Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2019-Q1

[Astrid Martinsen, Vice President of Corporate Finance & IR]

[Audio Gap]With that, Craig, I leave the floor to you.

[Craig Jasienski, CEO & President]

Thank you. Thank you, Astrid. Good morning, everybody. Good morning. Welcome to a beautiful spring day in Oslo. We're here to present our first quarter results. We have pretty much the usual format. But I'll, of course, start with our highlights for the quarter. We had an EBITDA of $218 million, which is a good, strong performance. We're very happy with that. Of course, we've had the benefit of the new IFRS 16 rules. So that gave us a little headwind. So within the old money, it was $176 million. We're not going to talk about that very much anymore, but take this as we look into the new regulations or the new rules, but taking the old money, it was $176 million. So it's still quite an improvement on a year ago. Ocean results have been positively impacted by the performance improvement program, so we're happy with that. We also had lower net bunker costs, which gives us a lag in the positive. Last year, we only talked about lag in the negative, now we can talk about lag in the positive. And we also had some good project cargo shipped recently in Atlantic during the quarter. Otherwise, underlying ocean volume is in fact flat, pretty flat year-on-year. We'll get into more of that during the presentation. Landbases delivered a stable performance despite a weakening U.S. market. We have our largest operations in the U.S., as you know, but they still delivered a stable performance. And we're also very happy to say that we're able to confirm $60 million of the $100 million improvement program that was put into place. So that's sort of our key highlights. So the agenda, you -- I think you all know well by now, so I'll just go through a business update. I'll have Rebekka cover the financials, and then I'll come back to the market outlook. If we look to our volume development, we have in the first quarter the usual seasonal dip. Q1 is generally the slower quarter. So ocean volumes are really underlying relatively flat, it's about a 2% drop overall. The high & heavy portion has increased. There is a small improvement in high & heavy volumes, as you can see, but the main reason for the ratio increase is, in fact, a reduced volume of automotive. The volumes also pulled down by some contractual choices, we talked about that last year. That's come into effect this year. So there is some business that we chose not to renew, specifically in the Atlantic. That volume is not in the books this year. It has a positive effect at the bottom line, but it comes out of the volume on the top line. The trade mix. I'm going to come back and talk a bit more about rates and average revenue per CBM shortly, but the trade mix has also been quite positive during the quarter. So some of the underlying fundamentals in the way the business came to us in this quarter has delivered the strong results. We'll now go into specific trades, and I've got quite a few comments around these, so if you can bear with me. I'm going to start with Europe, North America, Oceania, in the bottom left-hand corner there. The market itself has had a pretty slow start to light vehicle sales. So the Oceanian market per se is slow. Imports were actually down 7.7% year-on-year, that's the actual import change into Oceania. We've had a slight volume uptick if you look compared to Q4. Primary reason for that is we had some carryover volumes from the last quarter because of the biosecurity challenges that we have -- had. Some of that volume carried over into Q1. So that looks positive in the quarter, but some of that volume is, in fact, from last year that's been carried over. But the underlying market in Oceania has actually started pretty slow. Australia had a significant drought last year, and we're starting to see the effect of that on lower agricultural products going into the country as well. Moving around the clock, the Atlantic Shuttle. As I said, we had to release some auto business by choice, which brings down the overall volume. We also had some very good high & heavy spot shipments, which partly accounted for that. Certainly from an average revenue per CBM, it's positive. And for the bottom line, it was positive. But the volume is in fact down in that particular trade. The overall contribution in the Atlantic is now better than it was last year, and that we can see in -- up in the underlying results. Continuing around Europe/Asia, it's quite a dip there. It is anyway a slow quarter typically in that particular trade. The China market from the sales point of view slowed, as we all see. I'll come and talk to that in a bit more detail later on. But despite that, there was also a specific manufacturer in Europe that actually stopped production and stopped shipping and it's one of our main customers. And that's why you see that we have such a drop in that particular quarter relative to one specific client, but it is generally a slow quarter as well. Asia to Europe to keep moving around the clock. We actually have improved automotive volumes into North Europe from Korea, very pleasing to see that Hyundai and KIA are getting some traction back in North Europe. So we had a positive volume effect there, but that was then countered by more or less a complete dry up of the high & heavy business into Turkey. So therefore, you can see, for us, it's basically a flat volume development Asia to Europe in that trade. Asia/North America. Despite the slowing -- the slowdown in sales, the underlying base in North America is still pretty good. We were fortunate to secure some new business out of Japan, which we appreciated and enjoyed in the first quarter as well. So that's why we can see a continuous volume improvement from Asia to North America. We also have a good mix of cargo with high & heavy and breakbulk cargo in that trade. So that's been a very pleasing picture. In fact, it's the one trade which has had the biggest growth in this quarter. We also see that the Korean manufacturers are regaining their position in the U.S. market. They're taking market share. Even though sales at a total level are coming down, our customers are actually improving their actual market. So it's good for us, and it was good in that quarter.Asia to South America West Coast was -- has been very depressed for quite some years. Last year was a better year than has been in some time and that was a good momentum. Unfortunately, that momentum has now cooled off and now we just see a general decline in the trade across all the brands that we move out of both China and Korea into South America West Coast. So that trade has also slipped from a volume point of view. So hopefully, that gives us a little bit more flavor and color around the differences in the trades. It's a bit of a mixed bag, but the aggregate of all of that is that our underlying volume is basically flat. Moving over to fleet capacity. We had some changes in the quarter. We had 123 vessels in operation when we began. As volumes build up towards the end of the quarter, particularly out of Asia, which is quite normal this time of the year, we're up to 127 vessels in operation. We still manage the fleet very tightly. So we're still very active in the short-term charter market. We take vessels in and out as we need so that we do our best to balance our own supply/demand as best as we possibly can. So we were as active in the quarter as we always were -- always are. We did have some operational delays in the first quarter because of the biosecurity challenges that we had mainly impacting us in Q4, but we have some carryover into Q1. So we did have some delay on the fleet there too. We keep our flexibility. We've got room to deliver up to 12 vessels in 2020 during the course of the year. So should a rainy day come, we have that downside flexibility, which has always been our continuous focus. We had delivery of our -- but I'll come back to that later, we had delivery of one of our vessels out of China in -- actually in April, but given we're standing here and it's news, we thought we'd share that as well. The remaining 2 vessels are under construction and will be out during -- one later this year and one next year. I'm going to go to rates. This is a bit more of a -- not a complicated picture, but a picture that describes -- that requires an explanation. So looking on the left-hand side of the chart, this is a picture of our total contract renewals to be negotiated during this year. 23% of the volume has already been fixed, which is represented in the bubble chart on the right. We still have 77% of the volume to be discussed and to be renegotiated. It's not until later this year. So at this point in time, it's mainly the 23% that is impacting the business. So the good news is you can see lots of small bubbles. The bubbles are representative of the size of volume. Anything that's up on the right means that we've got rate increases and it's impacting the bottom line, so that's a very good story. But I'd like to counter that, it's lots of small contracts in a number of -- or in some niche trades where we have a strong position, and we've been able to improve the right bubbles, particularly relative to underlying fuel cost increases that we had last year. So whilst that's been a necessary step and a necessary development, we have those 3 late -- or the one very large blue bubble and the 2 gray bubbles, which are quite large contracts, which then pull that down. They're larger contracts. We have -- as you can see there, they have a negative -- at least 2 of them have had negative impact on both rates and revenue for the company. So that, that whole picture combined is in effect a wash from a revenue per CBM perspective. Why do we enter into those large contracts and accept to take a reduction in rates? They're the type of businesses -- and I'll leave it at this, it's a type of business that we like to take out of the market long term. It's our niche playing area. It's the type of business that our competitors are very hungry for, and we have very long partnerships with those clients and they like to work with us long term. And they provide a volume which provides a base network in our system. So that's why that makes absolute sense to have those contracts even with some reductions. In 2 of the cases here, they're renewals. So they're contracts we already have running, but we had a deflator in the contract for this year. So that's the picture there. If we look at the whole of 2018 comparative to what we renewed last year, the negative effect annualized this year would be a $10 million down. This is based on what we renewed last year. But because of the contracts portfolio changes that we've made, we will try to make the contracts more efficient than some of the contracts we've moved away from. The net effect in this year, as we talked about last quarter, is actually a positive of $25 million on an annualized basis given our current contract portfolio. That's how we need to look at this year specifically. To give even more flavor, and this is the one that I don't want everybody to get super excited about because I'd like to not talk it down but to explain it. Yes, we have a lovely uptick in the average revenue per CBM in this quarter. Please don't -- based on everything I've just said now, please don't read that as all the freight rates are flying upwards. We had a really good quarter with a really good mix of cargo, but we have a number of really good reasons there as to why the average revenue per CBM [ lifton ] was, in fact, pretty impressive compared to that picture in the previous quarters. In the Atlantic, we had strong spot shipments of high & heavy, as I mentioned. We don't expect those spot shipments to come in the next couple of quarters, that has a positive effect on the averages here. Asia/North America is one of the higher revenue trades that we have, and we've had the largest growth in that trade, as I talked to a minute ago. So that's positive from a cargo mix point of view. Oceania, we had good volumes in the quarter, as I said, because we had a hangover from last year that we carried into this year. It's a long haul trade, so the average revenue per CBM is relatively higher. And that has a -- also a positive impact in this particular quarter. And because the high & heavy portion compared to automotive is better because automotive was down, that also drives up the average revenue per CBM. So there's a number of very good reasons that we explained why we've seeing such a big uptick. It's not because -- I wish it was, but it's not because freight rates are flying up, it's simply because we had a particularly good quarter where things came together very well. The contractual improvements in the Atlantic had a relatively low contribution. So it hasn't had a negative effect on the profitability. In fact, it's had a positive effect on the profitability, but it does have also a positive effects on the revenue per CBM because of relatively low-rated cargo that we don't carry any longer. So that's also one of the effects. So all in all, I won't to talk to the impact per quarter, I've mentioned that in the last slide. But all in all, it's been a positive view. But we very much err on caution that we should not assume that this is the average revenue per CBM that you will see us carrying into the following quarters this year. Now it's set, you have to make your own judgments. Next one, this is very much about what we control ourselves, that's our performance improvement program. Very happy to see and to report that we can now confirm as of this quarter an annualized impact of $60 million out of the $100 million program. Very pleasing that we've had such an effect so early on. The remaining efforts that we have will have a longer tail. So whilst it's good to see that we're 60% on track for a 2-year program, it doesn't mean that we're going to keep the same pace. The contract changes that we've made that we keep talking to and I just touched upon definitely have the biggest impact, and it has an immediate impact as soon as the contract changes. All of the other effects that we have here are efficiency drivers and they will take time to work their way through the P&L. But having said that, so I just wanted to caution that we're not going to see that same trend line, but we feel very strongly that we will achieve the target. We'll continue focusing on it. But it's very pleasing to see where we are today. It's a good example of the things that we can actually control ourselves, we're really doing something with it, and that's really showing its effects. Okay. So with that, hopefully, that gives us a backdrop of the business as we are today. And I'll hand to Rebekka for a walk over the financials. I guess I should take my papers away.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Yes. Good Morning, everyone. So as Craig said, we're quite pleased to deliver a relatively strong quarter in what is normally quite seasonally weak as a quarter. But I think, as Craig also did, we do need to caution a little bit that this doesn't necessarily reflect improvements in the market. The markets remain challenging, and a lot of the improvements are related to cost-saving initiatives of our own and also bunker and currency developments. So starting then from the top as usual. Revenues also this quarter hit the $1 billion mark. It's a flat development over the previous quarter, but up 5% year-on-year. Improvement comes then from the ocean segment. It's partly the net freights per CBM improvement that you see. It is also partly surcharges that are up because of bunker prices being higher. Net freight improvements comes then partly from improved cargo mix, but also, as Craig said, it comes from project cargoes that we had in the Atlantic this quarter, which we don't necessarily expect to come in the future quarters. And the monetary effect of that is around $10 million on the EBITDA. Volumes down by about 2% year-on-year driven partly by the market but also volumes that we decided ourselves to relinquish. Quarter-on-quarter bigger drop, 5%. And of course, that's also explained by seasonalities. So EBITDA, as you see, a good number of $218 million. And as most of you have already discovered, that's partly because of IFRS 16 leases. So you need to deduct $42 million from this number. And the real effect of IFRS 16 is, of course, that we move costs from the operating level down to depreciation and financial expenses. But still when we take out IFRS 16, we see a really good improvement year-on-year, almost where it's around $50 million. That's quite good. Of course, roughly half of that is related to partly the synergies that didn't have full effect a year ago and partly also the performance improvement program. So that's half of the $50 million. The rest is linked to lower net bunker costs, it's linked to currency development, it's linked to the project cargo that we mentioned and also back to cargo mix in this quarter. So quite a number of positive effects this quarter. Depreciation is up, of course, explained by IFRS 16 leases. When you look at the net financials, they remain at the relatively high level. New this quarter is, of course, that there's a $10 million impact from IFRS 16 on financial expenses, so that's gone up. But still the underlying financial costs are quite stable. The reason we have a higher cost is a negative development on the interest rate derivatives of $22 million this quarter. We had a similar negative development last quarter, that's why it looks flat. Positive a year ago, that's why that looks a lot better. So all in all, when we get to the bottom line, $22 million. It's doubling over last year, but it's still at the relatively low level. We have a return on capital employed of 5.2%. That's an improvement, but it's still below where it should be, and our target is still 8%. We've included a slide to explain to you a little bit on the IFRS 16 effects since that is a new development this year. As you probably know by now, all leases beyond 12 months have to now be accounted for on our balance sheet, and that leads to kind of a gross up on the balance sheet of $855 million. The leases we have relate mainly then to terminal leases and site leases, but also vessels that we've charted in for longer periods. And of course, grossing up the balance sheet has an effect on solidity, and I think we said a quarter ago that, that effect was around 5%. Now with the improvement that we also saw in the first quarter, that's down to 3.8%. So you will see later that equity ratio remains at the very solid level. On the P&L, it's mostly a matter of reclassification, taking costs out of operating expenses and adding it mostly to depreciation, but also to the financial expenses. And you will see that when we get to the bottom line, it's a slightly negative effect that has to do with the nature of depreciation. You get a bit of front loading of the costs compared to having straight lease expenses as we had in the past. So this would even out over time. So I think to sum this up, the only set of real substantial effect is on the equity ratio, this change, but that is still at the solid level. So we don't really see many consequences of IFRS 16 other than serving to confuse the reader. And hopefully, by giving this, we explained the underlying developmental to you. Moving then over to ocean. Ocean delivered revenue of $812 million. That's an 8% improvement over the previous year, flat quarter-on-quarter. And of course, this is the basic parts of the results this quarter. Net freights increased even if volumes were down driven, as you've seen, by net freight per CBM, but also the increase in surcharges to customers due to the bunker prices. I think Craig went through the net freight development and why it was possible -- positive, but also why it's not necessarily a sustainable level as it relates to the project cargoes in the Atlantic that we have in this quarter. What is sustainable, though, is the improvement that we see from the volumes that we walked away from in the Atlantic, that will continue. Rates, of course, continue to be lower than last year, but the quarterly effect of that is now down to $2 million to $3 million. It's lower than the impacts we had last year. So EBITDA then ended at $190 million. When we exclude IFRS, we're at $159 million. That's a 43% improvement over last year, and that's pretty good. And due to all the aforementioned effects, it's the cost saving, it's the bunker, it's currency, it's the higher net freight per CBM. Of course, some negative news in the quarter as well related to biosecurity challenges. We had a cost on that of $5 million, which is slightly higher than it was a year ago, then it was $3 million. And we don't expect that to continue into the next few quarters. This is kind of a winter phenomenon in the Northern Hemisphere. Landbased. Not so much to say about landbased this time. It's a flat development. Of course, this segment is also affected by IFRS leasing. We have terminal -- we have leases on our terminals at the various sites. Excluding this, it's an improvement of $2 million and relatively flat from the previous quarter. Underlying, though, we do see some weakening on the auto side, particularly in the U.S. Some lower volumes for some of our customers, that also impacts some of the terminals. But volumes remain at a healthy level, so earnings are still good. What's pleasing to see is the positive development for early acquisitions, Keen and also Syngin. For Keen, we've realized synergies as a result of the acquisition. And we also see a good volume development and high-quality revenue coming in from Keen, so that's very pleasing. Moving on to cash flow, it's positive this quarter. It's up by $71 million. Of course, leasing has worked its way in here as well. It's taken out of the operating cash flow, it's now under the financing cash flow. But when you look at the net cash, it has a neutral effect. Investments below this quarter, only $9 million. We did a refinancing in EUKOR of 3 vessels, raised proceeds of $126 million. We got a margin of 155 basis points, similar to levels that we've seen in the past, so quite stable. We had a new building just delivered. We have 2 more remaining. That's the CapEx of $80 million. That's all debt finance. In addition, we have scrubber investments. There will be 2 scrubbers being installed for the remainder of this year, and the rest is then distributed over the next 2 years. And then finally showing you the balance sheet. It's higher than before. Now it's at $8.3 billion absolute with IFRS again. And of course, net interest-bearing debt also increases as a result of the leases and now stands at $3.8 billion. As I said, solidity remains solid. We're at 35% equity ratio, and cash is also at a very healthy level at $555 million. We just paid down a bond, but that happened after the quarter was closed. We refinanced that late last year, and that also means that we don't have any immediate outstanding bonds until 2021. We were sitting on quite a lot of refinancings recently, so still no really big needs on that side going forward. That concludes my remarks. Craig?

[Craig Jasienski, CEO & President]

Thanks, Rebekka. We'll now move to market outlook and just have a rundown of what's happening in the auto markets from the sales point of view and exports and then talk to high & heavy and try and give some forward view as we see it. If we look into the -- I'm going to focus on the right-hand side now specifically. Let's have a look at the U.S., West Europe and China as markets. The U.S. market has fallen and slipped 3% year-on-year. It's still a relatively high level. The average sales level is $17.8 million -- or sorry, it's fallen below $17 million now. So it's still at a very high level comparatively and historically, but it is slipping. There is a series of drivers for that likely, but we definitely see that the cost of capital, of course, is affecting the value of the -- or the price of the vehicles, that's having its impact. In that market, we have noticed that inventory is climbing. Inventory now today is actually at its highest that -- since last May 2004. So the inventory level is pretty high in the U.S. That's not a great signal, and it's indicative of what we see in the solutions business in the landbased business where there is more storage work and less accessory fitting.So the U.S. market is -- we can call it flat for the time being, but it is at a relatively high level. Our expectation is it will continue relatively flat depending on what other major economic events occur around the world. But all other things being equal, we expect it to be a relatively flat picture. Given the high inventory, given the dealers are on average sitting on 74 days of stock, that's the average for dealers in U.S. right now, they will have to push product in order to get that inventory down. So that will push sales eventually, and it will require a demand in production and imports over time. So it's one to watch. We're not deeply concerned about the U.S. market, but we definitely have to assume it's flat and will be so going forward. West Europe year-on-year is down 2%. Europe is still struggling. A number of manufacturers struggle with the WLTP regulations that came in last year. So they're still working through that. There remains uncertainty around Brexit. That has an impact on sentiment. Therefore, it has an impact on car sales. So the fact that Europe is a little weak is also not really surprising to us. Our view on Europe looking forward, subject to the WLTP issues being resolved and once we have an answer on Brexit, the fundamentals are still okay. So we would expect flat to a slight improvement. China, little more worrying, down 12.8% year-on-year. That's quite a drop. Off a very high level, in all fairness, but it's quite a drop in the China market. Lots of talks around tariffs, lots of talks around this is why cars aren't being sold because of the risk of tariffs. That might have a sentiment impact probably, but we have a view that we need to look at the underlying China economy -- or Chinese economy and recognize that domestic- to mid-debt is rising at pretty significant levels as a portion of GDP and as a portion as well of income. The urbanization rates of moving people from the land to the cities is slowing at a pace that we haven't seen in a couple of decades. So there are a couple of fundamentals in the Chinese market which bode well to explain why sales are actually generally down in China. There's also the impact of the effect that everybody saw everybody, but certain demographic will be waiting for some incentives from the government because the government will want to lift car sales again. So that has an impact, and people will wait and see. So that slows down car sales. The belief that the Chinese economy is so important to world economy and that China being such a controlled economy as it is that they will resolve their issues and work through this, we believe that's the case, but we have to expect that China is going to look soft during this year, and that's our view there. Overall, as you can see the picture year-on-year, auto sales are actually down 4.3% globally. So we do we see it in a market which is softening on the automotive side in not only dramatic levels, but it is softening as we've talked to in previous quarters as well. If we look to auto exports, it's also a bit of a mixed bag on the export side, but I'll -- again, I'm going to focus on the imports, the right-hand side of the chart. North America has -- imports have declined by just over 4% year-to-date. Europe is actually up despite the slowdown in sales. Main reason for that is we have seen an increase in production coming out of Korea into North Europe, as I said before. But there has also been some new models coming out of South Africa into Europe, so that's been driving up the import picture for the European market despite a slower general market. China sales market. China imports have actually grown. Still a lot of luxury products going in. They're holding at relatively good levels. So it's the smaller and local production which is really suffering. So we see the import levels into China are actually holding in an okay base. We suffered in the quarter because we have one manufacturer that didn't produce and ships for this market, as I mentioned. They're starting to ramp that back up again. And Australia, I also mentioned earlier, is actually off to a very slow start with a 7% or more reduction. We expect Australia to remain relatively fat -- flat during the rest of this year as well. If we look at some -- so then try to make some -- well, we don't predictions, as you know, but if we try to look forward and take all the information that we have and have a view, auto analysts say that in the short-term, car sales will slip, but in the medium to long, they will recover and start to grow again, as indicated in these slides. Our view is this year will remain relatively flat to weaker, if anything, for the course of this year, given everything that I've just talked to. We are fortunate that we have a broad mix of trades, that we have a very broad mix of manufacturers that we work with. So when some go down, others increase and vice versa. So even if we believe that the general sales market will continue to decline very slightly during the course of this year, it may not have such a negative impact on us because of the spread that we have. So that's our view on automotive going forward. I've touched upon China, I've talked about Brexit, I've talked about U.S. vehicle prices. The bottom, on emerging markets, given the risk of the macro instability that we see in general in particular markets, such as Turkey and Argentina, and the geopolitical challenges that we still see in the Middle East, they also have their effect in the short term. So there are a number of indicators out there to err some caution, which is what's really reflected in our outlook statement.High & heavy. We have seen a growth. We've seen an increase in our real volumes. Actually from calendar year or full year 2016 to 2018, we've actually had 25% more high & heavy through our operations than in 2015 -- sorry, in that period change. So that's positive, and it has been a good run. We don't expect that pace to continue. We do expect that we will see a slowdown in the growth of high & heavy. So we expect high & heavy to grow, particularly mining. We see construction growth will slow quicker, mining growth will slow thereafter, and ag will always be the mixed bag it -- as it is, depending on seasons and farmer income. But we do expect that high & heavy will grow, but at single-digit rates going forward. The order book remains thin. There's no real news here. I'm just watching time. There's no real use here. It's no change from what we presented before. We do see that based on analysts viewing growth to come back in the automotive segment in 2020, there's an uptick in demand. So if that happens, it will just spread us a little bit as far as imbalance is concerned. The good news, though, is that given there are no orders, there is no new supply coming in from 2020, from next year, and that should be healthy overall for the industry because we just don't see the need for the capacity because we still have a degree of overcapacity in the market today. Lastly, I already leaked this one out before, but this is news. It's not in the quarter, it's actually in April, but we have taken delivery of Traviata, second vessel out of our 4-vessel program in China. So we now have a new, efficient vessel to add to her sisters in our fleet. These vessels have been performing extremely well. We've got 4 in Korea. We're doing 4 in China, this is the second. Their performance has been fantastic, and we do see a real 15% improvement in efficiency from the fuel point of view. So it's been a very, very good program for us. And keeping our -- as a replacement capacity, keeping our tonnage picture balanced and getting more efficient, which is good. So I'm going to go to outlook, and then we'll go to Q&A. Just before I do that, there is one thing in the report relative to governance. We don't have any slides on it, but we have mentioned in this quarterly report that, regrettably, recently, we've got some information that we had some potential wrongdoing of a couple of employees or a small handful of employees in South Korea. That was regrettable to learn. We took those allegations, and I instructed immediately that we did an independent investigation of what's taking place, so that has been done in its preliminary stages. So we have run an independent investigation. Only yesterday, the Board and myself received the preliminary report from the investigators to find out what's the issue. Regrettably, it looks like there is some degree of wrongdoing, and it looks like there's some degree of a small handful of individuals which have chosen to not work in accordance with our code of conduct. It's fortunately relatively limited from a financial point of view. But to be very frank, whether it's $1 or $10 or $100, it's wrong, it's unacceptable, and we don't accept it. We have a zero-tolerance policy. And we're taking this one very, very seriously, and we're acting on it as quickly as we possibly can. The people, the small handful of people that we've identified so far that have allegedly some wrongdoing, and we have some indications of that, they've been taken out of active duty. So we've taken some immediate actions there. We'll continue our investigative work now in order to close this off as quickly as we can and to determine whether there's any other actions that we need to take towards employees. So it's very regrettable, and I'm actually quite sad that it happens on one hand. On the other hand, I'm actually somewhat happy that we have an organization that's willing to speaking out. So this was discovered internally by our own employees. They've been willing to speak up, they've been willing to come forward and have the courage to come forward, and we've been able to act on that. So that's -- I'm happy about that, but I'm not happy about the actual situation. So it's very regrettable, but we're dealing with it as best as -- and as quickly as we possibly can. So that's where we stand on that one. We think it's appropriate and prudent to inform relevant authorities. We don't have to, we are not obliged to, but we think it's the right thing to do, and that's exactly what we'll be doing in the course of the next days and weeks. So I just wanted to give you a little verbal on it. It is in the report. If there's any more information that we can share with you that we think is relevant and valid for the market and the media, we'll do so. But in the meantime, we want to get on and deal with this as quickly and as professionally and as best as we possibly can. So just to have that one mentioned while we're standing here together. With that outlook -- volume outlook, it's -- remains uncertain, as I've said. We tend to enter every quarter and try and caution ourselves down a little bit, but we do see still a macro picture, which looks to be uncertain. Market remain -- rates still remain at a low level. In certain trades, competition is still pretty fierce. But tonnage picture is gradually improving, so we hope that the supply/demand picture will go in our favor over time. The net freight per CBM had a very nice uptick in this quarter for the reasons explained. We don't expect that to remain at those levels going forward. We don't expect it to drop massively, but we don't expect it to retain those levels. Solutions is to doing okay. Slightly impacted by the auto market, as we talked about, but the rest of the landbased business is actually performing quite well. So as a package, it's a nice balanced and a strong picture. And last but least, the performance improvement program. Very good progress, really happy with where we are now. The rest will come with a long tail over time, but we have all confidence that we'll be able to deliver on that. So that's our summary. With that, I'll ask Rebekka to join me, and we'll take any questions, if there are any. Any questions? Yes?

[Unknown Analyst]

Just on the landbased business, so which [ eras ] are performing best and where do you see the most growth in? On the U.S. business, is it only impacted by the weak U.S. sales? Or is it other more structural things are impacting the performance on U.S. landbased?

[Craig Jasienski, CEO & President]

So Keen -- I'll take the goods. Keen is doing really well, the acquisition we made just over a year ago. The performance is better than expected with all the synergies that we planned in the acquisition. So we're very happy with the development of Keen, and they're doing well. They're in the high & heavy arena, so they're working closely with construction and mining. So that's holding up well. Marine terminals are holding up very well from a margin point of view. Volume is relatively stable, but the margins are good, and we're getting more and more efficiencies. So everything around the equipment side in terminals is good. Automotive, there's no other fundamentals than just weaker auto sales. One of our biggest -- we have a very large contract. We work with many manufacturers. We have one very large contract. They had particularly lost a bit of market share recently, so we see that. But they will get that back over time. So no other fundamentals than just the general market.

[Unknown Analyst]

Are there any opportunities in the U.S.? I mean as you know, our competitors are sort of struggling with the same markets. And obviously...

[Craig Jasienski, CEO & President]

We -- there are, and actually, the good news is we have that very solid platform that was built off one manufacturer 12 year ago. We've been able to attract new manufacturers over time. So actually every quarter, we're able to win a little piece of business here and there. So...

[Unknown Analyst]

And then on geographical basis, I mean Europe, Asia or other regions, are there any sort of interesting areas you like to grow more than the U.S.? Or where do you sort of -- where do you see the better development?

[Craig Jasienski, CEO & President]

So we're definitely interested in growing. We think that Europe, yes, because it's a big market and it's kind of our home market in many ways, but definitely Asia. Asia Pacific region is certainly an area we're watching very closely.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Just to clarify, in the U.S., because no one is struggling, volumes are still at the very high levels.

[Craig Jasienski, CEO & President]

High levels.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

It's just that it's been earning up.

[Unknown Analyst]

In terms of rate changes, you have a few big bubbles and lots of small bubbles. Are those changes relative to the same period in time? Or are differences there? So I'm trying to get sort of the understanding of whether the small boxes are, sort of the spot rates, moving 30%, 40%? Or am I wrong?

[Craig Jasienski, CEO & President]

So the relative picture here is for the year. This is the annualized effect for 2019. The expiry is varying. The bigger bubbles would typically be longer contracts, 2 to 3 to 5 years. The smaller bubbles will be annual, typically.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

They're all contracts, not spot rates.

[Craig Jasienski, CEO & President]

They're all contracts.

[Unknown Analyst]

Right. So there are then some contracts which has been used at 30%, 40%, 50% improvement relative to a year ago.

[Craig Jasienski, CEO & President]

Correct, yes.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

But those contracts were renegotiated several years ago.

[Craig Jasienski, CEO & President]

But they were at very low basis before. Other questions? Anything Online?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Yes. How much of the 73% of contractual volume that is to be renewed in 2018 -- 2019 is HMG?

[Craig Jasienski, CEO & President]

That's a good question. HMG is 15% of our volume roughly. So of that portion, it's -- what was that number? We will come back. If you can find out who that question came from, we will answer that correctly -- or directly. But the total portion on our global business is 15%.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Yes. But it's a large renewal. It is a big share of it. So...

[Craig Jasienski, CEO & President]

I don't want to throw a number and have it wrong.So any other questions? No.Thank you for your attention. Thanks for listening, and enjoy the rest of the day. Thank you.