Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2022-Q2

[Lasse Kristoffersen, executive]

[Presentation]

Good morning, and welcome to this presentation of the second quarter results of Wallenius Wilhelmsen, My name is Lasse Kristoffersen, and I am the CEO of the company.

Before I move on, I would like to introduce the colleagues that are with me here today, and then I'll come back to the program. Starting with Torbjorn, you can stand up so people can see you, he's the CFO; and we also have Mike Hynekamp, running our Logistics business, you will see more to him; and then Xavier, who is the key -- sorry for that, got crimped up, the Key Customer Officer, but also today, as our Head of Shipping called in sick unfortunately, he's also presenting the Shipping part. So be nice to him, please.

We will have a Q&A after this presentation. We will do the audience in the room first, and thank you for coming, so many of you; and then we'll do questions from the stream after. So feel free to shoot whatever question you have.

Before we come into the detailed presentation, I wanted to just share some reflections on, I mean, who is really this company, Wallenius Wilhelmsen. And in short, we are, in my view, the world leader in logistics of rolling equipment. That means we transport everything from cars and tractors to excavators and harvesters, all the way up to using our roller trailers to transport windmills and other heavy equipment.

Most of you would think of us with our legacy business, which is Shipping, and that is correct. We are the biggest operator of fleet in the world of car carriers, a total of 128 at the moment. And the good news is that, that capacity is for the moment completely sold out.

But this company has expanded into handling basically all parts of the supply chain over the few years. And if you see on the illustration, if you start with the factory where the cars are produced, we are actually at the end of the line in these factories preparing -- during the last piece of production and preparing and shipping the cars off. We're taking them to the terminal, we are managing that process. We have terminals where we store cars; with EVs, we can charge them. We bring them across the sea. We bring them into a new terminal. Do the final processing and processing centers in the arriving area. We do inland transport. We have trucks. And we are also delivering cars all the way to the consumer.

And for those of you who live in Norway, I've seen the new brand from China, NIO, we are basically managing that whole supply chain. We pick up the car in China, bring it to Europe, bring it to Norway, and if you want, put it on your doorstep. That's what Wallenius Wilhelmsen in a nutshell.

And that means that we are uniquely positioned to working on dialing and also decarbonizing the supply chain of cars in the world. And some people ask me, so why did you join this company? That's exactly why. Number one, we have the leading position. We are playing a part in all parts of the logistics chain of moving vehicles. And we have customers that change fast both when it comes to the requirements of digital and not least on decarbonization.

On top of that, we have customers like the old OEMs and now moving into mobility, meaning they're not selling cars, they are selling mobility services. And we have products and support for them in that part as well. And we are working on the big growth opportunity on extending into the full life cycle of cars. So this company is really positioned for that whole transition that the world is going through, both on digital, electrical and decarbonized.

So jumping into the quarter, we think this has been a strong quarter. We delivered an EBITDA of USD 311 million, and that is very much driven by strong Shipping results. We built our cash position and it's currently at USD 821 million, which we believe is a strong position and gives us flexibility.

Some, not me, think it's a highlight that I joined, but at least it's a noticeable event, I guess.

We have paid dividend as we promised of $38 million the last quarter. And we have also been able to raise new debt of $950 million linked to emission reduction -- the pricing linked to emission reductions. So it's been quite active and good quarter for us.

Then we will take you through some specifics today. I will share some reflections on the market. Then I will have Shipping and Logistics, the financials. I'll come back and talk a few words on our sustainability agenda and performance. And then it's up to you to ask your questions.

So starting with the market. In general, you can say that the demand for transport of rolling vehicles in the world is very strong. It's somewhat muted on the logistics side and maybe in particular in the U.S., and Mike will tell you more about why later. But in general, in the world, we could say that we are not able to produce enough cars. There are more demand for cars than the world is able to produce. So this is a supply-constrained market, both on production of vehicles but also on deep sea transport of vehicles, i.e., the exports is also limited by supply chains.

So then moving a bit more into specifics on the market, starting with the market and sales for light vehicles, or cars, to put it very simple. Every car produced in the world is sold more or less immediately. There is a huge lack of parts. The most noticeable is semiconductors, and that is why the sales are down, and is down year-on-year, 13%. Although quarter-on-quarter, the export volumes are up. So the big car producers are prioritizing exports because that's really more the high end of their market.

We already see sign of easing on the lack of supply of parts to this industry, in particular, in semiconductors. And we think this will improve into the second half this year and also into 2023 with a more normalized situation. So our base case is that this year we will produce more or less 80 million cars in the world, and that will grow to somewhat 86 million cars in 2023.

Then, of course, we have a macroeconomic environment, which is challenging at the moment, and increased interest rates and expensive energy will eventually affect consumer demand. But then you have to remember that there is a huge pent-up demand for cars. For the last year or 2, we have not been able to deliver as many cars to consumers as we wanted and there are big backlogs on most of the world's dealers. So still, there is a big buffer between the need for cars and the ability to deliver cars. So even with a fall in demand, they will still be able to increase production.

When it comes to the heavy machinery that we transport, which are basically serving 3 markets, it's the construction market, it's the mining and it's the agriculture, and the same story goes here. Every unit produced is sold. There are hardly any stock left. And the volumes transported and sold in Q2 are all-time high.

In this market though, there are signs of tapering off of the growth, both in the construction sector, for sure. The mining sector is still running with strong profits. But with falling commodity prices, both in mining and agriculture, our base case is that we will more or less stabilize on the high levels we are now going forward. We will not see the same growth pace, but very high volumes moving also in second half of this year and next year.

So all in all, we see a car market with growing production, growing demand and what we call high and heavy or machinery market stabilizing on very strong levels.

When it comes to the fleet, the tonnage situation is very tight. And the utilization is in the high 90s, somewhere around 95%, we say, 94%. Normally, in shipping, if you're passing 90% utilization, you say that the fleet is sold out and we're above that, meaning that there is more demand than there is capacity. And this is driven by really the strong demand, but also by the fact that there is a lot of congestion in ports around the world. And just as a rule of thumb, we more or less have 10% of our fleet waiting in congestion at any given time. So that's also removing capacity from the market.

There are hardly any new buildings to be delivered going over the next 18 months. There's 1 this year and I think 11 next year. So the short-term supply constraint we expect to continue.

The order book is currently at 13%, and that are for vessels to be delivered in '24 and '25 primarily. And if you today go to a shipyard and ask for a new vessel, they would say, at best '25, maybe '26 we can deliver. So this from a supply side looks constrained also for the next quarters and maybe even years.

So that concludes the market update. So then I'll turn to our stand-in our Shipping boss today, that is Xavier, who stepped in on short notice. So please give us a few words on Shipping.

[Xavier Leroi, executive]

Thank you. It's quite an honor to stand in front of you today, and I would like to just to say good morning to all of you, but also good morning and good afternoon for our friends, colleagues and partners, which are following this webcast around the world.

As Lasse said, I'm standing in today for Erik, who couldn't make it because he felt sick. And I'm here today, and I would like to start with the Shipping and building on what Lasse said on this 10% operational disruption that we're facing currently.

As Lasse said, this is primarily due to port congestions. And we see that, as you mentioned, 10% of the fleet today in terms of vessel days is being lost and not producing basically shipments for us. Of course, we're trying to speed up the fleet. We're also trying to find short-term charters, which we do successfully. But I wanted here today to raise the point regarding our service deliveries, which are hampered by this lack of capacity, again, highlighting how much stress and work -- additional work needs to be put by our colleagues around the world to manage this situation. And of course, it has an impact a little bit on our earnings.

But first and foremost, I wanted to relay how proud we are about our teams around the world and the great job that they are doing every day to try to take -- or solve this issue for us, of course, and our customers.

Yes. These disruptions, though, have not kept us from growing our volumes quarter-on-quarter by 4%, as you can see, on the back of strong European markets. Primarily the trades to Oceania, but also to Asia ex Europe have been primarily strong, very strong, as opposed to the Atlantic trade, which is typically where we ship volumes from Europe to North America back to Europe, which has been then slower or lower on volumes due to lack of demand, lack of exports.

What you will see also from this graph is that the Asian trades are actually a bit lower. And here, unfortunately, and back to the illustration I had before, it's not related to the lack of cargo or customers or products to be transported. It's more our capacity. So back again to this 10% of our capacity, which is a bit held up in disruptions and congestions, this is the impact that we can see right now ex Asia.

The net rate is strong, remaining very strong, somewhat down from last quarter, primarily due to the trade mix I mentioned. Higher volumes ex Europe means less volumes ex Asia -- or sorry, the combination of this trade mix has an impact on our net rate. And it's also, as you can see on this third bullet here, the general -- the fourth bullet, sorry, the cargo mix and the high & heavy market share -- or sorry, share in our cargo mix has gone down by 1 percentage point. So this somewhat impacts a little bit our net freight rate.

This quarter has seen continued contracting -- or successful contracting operations from the sales and the product teams. It's important to remember that we continued this effort to reprice our current business or our book of business to sustainable levels. And Q1, Q2, a lot of what we did in 2021 was very successful and we continued to put the pressure on this. Because having this book of business back to some sustainable level is extremely important for us to cover the future and the cost increases that we see. But also and more importantly, I think that we have a good understanding now with our customers and acceptance by the markets that they need to value our product offering and that without these cost increases and this repricing of our book of business, we're not going to have the money to invest in ships. And I think this starts to be much better understood by our customers.

Talking about fleet and following on Lasse's lead a bit earlier, the fleet has been very stable at 128 vessels. You can see that we have 6 short-term charter vessels. There is somewhat a redelivery of a long-term charter, and as I said in my intro, we're trying to build some short-term capacity or long-term capacity as we need them currently to bridge the gap with the current capacity constraints we see.

But we don't do this at any cost and at any term. So it has to make sense from a financial perspective, and most importantly, in terms of the future IMO regulations coming in terms of having a clear and sound dialogue with the charterers about what they do, what we do and how we build the bridge towards the CII regulations coming our way.

There is no further newbuilds on order right now, and we will keep you informed about our newbuild program towards the later part of this year.

I think that sums it up for me today, and I would like to give the mic and the pointer to Mike.

[Michael Hynekamp, executive]

Great, thank you. Xavier. Good morning, everyone. Pleasure to be here in person. Normally, I'm taking this call at 2:00 a.m. in the U.S. So this is far better, to say the least. And just thanks to Xavier, of course, for stepping in and Lasse for the introduction.

I'd like to give you a little more insight of what's happening in Logistics. Obviously, the one area where we're challenged at the moment, but there's a good reason for that, what's happening in the marketplace. But also share with you that we're also focusing on our longer-term ambition and conviction towards our strategy.

And I think to that end, I'd like to say a few words about the conclusion of our 100% acquisition of abnormal load services, or ALS. ALS was an entity we owned 60% of for the better part of the last decade. And it became time in recognition in terms of stepping in and leaning into our end-to-end strategy that we wanted to ensure we did that by 100% acquisition and the ability to bring ALS into the fold of our portfolio in a way that we have now developed an increased presence in asset-light capabilities with ALS, but also an opportunity to connect ALS into the wider network of Wallenius Wilhelmsen as a group. ALS is a multimodal project mover of static cargo or big high & heavy equipment. In addition to that, we are able to combine and consolidate with our existing small operations in the auto space and freight forwarding.

So bringing all these pieces together allows us to utilize the 100 great employees that were in ALS to furthering our ambition for end-to-end solutions for our customers with a one-stop shop solution. So it's another opportunity for us. It's another asset for us that allows us to really leverage what our longer-term ambitions are that Lasse touched upon when we talked about this migration towards transformation and end-to-end logistics overall for us.

So really excited about that opportunity, and I think we'll see more of that benefit in the time ahead as we move forward.

So I would like to spend a little bit of time talking about Logistics. And I think we know -- we see the strength in Shipping, and we've had our own host of challenges in terms of Logistics itself.

For the quarter itself, autos remains the main focus for us based on market dynamics. And the reality is that the market, when it comes to production overall for automotive globally remains challenged. But particularly for us in Logistics, we have a high concentration in North America and North American production, in particular, has been down. So we see a 14% reduction overall year-on-year in revenue. Equally, I think that's commensurate what's happening in the market. And I'll come back to the market dynamics in the next slide.

An important part of that, though, is we continued to manage labor. Labor is becoming a more and more challenging commodity capacity-wise. And it's an important component for us in not being a very asset-heavy organization in Logistics. So with the labor markets being challenged globally, the ability to manage that labor now for the demand that we have, but also to position ourselves for the eventual upturn that we'll see in the marketplace for automotive is going to be important as we see that upturn coming in the second half of the year.

I'll talk a little bit about high & heavy. High & heavy on the other side is seeing benefits that we talked about with the strength that we have in the construction, mining and ag segments, in particular, in our equipment processing centers in North America. And so we continued to see storage revenue on top of the volume growth, as well as more in-depth accessorization of those units.

Our Terminal revenues were kind of commensurate and have been for some time with the ocean business that we've seen the strength in. We saw a slight challenge in the quarter, in particular, in the Terminals related to a few things: number one, fewer vessel calls due to port congestion that Xavier talked about, but also we're seeing the challenges in terms of a slight dip in volumes but nothing too dramatic. And it's been a bellwether for us.

And then Inland revenues, you can see the overall trucking revenues that we've been involved in have ticked up slightly. Although the results related to the Inland revenue itself were muted by the fact that fuel charges have been volatile during the course of the quarter in particular. And here, we're talking about fueling on a daily and weekly basis, which is a very different dynamic.

So all in all, I think autos is the area of key focus for us as we move forward. And it segues pretty well into this situation when we talk a little bit more about the market in particular as it relates to our Logistics business.

So as I've said probably in previous quarters, we talk a lot about where the strength is in the auto segment for Shipping. But 15% roughly or so of all auto production globally goes deep sea. The remaining 80 -- 85% of course, is handled for domestic consumption. That's where Logistics really is being impacted. We're heavily involved in factories, as Lasse talked about, so we're dealing with a lot of domestic consumption and production reductions that are unique to the Logistics segment itself. And so we're seeing volume really impacted in terms of what's processing through our facilities.

So if we break down the 2 key markets that we're in, North America, in Europe in particular in Logistics, North America is still seeing a chip shortage impact in production. Certainly, there's still pent-up demand, I think, as Lasse alluded to earlier. Even despite the headwinds that we see in macroeconomically, there is pent-up demand in the North American marketplace. And the dealer inventories remained consistently low. We've seen a slight uptick in dealer levels, but we're still at roughly 37 days, which comparatively to 2019 is a much lower level of dealer inventory than we've seen before.

And the good news as well is I think we've seen the Inflation Reduction Act passed over the course of the last week in the U.S., which has good incentives towards electric vehicle purchase in North America not contingent upon which brands. And the only things that we'll see there is the development of that because it has to be U.S.- contented EVs to continue that subsidy of roughly $7,500 per unit.

In Europe, much of a similar story. Production muted by the semiconductor space, but also, of course, the efforts of what's happening in the Ukraine and the conflict there have muted demand and also challenged a lot -- some of the production.

So I would just try to conclude with I think what we're seeing is demand remains relatively strong despite the economic headwinds. We're going to keep an eye on where incentives are for automobiles, in particular, and see if that begins to trend up. But we remain optimistic that we'll see the second half of this year the chip production returning to some semblance towards normalcy, but won't happen probably all in this year and the remainder of this year, but heading into 2023. And because of that, we see that market potential there for Logistics to continue.

So thank you for that. With that, I'll hand over to Torbjorn for the financial update.

[Torbjørn Wist, executive]

Thank you very much. This is Mike following, yes, perfect. Good morning to everybody. Great to see you all. Hope you all had a lovely summer. Judging by the number of tanned faces in the audience, I suspect the answer to that is yes.

I'm going to give you a little bit of an update on the financial situation. If we start with the financial highlights for the quarter, revenues was up 4% quarter-on-quarter. Whilst adjusted EBITDA of $305 million was up some 1% quarter-on-quarter. Net profit for the group was $126 million, down in part due to unrealized noncash losses on cross-currency derivatives, and they mainly relate to our dollar-NOK cross-currency swaps on our Norwegian kroner bonds.

Given the development, you can see net debt has trended down to NOK 3.26 billion (sic) [ $3.26 billion ]. And when you combine that with the net -- the EBITDA development of the group, we now have a net debt-to-EBITDA of under 3x, which is obviously a solid level and the first time it's been under 3, at least in my period here in the company. So we're pleased with that.

Combined with that, we also saw that the return on capital employed was 8.9%. And our equity ratio was further strengthened to 37.5%.

If we look at the segments and the EBITDA development, I guess the short comment is it's all about the fuel. If we start from the left, you can see that we're slightly up in terms of the EBITDA development of the Shipping segment, which delivered yet another very strong quarter. The revenues increased on positive developments in volumes and fuel surcharges, but was offset by increased fuel expenses. If you look on the year-over-year development of EBITDA in the Shipping segment, it is clearly very strong at 72%.

Logistics saw a negative margin development in the quarter with lower auto volumes, and as Mike touched on, terminal congestion. A bit of fumigation seasonality against the stink bugs, and I guess we will pick that up -- we'll start picking up now from the third quarter. But again, we also saw a fair amount of what we call lower-margin business, both in the service centers, but also in terms of inland transportation. And inland transportation was, of course, also impacted by the higher fuel costs.

Year-on-year, the main driver for the negative development in Logistics is, of course, the semiconductor shortages that we have lived with now for quite a while.

When you look at the Government services segment, the EBITDA was boosted by the sale of a vessel to the U.S. government, both in the first and second quarter of the year. If we strip out that, we saw that adjusted EBITDA grew moderately due to improved U.S. flag cargo. But again, that was offset by increased fuel costs.

Turning then to the group development. The revenues was up $41 million to $1.2 billion quarter-on-quarter. Again, this was primarily driven by the positive volume effect, as you can see here, that was offset due to the slightly lower net freight per CBM, again, mainly driven by cargo mix as well as trade mix in the quarter. The increased fuel surcharges that you will see there was $40 million and this is, of course, reflects the significant increases that we have seen in fuel prices in recent quarters, particularly following the outbreak of the war in the Ukraine.

The adjusted EBITDA was slightly up, $4 million quarter-over-quarter. The increased revenue was in part offset by the increased fuel expenses. We saw that cargo and voyage costs decreased $19 million due to reduced space charter costs and also cost efficiencies related to good, strong fleet utilization that Lasse mentioned in his opening statements. The fuel costs outweighed the fuel surcharge for the quarter.

Vessel OpEx increased marginally by $3 million, and we saw that charter expenses was up on the increasing charter rates that we have seen in the market despite the lower charter activity. And SG&A was a bit up on general wage and price inflation that we see across the group.

Turning then to the cash position, total cash increased by $62 million to $821 million driven by the solid EBITDA development. We paid out the first installments of $38 million in dividends and the remaining $25 million will be paid out in November. We have a policy of paying out between 30% to 50% of net profits. And the total payout for the year of just over $63 million represents about 36% of total net profit, but if you were to strip out the minorities in EUKOR and Armacup, represents some 47% of the profit attributable to the owners of Wallenius Wilhelmsen.

We continue to invest in our Zeebrugge and Brunswick terminals to meet the customer demand, very proud of the work that is going on there. Other CapEx includes vessel maintenance but also proceeds from the sale of a vessel.

We paid $14 million in customer settlement and fines related to the antitrust and now have $80 million of liabilities on our balance sheet in relation to both sort of current liabilities, as well as remaining provisions. And that significantly reduces sort of the remainder that we have and hopefully we'll now can look at this black event in the company's history in the back mirror.

Working capital expands a little bit in the quarter and there's a number of factors that contribute to it. Some of the factors that are contributing to, call it, congestion in terms of ports, for example, COVID lockdowns in China, will also impact the financial operations. Because if you're going to get money out of China or a payment of a receivable out of China, it often requires a stamp from a bank in Shanghai, for example. And when those banks get closed, clearly, that delays the payment of money due to us. So that has impacted us.

We've also seen that following the outbreak of the war in the Ukraine, fuel suppliers are also demanding shorter number of days payable in order to manage their own risk.

So the whole turbulence that we have seen in the market doesn't just affect the operations, it can also affect the financials.

You will also note that the undrawn credit facilities have decreased to $247 million -- and this mainly relates to refinancing but also removal of what we deem to be unnecessary credit lines.

Turning to the balance sheet, we maintain a solid balance sheet and a comfortable liquidity position, which means that we are in a good position to continue our delivering on our dividend policy and continue to reinvest in our business. The equity increased to some $3 billion and total assets to $8 billion. The leverage reduced as we talked about, and cash was solid at $821 million.

In Q2, we concluded some $1.15 billion of refinancings in the bond and bank market. And the debt maturity profile we have in the group is very comfortable going forward. Of that $1.15 billion, $950 million of that was financing, which are linked to our sustainability target of taking down CO2 intensity emissions by 2030.

We have no remaining 2022 maturities. I can tell you, we are very happy that we did the sustainability-linked bond in April and not have to live with the uncertainty that we see in the bond markets now. So the 2023 maturities are manageable and will be refinanced in the next 12 months. And the next bond maturity is now in the third quarter of 2024.

So with that, I thought I would close by giving you some insights into the flagship fleet financings that we just completed. As mentioned, we signed $800 million in secured bank financings with 11 banks, extending maturities and increasing our available credit lines as well as unencumbered fleet. So that means that our fleet is fully financed until 2025.

This past Monday, we drew down $670 million of that of which $570 million was used to refinance existing debt on those vessels. And that leaves $130 million for any general corporate purposes that we may need.

It is attractively priced with a link to our CO2 intensity targets. In short, what it means is that if we meet the targets, and they will be measured annually, the margin will decline by 5 basis points. If we do not succeed, they will increase 5 basis points and this will be tested annually.

The vessels are secured by 20 -- and this facility of $800 million is split into 2 facilities. But in total, the facilities are secured by 20 sailing vessels with an average of 12 years. Five vessels have become debt free and this, of course, increases our number of unencumbered vessels to 12 in total.

So with that, I will close the financial update and hand the word over to Lasse.

[Lasse Kristoffersen, executive]

Thank you, Torbjorn. Sustainability is a core element in our strategy. And some people ask me, so what is really sustainability, and I'll come back to our framework. But I learned once that it's very easy: either it's sustainable or it's not. And everything we do in Wallenius Wilhelmsen, we have that mindset: can we keep this going forever, then it's okay; if not, we need to change it. But we can't change everything in 1 day.

So we have set a framework around how we work with sustainability and we have 4 elements of that framework. It's basically how we run our company or the principles of governance we have; how we treat our people, how we keep them safe; how we affect the planet around us; and how we drive prosperity. And you might think why is prosperity part of sustainability? Well, if we are to lead the road to 0 and lead this industry forward, we need to make money to invest. So prosperity is very much linked to sustainability.

Our priority #1 is safety, and this is a work that never stops, and we are working, continuously improving. And in particular, in our Logistics area, even though the numbers were slightly better quarter-on-quarter, we are not happy with our performance. And Mike and the team work very strongly with how can we improve safety at our production facilities. It's not an unsafe working environment, but we have too many minor incidents happening.

We have quarter-on-quarter improved our emission profile, both in absolute terms but also in terms of intensity, meaning how much CO2 are we releasing divided by the volume we transport or transport work, in other words. And as Torbjorn explained to you, this is one example of how sustainability and prosperity is linked. The better we do it on CO2 emissions, the lower cost of capital we have in the company.

So on that note, summarizing what we see when we look forward and the prospects of our business and our industry, we see that the shipping capacity and the tight supply-demand balance is going to continue in the foreseeable future.

We believe that the Logistics volumes will start to pick up second half of this year as we see that the supply of, among others, semiconductors are improving. And we think we will see an even larger effect of that into 2023.

We expect our financial position to strengthen going forward and that provides us flexibility, both to pay back to our shareholders through dividends and to invest in the future of this company.

There are still large uncertainties on the macroeconomic picture. But there is a big buffer before that really hits the supply of cars and vehicles in the world.

So in our view, we have a very positive outlook for the next 6 to 18 months.

On that note, we are concluding the presentation. I'd like to invite Torbjorn, Mike and Xavier to the stage and we open for questions.

[Lasse Kristoffersen, executive]

For those in the audience with questions, please make sure that you get a mic, so those on the stream can hear you. And for those on the stream, fire away. And Anette over here will make sure we get the questions. So if there are any questions in the audience, this is the time and place. It's always difficult to be the first.

[Unknown Analyst]

Starting out with newbuildings So I guess I'm jumping to it here a bit. There has been rumors that you've all placed orders, which you denied afterwards. But could you give some sort of prospects on when and where we should expect newbuildings to be placed?

[Lasse Kristoffersen, executive]

Yes, what we have said and what we stick to is that we will have a strategy presented by the end of this year and we will do that. We are working intensely on looking at what is the next generation of fleet we will have. We have not placed orders, so that rumor is fake. But we are actively looking into options.

What we have said is that it's a very big dilemma we're in. We're in a very high-cost newbuilding market. We are in an energy transition where we do not really know which technologies to put on the vessels, which means that it takes a lot of optionality or flexibility that we need to build into these vessels to opt for potential future scenarios. So that's why it's both technically, commercially and financially a big task to do this right.

What we have said is that we will only invest in new vessels if they take us a clear step towards our zero emission target. So we will not just invest in yesterday's technology. We will invest in something that takes us forward. And as you might know, we already have been working on this, Orcelle Wind project, and that's one of the things we look into, how can we use wind much more extensively to propel the vessels of the future.

[Unknown Analyst]

I'll throw a quick one. For the quarter, your net rate is declining, which is in contrast to, for instance, Höegh Autoliners, which reported last week. Could you explain a little bit more on exactly why it's declining? And you also revised up your net rates for the previous quarter. So the decline is, in this set of numbers, actually higher than what it would have been if you didn't revise your numbers for Q1. So is it high & heavy volumes only? Or is it very, very sort of low-priced long-term contracts filling up with new volumes?

[Lasse Kristoffersen, executive]

It's a combination of factors and maybe you will fill me in. But as Xavier said, there are primary 2 things. Between quarters, there are some shifts in the trade volumes. And this quarter, we had strong trade volumes in parts of the business that are less -- with lower basically market rates. And the other element is a somewhat lower level of high & heavy, which was also varying between quarters. So there are both -- I mean, mostly periodical elements to the quarter-on-quarter developments.

And as related to you said Höegh, we have a very, very strong book of business, and have hardly any capacity left for spot activity. And I think they reported a much bigger spot activity. So you should expect them to have more volatility in the numbers than us. I don't know if you want to add anything, Xavier.

[Xavier Leroi, executive]

You covered most of it. I think what Höegh reported, at least what I read, was that they have 34% of spot business liftings. Our numbers are closer to 5% to 6%. I mentioned as well that a lot of our focus is on building a sustainable book of business, not only for the next 6 months or the next year, but really bridging the next cycle, maybe 4 or 5 years. So we are really focusing on having this overall 95% of contracted business pricing and net freight up and up and up steadily, once again, as this will be the source of financing for our future vessels. So it's a structural book of business, I would say, that's explaining the difference.

[Lasse Kristoffersen, executive]

Thanks. Other questions from the audience? Not yet at least. Do you have anything from the stream?

[Xavier Leroi, executive]

Yes. There's a question over there.

[Lasse Kristoffersen, executive]

There's a question.

[Unknown Analyst]

You mentioned that you missed an emissions target this year because you had to -- because of the increased speeds, vessel speeds. Does that mean that you're going to have -- would you have any problems after January with your vessel speed with new regulatory requirements?

[Lasse Kristoffersen, executive]

Well, I think the general picture with our fleet is that we are -- significantly have reduced the emissions on our fleet over the last 10 years, and we work hard on that every day. The challenge over the last period has been that due to the extreme demand for transport, we have needed to speed up the vessels. And that's the principal challenge in terms of the absolute emissions in our fleet.

And the target you related to was probably linking to 2021 numbers, we reported that, that did not meet the full target. But we're still committed to our target towards 2030 of reducing the emissions of the fleet. Any...

[Torbjørn Wist, executive]

No, you said it perfectly.

[Xavier Leroi, executive]

Maybe I can just add as well that the current disruptions we're facing with this 10% of capacity lost to vessel days. I think if we didn't have that, so if we managed to go back to a normal supply chain across the world, we would be balanced and the need for speeding, and therefore, the subsequent emissions would reduce tremendously.

[Lasse Kristoffersen, executive]

There's a question over here.

[Unknown Analyst]

Talking about the problems of the semiconductors. Obviously, that's a problem within the car industry, which is basically the bulk part of your business. But you also have a very profitable branch within in the heavy machinery equipment. Is the problem with semiconductor shortages the same within that branch? And do you have any plans on expanding that sector since it's a highly profitable sector of your business?

[Lasse Kristoffersen, executive]

Do you want to take a go on that, Mike?

[Michael Hynekamp, executive]

Yes, certainly. So the one thing is absolutely clear: in any industry that was faced with semiconductor need, there was a challenge. And we all saw what happened as a result of the COVID epidemic, and then suddenly, in particular, auto manufacturers began to reduce the orders of semiconductors, which then went to the consumer market.

But in most of the sophisticated pieces of equipment that we handle, like high & heavy, using combines or anything else, there are a significant amount semiconductors used for those pieces of equipment. And so they were impacted as well. So you see that same tightness that we talked about earlier, that everything is being produced even in the high & heavy space is being sold.

When it comes to our focus, I think that we have a uniquely positioned, I won't speak for the Shipping group, we have a uniquely positioned portfolio of ships that can handle that segment to handle any of that growth. But we think, as Lasse pointed out, the market itself will kind of stay at the levels we're seeing today based on the robust demand that exists and the capacity to produce.

When it comes to the land-based business, we made an acquisition a few years ago, Keen Transport, which had a lot of high & heavy equipment land-based processing capability and we feel really well positioned there as a leader, particularly in the North American market to handle the growth moving forward. So that's why we've seen the Logistics result, while challenged in auto, has been buoyed by the growth in high & heavy.

So our continued focus on that, coupled with what I mentioned earlier, an asset-light solution like ALS, allows us to handle this kind of heavy equipment or out-of-gauge equipment in the exact space that you're talking about in the European market and then we begin to connect some of that for global solutions. So anything we can do to conquest a premium cargo like high & heavy, we focus in on as a group.

[Lasse Kristoffersen, executive]

You see any other hands? No? Anything from you, Anette?

[Anette Orsten, executive]

Several questions from the Internet audiences. So we have a few questions that have already been covered, including on fleet renewal and CapEx. One more question relating to newbuilding and Jørgen Lian asks, "You said lead times for newbuildings was for 2025, maybe 2026 deliveries. Is that the case for you as well?" And Lasse, maybe you would like to get that.

[Lasse Kristoffersen, executive]

Yes. It is. Basically, the relevant shipyards are sold out. So if you are discussing -- if anybody discuss on its lot today, it's '25 at best and realistically maybe at least a portion of that order into '26. And that goes for all players.

[Anette Orsten, executive]

And we have a few questions relating to capacity as well, starting with a question from Frode Morkedal. And Xavier or Lasse, you may consider who should answer this. In terms of congestion, do you believe 10% of the fleet is typical of the entire industry?

[Lasse Kristoffersen, executive]

To be perfectly honest, I don't have the number for the entire industry, but I would be very surprised if it's not because we are basically trading in the same terminals of the world. And even terminals we run have all our competitors being there. So my assumption would be yes, but I don't know. I don't know if you guys know.

[Xavier Leroi, executive]

Nothing to add. I think that's right.

[Anette Orsten, executive]

Very good. Continuing on the topic of congestion. What is the cause of this congestion? And do you believe it will be sustainable? Or I guess, will it last for much longer? Xavier, maybe you'd like to have a go.

[Xavier Leroi, executive]

Yes. Just it's difficult to explain on the cost. Of course, basically, capacity not producing is a cost, and we see...

[Anette Orsten, executive]

Sorry, sorry, Xavier. The cause of it.

[Lasse Kristoffersen, executive]

It's cause. The reason, the cause.

[Xavier Leroi, executive]

All right, sorry. Well, primarily, what we see is that we have vessels in parts of the world, which are basically unable to complete their voyage or to start it. That's basically been the case completely unexpectedly. We have had a lot of volatility and unexpected macro developments: lockdowns in China, I've just blocked and stopped the whole trading of vessels needing to discharge or starting their voyages there; the port congestions and the push of a lot of manufacturers at the same time; and the volatility of their own parts supply, bringing that, maybe they don't have cargo available for this voyage, but the next one. I think over time, this has created an extremely vicious circle where everyone is running after the next vessels.

Just to give a short example, some of the voyages that we're having, which typically work like clockwork and that are really like a shuttle between fixed ports are today completely unpredictable, and sometimes we're losing more than 20% of the time on some voyages without real pre-notice because the ports close, cargo is not available.

So I think that we don't see that this trend is easing anytime soon, but we are, of course, extremely eager to watch any signs of relaxation of the problem.

[Lasse Kristoffersen, executive]

And just to add a few words, I mean, coming new into this, trying to understand why is this big disruption, and it's pretty much the same as in container, and I think it's down to 2 principal reasons. One is that we had a lot of volumes falling out with the initial phase of COVID. Then we had a significant rebound, and we were trying to push more volumes than capacity through a system and that basically blocked it.

And then adding to that, the unpredictability of production imports because people are sick with COVID, suddenly in China they shut down. Now you have strikes. So all this volatility in the productivity of the ports, combined with extreme high volumes, basically creates this vicious circle that Xavier explained.

[Anette Orsten, executive]

Very good. Moving on to another question on capacity. I think we covered it quite well, but there's also a question on whether cargoes are finding alternate transportation solutions. And whether we have -- well, how we prioritize the cargoes that we end up shipping.

[Xavier Leroi, executive]

I'll start very quickly. It's 2 different pictures. I think on the car, when the car is not shipped, it's not sold and people delay their order. So that's basically what's not shipped is actually not leaking to others.

On the high & heavy front, I think it's a bit different because the orders and it's partly most of the time -- part of -- sorry, of an industrial value chain, so the equipment is needed. So if we can't load the high & heavy, there's a chance that it's going to leak to competition. I think today we have a very high retention and we don't see leakage of cargo that's complementary.

[Anette Orsten, executive]

Very good. A question for Torbjorn relating to dividends and dividend policy. You are distributing only a limited portion of your earnings as dividends. Any thoughts on changing this policy?

[Torbjørn Wist, executive]

Well, we will make sure we will inform the market when we do. No, I mean we have a policy today of 30% to 50% and that is, of course, something that we will -- that we continuously discuss within management, as well as with the Board and there are no changes as of yet. But of course, we will inform the market if and when we make a change to our policy.

[Lasse Kristoffersen, executive]

Yes. I think the only thing we can say is that we are now building financial flexibility, allowing us both to look into dividend policy and to investments.

[Anette Orsten, executive]

Very good. And there's a question on the GDP outlook, and I guess I can answer on that. What GDP outlook do you assume in your market outlook?

And for this quarter, we expect 2.7% for the remainder of the year based on our market sources and that has come down during the last 2 quarters.

And a few questions relating to -- well, we can start with one on fuel prices into Q3 and how that may be recouped in surcharges. And I guess we've covered it a little bit.

[Lasse Kristoffersen, executive]

Yes. But just in general, we have very good coverage in our contracts. And we are basically recovering 90%, 95% of the fuel changes. And then there are smaller periodization effects, I mean, lagging and so on. But in general, we are compensated for the changes in the fuel, at least across quarters.

[Anette Orsten, executive]

And then the remaining questions I can see are related to contract renewal, how much we've renewed during the year, what is remaining and the impact on prices. I see questions coming in from both Frederik Ness, Jørgen Lian and [ Chrysis Aristidou ].

So I guess, in general, Xavier, could you say a few words on how much of sort of contracts planned renewed for '22 are already covered? What rate renewals or if you can give any color on that. And as well, there's a question on if there's a difference or if we're seeing reducing spreads between auto and high & heavy rates.

[Xavier Leroi, executive]

Maybe you should have taken those a little...

[Anette Orsten, executive]

Why don't start with the renewal and how much have we done.

[Xavier Leroi, executive]

Yes. I think that we have -- I'll start by saying that we have a very transparent and open dialogue with our customers when it comes to renewal and are very, very transparent and forthcoming with our capacity. And I think our customers appreciate our openness and this kind of dialogue and that we're actually committing to something that we're going to be able to deliver or at least we strongly feel like we're going to be able to deliver.

As I hinted in the Shipping segment, we've been very successful with the shipping contracts renewal. And we're also, overall, very happy with our ability to reprice to the sustainable level.

I think on the Logistics front as well, we've been very, very strong. Sorry, Mike, if I'm just putting now my customer -- my commercial cap. We've been also very pleased in the collaboration and the fact that we've been purposefully and jointly with customers and with our entities able to grow and develop new parts of the business.

To the question about high & heavy versus cars, the repricing is both. And I think that we're trying to put the trend forward. High & heavy is our premium cargo segment. This is an area where we believe that we have an edge and where we have capacity and trading globally that maybe our competitors don't. So we will continue to push and put forward our advantages right to the market.

Cars are also being repriced or the auto contracts are also being repriced, but the gap remains as this is just a general effort across all segments.

[Anette Orsten, executive]

Yes. And if I may add, we typically have 1- to 3-year contracts on the auto side, sometimes up to 5 years on heavy machinery.

And a final question is relating to the basis for the expected strong 12 to 18 months of Logistic growth considering the major macroeconomic headwinds this week from China. And I guess, Mike, would you like to take this one?

[Michael Hynekamp, executive]

Yes, certainly. I think we touched upon it a little bit in the discussion that while the headwinds are certainly present, we're all well aware of them, we see them consistently in the press. We also recognize that demand has remained consistent, and we don't have any basis for suggesting that demand will not remain consistently strong. There's a large level of pent-up demand that probably and likely will need to be filled in the next 12 to 18 months. And so all auto manufacturers are really gearing up for that pent-up demand to be met.

Now what happens 2, 3 years out based on headwinds is another maybe conversation, but reality is right now we continue to see that, that pent-up demand will need to be met. And inventory levels remaining low, EV is continuing to expand in the marketplace, incentivization in large markets around EVs. We feel that while there is this more challenge that we're seeing now, macroeconomically the demand will still remain robust.

[Anette Orsten, executive]

Very good. And then one final question from the online audiences. It's relating to our spot share. So Xavier, if 95% of business is longer-term contract, does that mean that Wallenius Wilhelmsen is excluded from spot revenues in the next 12 to 18 months?

[Xavier Leroi, executive]

The way we structure our contracts is also applicable for what others would consider spot businesses. So a lot of our industrial accounts and the likes of, I think we've mentioned in previous presentations, Airbus, for instance. That's typically an industrial breakbulk business that we are able to contract because we have a consistent fleet that can deliver the level of product.

So it's in the advantage of our customers not to ship spot, but to engage in contractual relationship with us because we can day in/day out, week in/week out, deliver on capacity. So part of this -- of our portfolio of contracts is actually taking advantage and securing this portion of spot business or the likes of spot business through contracts. I hope that was clear. But yes, so we are there.

[Lasse Kristoffersen, executive]

Yes. But in general, I mean to be clear, we do not use this market to become more opportunistic. We are more thinking how can we work long term with developing with our customers, both in service scope, extending contracts, extending the duration of contracts and getting levels up to sustainable levels on pricing.

So we are not very much focusing on the spot market in the short term. But of course, we have some exposure. And when we are in the spot market, we see that it's very strong.

[Anette Orsten, executive]

Very good. That's all from the online audiences. So Lasse, I hand it back to you.

[Lasse Kristoffersen, executive]

Thank you. I think we'll close it off then. So just in closing, as you have seen today, I hope, Wallenius Wilhelmsen is the leader in global logistics for rolling equipment. And we will take and use this position to take a leadership in how this industry decarbonizes and how it digitalizes.

And I think this quarter has shown the potential of our Shipping business. We think this trend is continuing. And as Xavier said, when we renew the book of business, it's always better what we do tomorrow and what we did yesterday. And so the Shipping trend will continue, in our view.

And then we believe there is a significant upside on our Logistics business as the, particularly the U.S. market, and production of cars are normalizing.

So as you might imagine, I'm very proud to be part of this company. And I think we have a very strong outlook for our business in the next 6 to 18 months.

So I'd like to leave you with those words, and thank you for attending.