Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2019-Q2

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

Good morning, everyone. A warm welcome to everyone both here in the room and following us on the webcast today. And welcome to the second quarter presentation for Wallenius Wilhelmsen for 2019. We will have 2 presenters: President and CEO, Craig Jasienski; and CFO, Rebekka Herlofsen. After the presentation, there will be a Q&A where you can pose questions. And for those following us on the webcast, you also have the opportunity for questions and we will aim to cover those as well at the end. With that, Craig, please. The floor is yours.

[Craig Jasienski, CEO & President]

Thank you, Astrid. Good morning, everybody. Welcome to our Q2 presentation. Very quickly, I'll start -- I'll get straight into it. As we are a little bit behind. Highlights for the second quarter. We had an EBITDA of $211 million. We're actually very happy with where we are given the degree of market uncertainty that we like to hear and read about in the papers. But as far as where we are for today, we're very happy, very comfortable with the results that we're delivering. So that's a good quarter for us. Ocean results have been driven upwards by primarily a better net freight per cubic meter over a period of time due to more efficient operations and a lower net bunker costs. I'm going to get into that, as usual, into somewhat more detail as to what is actually driving the underlying improvement in results. Our volumes have actually declined. So that's the reality of the market that we do see, that volumes are slipping. We've been partly making that happen ourselves through the commercial priorities. So we've been choosing the right business, so that is reflected, in fact, in our volumes. On the land based side, the businesses are performing on a pretty stable basis, so it's all good news there. And we have particularly strong development on high & heavy land-based activities. And last but not least, with our performance improvement program, we're still tracking very well towards our $100 million target towards the end of next year. This quarter, we've increased the realized savings to $65 million by another $5 million. So that's our quick highlights. Agenda has -- sorry, quick clicking here. As usual, I'll give you now a business update, and I'll hand over to Rebekka to go into the results into somewhat more detail. And then I'll spend a bit more time on the market outlook this time around. And then we open up for Q&A thereafter. So straight into the business. Yes. So volumes, this is our volume picture. Overall volumes are down 8% year-on-year. More than half of that is our own choice. We, as you would recall, in previous quarters, talked about the desire to move away from some non-profitable business, that we did. That took effect from the beginning of this year. And that, of course, had some impact on our volumes. So we're not so concerned about our own volume picture, the fact that it is down because, we're actually improving our own earnings and our yield. So this is partly by choice. But having said that, there is a general downturn in automotive sales, which represents a little bit less than the other 50% of the drop. And I'll go into that in a bit more detail. But yes, the automotive market is in general weakening. High & heavy, pleasingly, is stable. So actual high & heavy share for the quarter is up 2 percentage points, up to 29% of our total volume, but that's due to the drop in auto, not due to any growth in high & heavy specifically. Let me go into the trade to explain a little bit more around the volume picture and what's been shifting over this quarter, and particularly with the year-on-year focus. I'm going to start in the bottom left-hand corner with Oceania and make my way around the world that way. Oceania, as far as that market is concerned, auto is weaker, so we do see a weaker sales position, and Australia has particularly got off to a slow start this year, that's noticeable. And one of the factors here is there has been -- to get to a bit of detail -- one of the manufacturers is, in fact, changed the way they record sales in Australia. Rather than recording at time of import, they're recording now at the actual time of sale through the dealership, so that muddles the numbers slightly. But the underlying market is a little bit weaker. Unfortunately, the agriculture market in Australia is also weak, particularly tractors above 50 horse power, which is sort of large units, which is typically what we lift, they're, in fact, down 10% year-on-year as far as sales are concerned. Australia's been suffering with some pretty severe drought in certain areas for a while now, so that's clearly impacting agriculture. So in general, market for Oceania is slipping a little in line with what we can see here, in a 200,000 cubic meter drop year-on-year. No major concerns, just a slow order market. Agriculture will shift seasonally as we move through time. I will later on talk about mining when we get into the market outlook because that's somewhat more interesting story. Continuing, we have Atlantic Shuttle, looks like a fairly dramatic drop year-on-year. This is one of the specific trades where we chose to walk away from business that was not profitable. That's a good reflection of the drop in the volume. But what I can happily say is the yield and the earning in that trade area, in fact, improved as a result of making those decisions. So that's actually a good story for us. The high & heavy mix has improved, so that's also supporting a better yield in that particular trade. I'll continue around Europe/Asia trade. I'll just give a little caveat. The Q1 2019 was a very abnormally low month in the Europe/Asia trade. There was a shutdown of one particular large plant or a series of plants in the U.K. They were not shipping to Asia in Q1 and that had a pretty significant dip, and that's very reflected in that drop. Year-on-year, it's pretty stable. So in the Europe/Asia trade, where we see a flattish picture in a long-term perspective. And in fact, imports to China are up 11% year-on-year. So even though China sales are slipping from an overall market point of view, imports have, in fact, grown, and that's been also a positive for us. Asia/Europe trade, moving over there. We continue with a very firm automotive base in both of our brands, both in Wallenius Wilhelmsen Ocean and in EUKOR. So we see the underlying order volume quite stable. High & Heavy is, with the exception of Turkey, also quite stable in the Asia/Europe trade. And we saw, as you can see, there, an increase in actual liftings in the second quarter compared to the first quarter. So Asia/Europe for us is also quite stable from an overall picture. I'll also go back year-on-year, if you look at Q2 '18, that was a particularly strong quarter of exports from Korea. So the 3.4 million cubic meter in Q2 2018 is abnormally high when you look at this year-on-year. So when we're looking at 3.2 million cubic meters, we look at that as being actually a stable picture for our business. So we're quite happy with the development there. Asia/North America is developing particularly well as a trade for us in 2 main areas. We lift more and more high & heavy in breakbulk, and that's been a continuous trend over the last 2 years, in fact, and that continues to support the underlying development in that trade. The actual exports from Korea and Japan, from the macro point of view are, in fact, down to the U.S., but our volume that we actually lift ourselves is, in fact, stable. Specifically, Japan to North America, we've been able to, in fact, take some market share in that trade. So we've been able to improve our liftings, in fact, from Japan and North America, which is opposite to what's actually happening in the market. So Asia/North America is also, for us, a good story and a very positive development and stable. The last but not least, it's a small volume here. Asia to South America. West Coast, generally softening markets on the West Coast of South America, and that's reflected in the numbers here. I won't spend much more time on that one. Moving over to our fleets. No major changes. We operated 127 vessels as of the end of the quarter. In June, we've been adjusting capacity month by month, as we always do, depending on our own supply-demand picture. So we've kept the fleet very tight. Our picture as an operator is balanced. We always aim to do that month by month. So that's all very stable. I think, importantly, for us, in any term of risk of a general downturn in the market because that's the -- what seems to be some of the sentiment around, we still have the flexibility to release up to 12 vessels, long-term vessels in our fleet during the course of next year. That excludes any short-term capacity that we take in the market. So in the call it a worst-case scenario, if we were to see any downturn, we're quite comfortable as far as fleet deliveries are concerned. So we feel quite comfortable and balanced. We are still running our newbuilding program, which is not news. But what is news is, in the quarter, we took delivery of Traviata, the second vessel coming out of China. Some of you are able to join the naming ceremony which took place here in Oslo at the end of June. So she is now in operation, performing very well. We have 2 vessels left and they're due to come out in Q4 this year and early next year. Rates, how is the rate market developing? I'm going to start on the right-hand side. We tried to be helpful. We've tried to make the -- now the light -- not the light green, but the sea green bubbles is what's new this quarter compared to last quarter, for those of you who like to follow quarter-on-quarter. So that's to try and help. In the detail there, there's roughly 8 contracts which were renewed during this last quarter. Of those, 3 of them were high & heavy breakbulk contracts. This is very important to us. Some of these contracts, we've extended for quite long periods of time, so we've been able to take that volume from the market for some time. And we've done that because the rate levels are good and the relationship and the partnership with those clients is also very good. What's pleasing to see is you'll notice that all of those green bubbles are above the 0 rate percent change and they're to the right of the rate impacts change. So it's all been -- it's not big numbers, but it's all positive in terms of development. So we would love to see much greater rate increases in that, to be very honest, but -- so this is the reality of the market. We're quite happy that with these smaller contracts. We are, in fact, able to either retain or improve terms. So that's been a good feature. To the left side. During the course of this year, we still got, however, 72% of what's available to be renewed this year will be renewed, so that's not insignificant. That's representing, to avoid the question later, roughly $780 million worth of revenues, so that's not insignificant. More than half of that, of course, is the Hyundai/KIA contract, which expires at the end of this year, the OCC contracts. And what I can say about that at this point in time where we are now in moving very close to September is we have a lot of confidence that our performance is good. We get tremendous feedback from both in Hyundai and Kia that we are performing exceptionally well, as we have always done in that long relationship, so we have a lot of confidence that we'll continue to work very closely within, Hyundai/KIA, and we received a lot of strong signals. So that's still work in progress, but we're quite comfortable where we are as far as the OCC is concerned. The relationship is strong, and the work together is extremely transparent and very valuable for both of us. So that is yet to come. There's a few other larger contracts in there. They're in play right now. So we'll probably have news on those when we get into the Q3 presentation in November. And probably to cover a question later, when will we know about Hyundai/KIA, that will be towards the very end of this year. I'll move over to the rate development, the net freight per cubic meter. A quick word of caution, the $43 per cube that we had in Q1 was abnormally high. We explained that at the time. There was a number of reasons behind that I won't reiterate it. But what is pleasing to see, we've come back to a more normal level, but the trend is improving. So we are able to continue to focus on focusing on improving our net revenue per CBM, and that's reflected in the numbers here, and that is helping to drive some of the improved underlying operational performance and delivering the black numbers that we have. We still have the negative impact of renewals that were done in 2018 coming into this year, it's about a $2 million to $3 million impact year-on-year, so it's not massive, but it's still a feature. Performance improvement program, very happy to see how that's developing. As I said before, it started quickly, and it's a bit of a longtail, and it will be a longtail through the end of this program. What's been the biggest driver now for this quarter has been an improvement in the efficiency of how we're doing underwater hull cleaning and also improved voyage optimization, and that's seen in our underlying performance and in the operating growth. What we have left to achieve is very much centered around centralized voyage management, digitalization of a lot of our operating activities, and that will lead to further optimized -- voyage optimization. This will take time because we need to build tools. We need to invest in some digital capabilities in order to get there. But we feel very confident that we'll reach that target at the end of the program, but it's going to take us some time to get to that point. Very topical now. We think it's now much closer to time to start to talk about this in somewhat more detail. Coming up in January, we, of course, have the fuel shift change for the new sulfur regulations. We wanted to give you a quick update of where do we stand. As far as technical readiness is concerned, we have been -- we haven't talked much about this, but we have been extremely busy for quite some time now doing a lot of testing. We've tried and tested various methods of switching fuels, different fuel blends, different qualities of fuel. And during that entire testing period, we've not had one off-hire day. So we consider the technical risk to be very low. We've looked at the quality of the different types of fuel, bearing in mind that what's available in the market today is primarily a blend. It's a mix. It's not refined to that quality. But we've been satisfied with what we've been experimenting with so far. So we also consider that to be a low-risk assessment as far as technical readiness is concerned. The availability of the fuel is the question mark, we don't control that. We can manage our technical side, but we can't manage the availability of the fuel. So that remains to be seen. So we consider that to be a medium risk. The alternative in case the actual quality of fuel is not available in terms of the quantities that we need, we can always switch to MGO to gas oil, which is readily available. So that's a more medium risk assessment on that one. As far as financial and commercial impact is concerned, we've put in place some financial hedges to deal with Q4. And also, we will also try to minimize the running period on the new fuel leading into January. Bearing in mind that from the 1st of January, we shall be compliant, 100%, without question, so we need to start bringing that fuel on board during Q4 and we need to start consuming some of that fuel as we end Q4. So that will have some impact. We have very good progress on discussions with our customers as far as bunker adjustment factors and causes are concerned. So we are building the new fuel price and quality required into our contracts. That's progressing very well. So we're quite comfortable with that direction. But it remains a medium risk because we still, at this point in time, don't know what the price is going to be for this fuel once it starts really trading in the open market. We've opted to take a very minor scrubber program, as you're all aware. We consider, from a risk assessment point of view, for that to be low as far as acceptance because we've chosen hybrid scrubbers. That's our decision back when we made that choice. So the way we see this now, we're comfortable given there is a massive change for the industry. We've done everything that we can do to prepare ourselves. So we're ready. But what I would say is that, as we start switching over to the new fuel, there may be some cost impacts in Q4. We haven't quantified that yet. But when we've been able to quantify that, we'll of course, share that with everybody. That's where we stand on readiness for the January, which is very much just around the corner.With that, I will hand to Rebekka to take us through the financials.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Thank you, Craig. So where are we? Volumes have come down. Rates are pretty low. Markets are uncertain. And yet the profitability is up. So I'll try to shed us some light on why that is. Starting then, as usual, at the very top on the revenue line. Revenues year-on-year, down 4%., all of that comes from ocean and net freight being down because of volume reduction, somewhat offset by lower fuel cost compensation. 8% volume drop sounds high. But as Craig said, roughly half of that is actually through our own decision to get rid of some volumes to improve profitability. And the remainder of that is the mix of the fact that there was a rush of sales in Europe ahead of the regulation last year, so the comparison base is pretty high. And of course, the fact that auto sales are weakening, we do see that in the volumes. If we look quarter-on-quarter on the revenue line, it's more flat. That actually volumes were up by 5%. The net rate is up, the fuel compensation, the surcharges are down because of prices. And also, other revenue is down. Now that's the deep-sea bearbulks income from external parties. So that's why that line is flat. If we look at EBITDA, you will see quite a massive improvement from last year, 32%, that, of course, is related to IFRS 16 which improves EBITDA by $42 million. So if we exclude that, it's a 10% improvement, but that's still pretty good. And as we already said, a large part of that is due to the performance improvement program, but it's also related to a better cargo mix compared to last year and lower net bunker costs. If we look quarter-on-quarter, less of a change, but it's down 3% even if volumes are up. So a part of that expense, but what I said on the revenues. But also, on the costs side, the kind of good development we see on costs even if volumes are low is offset by a higher SG&A costs in the quarter. A lot of those are one-offs, and we do expect to return to more normal level on that in the next quarter. Moving further down, we have the IFRS 16 effects and we will be dealing with that for the remainder of the year. So depreciation is up by $37 million as a result of that. So if we take that out, that's actually a neutral development on that. But where there is a development is on the financial side, where we have a negative development on the interest rate hedges. These are unrealized losses. So it's more like you paper loss, it's still a large number because interest rates have been falling. So of course, if we look at the bottom line, $3 million, not a very impressive net profit but there are some adjustments that are noncash items. IFRS hits us with around $5 million negatively on the bottom line. And then, of course, the interest rate hedges of $31 million. So if we adjust for that, we do actually then have a net profit of close to $40 million, which is not that bad. Let me start then by going into the Ocean segment in more detail. Some of it has been mentioned already. If we start on the left-hand side. Looking at the revenues, $800 million, 5% reduction year-on-year, explained by the volume reduction, that I have already been through. But I could also add that we do continue to have a rate impact compared to last year, but it is down to around $2 million to $3 million per quarter. So it's a lot less than what we experienced last year. Quarter-on-quarter, it's more flattish, down by 1%. Of course, also linked to the other revenues and the fact that there was less fuel cost compensation in this quarter. Volumes were actually up. In addition, actually, for Ocean, a transfer of one business from ocean to land-based, which moved $5 million in revenue from Ocean to land base. So you won't see that in the group accounts. When we look then at EBITDA, of course, you will see the IFRS impact. Again, that's $31 million. So we try to exclude for that when we look at the underlying improvement. And then we're actually up 14% year-on-year in Ocean. That's related to performance improvement program, the cargo mix and also lower net bunker costs, that I've mentioned. If we look at the net bunker costs, it's actually $23 million less year-on-year. That's linked to both the surcharges increasing and the actual bunker costs lowering. That we -- when we publish our numbers, we actually adjust for the volume changes. So when we say that the underlying effect is $10 million, that would be assuming that the volume has stayed constant. And performance improvement is around $18 million impact in the quarter, so it's also realized. And where you'll find that on our P&L is on the bunker line on chart with expenses and also the cargo expenses. Quarter-on-quarter, 3% down, of course, linked a lot to the revenue reduction, but also the SG&A costs that I mentioned, they are up about $5 million quarter-on-quarter. And most of that are one-offs that we had in the quarter related to some smaller write-offs and assessment with a vendor. So you should expect that to return to more normal level. In the next quarter, we do have some smaller increases as we have a lot of projects going on related to IT and digitalization. Moving on then to landbased, it looks quite good on the revenue line year-on-year. But as I said, they were given $5 million by Ocean, so that's explains a part of it. But we do see a good improvement on the high & heavy side in the U.S. and also actually quite an increase in Europe and Asia. The best revenue doesn't have the best margin, so you won't see the same effect on the EBITDA line. Quarter-on-quarter, quite flat, but this is marked by actually volumes being weaker for the auto business in the U.S. as some of our customers have suffered from lower volumes, but that is then masked by the fact that the high & heavy business is doing better and thus, we have new revenue in Europe. Looking then at EBITDA. Of course, IFRS effects, again, $11 million. When we take that away, it's a flat development year-on-year. So what's actually pleasing and what you don't see here is that the revenue decline that we had on the auto business in the U.S. doesn't come through in EBITDA because of efficiency gain. So we are actually able to take up costs when volumes drop there. So that's quite good. Terminals, slightly down, also related to volumes. So to kind of sum up the landbased side. We do see weaker volumes in the U.S., as we have warned about earlier, but they're still at the very high level. So remember, that is still healthy. And we are able to offset those declines through efficiency gain. We also see good benefits from the acquisition of Keen, which we saw was a very good timing for the high & heavy income and Syngin has also contributed nicely to the results. So since we are halfway in the year, we also sum up where we are. The revenue here, relatively flat. That's, of course, because we had a good revenue expansion in the first quarter. We had the higher surcharges in first quarter and also favorable cargo mix. EBITDA, $430 million, a 50% improvement. Excluding IFRS 16, a 23% improvement. Volumes, actually down by 5% when we compare with last year, that's a very good net profitability improvement, and that is, of course, linked to the performance improvement program, as we've said many times, but also better cargo mix. In the first quarter, we had a quite good healthy levels of project cargoes in the Atlantic as well, so that contributed, and lower net bunker costs for both quarters. What's not so good in the first half is the hedges that we have in place on the interest rate side. In total, it was a negative development, both in the first quarter and the second quarter, as so we have a paper loss of $53 million related to them. So actually, when we look at the bottom line, we should adjust for IFRS, that's a $10 million impact to $53 million on the interest rate hedges. And if you do that, we're actually close to $90 million in net profit, which I would say, is a pretty good improvement. Moving on to cash flow, it's down by $68 million this quarter. I'll explain briefly why. As Craig said, we had one vessel delivered, the Traviata, so that is the main part of the CapEx in this quarter. We also had some dry dockings and some installations of ballast water treatment systems and expansions at the few landbased facilities. So that explains the $56 million in CapEx. Then you'll see quite a reduction also on the debt side. We repaid bonds, so that's $90 million reduction in the quarter and the rest is kind of regular installments. We did raise a new facility, but we paid down another one. So that was only a $5 million increase. On the other, it's actually the first time we paid a dividend in several years, so that EUR 25 million of the EUR 53 million. The rest is realized hedges. I'm going to spend this time a little bit more on the cash flow, showing you an extra slide on it. We know that the investors like to focus on free cash flow. They define it in different ways. The way that we have defined here is to look at the operating cash flow, deducts interest rate costs and we deduct regular CapEx that is not CapEx related to acquisition and sales. So typically, investors will look at this and say, this is the cash that goes to service the equity. In our world, we have some commitments on leases where we make these payments. And on the debt, where we have to pay installments. So we're not quite free to spend this cash in the way we sometimes would like to. That's what you will observe when you look at the left-hand chart, is that we do generate quite ample cash flow as a business. There is 1 quarter that was significantly negative, that was related to the EU fine that we paid in relation to the antitrust case. Other than that, it's quite high. It's increasing, and that's partly explained by IFRS 16 again, because we moved some of the lease payments over to debt payments. So that explains $30 million of the improvement. But I wanted to show you this in comparison to the other chart, which is the net debt repayments, and which really shows you that most of the free cash flow that we generate has come to reduce debt and mostly through installments. This has been a clearly stated priority from our side, so it's not a surprise. But it kind of shows you why we haven't been in a position to pay larger dividends before now. We do have a strong cash position. So we are able to make some smaller investments as well. And we are starting to be able to return cash to shareholders in the form of dividend as represented by the recent dividend. So that's looking good. Then to close off the balance sheet. There is very little to report in the quarter. We had a big change in the last quarter, of course, because of IFRS '16. So the balance sheet expanded by almost $1 billion. This quarter, equity ratio, just a marginal improvement as the net profit was low. Cash is down, as I explained. We did a large refinancing this quarter on the land-based side. Close to $300 million revolving credit facility. 4 years unsecured. Margin at 175 basis points. Lots of good interest from banks. So we continue to get quite favorable terms on the banking side. So to close off. We do continue to have a very good and solid cash position, including undrawn facilities, it's close to $800 million. Some of that, of course, will go towards the antitrust provision in the future, some will go towards small investments that we make. But as you note, dividend is then becoming an increasing priority for us. So with that, back to Craig.

[Craig Jasienski, CEO & President]

Thank you, Rebekka. I'm a little conscious of time. I'm going to go through market outlook now, a little conscious of time, but there is some hopefully useful information for everybody. I'll go straight into the auto sales decline as we've seen it globally based on this quarter. Year-on-year, it's down 4.9%, nearly 5%. So yes, automotive sales globally are slipping. The U.S. market has declined 3.2% year-on-year. But as Rebekka also just mentioned, we have to remind ourselves that U.S. is still at a relatively high level. Now the other thing about the U.S. market while I'm on it is the manufacturers in the U.S. are -- these U.S.-based ones, are in far better shape now than they were if we turn the clock back 10 years ago. So they're in better financial position, they have better cost control and they have better efficiency in their production facilities. The only reason why we say that is, if there is a deeper downturn in the U.S. automotive market as far as sales are concerned, I don't think we're going to see -- or we don't think we're going to see the same negative impact from the manufacturers in terms of the turmoils that they went through. They're in a much better, better shape. It doesn't really help shipping, but it does a lot to do with sentiment and views in the marketplace. Western Europe actually dropped 6% year-on-year. Still, the WLTP introduction last year has created some distortion when you look at quarter-on-quarter numbers always, and that will continue to be so until we see the market really, overall, settle. But having said that, Germany is still holding up pretty well. I'm going to talk a lot about U.K. at the end. We're not going to be experts on Brexit, but we're going to talk to the U.K. market. But Germany is holding up quite well. Southern European markets, starting to slip. They had some good strong runs, but there are some quarters back, but they're now they're starting to slip. So and underlying, Europe is not unstable, but the sales are clearly slipping. China, overall, continues to fall off its high. A number of factors in their household, that is increasing at pretty significant levels. I think we're all familiar with. There is somewhat -- or less consumer confidence. The VAT incentives haven't really taken hold as we would have expected and I think the market would have expected in China. So China sales continue to slow. But again, having said that, imports are in fact, increasing. Q1 was particularly slow, as I've talked to previously, but Q2, we can see that the overall sales -- imports as a portion of sales in the China market is actually growing up to now just over 4%, used to be just over 3%. So imports continue to grow into China. For us, that's good news. We don't worry so much about what's produced and sold in China. We concern ourselves way more with what's imported to China. And that's also reflected in the improvement in our own numbers. I'll continue on China just quickly. China is down 12% year on -- year-to-date, as you can see. The market still carrying a relatively high degree of inventory which needs to be washed through. Another factor that may affect China sales going forward, again, primarily for local production, but potentially imports is the fact that different provinces are bringing in new environmental regulations, not unlike Europe is doing. The challenge there is that each province will bring it in at different stages. So we might see a degree of, call it, fits and starts over time as far as China sales are concerned, just as a precursor. So we may see some instability at some point, some time going forward. Again, what we're going to focus on, of course, is imports and where we can maximize our earning potential into the market. Moving over to auto exports. They're overall down 3% year-on-year. North America has dropped quite a lot. It's nearly 10%, 9.2% year-on-year drop. There has been somewhat slower uptake of U.S. products in Europe, that has some of the reason behind. The trade war issues between China and U.S. has clearly had its effect as well, so U.S. products are weakening into the China market. So that's having somewhat of an impact on the North American exports overall. EU is slightly down 0.6%, nothing really of major note on the exports side. I'm still talking to the left-hand side of the screen, by the way. Japan, I mentioned previously, it's actually down from an export point of view, 1.4% year-on-year. Our volume of automotive out of Japan has increased. So we're bucking the trend. I'm happy with that. Interestingly, China exports have also grown 7%. So whilst China domestic market is weakening, they're increasing their export position and actually to an array of markets. Obviously, not the U.S., but into various other markets. Moving over to the right-hand side now, the imports per quarter. China, I've already talked to, so I'm not going to rehash that, and -- sorry I'll restate one statistic. Import as a portion of sales is 4.5%, in fact, up from 3.7%. North America is down mainly because of production shifts. So it looks a little dramatic. It's very easy to connect that with trade wars. It's very easy to connect that with political rhetoric in the U.S. But when you get into the facts and have a look at it, there's actually been a production shift. There is more sourcing of production in North America for the North American market, which has been very much part of the administration's aims. We also had last year one particular manufacturer out of Japan, had a new model going to the U.S., which was very popular, which shot up sales performance. But that has become less popular. So those exports from Japan has, in fact, reduced. So we have to bear in mind that's important for us to look at the U.S. market and get a little bit into the weeds and not get too hung up on what we always see in the paper about trade wars and political issues there. Australia is, as you can see there, it's pretty dramatic. It has been off to a weak start. There is no doubt there, the automotive market is weaker. General sentiment is a little softer. But there is a factor I talked to very briefly before, and that's the shift in the way imports and sales are registered has changed for a couple of major manufacturers. That's distorting these figures a little bit. So as we move forward, we'll -- into this -- rest of this year, we'll get to see what the underlying market really looks like as far as Australia is concerned. So that's the picture on quarter looking behind. Looking forward, yes, market uncertainty is increasing. We're not going to hide from it. But again, as I just talked to, we like to get a little bit into the details and have a look at what is actually driving our volume, what's really happening in those markets. The macro picture tells us that we have a relatively soft market going forward. We always read that from IHS, as far as looking at forward forecasts are concerned, that's reflected here. Our view is flattish. We don't expect any major downturns, save for any major global events that may or may not occur, but we can't judge that. But we expect the overall market for automotive to be flat and flattish going forward. There's a lot of reasons that are fueling the uncertainty. They're listed here. We've talked to them before. Brexit is one of them. But we're going to try and have an attempt to demystifying that towards the end as far as we're concerned. But I think China is the one to watch here in terms of it's just a general softening momentum. And as said, household debt is actually increasing at pretty significant rates.It remains to be seen how much of that will really drive sales in the Chinese market. For us, it's important, again, on imports, but Chinese market is just so big, but when that market shrinks, it creates negative market sentiment. We need to try our best to filter that out and look at what's really happening in our real volumes, and also, ultimately, our real performance. That's enough on auto. High & heavy, trades definitely weakened, but it still remains at high levels. We're comfortable with the proportion that we're booking as a portion of our total volume. With construction on the left, as we have talked to, and we have seen, the actual growth in exports is coming down to an end. So now we see a flattish picture for construction. Moving into 2020, we will probably see a decline in construction shipment, that's our expectation and that's what we factor in, because we've had a pretty long run over the last couple of years and a lot of the big infrastructure projects have been supplied, a lot of the replenishment has been done. So we did expect and we do expect construction to level back down as far as growth is concerned. Mining still remains for us a very interesting story. We have a very bullish view on mining still. Everybody's waiting for to see it come. But this is a slow game that is coming in our direction, we believe. Reason for that, and here, you can see the statistics, that sales year-on-year are continuing at a growth base. Some of the bigger manufacturers have just talked to their own quarterly results recently. They also remain quite bullish. One of the reasons why we remain bullish for our business is, when we look at large dump trucks and excavators for mining, there's a life span. We talked about this back in the Q3 2017. This is a long time ago now. But if you look at engine replacement in a big machine, an engine needs to replace after about 4 to 5 years. That's been driving, over the last couple of years, that's been driving a lot of the growth in sales for companies like Caterpillar because they've been replenishing engines, providing new cars. There hasn't been the big machines that we ship. There's been a lot of componentry supply. It's been very positive for them. It doesn't do much for shipping. The truck's chassis itself has a life span of 80,000 to 90,000 hours of operation, which is roughly 13 to 15 years. When the chassis is worn out, it needs to be replaced. You can't fix it -- the engine can be rebuilt, the chassis cannot. We're at the cusp where, if we look at the total truck,[indiscernible] some dump trucks, dump truck part size global is about 1,100 trucks. If we look in the forward curve of the replacement as we move through units which are getting to 13 to 15 years of age, as we look forward now for the next 7 years, we're going to peak, up to 5,000 trucks will hit the age 15, based on where we stand today. So looking forward, there's thousands and thousands of dump trucks that are reaching their end of their usable life as far as the chassis is concerned, and they will need to be replaced. It's not happening next quarter. But it is happening over the next couple of years on a steady pace. So we remain quite bullish as far as mining equipment is concerned, big mining equipment, which is good for us. I love mining [indiscernible] Ag flat, remains seasonal. Australia struggles with the drought. Australia will go from drought to flood, that's how it is. Farmers will regain money and they'll spend on recruitment against so then we'll see a lot of Ag going back into Australia. U.S. market is relatively stable as we see it today. So we see a flattish picture as far as Ag is concerned looking forward. Freights. I'm watching time. There was 2 new orders reported in this quarter. 2 Japanese carriers have ordered one vessel each. It still results in pretty much marginal net fleet growth of nothing by the time we get to 2021. That's healthy. That's the picture that we think we need to see. The market is not really balanced yet. And for us, the bottom line, in this sense, is actually the same as the top line of the slide, and that is current markets do not justify ordering, and we'll leave it at that. Brexit. So we're not going to try and demystify everything around Brexit and what does it mean. What we want to try and demystify is the impact of Brexit on our business and how we view it because there's lot of sentiment around this. It may be factored into how people look at the company today. But I'd like to try and explain how we view it. On the left-hand side, our light vehicle sales by production origin for the U.K. market. U.K. market in terms of sales is about -- currently, about 2.7 million units, it's down from 3.1 million in 2016. That's the total size of the market. Of that, only 15% of what's sold in the U.K. comes from outside of the U.K. and outside of the EU. That's our market. We do not ship anything from the EU to the U.K., and we're not involved, obviously, in the local production in the U.K., so it's only the 15% of volume is imported to the U.K. market. That's our playground. That's a total of about 420,000 units of the total sales. So those 420,000 units per year, we bring in roughly 120,000. So those 120,000 units that we bring in is about 3% of the market, 3%, 4% of the -- sorry, 4% of the market in the U.K. So if any of us assume that because of the very hard Brexit and a lot of political uncertainty, that every single person in the U.K. stops buying a car completely forever, we'll lose 100,000 units. It's unlikely that everybody in the U.K. will stop buying a car forever. So will there be an impact on our volume for imports? Yes, there could be, but it's pretty marginal. The total U.K. market as far as volume is concerned for our business is less than 3% of our total volume. It's volume, but it's not a disaster as far as imports are concerned. So just to demystify that one a little bit. On the right-hand side, if we then look at exports, and that's a bit more of an important picture for us because, yes, we are a big player as far as exports are concerned from the U.K. U.K. exports, well, here, you see total production and exports on a run basis. It peaked in 2017 with 537,000 units. There was some big choices already made back then, Jaguar Land Rover decided to move production to China, already opened up new plants during 2017 and 2018. So production already started to shift as far as exports were concerned. So serving particularly the Chinese market. As we move through this forecast, yes, exports are expected to decline. But the vast majority of these export declines is based on a shift in sourcing. Production is being moved out of the U.K., whether that's because of Brexit or other reasons, that's -- we don't have an opinion on that. But the fact is that production is slowly moving out of the U.K. What's most important is the production is moving out of the U.K. into another production facility somewhere else, it still needs to be shipped. Some of the U.K. manufacturers are moving production onto Mainland Europe. Whether it's produced in the U.K. and sold in China or North America or it's produced on Mainland Europe and sold in China or North America doesn't affect our business. It just changes the port of load. So whilst we do have some volume and a significant amount of volume that we do get out of the U.K., we don't expect that volume to disappear from the market. It will be shifted somewhere else. And we're still in a position to be able to [gear it] If there's a move of production from the U.K. directly into the U.S., which is the case for one particular manufacturer, they're taking a product, they've produced in the U.K. today, you're going to move that to the U.S. for the U.S. market, well, maybe we can pick it up on landbased. Maybe we can do the processing for them. So it's not necessarily bad news either if production shifts into -- from the U.K. into the U.S. market. So all in all, well, there are 2 statements I like to make really and that's what we accept that a hard Brexit could affect sales further. We accept that. I understand that. But our volume is so small from an import point of view and it's not connected with the EU because we think it has a limited impact. Secondly, we accept that manufacturing will reduce, as has been shown over time already, for exports. But we believe that it will be primarily a sourcing shift. So we're not that overly concerned about Brexit from our own direct business point of view. It's very concerning sentimentally and geopolitically, undoubtedly. But for our business, we'd like to try and demystify a little bit of any concerns that might be there. With that, I will stop about being an expert on the U.K. And I'll ask Rebekka to join me up here so we can have Q&A. As we close off with the outlook, it's very much a summary of what we've talked to. The volume outlook does remain uncertain. Automotive is a feature there, more so than the high & heavy piece. We do expect tonnage to gradually improve because there's still a very disciplined, no ordering or limited ordering activity. Our terminals are impacted by lower volumes currently. But overall, our land based performance is expected to continue quite stably and to develop well. We expect a continued improvement in our performance improvement program leading in through -- into next year. And obviously, for the rest of this year, our key preparations about IMO 2020 to make sure that, first, that we're compliant, and secondly, that we do this in the most at least risk way from a technical and financial point of view. So then we open for questions both in the room and on the web, if any.

[Unknown Analyst]

About the Q4 and bunkers. You said that you were going to [indiscernible] boxes, I suspect you have done a little bit calculation. So is it possible to provide, to some extent, in the magnitude of what risks we are seeing for Q4 and its impacts?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

The reason we're not guiding is because we don't know what the prices will be in the fourth quarter obviously. The risk is related to -- one is switching costs where we will be doing sloshing, we'll buying some MGAs to wash out the tanks. It's the lag effect, so it's the risk that the spread widens in the quarter, as many will be buying the new type of fuel. And it's the risk of having to buy early, so we buy at more expensive levels earlier in the quarter. And so quite -- it's too early to quantify that because we don't know prices, but hopefully, we can get back to you.

[Unknown Analyst]

What's the proportion of your customer base have accept the bunker [indiscernible]

[Craig Jasienski, CEO & President]

It's well over 85% of the main customer base have accepted and understand. The remainder also understand, but their contracts should be renewed or clauses to be settled.

[Unknown Analyst]

impact[indiscernible]

[Craig Jasienski, CEO & President]

That's a great question. I can't answer that. And it probably varies from vessel to vessel.

[Unknown Analyst]

I think in terms of -- one thing is purchasing the fuel [indiscernible] to have flexibility to have multiple tanks in consume age of oil.

[Craig Jasienski, CEO & President]

There's definitely, flexibility, that's the reason for the sloshing of the new fuel and the old fuel using MGO to clean out. So we have multiple tanks. I can't answer you exactly what number on what vessel. So we have to same flexibility in that regard.

[Unknown Analyst]

Well, what's the likelihood os a third operating [indiscernible]

[Craig Jasienski, CEO & President]

The likelihood?

[Unknown Analyst]

Yes.

[Craig Jasienski, CEO & President]

Very low. Any other questions?

[Unknown Analyst]

In your mining outlook, and bullish [indiscernible] to your company. To what extent does the Chinese replacement of dump trucks [indiscernible]perhaps explain that. How does China play into the mining.

[Craig Jasienski, CEO & President]

So for today, there's no real significant Chinese -- pure Chinese producer who makes large dump trucks and exports them to the world. So that doesn't feature at this point in time. What does feature potentially over time is the large manufacturers that with Americans and Japanese that we work with is if they start to shift their supply base and they do a sourcing shift themselves where, but they produce large equipment in China for exports. That has incurred in any big scale yet, but that's what we continue to monitor. One of the reasons why we retain a very strong position in the Chinese market where we're very strong there today, both import and export for auto for the reasons of having a strong position in the market.

[Unknown Analyst]

In terms of the Chinese team for replacements, mining equipment, is that large or a small share of the overall replenishment you are expecting in the mining segment globally?

[Craig Jasienski, CEO & President]

You said about the total -- I can't answer specific to dump trucks in China. So I don't have that in my head. What we see, however, is the average global carpark is reflective of what we see in Australia, which is a very important market to us, and also South America. Question from the web. I think -- sorry, did you say one more...

[Unknown Analyst]

No, a very good presentation that shows the car sales down by [ 8% ] year-on-year[indiscernible] flattish, is there confidence in that flattish?

[Craig Jasienski, CEO & President]

So given the volume has already fallen off to a point, if we look forward to the rest of this year, we would just have a flattish outlook and a flattish view because we've already seen somewhat of a drop. What remains the unknown is just what's happening from a global economic perspective. We can only know what we read in the papers. And if that changes dramatically, then our view match it, which is also why we retain a relatively conservative outlook. Were there other questions in the room? On the web?

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

Yes. We have 3 questions from the web. First, do you expect to redeliver any of the vessels you currently have out on -- have on charter?

[Craig Jasienski, CEO & President]

That depends on volume. So if the volume drops and we don't have the need, we will redeliver. If the volume holds and we need the vessels, we use them.

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

Second question. Your cash flow was very strong, but partly boosted by IFRS 16. How would cash flow be in a non-IFRS 16 world?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Yes. So the effects on the free cash flow on the slide that I showed is roughly $30 million improvement per quarter related to IFRS 16. That been moved from operating cash flow to the financial cash flow. So in the totality of the cash flow, it's the same as it has been before.

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

And another more financial question to close off. What are your CapEx plans? And can we expect CapEx to run well below depreciations going forward?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

For the foreseeable future, yes, there are 2 vessels still to be delivered. They are financed through that. And there are no other plans for new building. What we do have is scrubber investments plan, which is a roughly $140 million program, and that's what we know about CapEx. XX

[Craig Jasienski, CEO & President]

Any other questions? Good. Thank you very much for your participation. That was a very long presentation and meeting. Sending apologies, but we hope we've given you some useful information given. Given that you all came to see[indiscernible] Thank you.