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Maersk boosts bottom line with improved unit costs

2019-08-20 Source: Jctrans

Improvements in its ocean segment helped Maersk increase its operating profit in the second quarter. But non-ocean segments saw weaker returns

160715  MORTEN MAERSK at APM Terminals Maasvlakte II.jpg

Maersk has reported an underlying profit of $134m for the second quarter on the back of a slight increase in revenues as it eked out a small rise in volumes and ocean rates.

But earnings before interest, tax, depreciation and amortisation improved from $65m in the second quarter of 2018 to $416m in the three months to the end of June as the Danish carrier kept a lid on costs.

Maersk’s performance was helped by a strong operational performance in its Ocean division, which saw volumes rise 1.4% to 3.4m feu while average rates rose 1.5%.

The line said network improvements had driven down unit costs by 3.5%, driving up ebitda in the segment by 25% to $1.1bn.

“Total operating costs were largely unchanged as the impact from the higher volumes were partly offset by network improvements, including higher bunker efficiency, which resulted in a 3.5% decrease in the unit cost at fixed bunker,” Maersk said in its interim report.

Speaking to analysts following the release of the results, Maersk chief executive S?ren Skou said that for the first half of the year, unit costs improved by 2%, in line with the carrier’s ambition to reduce costs by 1%-2% per year.

Despite bunker costs rising by 8.5%, bunker costs were unchanged due to a 7.5% reduction in consumption, due to an improved network and higher reliability, Mr Skou said.

“We expect to continue to improve fuel efficiency, Mr Skou said. “There are many levers to that that are important. One of these is the speed of the network. In the past couple of quarters we have been able to significantly improve the stability and reliability of the network. That means that when the ships are on time they don’t have to speed up to meet the berthing window, which is good for fuel efficiency.”

There was also a “structural” speed reduction with slow steaming that also improved fuel efficiency.

This would be even more important as IMO 2020 approached, he added.

“The best thing we can do in terms of mitigating the impact of that is to use less fuel.”

But Maersk warned that higher fuel costs this year would hit free cash flow and working capital as the line began buying more expensive low-sulphur fuel.

Chief financial officer Carolina Dybeck Happe said that it was too soon, however, to quantify the effect.

“I wish I could, but we don’t yet know the cost of the bunkers. But we see the spreads and we see things changing, but what it really will be we won’t know until the day we buy it.

“As it is such a big change, we don’t want to speculate. But we are prepared for it operationally and we know it will take up some of our working capital capacity.”

Increases in the freight rates, along with network enhancements implemented in connection with the integration of Hamburg Süd also helped drive the improvement in the Ocean profitability.

But total volume growth was below the market growth, and the weak demand on the Latin America, Oceania and North America trades continued from the first quarter, it added.

In its non-ocean segments, revenue declined by 1.2%, although this included the closure of production facilities at Maersk Container Industry.

Maersk’s Logistics and Services division reported revenues flat at $1.5bn as revenue for supply chain management increased but sea and air freight forwarding revenue declined.

Gross profit increased by 4.9% to $298m but was partly offset by lower volumes and margins in sea and air freight forwarding.

Nevertheless, across the group, Maersk still managed to improve its return on invested capital to 3.1%, an improvement on last year's negative figure but still below its desired 7.5%.

“We have continued the progress on generating free cash flow with a cash return on invested capital of 6.9% and realising synergies of $100m in the second quarter,” Maersk said. “Total synergies accumulate to $1bn by the end of June, thereby achieving the target earlier than expected.”

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