa, more than compensating the declines we saw in Europe. Excluding impact of portfolio and new changes and new terminals, we had a volume like for like that was 5% above last year. A number of initiatives continues in APM Terminals. We have signed an agreement to invest in Ningbo, increasing the capacity of Meishan in China. We've also forwarded a proposal to operate all of the Port of Virginia's facilities in the US. We already have our small terminal or mid-sized terminal rented to the port.
We think we can be a pretty good operator on the totality, and we are in talks with the municipalities there. We've also commenced now construction at Rotterdam's Maasvlakte 2, which of course is a milestone in APM Terminals development. It will be a top modern, very large facility in the largest port in Europe. We signed the concession for Lázaro Cárdenas, which will also be a flagship terminal on the Pacific Coast of Mexico.
Lots of exciting things are going on in APM Terminals. Apart from good development in volumes, given the global trade situation, also the trend in increasing EBITDA margins continues. We feel that we are on a very good development in APM Terminals towards becoming a business delivering more than $1 billion in segment two profit. If we take Maersk Drilling, we have a result in line with last year in the second quarter. We have reversed $30 million of an impairment.
But delayed yard stays and the delayed start-up of two large rigs have cost us some money in this quarter and will also cost us money in the third quarter as well, until we get up running fully. This is of course unfortunate, but we see that the business is still on a good track. We are developing with good solid orders for the new rigs we've ordered and see a lot of interest in also our deep sea capabilities that are growing by the day. I will not go into the details.
You can see the figures on the various contracts as in the presentation slide. We are also determined to develop Maersk Drilling into an important fourth leg of the group approaching $1 billion over the midterm in segment profit. If we take very quickly the other business units, here we'll start from the top, and we'll start with the figures from the bottom. Starting with Maersk Supply Service, we have a result that is below last year.
This is mainly due to less attractive rates in the North Sea spot markets. We do maintain a high level of activity both in Brazil and in West Africa. We have good contract coverage for these areas. Even if the spot market continues to be soft, we should still be able to deliver a reasonable result. If we take Maersk Tankers, we continue in the market having the situation of persistent oversupply. The order book is shrinking, but we see lots of oversupply, in particular in the VLCC area, but also in product tankers.
The only segments here where capacity is more or less in line with demand is the gas area that delivers acceptable returns at the moment. Damco has an extraordinary gain on the sale of facility in China. We also have cost for restructuring in Europe where we're reducing cost. We're also focusing Damco more and more on the developing markets where we have a very good skill set and feel we can drive a good development of this company going forward.
Volumes are up in a good way, both in air and in sea, so the company is developing well, and we also see good traction on our supply chain activities. In Svitzer, we've been able to increase the harbor towage tariffs in a number of areas. In the terminal startups that we're making are fundamentally with higher returns than we see in the traditional harbor towage area. Here we also see a good positive development.
The other businesses, which are primarily then development here is primarily driven in a negative sense by tankers market, which is delivering less of a result than last year. We have a good development in Maersk Container Industry, so it's a modest negative trend in this business. That leads me to hand the word over to Trond, who will take us through the group overall figures.
Thank you, Nils, and good morning, ladies and gentlemen. I'll take you through the consolidated numbers on page 10 in our functional currency of U.S. dollars. I'll focus on the first column of the second quarter, and I'll make some reference to the development from the first quarter. Our revenue base in the second quarter were $15.348 billion, an increase of approximately $1 billion from the first quarter.
The EBITDA have the same development in the nominal numbers, so we ending up at $3.582 billion, coming from $2.5 billion, and that leaves net growth from first quarter to second quarter of $1 billion. Going to the earnings before interest and tax of $2.407 billion. That's an increase from the first quarter of $746 million. We have net financial items in the quarter of $237 million, slightly up from first quarter when the financial costs were $166 million.
Ending at profit before tax of $2.17 billion. We have a tax charge in the second quarter of $1.205 billion, leaving us at a net profit for the period of $965 million, down from first quarter. First quarter included the Algerian tax settlement of approximately $900 million, and that is the reason why the tax charge in the second quarter goes up from the first quarter. All in all, a good quarter.
On the bottom you can see that we do have a return on invested capital of 8.8%, and the capital base in the second quarter is $53.7 billion. Net interest-bearing debt are up to $1.6 billion. I'll come back to the development in that, and earnings per share in the quarter were $208. Going to the next page on the development of net interest-bearing debt. A simple chart starting in 2012 with $15.3 billion. The EBITDA is $6.1 billion. Change in working capital and other miscellaneous in the current account is $1 billion. Tax paid is $1.9 billion. CapEx, $3 billion spent. Financial items, $400 million.
We did pay our, the dividends in the second quarter and some other miscellaneous ends up at $1.1 billion. That means that we are coming out of the second quarter of $16.6 billion on net interest-bearing debt. Going then to slide 12 on the outlook for 2012. The group revises expected result for 2012 upwards from slightly lower to slightly above the results of 2011. Cash flow used for capital expenditure is expected to be lower than in 2011, while cash flow from operating activities is expected to be at the same level.
Maersk Line now expects a modest positive result in 2012 based on higher average rates in the second half of the year. Global demand for seaborne container is expected to increase by 4% in 2012, but with declining inbound European volumes. Maersk Oil expects a result for 2012 at the same level as the result for 2011, including the impact of a settlement of the tax dispute in Algeria. The expected result is based on share of production of 265,000 barrels of oil equivalents per day during 2012, and the average oil price of $108 per barrel for the remainder of the year.
Exploration costs are expected to be above $1 billion. APM Terminals expect the result of 2012 above the results for 2011 and above market growth in volumes supported by portfolio expansion. Maersk Drilling now expects the results for 2012 below the results for 2011 due to postponed start-up of new contracts. The total result for all other activities is now expected to be lower than 2011, excluding divestment gains and impairments.
That is primarily due to lower expected results in Dansk Supermarked and Maersk Supply Service. The outlook for 2012 is of course subject to considerable uncertainty, not least due to the development in global economy. As we have shown you on top left, right, we are of course also influenced by having some sensitivity guidelines for you relative to what is actually our primary drivers on what affects the numbers. With that, I'll leave the final remarks to Nils.
Okay. Coming back to, just to sum up, the important thing of course is that this quarter is in itself not very eventful. We're happy that we returned Maersk Line to profit as we had promised. Importantly also is that we continue to pursue our strategy, which is to concentrate our investments going forward in the four core growth businesses. We expect and have as an ambition to grow Maersk Line in line with the market. It is also our ambition to grow our profitability to a level where we have an EBIT margin advantage of 5% above peers.
With those two objectives, we see relatively limited need for new capacity investments in the industry. We have the Triple-E's coming from the middle of 2013 until 2015, and that should cover our need for capacity for that period of time. Short term and medium term, very limited investments in this business, which means that the share of invested capital in that part of the group will tend to reduce over the period we're looking into.
Maersk Oil's aspiration is to reach a production or share of production of 400,000 barrels per day. That means, of course, that we will invest. We have made successful exploration activities over the last years since we upped the investment budgets in this area. We've been more and more consistently successful, and that means that we have good funds that we'll invest in.
The most significant projects that have not been sanctioned at this point of time seem to be Chissonga in Angola and Johan Sverdrup in Norway that combined will reach a level of production, our share above 100,000, when they become producers in 2018. We will invest significant amounts of money in these projects, but we have not finalized the project descriptions. We are also, of course, awaiting more input towards Statoil, which is the operator on Johan Sverdrup.
We do appreciate that the extraordinarily high returns we've seen in Maersk Oil over the coming years will tend to decline when we up the investment level, but we do expect to stay in double digit return levels even during the expansion phase, which will be we feel a good achievement. APM Terminals is expanding, we'll continue to expand. Already today we have a good EBITDA margin. It's improving, and we also have a good return on invested capital.
We want to continue investing in this attractive business, and continue through cost measures and portfolio work, to push, hopefully the returns to an upward trend so that we can achieve a $1 billion+ profit from this business, within very few years. Maersk Drilling has been very active on the ordering market. We've ordered seven large rigs. We already have contracts for some of them, and we have big interest in the, or high level of interest in the others. Also here, the ambition is grow Maersk Drilling into a business that would give us a profit in the area of $1 billion.
It requires some additional rig investments, but these we'll be doing, hopefully in a paced and sensible speed over the coming years to reach the level of $1 billion. We are committed to profitable growth. We also remain committed to increasing the dividend per share, gradually in nominal terms. Over the cycle, we wanna comply both with the financial ratios and of course also with the return criteria that are required to be a strong investment grade company. As a last remark, we have, of course, limited time for these quarterly presentations.
Being a conglomerate, we find it quite difficult to get enough details communicated around both APM Terminals and Maersk Oil, which are, let's say, the most complex and in many senses, also the most attractive growth areas of the company. We decided that we would like to increase the information level of these gradually over the coming years. The first next step that we will take in this is to make a capital markets day on ninth of October 2012. We'll send invitations out during the coming weeks, also detailing all the content of the day.
So far we've only defined the need to explain more about the individual projects, as well as the individual core activities, that we are into. We hope it'll be an exciting day, and look forward to seeing some of you in that connection. That closes the presentation for now. We look forward to having a very good discussion and some exciting questions as well. Thank you for listening in. Thank you for your patience.
Ladies and gentlemen, if you have a question for the speaker, please press zero one on your telephone keypad, and you'll enter a queue. After you're announced, please ask your question. The first question comes from Mr. Chris Sherrington from J.P. Morgan. Please go ahead, sir.
Yeah. Good morning, Nils and TRond. With respect to minor rates, you mentioned no expectation of declines, but at the same time, it looks as if the CCFI, which at least has some directional value, has come off a bit from its peaks in May. Is this necessarily indicative for what we should expect from Maersk Supply?
Coming back to the explanation I gave before, we have a slower increase in our average rates than you would see in the market. In particular, that you will see in the spot indexes, whichever one of them you look at. We feel that there is, even if the spot rates should peak now, there's still some room for us to improve our average rates.
Having said that, we also feel that the spot rates should stay on a reasonably high level, and that they should improve from where they are now because the industry needs a better return than it's been seeing in the last quarters. We feel there's limited room for downward adjustments in the short term, but we will definitely continue our efforts to increase rates until the industry has a satisfactory return.
Okay.
Even if the volumes should be unexciting in the second half, which we expect they will be, the solution to this for us is not lowering rates.
Okay, that's clear. As capacity continues to rise in Asia to Europe, can you give us some color on what your utilization level has looked like in Q1 and Q2, and then relative to what you see in the broader trade lane?
Well, we actually haven't brought in capacity. We've taken out some capacity, and we've seen increased volume for our business in Asia, Europe. We have seen a quite good capacity utilization. Again, I think we will warn against just looking at capacity utilization as the trigger of rate increases or decreases. The mistake we've done along with, I can say respectfully, others in the industry, but it's not the way forward.
It's normal for an industry to have excess capacity when growth is slow. We just have to live with that and avoid dumping our rates. We're not gonna get more volumes in total onto the vessels by dumping the rates because our competitors will dump their rates as well.
Okay. Very last question on your reduced CapEx guidance. Can you give us some idea of which areas afford you the greatest flexibility? Does this imply deferred acquisitions perhaps centered in the oil and gas division?
Well, we do keep quite a high level of investment, so the reduced net investment guidance we're giving is mainly a consequence of having divested both the LNG as well as the FPSO businesses.
All right. Thank you.
Next question comes from Mr. Dan Togo from Handelsbanken. Please go ahead, sir.
Yes, good morning. A few questions from me as well. Could you please elaborate a bit on the guidance? First of all, you are taking down drilling. You have given the cause here. Can you give some sort of amount or quantify the effects of these postponed projects? Some words on the downgrades on retail and supply. An additional question to guidance. If you wouldn't have sold Peregrino, yielding $200 million, would you still have upgraded the outlook for the group?
I don't think we've given any figures for Peregrino anyway. What we see as driving the upgrade is basically Maersk Line now expecting a modest profit for the year.
It's not the one-off sort, say?
That's the way we see it. Peregrino, a small profit from that is coming in the third quarter. This is good, but it's not really significant for the outlook.
Some words on retail and supply.
Yes. On retail, the business is impacted by poor Danish demand situation. It's mainly the supermarkets and the hypermarkets that are impacted. It's mainly non-food issue. The discount part of the business continues to go well. We actually also here feel that the investment direction that we have focusing a lot on Netto is right, but the supermarket sector in Denmark at the moment is very complicated.
On supply, it's we have had a relatively weak spot market in the North Sea. Nothing dramatic. It happens once in a while. The underlying business is still very healthy, and we're still leading the industry on returns, in a clear way. We're happy with that business.
Some questions on containers. I understand from the previous answer you gave that you expect rates to be solid throughout second half from where we are now. That's at least what you implied. Is that correct, or even moving higher?
Well, I think it's difficult to say where spot rates are moving. We have some of the spot rates Asia-Europe and are at the moment the only one who has been doing that. We've done that towards the end of June. This impacts volume at the moment slightly. We do believe that the competition will follow, which will stabilize and potentially even increase the spot rates over the coming months. Even apart from that, there should be room for us to work on our contracts to increase our average rate over the coming quarters.
Okay. Because when you look into 2013 is still quite a sizable delivery year to the container market. It looks, at least when you look at the spot, increasing difficulty to drive up rates further. Looking a bit further ahead, beyond second half, what will drive profitability? Will it be a cost exercise, or is it pure rates that will drive up profits going forward?
Well, we of course will do our homework and do our cost exercises. I think we've been quite successful with that, in the last five years. But don't forget, the competitors are doing that as well. We can't, as an industry, cut ourselves to success. We need stability of rates, if we wanna keep a reasonable level, of earnings. I think having learned from 2009 that cutting rates doesn't create more business, maybe quite to the contrary, it's not the solution.
We need to maintain acceptable rates, and the customer also need to understand that if they want investments in the industry and good service, they have to look at the total cost of transportation and production in their results, not just on $50 more or less per container.
Okay. Thanks a lot.
The next question comes from Mr. Lars Heindorff from ABG. Please go ahead, sir.
Yes. Morning, gentlemen. Also a couple questions regarding the container rates. I think you stated in the second half of last year that you've not really sort of engaged in longer term contracts on loss making volumes, also loss making rates. I'm curious if-
Please speak up closer to the microphone. It's almost impossible to hear you.
Can you hear me now? Can you hear me?
Try again.
Is this better?
Yeah.
All right. A question regarding the rates, sorry. I think you said on an earlier occasion here, some of these conference call, that in the second half of last year, that you were not willing to engage on longer term contracts on loss making rate levels. I'm curious to find out if your share of longer term contracts, how that had developed during the quarter year. If you can give us a sort of an indication maybe of how much is contract and how much is spot.
Yeah, I think. First of all, we don't, our longest of all contracts of any significance are a year. This has traditionally been particularly important in the Asia, the US, so the Pacific trade. In the Europe trade, which was actually half of the business more or less. If we go to Asia, Europe, we have a mix of spot, short-term contracts of three months, and some yearly contracts. Of course it's right now it's the yearly contracts that are giving us the trouble. I guess our share of yearly contracts in that business would be 30% to 40%.
Okay. Also staying with the rates, we can see in the slides package that you've been sending out here, I mean, you have had a decent increase in the average rate from March into April. From April into May and June, the average rate increase is actually sort of fairly small. Can you tell us a little bit about the recent rate hike that you announced on Asia Europe on $250 per box, how that had developed, and if you just see that these average rates will continue up here on a monthly basis?
We did increase. It's actually $250 per TEU. We increased to $500 per FEU. That was at the end of June, and so far it's sticking.
Okay. The first of August, you also announced another rate increase. Has that been successful as well?
We hope so.
Okay. All right. Thank you very much.
The next question comes from Mr. Mark McVicar from Nomura. Please go ahead, sir.
Good morning. I have a couple of questions on the sort of investment and future development piece. Could we just clarify that when you talk about the $1 billion of profits that you-
One-
Hope to make from drilling and terminals? Are you talking about NOPAT there? Are you talking about EBIT?
We're talking about NOPAT. I couldn't really hear your question, but the others have better ears than me, so.
Okay. For the $1 billion is at the NOPAT level for the medium-term guidance, yeah?
Yes, that's right.
That's lovely. Thank you. Secondly, on the Angola and Norway production plans, is 2018 where you would have sort of expected that first oil to come from?
It goes both. We've guided on both Chissonga and Johan Sverdrup, 2018. Of course, the Johan Sverdrup estimate is based on Statoil's statements there, the operator there. In Chissonga we feel that 2018 is realistic. We are actually going to drill quite a number of wells in Block 16 over the coming quarters. The more we know before we do the final design, the better the design will be and the higher our chance of doing it on time and budget, as we have done, for instance, in Qatar. We'll prepare it very well, because it is potentially a sizable investment.
Sure. Okay. Just on overall production, is there anything further you can tell us about, you know, how much lower than this year's 265, that production might go? You know, when are we expecting to see, and at what sort of level, the bottom of the production profile?
Well, we had previously guided that we would continue to see some declines during 2013 and 2014, but thereafter we expect it to grow. We will be more specific on this in our Capital Markets Day, when we meet in October.
Okay. That's great. Thank you.
Next question comes from Mr. Herman Hildan from RS Platou Markets. Please go ahead, sir.
Good morning. I have two questions. The first is on the capacity on Asia-Europe. You saw at the beginning of the year, most operators had 10 vessels in Asia-Europe, and you've now implemented an eleventh vessel on most of your strings. Could you say a few words about how far you have come in implementing eleventh vessel, and also if you see that competitors follow suit?
Yes. We believe that actually most competitors are working towards lengthening their strings. We've come very far. We can see that on average speed and bunker consumption. You'll still see some effect coming in the second half because we're continuing, but it is flattening off from now on.
Also could you say something about how much further or how many more vessels do you believe you can add on the Asia Europe? For example, a twelfth string and for at what time do you believe this could happen if demand fails to relieve?
We're not planning to add additional vessels in Asia Europe. Obviously no guess on when it could happen. The market is oversupplied. What it surely doesn't need is more capacity.
I meant more on the string per string basis. Is the call it the benefit of slow steaming will it be diluted if you, for example, add the twelfth vessel on Asia Europe?
Well, it depends which strings you're talking about. They have different numbers of vessels. Don't forget that our most important trade lane from Asia to Europe is actually Daily Maersk, and that is not a string per se, as you define it there.
Also one last question. Are you happy about the way that the current share price reflect underlying values shares in the company? Have you call it made any actions in terms of reorganizing the group? For example, you see, take Teekay Corporation, where you have listed subsidiaries. Is this something that you would consider in the future?
Well, if we do come to consider that, we'll surely tell you. What we will try to do now is the next step in making the group more transparent, to have the Capital Markets Day in October. We're planning that. Come back to tell you more in detail what would be there. We don't have any plans of listings of subsidiaries or anything like that.
We have actually changed the structure of the group over the last many years. We've left industry, we've left data processing, we left shipbuilding, we left the ferry transportation, we left LNG transportation, and we've also reduced our exposure to FPSO. Some things are happening every quarter. As to where the share price should be, there are many, many very, very smart people out there, so I'm sure it's in exactly the right place.
Okay. Well, I guess we can look forward to the capital markets day then. Thank you.
Sure.
The next question comes from Mr. Robert Joynson from Macquarie. Please go ahead, sir.
Oh, good afternoon, gentlemen. A couple of questions from me, if I may. First of all, just on bunker costs. The average bunker costs paid by Maersk Line increased slightly between Q1 and Q2, which was, of course, the opposite of the decline in bunker prices seen by market in general during Q2. Now, I assume that was due to the bunker fuel that you have stored in the tanks, and the lag effects which you've discussed on previous conference calls. I mean, because of that lag effect, would it be fair to assume that the average bunker cost per ton paid by Maersk Line will decline materially during Q3?
It's not a bad model to assume that we'll be two to three months behind on average bunker prices. The logical consequence of that is that there should be a good chance of that.
Excellent. Thank you. Just a quick second question, more of a clarification. You mentioned in response to a previous question that on Asia/Europe, 12-month contracts account for around 30% to 40% of the total volume. Just to clarify, did you mean 30% to 40% of the total volume, or were you referring specifically to the contract elements of that volume?
No, I can't be very specific on that because I don't have the figures right here. We, the share of contracts on Asia-Europe long-term are lower than they are on the Pacific. 30% to 40% was meant to be, and it may not be entirely correct, out of the total volume.
Okay. That's very useful. Thank you very much.
The next question comes from Mr. Mike Sherlock from Clarksons. Please go ahead, sir.
Yes. Hi, good morning, gentlemen. Just a couple points of clarification. One is, am I to understand that the invested capital in the Maersk Line will reduce despite the new build program?
No, you're not. That's not the intention. We'll continue probably to see growth in the invested capital in Maersk Line, but it will be less than we see in the other four core businesses, and it will be less than the average invested capital of the group.
Okay, great. Can you also talk about some of the levers of capacity reduction in the box business? I've heard other liners talk about deployed capacity versus, you know, I guess, total physical capacity. How do you guys sort of measure it, and can you talk more specifically about some of the initiatives that you guys have done, like slow steaming and things like that? That would be very helpful. Thanks.
I don't think we can make this into an exact shipping bulk analysis conference call, but we have done a lot on slow steaming. You know the figures, I think, quite well. We've also done some things in the past on layups, but we actually consider handing back tonnage to charter tonnage and slow steaming as less costly and more effective than actually laying ships up. If the market goes down continues poor, we will reflect on it, and if laying up tonnage is what it takes, then we'll do that.
Great. Thanks for your time, guys.
The next question comes from Mr. Finn Petersen from Nordea. Please go ahead, sir.
Yes, good morning, gentlemen. Cost cutting in Maersk Line is on the agenda. Could you elaborate a little bit about what you intend to do, what the time horizons and the effect on results would be?
There's some things that will come very quickly, such as reduction of the headquarters, the effects of that we'll see already in the third quarter excluding one-offs for indemnifications and so on. Some things will take significantly longer, such as reducing overhead as a consequence of getting IT improved as to service levels. Many different steps are being taken.
For me, the most important thing probably is the continued effort to upgrade IT and systems and procedures, simplify the company. I think over the coming years, this will be a gradual but very significant impact both on customer satisfaction and efficiency of processes, but also on costs. We have gone through cost exercises in the past. We've taken significant costs out of both overhead and operational expenses. Of course, it gets more into really hard work than there are no low-hanging fruits we can pick at the moment.
Okay. Slow steaming. We're talking about slow steaming Asia-Europe. What about other trades? As of today, you probably have more capacity in emerging markets if we take Middle East, South America, Africa, and you-
We slow steam in the entire network, so there's no difference to Asia, Europe, and to the rest of the networks.
Well, what is the potential to further slow steaming globally if it's necessary? I understand that is probably limited then.
Yeah, relatively limited. We are sailing low speeds, but there may be some room on backhauls. The backhaul business is growing nicely for us, but it's actually a business where a lot of the cargo is not very time dependent. So you probably could slow steam even more on the backhaul. Apart from the container business, where there's definitely room for slow steaming is in the tankers area, where the tankers are sailing far too high speeds, considering that there's so much overcapacity in the industry and that they're consuming a lot of fuel. Could be much more environmentally friendly.
Just a final question. Rate increases in emerging markets, which we've seen spot rates lately falling in emerging markets as such. You have announced rate increases. Could you elaborate a little bit about how you see rates development in these trades, South Africa, South America and so forth?
Well, I think you will see volatility in the rates. In general, when we look around the globe, we've seen an acceptable development in rates in the first half. It's been, of course, given the catastrophic rates we had in Asia-Europe, the most significant increases. We've seen sensible developments in most areas.
Okay. Thank you.
The next question comes from Mr. Frans Høyer from Jyske Bank. Please go ahead, sir.
Yes, good morning. A question about the rates again, I'm afraid. In the second half, your guidance and everything you say suggests that you expect rates to be firm or even higher. But of course you have these various tools in the box, including a slow steam and so on. You also had those tools in the box last year. I'm just wondering what makes you so confident that this autumn is going to be markedly different from last autumn. Is there something new in the toolbox that you can apply, or is it something else that you are pinning your hopes on?
Well, I think the real issue here is industry conduct. I can't talk for the industry, but I can talk for us that we feel that we are maintaining our market share at the moment on a reasonable level. We have seen rates go up as a consequence of us behaving maybe less aggressive than we have in the past. That's what we intend to do.
What the industry does is outside our, of course, influence. We can't influence that. I think in general, the industry understands that you don't grow the market by cutting rates. When you cut rates, the competitors follow. It's really down to that. We've been through a number of iterations, and I hope we get wiser every time.
Thank you. A question regarding the oil business. Are you still aiming for 400 million barrels per day in 2017, or has that slipped into 2018 as the two big fields come on stream?
We have not given any indications of when the 400,000 barrels would be. So far we can, if there has been a slippage, we'll keep it internally.
There is still no particular timing in mind regarding the 400,000 barrels per day?
In mind, yes, but not communicated.
Okay. Also perhaps this next answer falls into the same category. Could you give us an idea of the scale of the Chissonga investment, if and when that hopefully goes ahead? You mentioned it's very substantial. Could you help us a little more?
We will try to help you hopefully early on that when we come to the Capital Markets Day, but at the moment, we don't have further details. We're still, as I said, drilling exploration wells in the area. We want to make sure that we understand the size of the field before we decide on a development. Good news would be a very high level of investment.
Yeah, I understand. Okay. Thank you very much.
The next question comes from Mr. Stig Frederiksen from Carnegie. Please go ahead, sir.
Hello, gentlemen. First of all, congratulations with your turnaround in Maersk Line. A couple of questions. First of all, could you elaborate a bit on how you see the peak season going on? We've had some very weak data recently and all talking about a delay. That was the first question. Secondly, if you could clarify a bit about your geographical split in your container Maersk Line because it seems you have changed the way you now talk about Asia, Europe from 37% in Q1 to now 24%.
The final question, I think you, Mr. Nils Smedegaard Andersen, want to talk about that you entered the year with too much capacity. You thought about that there would be a market share fight also this year. Is that still the view and that's one of the reasons why costs are still maybe a bit too high or higher than we assumed in this quarter?
I think it's first of all on developments of different routes. You can see it on page 14 in the released report. I won't go into details on that here, if you permit. There is still room for us to reduce our slim line, our network for sure. What we've done so far is we're slow steaming rather than handing back tonnage because that has been the most profitable way to solve the issue.
I guess this will be the way we'll do it also in the future because fuel prices are heading back up again now. We've seen the crude oil coming up. I think the most realistic assumption is that slow steam will be more important than actually reducing capacity. You're right. It's completely correct what you're saying. We did enter the year with too much capacity for the business. Having slow steaming and having taken the measures on sharing strengths and so on, we actually are at a good level of capacity utilization. There's probably less room than we thought three months ago for reducing the capacity overall.
Okay. Maybe on the peak season, or maybe I should interpret that when you are at good utilization, you also look at quite okay peak season for the time being.
We hope so. Of course, it depends on the global economy and demand in the U.S. and Europe, in particular Western Europe, and that doesn't look too bright. Don't forget, last year, we didn't have any peak season at all. The comparison levels we're entering into are not too difficult. We're cautiously pessimistic, but not overly pessimistic.
Perfect. Thank you very much.
The next question comes from Mr. Robert Bayer from Cantor Fitzgerald. Please go ahead, sir.
Morning, guys. Just two from me, please. On APM Terminals, could you talk a bit about the pricing environment? Are you able to sort of maintain or lift terminal handling charges at the moment? Secondly, just on debt and financial ratios, you mentioned this a little bit earlier. Do you have a target range for leverage that you can share with us? On my calculation, you're at about 2x EBITDA, including leases, which suggests that you still have a fair amount of balance sheet headroom to maintain that investment grade. Thank you.
I'll leave the financial question to Trond, and I think that's probably the most important. Trond, if you start.
Sure. Yeah. What we have said is that we want to be a solid investment grade company, and that's basically the guidance we've given you. When it comes to your metrics, just a comment on that is that on our EBITDA on the gearing level, even though you take into the charters, you have to take into consideration that the tax effects on the oil and gas is fairly high. Adjusting for that, you would probably be slightly higher than 2x on a comparable note to other industries.
Okay.
Taking that into consideration, I do think that I mean we have solid balance. The $16 billion is we haven't given any sort of characteristics whether how big or small that is relative to what we think we can do. I do think, as we have said earlier, the CapEx going forward is gonna be very much aligned with the operational cash flow going forward. Then again, it's not gonna be one to one either in quarters or in years to actually do it.
Okay. Thank you. Can I just clarify, when you say in investment grade, are you talking here about sort of triple B? You're talking, you know, a classic for an industrial transport company.
Well, I'm not saying that it's gonna be investment grade. It is of course from triple B and upwards.
Yeah.
We haven't, and a solid investment grade is probably higher than the lowest level.
Okay. Thank you.
The next question comes from Mr. Gianmarco Bonacina.
We still have an outstanding issue on the last question.
Oh, yes, please. Yeah.
That is terminal, the terminal pricing power.
Yeah.
It depends, of course, a lot on how the competitive situation is in the area where you're sitting and of course, you can also be more strong on pricing if you have bottlenecks in a fast-growing economy. Having said that, we actually saw in 2009, even when the container volumes dropped significantly, actually container handling charges didn't move a lot. There's no doubt that pricing power is much more solid in among the terminal operators than it is in the shipping lines. Of course, also here, we try to stand firm.
Yeah.
With our APM Terminals business, and I think they've done that successfully in the past.
Great. Thanks very much.
The next question comes from Mr. Gianmarco Bonacina from Equita. Please go ahead, sir.
Yes, good morning. Couple of questions. One in Maersk Oil. If you can tell us what was the contribution from the settlement barrels in Algeria in the second quarter. The other question is about the development of unit costs in Maersk Line. If you can give us more color on the 1% decline, making some reference to basically vessel costs, transportation costs, like for example, terminal costs and administrative costs. What was the development in the different items? Thank you.
The main saving was bunker consumption from steaming slower. That's really the savings element of it in this quarter. We're seeing the rest of the cost components staying pretty stable.
Okay.
On the Algerian thing or the Algerian question, it's the payments of the $900 haven't started at the end or middle of June. It's not gonna affect the P&L. The settlement, the other settlement is only having a minimal or marginal effect on the entitlement production.
Okay. Just to understand that the quarter-over-quarter increase, which was the main driver, was just some fields which were shut for maintenance that came back on stream?
Yes. Well, it's more a listing issue than anything else. It's the El Merk is not coming up to speed until the end of 2012. Nothing really major has happened in Algeria.
Okay. Thank you.
We did get Janice in the UK back on stream in the second quarter.
Okay.
I remind you that if you want to ask a question, you have to press zero one on your cellphone keypad. That is zero one.
We'll take the last question now, if there is one.
Yes, we have a question from Mr. Jacob Pedersen from Sydbank. Please go ahead, sir. Sir?
Hi, gentlemen. I have just a question on Daily Maersk. Could you comment a bit on the customer feedback that you've gotten from the service? Also the effect on your pricing power in the market from this service. If you have any plans concerning a timetable for rolling out some similar offerings on other strengths.
It's the reliability of the service is 97% now, and the customer feedback is really excellent. We hope over time to be able to translate this into better labels. At the moment, we're pricing this service at level with our other services from Asia to Europe. It's too early to say whether we'll do similar things on the other trades, but I think it really works very well on the Asia/Europe. We're very happy with it. I think it's also showing the way that you can actually get better feedback from customers if you're reliable and you have a service that is a little bit different from the rest.
What would it take for you to get a pricing advantage on the Daily Maersk service? A better market conditions, or how do you see it?
No, I think this is a matter of time. When the customers get used to this and understand how valuable it is in their supply chains, to get supplies every day instead of once a week, we do expect that we'll be able to price it up slightly. I mean, this is container transportation. We're not gonna get a huge premium on this service.
Okay, thanks a lot.
Okay, that concludes our teleconference today. Once again, thank you for listening in. I know it's been a long, slightly longer presentation than usual. Thanks for the many good questions. For that, we wish you a good day and look forward to seeing some of you at the Capital Markets Day, and hopefully, the rest of you for the next quarterly presentations in November.