Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2020-Q1

[Craig Jasienski, CEO & President]

Good morning, everybody. Welcome to our Q1 2020 results presentation. It's a little bit overused term these days, but under extraordinary circumstances, apologies that we couldn't invite everybody to the building and the auditorium today. We just didn't have the facilities to take a lot of external guests. So we only have a few internal staff here, but appreciate everybody that's been able to join the webcast. Under the sort of extraordinary times, we're also in the process of transitioning with CFO. Rebekka Herlofsen had her last day in the company on Friday last week. Per-Hermod Rasmussen, our new CFO, for an interim period started on Monday. However, he will not be presenting today. Together with me will be Astrid Martinsen, who you're all very familiar with as the Head of IR, Treasury and Finance. So Astrid will join me with the result presentation for the results in specifics. What we plan to do today is cover what we normally do, but also to give you a little bit more insight given the circumstances into the things that we see and what we're doing as a company, is the main part of today's presentation. Before I go into the usual agenda, we think it's prudent to start with the purpose and the values that we have as an organization and just to share with everybody the principles that we've been operating to during this period of COVID-19 and the impact it's been having around the world. First and foremost, it's all about taking social responsibility for our employees and the community. It's also about being financially prudent to our shareholders. We are very focused on cash. You're going to hear a lot more about that over the next half an hour or so. It's also important that we maintain operational stability for all of our customers and we have to make sure that we have that operational capability long-term at the other side of this crisis so that we're ready to make the future because we do believe the future will probably be slightly different. On the very first point, I'm extremely happy to report that over -- a population of over 8,000 permanent employees, we've been extremely fortunate of having only 3 confirmed cases of COVID-19 amongst our employees. So we're very happy that we've been able to retain and maintain a safe operation and very few of our staff have actually been affected directly. During this period, I have to add that our organization staff have shown incredible resilience, incredible flexibility in working with us as a company, dealing with very extraordinary sort of circumstances. So it's been a tremendous background or backbone, if you like, for our organization to just fight through and push through these difficult periods. It's been a tremendous amount of dedication and sacrifice. So I thank everybody for that. Moving to the normal run-of-the-mill presentation, if you like, in terms of agenda, highlights from the first quarter. What we're going to hear all about over this period of today's meeting is the adjusted EBITDA of $130 million, impacted primarily by lower volumes and pretty much in line with what we had estimated a couple of months ago. Ocean volumes declined 20% year-on-year. Performance in land-based has also fallen as a result of the lower volumes. And in both of those cases, primarily driven by, of course, the impacts in the market from COVID-19. We have some very good news in the quarter. We had a contract award to ARC for the global household goods contract with U.S. Transportation Command on behalf of Department of Defense. So that was very good news. But also to the fifth point, importantly, in this period, we've been taking decisive actions to reduce costs and to strengthen liquidity across the company. We did enter this with a strong cash position and a solid balance sheet, and we believe that's what we needed to help the company through a turbulent period. Moving to the agenda. Very much the usual topics. I'll give a business update. I'll hand over to Astrid to give us -- talk through financial performance, and I'll come back with a market outlook, and then we'll have Q&A. Sorry, I should have added at the end, we do have the possibility for Q&A through the Web. We have that coordinated here. So any questions should and can be posted. And Anna Larsson, our Head of Communications, will relay those questions to us before we close the conference.Continuing with the theme of COVID-19. Three main areas that I'd like to talk to in terms of the welfare of our employees, the community and customer needs. Three main areas we focused on is about health and safety, it's about the operation of the business, and it's also the commercial and financial impacts. On the facility side, [ back up at the ] beginning there with health and safety, we have worked very hard in all of our facilities to ensure we have appropriate social distancing. All the cleaning precautions are taken place to ensure that we have a safe infrastructure and processes. As far as office employees are concerned, the majority are still working from home, where in societies and countries where we have social distancing in workplace, people are back at work and we've retained the social distancing where we need to.Mental health and wellness has been a big focus of ours. We've continued to offer our organization resources online to assist them through any difficult periods that they may experience. And as far as the seafarers are concerned, we've minimized crew changes and taken additional health and safety precautions on the vessels through our ship management companies. On the operations, on the ocean side, vessels are on an efficient schedule. So we're slow steaming. We're reducing sailings. We're idling where we have to, in addition to the other actions or measures that we've taken, which we'll come and talk to in a minute. But the voyages that do operate are operating very efficiently and effectively. On the terminal side, all terminals are actually open. We are supporting customers with storage in many corners of the world. In the vehicle processing centers, centered primarily around automotive, roughly half are open with reduced volumes, and the other half were closed due to the plant closures across the OEMs. As far as equipment processing centers are concerned, the majority are still open. There is a slowdown in throughput, but the majority are open. There's a few that are closed around the world. On the customer side and moving to the next point, we had a very good and close dialogue with all of our customers in this period. Given the fact that volume has reduced, we've had tremendous support to relax the normal service requirements that existed across our contracts. So customers have been very accepting of less frequency and slower transit times. And as mentioned, that's helped us to ensure that the voyages that do operate are actually operating efficiently. We continue to explore new opportunities. Our customers are seeking help in times like this, so that there are opportunities between us and there's an extremely good dialogue taking place there. On liquidity, as I mentioned upfront, we have tremendous focus on cash flow. We have the whole organization very geared to focusing on cash in all corners throughout the business and the operation. We also have a very constructive dialogue with our banks. We always have, we always do. But particularly at the beginning of April, we entered new dialogues with the banks relative to the current circumstances, and those dialogues continue in a positive way. As far as the second quarter is concerned, which we're right in the middle of now, breaking a little bit from tradition, we will share our expectation for Q2, and that's a 50% reduction in volumes year-on-year. I will talk more about the forward forecast a little bit later in this presentation. Moving over to cash. We have the 3 main areas that we're really focused on putting in solid measures to minimize cash. What we've identified so far is upwards of $200 million of cash savings, roughly $140 million we will achieve in 2020 and the remaining $60 million in 2021. We are not stopping there. There is a series of initiatives underway to continue to find areas where we can reduce or preserve cash across the entire business. If you look at the different parts that you have in front of you there, Ocean segment, land-based and group SG&A. Ocean segment represents roughly 2/3 of the $200 million that we've been able to identify so far and the remaining 1/3 is split roughly equally between land-based and group sales, general and administration costs. On the Ocean side, not really news there because we've already announced that to the market previously, but we continue with our plans for early recycling of vessels, particularly. Cold lay-up plans are going well for the first 10. We are considering a further 10. We delay vessel dry dockings where we can, and we're working very closely and getting tremendous support from our ship managers to identify savings. So with the 2/3 of the impact, we're well on track. And then I'm going to move over to SG&A. We've had, as I mentioned earlier, up -- a tremendous solidarity from our organization. Everybody has pulled together. There's been tremendous sacrifice across the company, a combination of temporary layoffs, salary reductions, people working less hours for less pay. If it wasn't for that effort on behalf of the company and all the employees, we wouldn't be able to contribute in that way. So extremely good effort from everybody to achieve that $200 million so far. I underline that we will continue to see more across the company. Moving on to the next slide around fleets, a very familiar slide. With you -- the only point I want to make here really is we are exercising the flexibility that we've always talked about. We have always said that we'll maintain purposefully a high degree of flexibility across the fleet. We are exercising that as we go through. We have that room to lay up. We had some recycling candidates. We do have vessels that have been redelivered to -- and charter vessels that have been redelivered to owners. We have more to come. And you can see the forward forecast, again, breaking a little from tradition here, but under the setting, we think it's prudent to share with you what we believe to be the fleet plan through Q2, 3 and 4. We, in this context, are adjusting the fleet to match the volumes that we see. I would caution to not take a linear view of our volume from March and run that through to Q4 looking at the fleet size. It's important to note that in March, we had a little excess capacity in operation, and that will be the same in Q2. So I urge to not look at this slide solely to predict how the future looks like, rather that we come back to that a little bit further in the presentation. Ocean volumes declined 20% year-on-year. Of that 20% decline, roughly -- of the total decline, roughly 5% of that has come from non-renewed contracts in a couple of trades. So there is some effect in there. But in the main, the effect has been just a general drop in the market because of the production reduction. High & heavy portion is up 30%. The total nominal high & heavy volume is in fact down, but it's down at a much lower pace than automotive. Therefore, the mix is, in fact up.Moving over to the trade picture. I'll try to move through this fairly quickly. Of course, there's a lot of information here. I'll start in the bottom left-hand corner with the Europe-North-America-Oceania trade. A noticeable drop, clearly. One of the impacts here, roughly half of the volume impact is the -- one of the contracts that we relinquished at the end of last year, a contract that we chose not to renew because we considered the -- both the rates too low and the earnings unacceptable to us. So that was a choice. That's 50% of that volume drop. The remainder is, generally speaking, the slower and weaker demand given the current circumstances. Moving around to the Atlantic. We've actually seen a strong East-bound trade in the quarter comparatively, but a weak West bound. When we look all the way back to Q1 2019, it's also important to point out that, that particular quarter had a strong high & heavy volume. So it was a strong comparative base compared to where we see in the first quarter of this year. But in general, a decline that's relative to the impacts of COVID-19. Europe-Asia, 2 major drivers here. Of course, China is slow or China entered this crisis way earlier than the sort of Europe and North America and Oceania did. So we saw that impact in Q1. We also have a portion of relinquished volumes in this trade as well, where we also chose not to continue with a contract that was considered to be or deemed to be not profitable for us. Asia-Europe, moving around the clock. We -- one of the core reasons for the volume drop here is we do have a decreased portion of Hyundai and Kia volume to Europe in the new contract. So that's part of the decline here. High & heavies actually held up quite well in the trade in the first quarter. However, the general decline in trade because of COVID-19 is also an impact. But primarily, it's been a drop in volumes out of Korea based on the changed trade share agreements with them. Moving around Asia-North America, generally speaking, weaker auto and high & heavy. But the mix is stronger. We've had a bigger auto drop than we've had on high & heavy. And then lastly, in the bottom right of the screen there, Asia to South America West Coast, just generally down because of the weak market. On rate development, again, to explain this slide, important to remind ourselves, this is the average -- this is the total revenue divided by net revenue divided by the average -- cubic meters to create an average revenue per cubic meter. This is not the rate in the market. We have multitudes of contracts at varying rates and varying rates per trade. But as an average, this is the picture, basically stabilized. The needle hasn't really moved in the last couple of quarters in a negative or positive way. So it's a stable picture. The important point here is the positive trend line upwards since the beginning of '17, which has been very much our focus over these last couple of years. Moving to contract renewals, also will be quite quick here. It's only in the first quarter. We have one contract, one bubble at the top right-hand side there, which started at a very low base. So we were able to achieve quite a decent rate increase in that contract. So quite an acceptable renewal. The remaining cluster of contracts that have been renewed are in the main or balancing each other out to be basically 0 impact. So this is neither positive or negative from a rate perspective when we take it in totality. If we look over to the bar graph on the left-hand side, the total portion of contracts to be renewed in 2020 is equivalent to roughly 20% of 2019's revenue. So that's the portion of business we're talking about renewing this year. The 63% of revenue of that portion left to be renewed is really a myriad of very important, but a lot of smaller contracts. There's no single large contracts in that group. So there will be a series of updates over the quarters during the course of this year. Next, as mentioned, upfront, tremendous win in the first quarter. ARC, our U.S. operation, won the global household, goods contract with TRANSCOM. Once we've gone through the transition period, which is the rest of this year, we move into a 3-year contract period initially. And by the time we reach 2022, we'll be looking at a revenue of approximately $2 billion per year, which is significant. The role here is primarily as a move manager. We have a series of subcontractors working with us that will do the physical moves. And this is a responsibility for up to 400,000 domestic and international household good moves per year, working on behalf of TRANSCOM, but fundamentally for the U.S. Department of Defense. This is a contract we've been working on actually for many years in terms of plan and vision, and we're extremely happy and proud that our team in the U.S. have been able to secure that contract. With that, I will hand over a -- my newly sanitized clicker to Astrid and ask her to go through the financial performance.

[Astrid Martinsen, Head of Group Treasury & IR]

All right. Thank you, Craig, and good morning to everyone. I will take you through the financial results. They will be explained very much by the impact to our volumes, as Craig has talked about. Starting with the consolidated results for the group. We had -- sorry, here we go. Starting with the consolidated results, we had a total income for the group of $834 million this quarter. That is a decline of 18% compared to the same period last year and 11% compared to the previous quarter. Both Ocean and Land-based contributed to the decline, which is driven by the lower volumes primarily. We had an EBITDA at $130 million for the first quarter. That is down by 40% compared to the same period last year and 33% down compared to the adjusted EBITDA for the fourth quarter of 2019. Again, both Ocean and Land-based contribute to the decline, and I'll talk a bit more to that on the following slides. We have 2 large items impacting the EBITDA number -- sorry, the EBIT number this quarter. The first is, you may recall we talked about also at the fourth quarter presentation in the shareholder agreement for EUKOR. There is put and call provisions for both owners. It should be mentioned that the put is far out of the money, and we do not intend to exercise the call, but we need to account for it. This quarter, there was a change in value of this net derivative of $61 million recognized as a loss. The primary driver for that was an expected decrease in the value of the EUKOR shares driven by lower estimated cash flows. Furthermore, we recorded an impairment loss of $84 million in the first quarter, and this consists of 2 items. There's a $44 million impairment related to the 4 vessels that will be recycled. The expected sale price for these vessels is $11 million. That is now reclassified to assets held for sale. Furthermore, as a result of the impact of COVID-19 on our business, we have adjusted down the forecasted results for all our units with goodwill, and that has resulted in an impairment of goodwill in the Land-based segment of $40 million. Together, the -- sums up to about $145 million impact on the EBIT, together with regular depreciation and amortization of $117 million that takes EBIT to minus $132 million in this quarter. If we adjust for these one-off effects, the adjusted EBITDA would have been $13 million. Moving down. Financial expenses were $153 million this quarter. That's an increase compared to $22 million in the fourth quarter of 2019, and that big difference is explained by large mark-to-market movements in our derivatives portfolio in this quarter. Our interest expenses were $48 million. That's a reduction of $5 million compared to the same period last year and flat quarter-on-quarter. Looking at the impact from the derivative portfolio, large movements in financial markets have caused large mark-to-market effects here. First, we have $70 million impact from negative unrealized interest rate derivatives, and we also have a $9 million negative impact from unrealized bunker derivatives. Finally, we have a $42 million impact from FX derivatives. But here, I should mention that a large share of this, about $35 million is related to basis swaps for our -- 2 of our Norwegian kroner bonds, meaning that the negative impact we have from the derivative is one-to-one offset by a positive impact from the decline in the bond liability. All in all, we have a net profit for the period of $285 million in the negative and an earnings per share of minus $0.65. Our return on capital employed in the first quarter was, therefore, minus 1.4%. And however, if we look at net profit adjusted for all the one-off effects, that would have been minus $19 million. Morning on to the Ocean segment, total income here ended at $652 million. That is 20% down, very much in line with the volume decline compared to the last year. And it's a 14% decline compared to the previous quarter. When looking quarter-on-quarter, the lower net rate and other operating income was to some effect offset by higher surcharge revenues, and that is a result of all our bunker adjustment clauses in our contracts being reset to reflect VLSFO prices as of 1st of January. EBITDA for Ocean came in at $113 million. That's a decline of 41% compared to the same period last year. And the volume decline is the obvious explanation behind this development, but we also had some impact from higher net bunker costs when we adjust for further volume effects. Quarter-on-quarter, the EBITDA declined 34% when comparing to the adjusted EBITDA for the fourth quarter of 2019. Again, this relates to lower volumes, but also higher net bunker costs had an effect of about $15 million when adjusting for the volume impact. Land-based segments, we keep repeating the word volumes. That's the explanatory factor also here. Revenue was $205 million in this segment in the first quarter. It's a decline of 12% compared to last year and down 3% quarter-on-quarter. The volumes for our Land-based business were partly affected by the impact of COVID-19 and measures taken to curb the spread in the markets where we operate. But also here, there's a general weakening in the market impacting our results. EBITDA was $21 million for the quarter. That's down 37% year-on-year. And comparing to the adjusted results for the fourth quarter of 2019, it's a decline of 27%. The decline was across all product segments in the Land-based area, but particularly the auto business in North America and terminals contributed to this decline. Looking at cash flow in the first quarter. Our cash position increased by about $50 million, positively impacted by still decent free cash flow of $32 million as well as a net debt increase of $28 million. We had $18 million in CapEx in this quarter, $6 million of that was related to dry docking and scrubber installations. We paid around $1 million on the 2 newbuilds, and there was about $9 million related to a combination of expansion and maintenance CapEx in the Land-based segment. Looking at the moment in debt, the increase comes from refinancing of 1 vessel with net proceeds of about $30 million and increase in draw on the credit facilities and overdrafts of total $110 million. We've repaid a small Norwegian kroner bond in the end of March. That was NOK 80 million outstanding with a weak NOK to dollar that corresponded to about $7 million at that time. Furthermore, we paid regular installments on debt and financial leases of about $78 million, and we had payments on leases that are now classified as debt following IFRS 16 of about $27 million. In total, for end of the first quarter, we had a cash position of $451 million and undrawn credit facilities of $267 million. So overall, we're pleased that we still have a solid liquidity position going into the challenging period ahead. Looking at our balance, not so much to say. But our equity ratio has come down to 34.6% from 37.5% in the previous quarter, obviously impacted by the value changes for our derivatives and the impairment charges. Our interest-bearing debt was fairly stable. But net of the cash, there's a small decline from $3.6 billion to $3.5 billion over this period. That brings me to the last item I wanted to cover in this presentation. We published our investor presentation in April, where we shared an overview of our expected CapEx expenditure for the rest of 2020. Since then, there have been some further changes due to the efforts we are making to protect our cash. So we wanted to share an update on the current status. Mainly for Land-based, we've taken down CapEx to really only focus on critical required maintenance. So the remaining amount expected there is in the range of $5 million. And we also decreased somewhat the expected CapEx related to dry docking, particularly with vessels going into cold lay-up, some dry dockings can be postponed. So that's now expected to be around $30 million. And further, we made -- we have had some further cancellations of scrubber installations and some deferral of the same, taking the expected CapEx related to scrubbers for the rest of the year to $20 million. Note that we also have about $15 million of committed funding related to scrubbers that we will draw on when the vessels come out with scrubbers installed. Finally, as you know, we have 2 newbuildings that are coming close to delivery, 1 expected to be delivered around summer and 1 around year-end. Cautioning, there could be some further impact on the timing of this from COVID-19 as well, but they have remaining installments of about $40 million per vessel. And for each of those, we have committed financing that will be drawn upon delivery of $50 million. Meaning, that when we take delivery of those vessels, it's cash positive for us actually. All in all, looking at CapEx net of funding, then we have a fairly low amount we need to cover for the rest of the year of about $20 million. That's it.

[Craig Jasienski, CEO & President]

Astrid, thank you. Thank you very much. Then I will move over to market outlook before we get to some Q&A, if any. Quickly on global automotive sales for the first quarter, down just under 21%. The impact in China, of course, was earlier than most markets. So for Q1, it was down 20%. Very briefly, the U.S. market was down 5% in Q1. EU, just under 17%, at 16.8%. And China actually at 42.1% down, which is the biggest impact we can see in the Q1 sales on the left-hand panel. On the right-hand panel, it's global light vehicle exports per quarter, also down corresponding to the shift we've seen in the market and the lack of demand. U.S. exports were down 14.3%. Europe was down 6 -- just over 16% and Japan over 13% and Korea, just under 10%. So we have seen an effect out of some of our major markets as far as exports are concerned. Let's just quickly on very much in the rearview mirror of the first quarter. I think important to move over now is really how do we see the world looking forward. As of printing this material, the IHS forecast was a 22% drop overall for the year of 2020 in global sales. That was actually revised or readjusted yesterday to 23% is now what IHS declare as the full year effect as how they see global sales. There's a number of factors here, which is really driving the trend. Obviously, very early in the quarter, the first thing that impacted was a loss of production because of lockdowns and social distancing in China. Once China was able to recover and recommence production, we saw the world normalize for a very, very short period of time before the virus started to spread. And once we entered the global pandemic and we entered social lockdowns, demand started to drop very quickly. And that's resulted in manufacturers simply cutting production or significantly reducing production. As I speak today, production globally is currently for automotive or light vehicles, is currently running at 76.3%, if we get that specific. So indicative of where the current market lies, we're running at roughly 76% of total production, which is all things being equal, not necessarily as bad as the sales numbers would indicate. And that's where the current production numbers lie. What's going to be very difficult to predict going forward, IHS have made their markup of a full year 23%. But what's going to be very difficult to predict is as governments ease restrictions in society, how fast and by how much will demand recover, which will depend entirely on how much manufacturers will increase their production levels. That picture in most markets today remains very difficult to predict the way that we see it today. What's an interesting trend, though, we've started to notice on the automotive side is there is, of course, an increasing aversion to public transport, which is indicating an increased use in private vehicles or smaller vehicles, light vehicles for people to move around. It's simply safer in your own car or your family member's car. That's a trend that's being noticed in many markets around the world at the moment. What remains a huge question is how much does that drive a push on demand as we move into the remaining quarters of this year? So this year will be hard to say or it is hard to say at this point in time. As far as deep sea, what I think is very important to highlight to all of us, once production starts to increase again, we know from experience that, that will come back in fits and starts. We'll have volume spikes. We'll have dips. That may happen month to month. It may, in fact, happen quarter to quarter. So what will be hard to predict as we go through these next few quarters together, you may see volumes, deep-sea volumes and our actual volume moving up and down in fits and starts. I think we just have to accept that's how it will be as volume starts to return. What the ultimate nominal level is if volume does return at this point in time remains impossible to predict. If we look at IHS' viewpoint as far as global sales are concerned, they actually view March -- sorry, April as the low point where they expect global sales to be down 48% year-on-year. Only 34% down in March, it dipped again in May of 43%, and then June building back up to a 20% -- 27% drop and then building. Again, fits and starts through to the end of the year. So based on IHS' view, it would seem as though the worst month for global sales was last month in April, and we'll -- so we build from a low base from here. Moving over to high & heavy now. I recognize this is a very busy slide. I'll start a little bit on the left-hand side and just reiterate some previous points we've made that as far as high & heavy type of products are concerned, most governments have identified those as essential service. So production has in fact held up pretty well. Q1 global production of high & heavy is only down 8%. Having said that, we do expect it to slip a little further going into the rest of this year. That's the expectation. Production has only been suspended in a few locations. Generally speaking, production has continued across the board, just with a slightly lower output, as I said, total aggregate of 8%. Demand implications remain the question for the time being. If we then move over to the middle and the rest of the slide, going across horizontally, we have the 3 segments of construction, mining and agriculture. The first set of panels there is the actual trade volume that we've seen looking back, and then we have retail sales up to April this year, and then the estimates moving forward based on the different segments. So I'm going to deepen a little bit into construction, first and foremost. Whilst that chart indicates globally a deep sea decline of roughly 20% as far as construction is concerned, for our specific trades, our impact in Q1 was roughly 12% down. Sorry, I'll rephrase. The period December to February is the only statistics we can draw. But that 3-month period, December to February, was only a 12% decline. So we haven't been hit as hard in that context. If we look at total global spend moving over to retail sales, global spend for construction is roughly $11.3 billion per annum. There has been a production loss so far of around 5%. If we look forward into the OEMs sales estimate, which is that last panel on your right-hand side, I do expect a 16% drop in sales this year, but then recovering again in 2021. A very interesting piece of information, that we're able to access yesterday is engine, and this is little detailed now but engine utilization metrics of construction equipment across Europe and North America are actually monitored and measured. And interesting to see that at week 15, over 5 weeks ago, 4 weeks ago, engine usage time was 56% down from the same period last year. We actually moved into last week, week 19. Engine time was up to 85% of 2019 totals and only 10% lower than the same period last year. So that indicates that whilst we had a drop in construction activity because of social lockdowns, clearly, over these last 4, 5 weeks, that has started to reignite to a point. So with a year-on-year total engine time reduction of only 10% is an interesting indicator for construction that perhaps it will hold similar to the way the OEMs are in fact estimating. They've not seen massive drops during this year. Moving over to mining. Mining here also indicates a global growth or the global decline effectively at 50% as far as trade is concerned. Deep sea growth was dipping and over this period was slowing down. In our mix for Q1, we actually saw a 42% decline in mining. So that was quite a noticeable reduction in mining shipments with us in Q1. So we would not expect that to fall down much further from that. We move over to retail sales, an interesting point on mining is equipment value has only declined by 26%, yet total sales -- or sorry, total volume has dropped by close to 50%. That's an indicator that the average size or the average value of units is, in fact, increasing. So we tend to see larger pieces. And for us, that is really over a long period of time looking forward, only good news. Manufacturers, OEMs themselves see an 18% drop in 2020 as far as sales estimates are concerned, and then a rebound back in 2021. Agricultural, I'm not going to say much other than to point out in that 3-month period back to December-February, for agriculture, our trade effect was only a 1% drop. So agriculture has held relatively stable thus far. The OEMs do estimate a 14% drop in sales and a rebound again in 2021. So the overall message for high & heavy is we certainly saw a softening towards the end of last year, which we'd already reported on. We do expect it to remain a little slower because of COVID-19. The demand over the coming months -- or sorry, coming quarters will probably dip a little further, but not as dramatically as automotive. That's really our perspective as far as high & heavy is concerned. It is worth noting, and most of us are well aware of that, is the actual manufacturers themselves have actually withdrawn their own guidance as far as earnings are concerned. So it's hard to use their guidance as indicators. All we can do is look to the actual volume, what we see and also their sales estimates. So that's our perspective on high & heavy looking forward. I will wrap up with the overall outlook and a few other comments and then we'll open up if there's any questions out there. Again, just reiterating, we started from a very solid cash position as we entered this period. We took early and decisive actions. We saw that volumes were going to fall. Before they did, we made -- we took decisions and we started implementing. It takes time to wash that through our system with heavy assets such as vessels, but all the more reason why it was important to be out early and to take fast action. So we're happy with how we're tracking right there. As we've talked about I think in length now, volume outlook remains uncertain. We do expect a sharp fall in auto volumes coming into Q2. I think it's important to point out, I haven't said this previously, but March held up relatively well volume-wise, as did the beginning of April. So it's really only in the latter part of April and into May that we started to see the significant drop in particularly ocean volumes, but that sharp fall is there. As we said, high & heavy, we expect to hold up better. I've just used some time on that, although volumes will be reduced. So Q2, in our view, is likely to be a low-water mark for us with around about a 50% drop in Ocean volumes year-on-year. Looking forward beyond Q2, given some of the factors I've just talked to, it's very -- or nigh on impossible for us to indicate how we see volumes. The key driver here will be once restrictions are relaxed and eased across varying countries around the world, as demand starts to return, as manufacturers start to increase their production from today's levels, we'll then have a better indication of how the forward quarters are going to look, but we believe that Q2 will be a low-water mark as we see it today. On customers, we continue to support both through this wind down phase, as we can call it that, if you like, but also the recovery. We think it's important that we return to safe operations, both from a health and safety point of view with our personnel, but also that we have effective operations that restart together with our customers. We -- the last point there. We continue to manage what we can. This situation has been brought upon all of us. We're not alone, and we're not unique. We do what we can. We take responsibility for that we control, and we continue to push on. We started in a strong, as I said, a very strong platform, which puts us in a good position to be able to weather through a period like this. I think that's all I shall say, I'm watching -- I'm partly watching time here. We're moving through the morning. So I will open up to Q&A. Anna, would you like to join the front here if we have questions?

[Anna Larsson, Head of Corporate Communication]

Yes. We start with a question from Danske Bank. Anders Karlsen, 2 questions. Can you elaborate a bit on how you expect the effect of the U.S. ARC contract to come into effect?

[Craig Jasienski, CEO & President]

We -- during the build-up period now we have through this year or the transition period, we will really only start taking on the full granting responsibility of the contract in 2021 during next year. There is quite a buildup period, both building up resources, organization and the systems. One of the important points of this contract is or has been about improving the customer experience for the personnel that are moving. So that requires digital capability to achieve that. So we'll need most of 2021 to ramp that up, which is one of the reasons why we've said that we expect the margin out of this business in the first period to be between 0% to 2%. We start -- we expect to see by 2022 the positive impact of this.

[Anna Larsson, Head of Corporate Communication]

So -- and the second question is around bunkers. Will you get the benefit of lower bunker costs going forward assuming cost in Q1 was higher than normal?

[Astrid Martinsen, Head of Group Treasury & IR]

Yes. I mean you can say that with realizable prices having come down very significantly over the last few months, we would expect to have that positive lag effect that we have talked to. I think it's important to caution that we only earn bunker compensation on volumes actually carried. So with volumes coming down, that effect might be smaller than we used to.

[Anna Larsson, Head of Corporate Communication]

That's actually all the questions for now. So if there are any further questions, we still have some time. So please just write in on the web for now.

[Craig Jasienski, CEO & President]

Good.

[Astrid Martinsen, Head of Group Treasury & IR]

Obviously, we have been very clear.

[Craig Jasienski, CEO & President]

Good. Thank you. Thank you very much for your time.

[Anna Larsson, Head of Corporate Communication]

Sorry, I just got one here.

[Craig Jasienski, CEO & President]

Sorry, we have one. Just snuck in.

[Anna Larsson, Head of Corporate Communication]

We have one from Mr. Daul on Q1, when looking at your bunker consumption, it's fallen per vessel by minus 5% in the quarter. Is this a result of slow steaming?

[Craig Jasienski, CEO & President]

Yes.

[Anna Larsson, Head of Corporate Communication]

And around Q2 prospects, when looking at active days per vessels, is this due to vessel idling and have layups already commenced?

[Craig Jasienski, CEO & President]

So in Q2, the effect of layups will start to -- we had most of the vessels going into layup, the first 10 actually occurred during Q2. So they will come out of the fleet. One of the points that I made when I presented the fleet slide is we -- you'll see a fairly large drop in the actual operating fleet. If we look compared to March, for example, there, we have idle capacity. There, we have 15 to 20 vessels, which were not fully utilized in March. The forward picture, what we see is the number of vessels we need in operation, and they will be utilized. So we'll be taking out the capacity that's not needed. So it's -- the reality is it takes time to wind up. Hence, the decision or the reason for making those decisions very early in this pandemic so that we can start to realize the effect of that as we move into Q2 and 3.

[Anna Larsson, Head of Corporate Communication]

And then we have also a question from [ Eurobest from Mr. Kazam. ] Other noncurrent liabilities increased from USD 6 million at the end of 2019 to $184 million end Q1 '20. What's behind this?

[Astrid Martinsen, Head of Group Treasury & IR]

We can come back to that question.

[Anna Larsson, Head of Corporate Communication]

I think we have some work around here. From Kepler Cheuvreux, Mr. Haugen. How much of your volumes are at risk for rate pressure in 2020? Only 20% of the 2019 base or more?

[Craig Jasienski, CEO & President]

So less because of the 20% of the 2019 base, we've already renewed 35% of that. So what's remaining, so it's a relatively small portion that's at rate risk. And it's also, I think, important to point out again that the contracts that we have remaining to be renewed is many smaller contracts and in generally speaking, in niche trades or relative -- or filler volume and supporting volume in other corridors, where it's not normal to have such heavy competition. So we see that's lower risk at this point.

[Anna Larsson, Head of Corporate Communication]

With that, we don't see any further questions coming in at the moment. Thank you.

[Craig Jasienski, CEO & President]

Okay. Terrific. Then with that, we close. Thank you very much for your participation and your support, and stay safe. Thank you.