AP Moeller - Maersk A/S
CSE:MAERSK B
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
8 852
14 120
|
| Price Target |
|
We'll email you a reminder when the closing price reaches DKK.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
AP Moeller - Maersk A/S
You don't have any saved screeners yet
Good morning, ladies and gentlemen, and welcome to A.P. Møller - Mærsk's Conference Call on this Q1 Result. My name is Søren Skou. I'm joined here by Morten Engelstoft, who is CEO of APMT; by Vincent Clerc, our Chief Operating Officer; our -- and then Søren Toft, our Chief Operating Officer; as well as Jesper Ridder Olsen, our Head of Accounting.Getting started on the presentation. As always, I invite you to review our statement about forward-looking statements.Moving on to the results. The -- if we start with the positive story, then it's about growth. It's about the fact that we are replacing the revenue that is leaving the group along with the energy companies, and we are not becoming a smaller company as a result of this transformation. Revenue is up 30%, driven by the acquisition of Hamburg Süd but also driven by organic growth across the business, including in the non-Ocean segments. We improved EBITDA by 5% during the year -- during the quarter, impacted significantly by Hamburg Süd and also by very strong performance in Terminals & Towage. We saw quite some headwinds from rate of exchange during the quarter.The real negative story this quarter is that our margins in the Ocean segment were significantly impacted by higher unit cost, partly by adverse developments in the fuel price and exchange rates, but also partly due to our own cost management. The underlying result is negative in a -- of -- with $239 million in a quarter where we report a profit of $2.8 billion, driven by the closing of the Maersk Oil transaction.Operating cash flow was on par with last year. We have a very high conversion rate. The reason why operating cash was not up with turnover was really because we had an adjustment, a one-off payment of export VAT in Denmark due to a change in the scheme for payment of VAT. Gross CapEx was as planned, $1.2 billion. We reiterate our guidance for the year of a result above 2017 and an EBITDA in the range of $4 billion to $5 billion.Moving on to Energy, the Energy separation. As I said, we reported a very strong profit of $3 billion. That includes an accounting gain of $2.6 billion related to the sale of Maersk Oil, which we closed in March. We now own 97.5 million shares, almost 4% of Total S.A., and those shares have a value of more than $6 billion right now. They have, of course, benefited significantly from the increase in the oil pricing in recent months. We plan and continue to plan to return a material part of the value of those shares to the shareholders during 2018 and 2019, as we have previously stated that we would do, either in the form of an extraordinary dividend, a share buyback or direct distribution of the shares. We continue to work on solutions for Maersk Drilling and Maersk Supply, and we will -- and we expect that we will find such solutions before the end of the year, as we have previously stated that we would.Finally, moving to the -- an update on where we are with our transformation. We are -- for this quarter, we are introducing our new segment reporting with 4 segments of Ocean, Terminals & Towage, Logistics & Services, and Manufacturing & Others. And I believe that with this change in the reporting and with the change of Maersk Oil leaving, Hamburg Süd arriving, we are starting to see the contours of the company that we will become when we are fully focused container, shipping ports and logistics company.Revenue was significantly higher, as I already said, also compared to last year, with including energy. We are starting to see the benefits of much better integration and collaboration between the previous independent units. And particularly, you can see that in the segment results for Terminals & Towage because the Ocean and Gateway Terminals have grown significantly during the quarter in terms of volume. And that, of course, drives profitability in our Terminals business. We are also starting -- we've now owned Hamburg Süd for 5 months. We are confident we will deliver on the synergies. They will be a little bit -- or, they will be arriving in the second half of the year, in particular. We -- as we are able to extract Hamburg Süd from all of the vessel sharing agreements that they have previously been party to. Strong cash conversion during the quarter, as I said. And we have also this quarter, and I think this is an important point, been able to bring down our committed CapEx significantly from a year ago by $2 billion, and we now have committed CapEx going forward of less than $500 million per year through 2023.We are also progressing a lot on the digital agenda. Of course, it does not show up in the financial results list yet, but we see significant customer uptake in the digital offerings and moving through digital transactions online, and that will over time, result both in lower costs and also in our ability to sell more products on our online platform. 60% of all bookings, 84% of all quotes, $1.3 million worth of business every hour is currently transacted on maerskline.com.Moving on to financial highlights. I have already given the main numbers, but we do see a deterioration in the continuing business from $139 million to $239 million year-on-year. That is, of course, not a result that we can be in any way satisfied with. On CapEx, we now have committed CapEx of $3.2 billion going forward, and that includes commitments in the Terminals business that are beyond 2024, relating to concession agreements. So all in all, we have less than $500 million now in committed CapEx in going -- per year going forward. During the first quarter, we -- I believe we have bought one tugboat, but that's it. We have not ordered any ships, and we have not made any commitments to new terminals and the like. We plan to keep capacity constant, and Søren Toft will talk more about this, for the next 18 months, and we also do not plan to order any new ships at least for the next 12 months. The inflow of the proceeds from Total meant that we were able to reduce debt by about $1.4 billion to $13.4 million. And of course, we also now own around $6.2 billion worth of Total shares that are not included in the numbers.So with that, I will turn to Ocean and ask Vincent Clerc to take it from here.
Thank you, Søren. So our Ocean revenue grew by 38% year-on-year. Fueling this were mainly volume growth of 24%, where most of it is attributable to Hamburg Süd, who was, of course, not in our numbers last year. Without Hamburg Süd, volume growth would have been 2.2% from Maersk Line, in line with the guidance that we gave of growing slightly under the market this year as we integrate Hamburg Süd into our business. We see the market growing somewhere between 3% and 4% at the moment, and therefore, feel that we are well within the guidance.Rates have increased by 7% or $119, where some of it was attributable to contracts getting reset at higher rate. And some of it is attributable to Hamburg Süd coming into the mix. Hamburg Süd bring into the mix a business that are high rate, but we will see also later a higher cost to serve. And out of the $119, $55 is directly attributable to Hamburg Süd coming into the mix and the rest is due to rate increases. On a like-for-like basis, overall, it has been difficult to pass on to the full extent all fuel cost increase to customers in contracts, especially also in the short-term market in some areas where we have faced strong capacity injection. Other revenues also increased on the back of higher demurrage and detention collection and also a higher level of slot sales to competitors out of the network.Getting the -- getting into more detail on volume and rate development. You can clearly see the impact of Hamburg Süd on the volumes, where we see the growth in north-south from Latin America and Oceania and in intra-regional, which is for the intra-Americas. Headhaul volume increased slightly faster than backhaul, reflecting the underlying demand, which is stronger on headhaul at the moment that it is on backhaul, especially from Europe and North America into the Far East, we have seeing weaker demand than what we had expected.Freight rates increased primarily in the north-south and intra-regional, reflecting both the stronger underlying supply and demand we see in those trades. And the impact of Hamburg Süd, who is contributing volumes, as I mentioned, at higher revenue but also higher cost to serve, as we would see later. The situation has been a bit more tense on east-west, where significant capacity injections in Q1 have been a big impediment in achieving the increase that we were targeting and has not enabled us to pass on fully the higher fuel cost to our customers.North-south has traditionally been higher -- has traditionally seen higher rates than east-west in the past, due to -- which reflects also the higher cost to serve that there is in these trades, as we deploy smaller tonnage and have generally also longer transit time. This difference was -- temporarily disappeared in 2016 and '17, as demand was impacted in some of the emerging markets by the lower oil price and cascading of tonnage. And we are right -- basically seeing right now a gradual recovery in the north-south where rates are regressing back to where they were before the price war. So that's a positive development for this part of the business.
If we then jump to the part around cost -- and this is Søren Toft speaking. Let me start out by saying that we and I am by no means satisfied with the current performance. It's very dissatisfactory, and we are, as we speak, putting in motion a number of initiatives to immediately change the course.Overall, as you can see from the numbers, our cost increased 8.6%. Approximately 6% of that was due to rate of exchange and the mix effect that Hamburg Süd brings into the business. But obviously, we have no ambition of having a net increase as a residual of 2.6% to our cost base. The cost base mainly increased in the areas of what we call variable expenses. So that's terminal cost through the hubs, also partly affected by rate of exchange, feedering expenses both as a result of fuel increases and also as a fact -- as a matter of fact that the charter expenses year-on-year for so-called liquid tonne, it's up approximately 50%, and also on SG&A expenses.If we look at capacity then, Vincent Clerc explained that our volumes are up 24%, our capacity is up 31%. Here I want to just refer back to a previous quarterly call, where we also explained that slot sale to Hyundai Merchant Marine, which started taking off in Q2 '17, thereby not in the Q2 -- Q1 '17 numbers, about 6%. So we are more or less aligned on the net capacity and the net volume increase. That being said, however, we have tendered notice on all these existing VSAs in which Hamburg Süd served. There is a minimum notice period of 3 to 6 months, and that means also that in the first quarter, we have not been able to adjust capacity. And that adjustment will now start in Q2, Q3 and Q4.On the bunker side, here we have been impacted by higher prices, of course. We have also been impacted by the fact that we have added Hamburg Süd. And then also, like we have explained before, here we are measuring the tonnes that we consume, but we're not dividing by the FFEs that we have sold to Hyundai Merchant Marine. And again, that's about 6%. And therefore, the 3.4% year-on-year deterioration is in fact slight improvement, but we believe we can do more. We have put a number of plans in place right now ranging from the entire part of the cost toolbox. Let me explain a few. We will implement a number of capacity reductions over the next 2 quarters, capacity reductions in trades that are not yielding the desired results. We will optimize the landscape of feedering. That means we will reduce the number of feeders that we have out there and generally channel more volume to direct ports. We will push harder on fuel efficiency over the coming quarters, as we have now fully integrated the Hamburg Süd fleet since 2 weeks. We'll do a number of things in procurement, a number of things on improving our [ empty ] cost base and a number of things on improving utilization where it makes sense.On capacity, let me also say that in 2015, Maersk Line ordered a total of 27 vessels, 20 of them were large vessels. They have by and large been delivered. And as Søren Skou said, let me repeat, we have no plans of ordering any ships for at least the next 12 months. Equally, with the initiatives we're putting in place, we believe we can keep the present capacity unchanged for the next 18 month, even erring towards slightly lower capacity in the next couple of quarters as we implement the Hamburg Süd synergies.If we turn to the next slide on Hamburg Süd, then let me say that we've had a strong start to the integration. The customer retention is in line or even slightly better than the plan. But as we now move into the phase where we will merge the networks, we will obviously also in that process do some cargo mixing as we move for forward. Hamburg Süd added 21.6% more volume and an EBITDA of $88 million, including $13 million integration cost. The synergies are moving as planned. Basically in the first quarter here, mainly from procurement. So that's terminals and intermodal and also by putting more volumes onto APM Terminals' gateways. We have also done a few revenue synergies from basically aligning best practices between Hamburg Süd and Maersk Line. We maintain the guidance that you see on the right-hand side of the chart. But I can also say that based on what we know from the first quarter, we do believe that we will be able to outperform the $120 million for 2018.For Q2, Q3 and Q4, the main network changes will happen. And in fact, also in 19, due to a long notice period between Asia and East Coast South America, there will also be changes happening then. The Hamburg Süd vessels have been fully reflagged. And during this quarter, quarter 2, operations will be fully integrated. We're pleased with the progress so far, and we're working very hard on outperforming the numbers that you see on the chart.And let me turn the word back to Vincent Clerc, who will go through the Logistics & Services segment.
Thank you. For the Logistics & Services segment, our revenue grew by 6%. It was positively impacted by growth in volumes in our supply chain management business, in Damco and in inland haulage for Maersk Line. Especially in supply chain management for Damco, we have seen higher number of win in the -- in our commercial pipeline, and we see these projects coming online now gradually.This growth was more than -- has more than offset slow start of the year in our Airfreight and Ocean business, where we drove stronger focus on margin and had to let go of some of the lower-yielding business. But the focus on margin and mix and growth in more profitable business yielded improvement in our GP margin and SCM was up by 8%, Air was up by 5% and Ocean was up by 22%.Despite these positive development in the underlying business, the EBITDA decreased by $9 million and the business was impacted by continued investment in some of the wins that we have as we prepare for implementation of new customer solutions, including on our digital platforms, both in supply chain management and in the ocean forwarding, and also by exchange rate and higher sales, general and administration. This drop in our EBIT conversion is being addressed through different initiatives that we've taken to reverse it, reduce SG&A and fast track the implementation of some of the projects that we have. Noteworthy also is the improvement that we have in working capital, as we have driven a very strong focus on our conversion cycle to -- from business to cash. And that has yielded very strong results for us in that front.And now, I will pass it on to Morten Engelstoft to talk about Terminals & Towage.
Thank you, Vincent. So some words on the Terminals and Trucks segment. We increased our revenue by 11% compared to Q1 last year, first and foremost driven by strong volume in both our Gateway Terminals and towage activities. Our EBITDA increased by 41% to close to $200 million and to a 22% EBITDA margin, supported by the strong volumes and also supported by lower costs and higher margins in our controls, Gateway Terminals and in our Towage business. And I also wish to mention that the income from our joint venture terminals, where we have a minority share and which are not part of our EBITDA numbers, increased from $34 million to $54 million.If we turn to the next page, then I'll give a few comments on some of the selected key performance metrics. As mentioned, Gateway Terminals volumes were strong, up 9.3% compared to last year and well above the general market growth. We've had very good support from Maersk Line and Hamburg Süd at double-digit increases, and we've also increased volumes from our other customers by more than the market growth, as we, during last year, won 4 times as many new services as we lost. And this has continued during Q1 this year.Both our revenue per move and our unit cost were impacted by rate of exchange in each different direction. If we adjust for rate of exchange, then both our revenue per move and our unit cost were about flat compared to a year ago. And then I also wish to emphasize that our Towage business, Svitzer, performed very well and above market growth, with both organic growth and also new terminal towage contracts taking effect in Australia and in Latin America.And let me then give the word on to Søren Toft, again.
Thank you, Morten. Just very briefly on the Manufacturing & Others segment. We can say that we have seen improved sales, and thereby, turnover and EBITDA in MCI, mainly as a result of MCI being able to improve significantly orders to third parties. This is also helpful as, in this year, the integration year of Hamburg Süd into Maersk Line, we are obviously not going to need as many containers as we are improving efficiencies by combining the 2 fleets. And then I can say that in terms of other business, there we have a significant increase in revenue but EBITDA turned negative, mainly due to losses from mainly physical positions in future periods. Let me give the word now to Søren Skou.
Very briefly on our Maersk Drilling and Maersk Supply. Maersk Drilling, we are clearly seeing increased activity. Rates are still low, but idle fleet is going down. And we have been able to preserve most of our backlog by adding new contracts. Overall, for Maersk Drilling, we have an EBITDA of $166 million, which translates almost 100% to free cash flow. Maersk Supply Service operates at EBITDA breakeven level in a very challenged situation. We have smaller operating cash flow positive, but free cash flow negative of $161 million during the quarter due to previously committed investments.So with that, I believe we will move to the guidance. We want to simply reiterate our guidance of delivering a result this year above 2017 and EBITDA in the range of $4 billion to $5 billion. We expect market growth of 2% to 4%, and we reiterate guidance on CapEx around $3 billion, high cash conversion, and we also would like to highlight the sensitivities that -- to the guidance. Thank you.And I believe now we will move to Q&A.
[Operator Instructions] And the first question comes from the line of Robert Joynson from Exane BNP Paribas.
I've got 3 questions. It's probably easier if we take them one at a time. I'll start off with the unit cost, given the fact that that's the main reason why the share price is down by so much today. And I appreciate that you provided a breakdown in the accounts of what drove the year-on-year increase in the fixed bunker unit costs, in terms of the FX, the [indiscernible] mix, et cetera. But of course Q1 2017 was itself a relatively poor quarter for unit costs given that they had problems at Algeciras and Tanjung Pelepas that restarted then. And so the comp isn't particularly difficult in that respect. If we look at the fixed bunker unit cost on a quarter-on-quarter basis versus Q4, it was up by $151, which is a surprisingly large number, even if you allow for the inclusion of Hamburg Süd over full 3 months. So the first question is really, could you just provide some more clarity on what drove that large increase in the fixed bunker unit cost versus Q4?
This is Søren Toft, Rob. You're completely correct. As I said also, $150 is the number. And you're probably referring to the previous statements that we gave also on Maersk Line. Two-thirds of it, so 6% out of the 8.6% is rate of exchange and the mix effect of Hamburg Süd. The rest is really within mainly the variable cost areas. Let me explain. We have, as a result of, also you could say, weather and reliability challenges, more moves to move the cargo. We have higher feedering cost. You don't really see that in the fixed bunker because when we do third party feedering, the bunker cost is part of the rates that we pay. We have higher TC expenses, which also hits the feedering cost. And on the intermodal side, which is also an element, also here you will see some of fuel hitting through, which is not, you could see, equalized out in the fixed area. So about 2.6% of the 8.6% is related to variable expenses. Finally, the category SG&A, so administration cost, including IT, has gone up here. We're investing, as Søren Skou also explained, in a number of digital solutions, but at the same time we're working on improving the rest of the SG&A cost picture.
Okay. And the second question on Hamburg Süd. Even if we add back the $13 million integration cost to the reported EBITDA, we're still only getting about $100 million EBITDA, which is equal to just 18% of the $554 million that was reported for last year. I mean, given that the north-south rates are up quite materially versus last year and also I think I'm right in saying that Hamburg Süd suffered negatively from its east-west slot purchase agreements in -- up until Q1 of last year when they were ended, it's a little bit surprising to see the EBITDA not doing better for Hamburg Süd because -- maybe could you just talk us through the moving parts versus Q1 of last year.
Yes. Here, Vincent Clerc to take that question. There is no doubt that if you look at the seasonality of the business, we always see that impact in the first quarter being our lowest quarter, principally because of Chinese New Year. So -- whereas, we have seen the nominal rates go up quite a bit as you could see in the illustration. We still see this quarter as being the low quarter because of the volumes that we get, specifically out of Asia, which is also the better paying part of the business.
Okay. And then final question on the contract rates. On the full year conference call, it was mentioned that contract rates have been agreed at higher rates this year, even adjusting to the higher bunker expenses. Does that statement still stand?
The contracts have been closed. I would say we have not been able to recover on average the totality of the bunker increase. And that has had a lot to do with the contracts that we have negotiated recently on the Pacific. So you'll have the double impact of capacity introduction on the Pacific, which has pressed -- depressed rates and the continued increase of the bunker, which has actually made the quantum that we needed to achieve bigger than what we had anticipated. And the combination of those 2 factors have landed us short. So for the stuff that we have negotiated early in the season, we have been able to retrieve it but that our ability to pass this on has decreased as the season progressed.
And next question comes from the line of Finn Bjarke Petersen from Danske Bank.
A few questions from my side as well. Unit cost, if we start there, and one on expectation for the rest of the year. Unit cost, how much does VSA affect your unit cost calculations?
This is Søren Toft. I'm not really sure what your question is. I mean, when we do VSAs, we obviously provide sometimes capacity. In the case of HMM, we sell slots, but we get it as slot income. So on the overall unit cost, this is factored in. But on the key metric that we share like the fuel price, kilo per FFE there, obviously we need to adjust for that.
Yes, so it is not included in your bunker cost. But when you say you have a unit cost of $2,072 in the quarter, you include VSA income in that number, is that correct?
That's correct.
How much is included?
We don't disclose that number other than we can say that is part of the overall unit cost.
Okay. Finally, the -- on the cost side, how long does it take you to get cover for increased oil prices? One of your competitors were talking about a time horizon that it takes before you can factor increased oil prices into your prices. Do you have any statement on that view on how long does it take you to cover the obvious higher unit bunker cost that came in through second quarter?
So in principle, the -- Vincent here to answer the question. In principle, the lag is between 1 and 2 quarter, a little bit depending on how the increase phases in during the quarter because the formula kind of takes average for quarter. The only exception, though, is that when you renegotiate the contract, you basically reset the clock for the year to come. So that's where usually it's pretty dicey as we renegotiate the contract to make sure that we can capture that in full there while we're in a procurement cycle.
So that means that your contract has not -- there is no BAF clause in any of your contracts?
No, there is BAF clause in 80% of our -- or more than 80% of our contracts. What I'm saying is as we're renegotiating the prices, whenever the contract needs to be renegotiate, we renegotiate the total package, including the BAF element. So you can have your bunker formula increase and then your ocean freight decrease, so that the price stays the same on an overall basis. That's -- and that doesn't happen during the life of the contract, but it can happen during a negotiation.
Okay. And a final question. Looking at the market conditions in the second half of this year and 2019, how do you see the supply side develop and also demand side, and so general balance in the market?
Well, we continue to -- this is Soren Skou here. We continue to have a view that we will see improving results driven by improvements in freight revenues and a better supply-demand balance over the year. If you look at the long-term picture on supply and demand, then the industry has come from a situation 10 years ago in 2008 where the order book of existing capacity was equal to 60% and now it's 12%. We've had to work through all of that excess capacity. Of the 12%, that is more or less in line with what we would need to meet demand when we also consider the leases of old ships. So that seems like a very manageable number. A lot of that capacity, however, is being delivered in the first half of this year, whereas things will taper off in the second half. So our view is that supply/demand will continue to improve in the next 12 to 18 months.
So do you have any number for the supply growth in the second half in your budgets?
Somewhere around 2%.
Okay. Just could I have just one question more that the -- you now started talking about currency, which have not really been a question earlier in your cost talks. Is that associated with the -- it has probably something to do with your [ hop ], your – that [ hop ] is coming into Ocean.
No, no. No, no. It's just because it was such a big effect this year -- this quarter.
So no change -- fundamental changes?
No.
And next question is from the line of Casper Blom from ABG Sundal Collier.
A couple of questions from my side as well. I'm going to start off by taking more into this unit cost question. You're very kind in breaking down the 8.6% increase into 3 different brackets. I understand that it's difficult to do anything about business mix and FX. But the remaining 2.7%, would you sort of expect that to disappear when we look into Q2? Or how long it will take? And what is sort of the scope of improvement that you see in these short-term initiatives that you're doing? I mean, how much improvement could we really expect sequentially in the coming quarters? That's my first question.
Thank you, Casper. Søren Toft here. As I start out by saying we are not happy, but at the same time, we're also going to do something about it. And I outlined some of the plans that we have. We will, amongst others, improve the capacity equation and the feeder equation, and that's going to ensure that we, for the remaining 3 quarters of the year, drive the cost down. We still expect that we can drive cost down for the year 1% to 2%, but we have to say that, that is net of the FX effects because they are so significant, at least they were for the first quarter. But we still have plans for the rest.
Okay. And my second question then. Vincent, you mentioned that you've sort of seen the, how to say, normal balance between north-south and east-west rates a bit compact with north-south seeing higher rates than east-west. Do you think we're done in that sort of return? Are things now as they should be between the 2 trade lanes? Or should you -- we still expect to see north-south bouncing back more?
So I think what is really driving this is that as the oil price recovers, actually a lot of the weakness that we saw in '16 and '17 was actually as a result of lower demand from a lot of economies that had -- where oil is a big component in generating that demand. As this is coming back, we're seeing more strength in the emerging markets demand. And as the supply and demand situation becomes more benign, as Søren outlined just before, we'd expect that we see more progression across the board. And if you look at the delta between north-south and east-west right now, it is still below what it was prior to the price war. So we had about $300 before. It varied a little bit. Today, we're closer to $200. So we would like to see it improve further.
Okay, great. Then just my last question. Now you just mentioned the higher oil price. Have you started seeing any signs of people starting to slow-steam on the back of the higher bunker cost?
Søren Toft here. No, we have not, you could say, seen that. But what we can share is that as a result of also this year unprecedented closures in Asia basically at a level 3x the level of Q1 '17 and the fact that there a lot of issues around the world in ports. Also we have had, on a few trades, to put in ships simply to safeguard our weekly schedule but also because given the current bunker price, there could be economics in doing so. But something structurally has not yet been seen.
I mean, would you expect to sort of see it happening, I mean, now we're at $80 per barrel?
I think it's too early to say. I mean, we are reviewing certainly what makes sense for us.
And next question is from the line of Lars Heindorff from SEB.
The first is regarding the bunker price. So I don't know if you could give us any indication of what kinds or what bunker price you have assumed in the guidance for the full year.
We always assume the forward curve follow bunker price.
All right. Secondly, regarding the outlook into Q2. One of your competitors has mentioned on the conference call here recently that they've seen some weakness in North-South in the past couple of months. You've been mentioning that you have seen a gradual improvement. I just wanted to confirm that view and that there hasn't been any signs of weakness in the North-South volumes or rate for that matter recently.
Yes, Vincent here. So the -- I think the -- how you will assess North-South very much depends also on your exposure to different geographies. One of the -- and it's certainly not a uniform picture. So there has been a gradual recovery. I'd like to add also that the first quarter of 2017 was really the low point for the delta between North-South and East-West. So right there, you already have some of the explanation for why it increases so much here. But in -- on some of the geographies and especially on the Far East into the West Coast of Latin America and the Caribbean, we are facing a quite significant oversupply of tonnage, and there is a pretty big price war ongoing and has been ongoing for the last couple of months there. So without knowing exactly what was being referred to by the other carriers, I would expect that this refers to something like this.
Okay. And then maybe a housekeeping question because this relates to the transparency now that you've changed the reporting structure. I'm still missing a bit of like-for-like numbers in terms of volumes, although you can actually calculate that. But particularly on the rate side and also on the capacity side, how much is Hamburg Süd and how much is Maersk Line? I don't know if you can share. You have a fine table in the report showing the nominal capacity. How much of that is Hamburg Süd and how much is Maersk Line?
Lars, Toft here. Maybe just repeating on capacity, as we put in the slide on cost, capacity is up 31%. But here, first of all, you need to deduct the approximately 6% to 7% that we have deployed specifically for the HMM agreement into 2M. And then going forward, as we have said, we don't expect that we will be needing any more capacity than we have today for the next 18 months. And on a short-term basis, in fact, we will work on reducing the number as a result of implementing the merged network between Hamburg Süd and Maersk Line.
Okay. I mean, I can see that you already reduced capacity post the end of the first quarter. Can you give us an indication of how much more you need to reduce of it towards the end of the second quarter?
No, we're going to give detailed guidance on that. It's an integral part of our synergy case. So you could say you'll have to deduct it from the $350 million to $400 million that we are disclosing on the Hamburg Süd synergy case.
Okay. And regarding on rates, any chance if we could get rates separate for Hamburg Süd and Maersk Line?
Vincent here. No, I mean -- and you have to -- you have also have to realize that the more we go, the more it is difficult to actually separate the 2. But we will not disclose the rate separately.
And next question is from the line of Neil Glynn from Crédit Suisse.
If I could first ask a question on FX. It's the first time, I remember certainly, you quantifying an FX hit in the quarter. But just looking at rates going forward, if you had a $100 million hit in the first quarter, it seems to me it may be feasible you have something like $300 million or so for the full year. Just wanted to check that that's sensible. And certainly, can we expect another hit in the second quarter at least? Then on -- a second question, sorry, but back to the unit cost side. Just interested, there's clearly a lot going on. You've the integration of Hamburg Süd, you've got a difficult market as well as clearly the medium- and long-term initiatives you're pursuing. But can you give us some color as to how much of the unit cost development here in the first quarter has been surprising? We've been hearing about disappointments, I guess, for a few quarters now. I'm just interested in the area where, I guess, you've been most in control of within the business. Now it seems a little bit out of control, so I would like some perspective on how big a risk distraction from other things maybe are to the cost control. And then the third point, again, on the cost side. It does seem the cost of operating a global logistics network is rising with inflation and other factors such as demand for infrastructure or assets. We've heard snippets of that elsewhere this quarter from other big global logistics players. Just interested, is the challenge to avoid inflation getting larger, perhaps requiring an increasing array of initiatives to combat it?
So this is Søren Skou here. First of all, on rate of exchange sensitivity, I would like you to -- I'd just like to refer you to the guidance section on page -- what is the page? I don't have that here. But anyway, it is in the rate of -- oh 8, Page 8, the rate of exchange. There we show the 9 months or the rest of the year guidance on rate of exchange sensitivities. On distractions, what I can say is that Søren Toft and his team are fully focused on driving the Ocean business and the operations and the cost side of that and are not involved in the, let's say, in all of the other, let's say, corporate maneuvering on energy and so on to any significant degree other than as being part of the Management Board. So I'm confident that the team that needs to be focused on driving cost out will also be able to drive cost out for the rest of the year. And then finally, in terms of inflation, I mean, as an industry, we have been, of course, on, I think, a 30-year or 35- or 40-year journey of surely but slowly very year mitigating inflation and taking out 1, 2, 3 percentage points of cost. And of course, we will have -- we have some headwinds right now that we need to figure out how to adjust to. I mean, the fuel oil price -- the fuel increases does not only hit us only on the ocean. It also hit us on land, because trucking rates and stuff like that do become affected. But here again, I -- while we may have some cost elements that go up, there will be others that will go down, not least as we continue to digitize the business, we will see how our sales and administration cost per container go down. I also do believe that there is plenty of opportunity for us yet to optimize the way we design the network and the way we fill the network. So we have quite a large toolbox, and we are -- we remain confident that we will be able to drive deflationary cost as a trend not necessarily quarter-by-quarter but as a general trend also in the coming years.
Just to round out the FX question, I see the sensitivities, but is it possible to confirm even broadly how much of an FX hit is in the guidance for the full year just to help us understand what's quite a tricky bridge given the new reporting structure?
No, I don't think we want to give any more guidance on the guide.
And next question comes from the line of Marcus Bellander from Carnegie.
Two questions regarding guidance from me. The upper end of your EBITDA guidance range, in light of the Q1 results and in light of what freight rates have been doing thus far in Q2, it looks like there's a -- it looks far away simply, and I'm just curious what kind of assumptions you make regarding freight rates in the second half of the year to keep guidance unchanged.
I don't think we want to expand further on the guidance, and we don't guide as such on specifics on freight rate assumptions. We do believe that the year will see a continuous improvement. The first quarter is a weak quarter to begin with from a seasonality point of view. Supply and demand will be improving in -- throughout the year assuming that we don't have any, let's say, major trade wars or other geopolitical things that gets in the way. And again, we have the sensitivities, and there you can see what needs to happen for us to hit the upper end of the range.
All right. And second question regarding -- or at the Capital Markets Day earlier this year, you gave a preliminary CapEx guidance for 2019 of $2.5 billion to $3 billion. But you clearly stated that you don't plan on ordering any new ships in the coming 12 months. And one of you gentlemen also mentioned that you're not going to need as many containers now that you've integrated or that you are integrating with Hamburg Süd. So I'm just wondering, what's going to drive that CapEx figure in 2019? And is it too high perhaps?
Well, I think it's too early for us in the year to really think about our CapEx guidance for 2019. It's a very important part of our strategy that we do become more disciplined in terms of CapEx. I mean, if we go back just a few years, this was a company that used to invest somewhere between $6 billion and $8 billion every year when we were a conglomerate. We're planning to build a business or have a business of a similar size, but certainly with a lot more discipline on CapEx. And that is the journey we are on. It takes time because we do make in our industry commitments that last 2, 3 years before they are fully fulfilled, especially on the terminal side; but also, when we order ships, it takes a couple of years to get there. But the fact is, we have reduced our committed CapEx by $2 billion year-on-year from $5.2 billion to $3.2 billion. We have only less than $0.5 billion of committed CapEx per year for the next 5, 6 years through 2023. And this is, should be and is a very clear signal that we will be much more disciplined when it comes to CapEx. We will get back to the guidance for CapEx in 2019 later in the year, but we are determined to be disciplined. And obviously, given returns right now, investing a lot more in more physical assets does not seem to make much sense, and that's also one of the reasons why Maersk [indiscernible] clearly states that we are not going, at least for the next 12 months, order any more new ships. We will still need containers. We will still need to do maintenance CapEx, including on terminals. We have some automation projects and other things that we probably will do. But the general picture should be very disciplined on CapEx.
And the next question comes from the line of Joel Spungin from Berenberg.
I -- just a couple of questions. I need to take one at a time. I mean, I appreciate you don't want to say too much about what your freight rate assumptions are in your guidance, but I was wondering if you could maybe just provide some observations on what you've seen through the early part of the second quarter. And then related to that, whether or not you can give us a sense, please, on whether you think, given the move in the fuel prices and the fact that, that probably won't impact until later in the year, whether or not you think that will be compensated for.
Yes, Vincent here. We're not going to guide on developments that are as recent as this for the simple fact that the quarter is far from being over and those are information of a higher, sensitive value for the business right now.
Okay. And maybe just sort of changing tack a little bit. Just I'm wondering if I could come back on Neil's question earlier about FX because I'm -- as he said, a bit confused, you've never really spoken about FX much before. Could you maybe explain what -- how this -- what explains this effect? Is it related to the fact that you report in dollars, but you have a disproportionally amount of cost in euro? Is that the right way to think about it or? Is there something else going on there?
So -- I mean, we have -- basically, I guess, what we can say is that the effect -- the FX effect is really in our Ocean segment. I mean, there's positives and negatives in the other segments, but those are not something that in any way are material. We've had a very big negative from the fact that -- in Ocean from the fact that most of our revenue is in U.S. dollars and a very large portion of our cost, of course, is in local currencies. When we order a truck in Europe, we pay in euros, and the same goes for the container terminals. So we do have some hedging that has worked in the other direction, but it is generally the situation for us that we have most of our income in U.S. -- is U.S. dollar denominated. Most of the freight rates are U.S. dollar denominated. And then we have a massive amount of local currency cost. I think that the reason for why we decided to mention it this time is that it was so material.
Okay. And then maybe just one final question. Just thinking longer term about capacity, obviously, as I understand what you're saying, you're committing to not placing any new vessel orders for at least the next 12 months and that you feel you have sufficient capacity for the next 18 months. Sort of thinking about the midterm view on a maybe 3-year view given lead times on new orders and so on and so forth, if the market continues to sort of develop at a sort of a 4-ish percent rate for the next few years, how will you go about growing with the market?
This is Søren Toft. I mean, first of all, we're not going to give any specific capacity guidance beyond what we have given today. But I can say that there are various ways of growing the capacity. One of them is, of course, right now, we are deploying capacity, selling that to third parties. So we could, of course, also not do that, and we could even become, in certain case where it makes sense, a net seller. We have a lot of focus on utilization, and there are still a number of focus where we will improve this. And obviously, we'll continue to work with our design. We are now deploying capacity of around 4 million TEUs, and that obviously give us some more options. And then finally, as I mentioned already, we are short term going to optimize our feeder deployment because if we ship a container from one end of the world with one feeder through a mainline and to the other end of the world, another way of moving that box can, of course, be without the feedering. So we are doing that to continue to optimize. Finally, let me say, of course depending on what happens to the bunker price, and one was already alluding to it, we will, of course, also closely look at where the case is for slow steaming and always have a positive notepad view on these decisions.
And the final question for today comes from the line Dan Togo from Handelsbanken.
Just a few ones back here. On Ocean, sir, you mentioned early in the presentation that profitability currently is at an unsatisfactory level. Could you elaborate a bit on this? What would be a satisfactory level? And what kind of measure would you use, so to say, to get to that?
So ultimately, we measure ourselves on a return on invested capital. And we have a target across the cycle of 8.5%. We have about $25 billion invested in the Ocean segment right now, so we have to get north of $2 billion in earnings from Ocean to be -- to call it satisfy.
Okay, understood. So it hasn't really changed. On bunkers, how should we think of that going into Q2? I understand that you're still on, some say, a lagging curve on the price curve basically and, i.e., prices will increase. So how should we look at that bunker cost per TEU or per FEU? And what is your assumptions of the bunker recovery? Is that still around 50%?
Dan, Søren Toft. As we said before, I mean, we have our assumptions based on the forward curve. Obviously, the price right now, you can see, is steeply up compared to just Q1. We generally have an 8-week lag on what we put into the tanks and what we consume. That's the amount of detail that we can give on this point.
And on other recovery parts, what are your assumptions there? Is that around 50%? Usually, you can just, so to say, pass through?
So as I -- Vincent here. So as we mentioned before, the recovery through a bunker adjustment formula will be for increases that we see over and above what is already built into here because the contracts have been negotiated with the starting point being the bunker -- the fuel cost that we had in -- basically in the first quarter. So it's -- I think the -- with 1 to 2 quarters delay, we can recoup the increases that will come over and above that level. And if the bunkers was to stay stable, then basically there is no recovery mechanism for what is -- if there is no volatility or no change.
And that was our final question for today. I will now hand the call back to the speakers. Please go ahead.
Yes, I just want to say thank you for your participation today and all the -- all of the questions. We remain committed to delivering on our guidance, and we look forward to talking to you in the -- at the end of the second quarter. Thank you.