Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2018-Q2

[Bjørnar Bukholm, VP, Head of Corporate Finance and Strategy & IRO]

Good morning, everyone. Welcome back from summer vacation. Welcome to the second quarter presentation for Wallenius Wilhelmsen.As always, we will have 2 presenters today, President and CEO, Craig Jasienski; and CFO, Rebekka Herlofsen. After presentation, we will have our Q&A session. And those of you following us on the webcast can post questions there as well, and those we will cover at the end.Craig, floor is yours.

[Craig Jasienski, Chief Executive Officer]

Thank you, Bjørnar. Good morning, everybody. Welcome back from summer vacation to those that have been able to enjoy.Welcome to the second quarter results, we're quite satisfied with what we're presenting today, in some ways an uneventful quarter, but more importantly, we're delivering results which is pretty much in line with what we were expecting and what we see from the business. And hopefully, you've also, many have noticed the new fact sheet that we've issued from this quarter, hopefully to help bring us somewhat closer of what we see in the business and what you're able to analyze out of what we're up to.But moving over to the quick highlights. We have EBITDA adjusted for extraordinary items of $159 million. As I said, basically, what we were expecting.We're pretty happy with the underlying volume development, that's been quite positive, also the mix of high & heavy. Ocean results are still impacted by sort of an inherent lower rate level. We're really looking at rates which are the lowest we've had for simply a couple of decades and that we continue to carry with us.We have one vessel delivered in the quarter, Titus, out of China, I'll talk more about that after.And as of this quarter, we've been able to confirm $110 million in synergies, so we're also very satisfied with how that is tracking towards our target of $120 million by this end of this year.And last but not least, we did have an acquisition in the quarter, a company called Syngin Technologies the U.S., I'll talk more about that after, for a price of up to $30 million. So all in all, we're quite happy with where we stand as of Q2.Today's agenda, pretty much in line as what we always do. I'll give you a business update now, then I'll hand to Rebekka to go through the numbers in somewhat more detail. I'll come back and give you a market outlook, and then we'll finish up with questions at the end.So back to the volume. Look, we're slowly crawling back when you look at the overall volume shipped that we're carrying. We're slowly crawling back to the types of levels that we had back in 2014 and 2015 from an overall volume perspective. It's taking its time, but we're slowly moving in the right direction.High & heavy has been a pleasing volume development, so the cargo mix is moving certainly in the right direction for us, but it's just not bringing the same level of EBITDA as we used to experience historically. And a lot of that simply has to do with the depressed rate levels that we've continued to talk about.High & heavy, it is a good -- sort of good development. If we look at specific trades, Asia to Europe is actually at historic highs as far as volume is concerned for us, but it's relatively small product with a relatively low yield. Where we still have a lot of headroom to go is exports from the U.S. U.S. exports of heavy equipment and large equipment are still at pretty low levels to our main markets that we've been shipping to of Oceania, South America and also back into Europe. So there's some upside in the future there.If I move over to the trade mix to have a talk about this picture, and this will help to explain some of the imbalances that we've experienced in the second quarter that we've referred to in the report and to give, hopefully, a little bit more depth as to why that impacts the results.Just look at the Atlantic Shuttle for a moment in the middle left there, that's a nice trend. So the volume that's moving between U.S. and Europe is trending in an okay basis.But if we have a look at Asia exports, Asia-Europe, Asia-North America and Asia to the South America West Coast, the combination of those, those 3 exporting -- major exporting areas in the quarter is 1 million cubic meters more, a bit over 1 million cubic meters more than the previous quarter. That results in some 18 to 20 additional vessel positions in a quarter.If we then look conversely back to the European trades, Europe-North America to Oceania and Europe to Asia, volume is basically flat, so that creates a further imbalance. So we're having to put more capacity in short term to deal with the demand out of Asia, but we don't have an equal growth in volume out of Europe to return vessels back, so that creates an imbalance in the system in the quarter. But 1 million cube jump from one quarter to the next out of Asia, it, as I said, drives another 18 to roughly 20 vessel departures, so that requires a lot more capacity.So that's some of the background explanation as to what's driving the imbalances that you see -- we see in the trading pattern and is impacting the efficiency in the trading results.Back to the freight rates again. We've recalibrated this slide back to the first quarter of 2017, and we'll continue using that as the anchor point for the time being. It's basically a flat trend. As you can see, it's slightly up. It's slightly up because of cargo mix and trade mix, but there has been, from quarter-to-quarter, no real underlying price change. Equally, have not -- we've not had any major contract renewals during this last quarter either. We do have some major contract renewals coming up during third quarter and fourth quarter this year, so we'll have a better feel for how the rate market is -- or the rates are developing in the market towards the back end of this year. But as you can see, it's pretty flat, flat basis.These rate levels, as an average revenue per cubic meter, these are historic lows. They're probably at lowest levels we've seen for a couple of decades, and that will also help explain why, yes, we see a nice volume development, we see nice high & heavy development, but we just don't see the EBITDA returns that we used to when we turn the clock back several years. But for this point, for this quarter, it's pretty much a stable picture, which is we're quite happy with.Fleet position. We had 137 vessels in operation in the second quarter. We still have the same core fleet, no changes there. We have one extra vessel in the quarter, that was Titus, as I've touched upon. And we continue to leverage the short-term market to deal with the short-term market growth that we see out of Asia, as I've talked about. So no, no major developments here other than, and I'll talk about that a bit later on, too, but if we do see any particular downturn in the market, we have 10 vessels in the system, which are on short-term charters, we can release them very quickly.So the newbuilding Titus, she was delivered on the 31st of May. She is the fifth HERO vessel, high-efficiency RoRo vessel, into our fleet, but the first one built in China. She has 3 sisters in dock being built now. We expect the next one to be delivered towards the end of this year and the other 2 in the later end of 2019. Very happy with this vessel design. As I said, we already had 4 in operation before she joined. They perform well from a quality point of view and also from an earnings perspective.Synergies. We had a big jump from last quarter to this quarter. The biggest effect there, as you can see, is on the ship management side. We have discussed that previously. The effort on the ship management side to reduce operating expenses, it takes time. We started some initiatives way back when we launched ourselves in April last year. We're now realizing that in the books, which is very pleasing to see.For those that will dive into the depth of the numbers, you might actually see that our equivalent ship management costs are actually the same as what they were in 2016, so the nominal cost is basically the same. The big difference here is we're actually -- we have 5 more vessels in the system. So we have 5 more ships for free from an operating expense point of view. So that's been a tremendous effort from the marine operations group to really get the cost savings on the ship management side.Very happy with the trend, $110 million as per this quarter. It's likely that we'll reach our target by next quarter, is certainly our plan. Worst case, end of the year.Next one, Syngin Technologies in the U.S., an acquisition that we made in the quarter. This is pretty exciting for us. This is our step into full life cycle logistics. It's our first step into that arena. What is Syngin, without sort of offending Jeff Bezos, this is kind of the Amazon, if you like, of the car insurance or the wreck industry in the United States, and I'll explain.When cars are traded out of fleet systems or insurance companies into auction houses, in the United States, that's historically been an extremely manual process. Syngin Technologies is -- it's a little 2-person operation, initially, and they came up with and developed a digital marketplace to connect fleet operators, insurance companies and auction houses to create, basically, a digital sales platform and a transportation platform. So they're able to trade digitally and put in transportation orders. So it's also moving used vehicles all across different states in the United States.We came across this company, found this very fascinating piece of business. They have a unique position with a couple of very large insurance companies in the U.S. And we see that we can apply this technology into our solutions business, initially in the United States.We've talked with some of our OEMs in the equipment processing -- sorry, the vehicle processing work we do for them, and they like the opportunities they see for their fleet business. So that's the reason why we've made this acquisition.Over time, we'll start to leverage the capability and expand it into our own client network, which is something the original founders of this company were not able to do because they just didn't have the marketing resources or the market connections that we have. So it's been a very, we think, positive tie-up between the 2 of us.The 2 founding partners will stay with us with a 30% share for the foreseeable future. They're very excited to develop the business together with us.Next piece of news we had in the quarter. Back in June, we made a decision to retrofit 20 scrubbers into our fleet. We already have 5 vessels in the system with scrubbers on board. This is really a risk mitigation focus towards the new sulfur regulations in 2020. CapEx is expected between $6 million to $7 million per vessel, including dry docking, the cost of dry docking expenses and lost time on the ships. We look at this as risk mitigation. There is still, per today, so many unknown factors in terms of the price of the fuel, what the fuel price spread will be from high sulfur to low sulfur, what quality and quantity will truly be available. There still remains to be many, many unknown factors. And for that reason, we feel it's prudent to make a step now and install 20 scrubbers. By the time we're complete with the program, which will be some time later in 2020, we'll have just under 20% of our operating fleet with this technology on board.Beyond that, as far as the additional cost is concerned, we have, of course, all intentions to recover the increased -- the cost for the low sulfur fuel for this part of the fleet and the remaining fleet from the customer market, so that focus doesn't change from a marketing point of view. This is really about risk-managing the cost base for the business. Payback periods are relatively short, depends on what the fuel price spread is, but worst case, it's within 5 years. We think, that's quite attractive for vessels that still have at least 15 years left of operating life.Okay. That's the main highlights for Q2. I'll hand the word to Rebekka to go through the numbers in detail. Thank you.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Thank you, Craig, and good morning. Let's see.So with the risk of repeating Craig's introduction, it's relatively uneventful quarter. The second quarter is normally seasonally strong. So you see a decent development relative to the first quarter. But of course, it's weaker relative to the previous year, mainly for the factors that have been carried in from previous quarters.As Craig said, we are happy to introduce better reporting this quarter. I think it's been long in the making to split up the costs in a better way. So apologies if that has taken some time, but it's here, and that should help you give a better tracking of the business.In addition, we've broken down revenues for you, so it's easier to track bunkers and the surcharges. We have a more detailed split for the landbased area, and we've also issued a fact sheet, basically, making it easier then to track the numbers going back. So we hope that it will be appreciated and helpful.Looking down at the numbers, this time starting at the top. Revenues came in at $1 billion. This time, that's 7% improvement over last year. Explanation for that is largely threefold with roughly equal weight.First of all, it's the volume increase of 3%, would have been 6% hadn't been for HMG and the reduction in those volumes.Secondly, it's the BAF surcharges due to increase in bunker prices that we managed then to offload to customers.And thirdly, it's actually the landbased segment, where we've had inorganic growth due to the Keen acquisition and also the ramp-up of the MIRRAT terminal in Australia.When you look at quarter-to-quarter development, it's also a good development, 8% increase. But that's almost solely related to the volume increase, which was 12% quarter-on-quarter and would have been 15% hadn't we lost the HMG volumes.Still, even if revenue looks good, EBITDA is weak when you compare it with last year, it's a 7% reduction. And of course, if you look at adjusted numbers, it's a 15% weakening because we had quite a few one-offs in the second quarter last year.I think we've been through exhaustively as some of the reasons, but of course, when you now look at the cost split, you will see that the bunker cost is a large part of the explanation. It came up $50 million on a year-on-year comparison. And almost half of that is then taken through the surcharges to the customers. But the remaining is linked to, of course, increased consumption and increase in voyage days. There is a lag effect in the timing of offloading this to the customers, and there's also a slight recurring element that we haven't been able to offload. I'll come back to that in a little bit more detail further on.The other items on the cost side worth mentioning is chartered-in expenses, that increased due to increased activity. And also, of course, some links partly to the trade imbalances and customer commitments. And as we talked about before, year-on-year effect also on the currency, but less so for the quarter.We keep having some restructuring costs. They were $3 million this quarter. It's linked to some severance payments that we have made, the sale of an office, and then it's really legal and consultancy costs linked to restructuring. And of course, as synergies are coming to an end, such costs will also come to an end until we come up with something new, of course.Net financials, back to a more normal level this quarter. Interest expenses are somewhat higher as interest rates have started to move up, but we also had some negative effect on derivatives. We actually had a positive development on the interest rate derivatives. But there's some, when you also look at the currency slightly, a negative this quarter.And that then leads us to a net profit for the period of $21 million. It's a doubling of the first quarter, but that doesn't really tell you much. We still think it's too low, it's unsatisfactory. And actually, if we didn't have the synergies, we'd be in the red. I think we just have to meet that. But it also goes to show the importance of the merger and the synergies that we have achieved.Moving on then to the ocean segment. Ocean delivered a revenue of $842 million in the quarter. That's an increase of 5% over the previous year, 12% over the previous quarter. And I think I've already mentioned some of the factors behind that, year-on-year. It's half-and-half volumes and the bunker surcharges, with a 3% volume improvement. And quarter-on-quarter, it's much more related to volumes since it's a seasonally strong quarter. Of course, this would have looked even better had we lost the HMG volumes in the contract in the first quarter, and there's also the effect of the lower rates.So when we talk about the lower rate effect, that's from contracts that were renegotiated last year. Of course, over the years, they've come down further. In the first quarter, we mentioned $15 million as an effect. And that reduces because it starts to work into the previous year. So the $15 million has come down to $12 million, and I think we're guiding on $7 million for the coming quarter.EBITDA then for ocean, $136 million, down from last year, 16%, but up from the previous quarter. And I think we've been through all the reasons. On the revenue side, it's HMG, it's the lower rates, it's higher bunker cost, I will explain a little bit more. It's currency, it's chartered-in expenses, largely.So a few words then on the bunker costs, which we keep trying to explain. But this time, you have also more detailed numbers on it. So if you go back 1 year in time and look at the change from then till today, bunker costs are up by $50 million. In almost all of our contracts, there are BAF clauses, but they vary, so it's a little bit hard to compile them. But largely, BAF covers price fluctuations. The freight rate is what covers the base bunker cost. But to guard us against price fluctuations, we have BAF clauses. Problem with them only is that there is a lag effect, so when the price goes up and it moves rapidly, we have a lag effect of around 3 months. So it takes time for the price effects to work themselves into our numbers. Of course, when the price falls, it's a positive.So in the same period, we recovered $24 million from customers, leaving us with a net number, $26 million. Then of course, we've had increased activity, more voyage days in the period, that's roughly $6 million. That leaves us with a $20 million that you see in the report, and then roughly half of that is the lag effect that we've been talking about and the remaining half is what we call more of a recurring element, which is then not covered by the BAF or it's due to the way the BAF is structured. That also changes over time, but it takes more time for contracts either to be renegotiated with BAF clauses or for those clauses to kick in at higher prices.So I hope that helps to give you a better understanding of why we've had these effects on the bunker side.Landbased continues to see a good development year-on-year, and this quarter, very good EBITDA development. Year-on-year it's, of course, inorganic movements because we bought Keen in the U.S. and it's also on the terminal side, the ramp-up of one of our terminals in Australia. So that's a large part of the explanation. On the negative side, we've had somewhat worse customer mix and profit -- and product mix in the U.S., which has then gone the other way.And in the first quarter, we changed our cost allocation somewhat, so it's $3 million that was then charged to landbased for IT cost. So there's no change on that this quarter. But when we do the comparison, of course, it has to be mentioned.But with taking out all these effects, we did see a relatively good improvement in landbased in the first quarter. And when you look at the underlying numbers, you will see also a little bit more stable development on the EBITDA side for the auto business in the U.S.So since it's the first half, we also show you the first half results. Not too much to say about them, of course. We're $2 billion on revenues, 8% over last year. Costs up, as you know, 11%. And the total restructuring cost when we add the first quarter is at $5 million. Depreciation going up somewhat due to increased fleets, leading then to the EBITDA of $111 million.Net financials have been positively impacted by the interest rate hedges that we entered into, that's actually a $42 million gain year-to-date. But then, on the tax side, we had some negative elements in the first quarter, partly related to withholding tax, partly related to a liability that was reclassified between 2 companies and leading to an increase in the deferred tax. So that was a real one-off for the first quarter, not something that will occur later in the year.Looking at the bottom line, doesn't look so different from the last year. But of course, last year, we had a merger loss of $62 million and we had restructuring cost of $20 million. So when you compare, yes, it's worse off than last year. I think we've been through the reasons for it.Cash flow for the quarter. It's down, $132 million. There is one good explanation for that, it's the fine that was paid to the EU, EUR 207 million, translated to $245 million. If we adjust for that, cash flow was positive by $130 million.Other things that happened in the quarter was, of course, we repaid a bond and we took delivery of the Titus and we also finished the financial restructuring. So there was actually quite movements on the debt side, but ended up quite neutral on the financing cash.And then, finally, the balance sheet. Not too much to say about it at this time. It keeps improving slightly on the equity ratio this time because of the fine and the reduction in the balance sheet, overall. That also increased net interest-bearing debt by the amount of cash we used for the fine, so that's now up to $3.2 billion.Cash is still ample after that at $517 million. We still have undrawn credit facilities. We keep refinancing at very attractive rates. Last one was at 155 basis points. So it shows that we still maintain a very good credit worthiness in the banking markets.That's it, I think. Over to you.

[Craig Jasienski, Chief Executive Officer]

Okay. Thanks, Rebekka. Let's talk to just a bit of a market outlook and cover some of the main areas again, automotive and the high & heavy markets.Firstly, on automotive sales, globally, there's not a lot more to add here than what we've been saying and reporting over the last few quarters. It's pretty much more of the same. There's a general continued underlying growth in auto sales globally, so I'm not going to spend time on that, actually.Auto exports, which, of course, is somewhat more interesting to us from a business point of view. Also, not a lot of sort of new information there, it's just a continued positive trend, which is recognizing our volume activity in the fleet that we're operating. There is more cargo in the market on the automotive side. The only real change here from previous quarters is a slight downgrading of the expectations of Chinese exports in the 5-year period. That's the only major change.Actually, year-on-year, China has had a 32% increase in exports, and quarter-on-quarter, 19%. So it's off a very low base, in all fairness, but there is clearly signs of more business on the automotive side being exported out of China, which is something that we've expected for a long time, and we expect it to continue in the future. But as I said, the forecast for the next 5 years is somewhat downgraded in terms of export growth from China, just under 10%. Other than that, it's a fairly similar trend to what we've talked about previously.Let's talk about a complicated area, and that's the risk -- well, not the risk of a trade war, that's something we don't want to comment on and we're not qualified to, but if there was something occurring in the market, how would it impact us?What we've seen so far is nothing. Or the only thing that we have seen so far, in reality, in our operation, is in fact a slight improvement. We had to do a rushed shipment of volume from China into the U.S. just before some new tariffs came into place, so that was a specific request from a client. And we've just been awarded even further business, a new car business out of Japan into the U.S. to feed the demand there. So, so far, the only impact we've actually seen from a potential trade war has been a slight improvement.However, if we take a short-term perspective, if the U.S. was suddenly slapping on significant tariffs and that reduced our volume into the U.S. by, say, 30% of car volumes into the United States, out of all the regions that we ship into the United States. If that were to occur, the impact on our EBITDA is pretty small, it's less than 5%. Reason being, it's twofold. Firstly, we can reduce capacity quickly, so we take out the fixed costs from our operation. Secondly and sadly, most of the trades going into the U.S. from an automotive point of view, have a pretty low margin. So doesn't really have such a negative effect on us on the basis that we can release fleet.So the short-term effect of a sudden increase in tariffs in the U.S. and a sudden drop in volumes to the U.S., we don't consider to be so problematic for us.Having said that, I need to balance my comments here, that would be in such a case. On the other hand, if there's an all-out global trade war, that's potentially a different circumstance. An all-out global trade war may result in lower shipped volumes globally. That could lead to overcapacity and that could lead to, again, even further rate pressure, as we have seen in our market for the last 2 to 3 years. But that's in the case of an all-out global trade war, and there's many other things that would occur in the world beyond just us in reality. But that's how we see the issue currently related to tariffs and a lot of the noise coming out of the U.S. in their discussions with various nations.So again, really, our perspective is in the short to medium term, we are not overly concerned. We are concerned for the global economies if there is a significant escalation of a trade war. But that's something that would be concerning all of us for other reasons than just our operating results.So hopefully, that gives some more flavor on how we see the tariff issue, which we understand has been affecting our share price recently.Moving over to the high & heavy segments. Construction continues, again not a lot of news here, it continues to develop quite solidly from a global point of view. We have seen a very good growth in shipments from Asia to Europe, actual shipments that we've carried over the last 3 years. We're actually lifting more high & heavy business out of Asia to Europe than we've ever done, so that's very pleasing. A lot of that is construction equipment, but the trend on construction continues to be relatively okay with a generally a positive outlook. And we're already experiencing those volumes on our vessels, at least that product, which is actually shipped on water, we have to always remind ourselves that a lot of the high & heavy growth that we see, in particularly regions like Asia, its production, which -- its product, which is built in China and sold in China. So we never see it on water, but it looks great on the top line numbers for the high & heavy manufacturers.Moving over to mining. On the right-hand side of the graphs there, you can still see we are some way to go as far as mining shipments are concerned compared to previous peaks, back in the old super cycle. So that's positive, that's pleasing. We've definitely seen an increase in mining shipments, and that's reflected in our numbers. But what we've yet to see is the whole sort of full-scale replacement cycle of big equipment that we've talked about a couple of quarters ago. That has yet to occur. So we definitely see -- on the mining side, we're still at the beginning of a good growth cycle for quite some time because we've yet to see that replacement coming through.As I mentioned earlier, exports from the U.S. as far as general high & heavy is concerned is still at pretty low levels into Oceania and South America and Europe for us compared to our previous peaks. Europe, to some markets, is tracking, not dissimilar to what we saw in the last super cycle. But the big shipments out of the U.S. is still at very low levels. So from our point of view, we still see this as an upside potential going forward.If you look at what minors are up to these days, they of course are investing in the equipment that they need, they're deleveraging and they're rewarding their shareholders, that's good to see. But as said, we do expect they'll be in a position to start replacing the big equipment, which is getting due.Next, on the ag market. It's again -- it's a bit of a mixed bag. It's for us it's a steady base of cargo. We have seen an improvement in shipments in the ag sector as well. The overall trend, quarter-on-quarter, in some of those key markets is in general positive. There are some concerns on the horizon. Australia is suffering a pretty heavy drought right now, that may impact sales of ag equipment going forward. That would have a potential impact on us because we're carrying a lot of the ag equipment down to Australia from Europe and North America. That's the only cloud that we can see on the horizon. Otherwise, it's a fairly stable picture on general ag shipments.Over to the fleet, before we close up. There has been no new orders in this last quarter. There's been one delivery, and that was to us, as we said. So it still remains a pretty thin order book, getting close to 3% of capacity. At this stage, we don't see any movement.Looking forward from a volume point of view, there is some inherent overcapacity, still. So we don't see, at this stage, a need to build for increasing capacity. However, it is likely now, as every year goes by, the average fleet age is increasing for the global fleet. It would not be a surprise that we start to see some replacement ordering coming up towards the back end of this year, that would not surprise us. But we would look at that as fundamentally replacing aging-out fleet, not a need to actually grow the global fleet. That's our perspective on it at this point in time.Because it's -- because volumes are up, as you've seen, the amount of free vessels of available capacity has shrunk a lot. So TC rates are firming up a little, not to crazy levels, but they are firming up. Generally, we think that's good news. We've only got a very small portion of our fleet that we play in the short-term market to start with. But secondly, an improvement in the TC results will also have a positive knock-on effect on the actual freight rates in the market going forward. So we hope that we see an upwards trend in the freight market as we look forward.So that's it for the presentation material, and my button has stopped. So, outlook slide.All in all, look, we see a positive volume development and the cargo mix is tracking the right way. We expect that to continue. We're very satisfied with that. We do carry with us in the backpack less in [ IKEA ] contracted volume and record-low freight rates. That we have in our backpack, and we're going to carry that forward. But the positive momentum in the market from a volume point of view and the cargo mix, we think, is good.We're very happy with the realization of synergies, that's had a very positive effect. Rebekka made the very clear statement on that one, so we're very satisfied we've been able to achieve that. It's been positive.Tonnage supply-demand balance, as I touched upon, is improving. Rates are generally, however, not at a sustainable level. So there has to be an improvement in freight rates and eventually time charter rates as well and vice versa.We expect, because we're carrying rate reductions in our contracts from -- that were renewed last year, we expect that to bring about a $7 million effect in the next quarter, as a heads-up, so we can be transparent on that.Current bunker prices are indicating about a $10 million higher bunker cost for Q3 results compared to the same period last year. So we have that behind us -- or we have that in front of us, and we do expect these challenges with trade imbalances to continue because of the volume increases out of Asia, which means we have more capacity, more positions departing Asia than we have going back. So we have a degree of imbalance, some more ballast legs and that creates some underlying inefficiency in the trading results. But again, that's a short-term impact quarter-on-quarter. Over time, more volume is only positive, and that's how we see the market.Thank you for listening, and we'll take questions.

[Unknown Analyst]

Have you fixed any of your new contracts at higher rates? Or is everything at the same level or lower?

[Craig Jasienski, Chief Executive Officer]

Same level or lower, unfortunately.

[Unknown Analyst]

What has historically been the lag effect from an increase in time charter rates [ from the service providers ] to where the operators can take higher freight rates?

[Craig Jasienski, Chief Executive Officer]

So the lag effect is more driven by -- and, I'll actually qualify an answer to the first question, too. The lag effect is more driven by the duration of the contracts than anything else. So the TC market can run very quickly from quarter-to-quarter, yet our typical customer contracts are running from anything from 1 to 3 years, depending on the circumstances. So the main lag effect is actually when the major contracts are up for renewal. So we would say it typically takes us a couple of years before we're able to see a markable increase in freight rates. To qualify my answer to your first question, when we talk about contract renewals, either same or less, that's primarily what took place last year in 2017. So far this year, we haven't had any major renewals to report on, but we have those coming up in the next couple of quarters and then we'll be able to let you know how that went. We have all intention to increase prices, that's our absolute intention, but we have to see how the competitive environment is.

[Unknown Analyst]

So this thing about scrambling to meet customer commitments and incurring extra costs, you had that last quarter, you have it now. Is that, when you say you have the trade imbalance, is that what feeds it? So it's going to go on for as long as the trade is unbalanced? Or is it something that you're adapting your way out of?

[Craig Jasienski, Chief Executive Officer]

So we need to adapt our way out of. Initially, we'll respond to the demands that we have. More volume, in principle, is good. But in a short-term perspective, when you have a lot of ballast legs, then you have a negative impact. Over time, more volume should be good, and we need to balance out the overall system. At some stage, we also need to see is it worth the extra volume in some trade lines? And that's a constant view from the operational organization as the orders come through. So it is a combination of both, in all fairness. When we see the performance as we've seen it in Q2, we have to take a much more acute view on excess volume and see whether it's making sense to bring in excess capacity from the market, particularly when the TC results are now starting to climb.

[Unknown Analyst]

Will it make sense for you to walk away from some of that stuff and let others do it because they have a trade pattern that is better adapted to it? Or are you the go-to guys if that has to be carried?

[Craig Jasienski, Chief Executive Officer]

So to walk away from a contract is not desirable. And in all cases, it's we're really lifting excess volume that's presented to us in the contracts. And yes, it's a constant evaluation. Is it worth putting in the extra vessel to -- or the extra vessels to cater for that volume, or leave that out to the market? That's a constant evaluation. The challenge we see is you'll see these numbers quarter-on-quarter. It's over the course of a year or 2 where we see whether it truly makes sense. More throughput for our business is better for the network.

[Unknown Analyst]

When you make your volume comments now, I don't know how many -- I can't remember how many cycles I've seen, but you've seen quite a few in this business. Would you say that this is consistent with what the trough looks like? You're still struggling with declining contract rates from past commitments. You've downsized your fleet to the point you want to be, then the volume starts to build, but you're not getting traction on the rates. And then at some point, you get traction on the rates, are we talking 2 years? Are we talking 1 year? What kind of -- we need to model this stuff, and for better or for worse, we need to model it.

[Craig Jasienski, Chief Executive Officer]

So we, with all the factors, and I'm not going to list them all up now, but with all the factors that we see right now, this is unique. So we can't go back in history and say we've had similar circumstances and this is what it looked like. So there's a number of settings around us which is we've not experienced before, so we are in a different place. And given the fact that the simple issue of the average revenue per cubic meter carried in the market is at decade-lowest levels, that resets the whole industry, frankly, and also resets us and the way we need to think. So it's a very different set of circumstances. How long time does it take to be able to recover? The biggest drive we've seen over the last 3 years, which is where we've seen this tremendous pressure on rates, has been overcapacity. The good news is that, at least right now, because of the demand out of Asia, there's not a lot of liquid vessels in the market to start with, and it's a very thin order book. And it looks as though all the major operators are retaining some degree of discipline of the market and saying that we just don't need the capacity. That will, over time, we hope, lead to an improved freight market. But again, back to contract cycles 1 to 2 to 3 years, now rates are so low, most contracts are only 1-year long. So it takes us a year or 2 to see a real impact in the top line average revenue per CBM. But we're at the bottom, that's a fair statement.

[Unknown Analyst]

We just want to get out of there.

[Craig Jasienski, Chief Executive Officer]

We're trying.

[Unknown Analyst]

You had the highest historic high & heavy volume share ever, at least, historically. How much further do you think that could go? Whether -- is it the cap 30%? 31%? Is there a significant upside? And do you think that if it broke 30% barrier, there could be a significant uptick in revenue per CBM for example?

[Craig Jasienski, Chief Executive Officer]

So that's the best high & heavy portion in very recent times, it's definitely not the historic best. Historic best is pushing closer to 40%, 40%, just above. That's where we're aiming.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Just to detail that a little bit, because if you look at the different operating companies we have in the structure, for the ocean part excluding EUKOR, it's been above 40% historically. But as EUKOR has lost HMG volumes, they've replaced them with high & heavy volumes. So when you look at the group average, it looks a bit more flat than the actual historic data.

[Craig Jasienski, Chief Executive Officer]

Any other questions? Nothing online?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

We have one online. It's not directly on us. Given the low rates you mentioned, do you think that other smaller players without your synergies are losing money now?

[Craig Jasienski, Chief Executive Officer]

Impossible to comment. They should ask them. Yes. Any other questions? Terrific. Thank you very much. Thanks for joining, and see you next quarter.