Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2018-Q3

[Operator]

Okay. Good morning, everyone, and welcome to this Third Quarter Presentation and Capital Markets Day 2018 for Wallenius Wilhelmsen. For the first talk to the quarterly presentation, as always, we will have 2 presenters, CEO and President,Craig Jasienski; and CFO, Rebekka Herlofsen. After this presentation, we will also have our Q&A. You here in the auditorium can ask questions and also you online. Before I give over to Craig, some new information this time. There are a lot of people here today. So information from the landlord in case of fire, exit through that door or that door and exit through the back entrance and walk on to the waterfront. But no fire expected, just to be clear. Just in case. Craig, are you ready?

[Craig Jasienski, Chief Executive Officer]

Thank you. Good morning, everybody. Welcome. We hope that you enjoy this format. It's slightly changed, where we've merged Capital Markets Day with Q3 presentation for the sake of efficiency for everybody. And I'm going to talk about efficiency in our presentation as well. So most welcome. And today, we'll do, as always, I give you a market update -- sorry, business update of where we are today. Rebekka will give us a detailed rundown of the financials, and then I'll give you a market outlook, and that will close on Q3 presentation, then we move into a couple of very interesting topics for capital markets. But -- not but, with the beginning, highlights for the third quarter. EBITDA of $152 million. We are quite satisfied with that. It's pretty much in line with what we are expecting. We still accept that's at a low level compared to what we should have as a sustainable result, but no surprises for us, so we're actually pretty satisfied where we landed in the quarter. The ocean volume development still continues relatively okay from a seasonal point of view. Particularly if we look year-on-year, the underlying growth is quite okay. And high & heavy is not growing rapidly, but it continues to trickle along and improve quarter-on-quarter or particularly year-on-year.In the back end of this quarter, we did have some weakening in volumes. There has been some profit warnings that we all read about and heard about during Q3 from various auto manufacturers. I'll talk more about it after. But there has been some weakening and there is some volatility at the moment in the auto markets. The ocean results, however, despite a relatively okay volume position, we still suffer from a lag effect on bunker and the carryover of cost that we don't fully recover. So that's hitting us each quarter every time the bunker prices continue to rise, and that was also the case in Q3. So Rebekka will talk more to that. We've also reduced capacity because, as I said, volumes had dropped a little in Q3. So with the flexibility that we've talked about before, we also reduced the number of vessels in operations during the quarter. So we had that flex in our system.The $120 million synergy target, which was the new target we set ourselves few quarters ago, we can now confirm as achieved, basically. So we're very, very satisfied with that. It's been an intensive and tough program over, basically, just 16 months but very happy to report that we -- we've now able to complete that program.That leaves us immediately over to the next step, of course, is to move over to performance improvement program. So now we have fully merged all the 5 entities together. We are one. We have a brand-new platform to work from. We've taken a lot of costs already. Now we need to take that new platform and fine tune it into the future. So we've launched a new performance improvement program to start catering for that. That's the highlights. Over to a little bit more specifics on business. We get into the volumes. Slight change in this slide. We've now explicitly broken out high & heavy. At the bottom of the bar graphs, there you can see it because we often get the question when we keep showing a percentage, but how is that relative to what's happening on the auto side. So now you can see it somewhat more clearly if you just focus quarter-on-quarter. Yes, volume is seasonally lower. Auto is somewhat lower compared to last quarter by nearly 1 million cubic meters. High & heavy slightly reduced, which is seasonally unexpected, but you can then look back previous quarters in such to recognize that the underlying performance of high & heavy is still slowly building as is the auto volume. So if we take a year-on-year perspective, we still see a general growth in the overall volume activity. What we're looking out for now in Q4? I'm not gonna get into the market outlook. But just as we transitioning into the fourth quarter now, we're watching the Q4 volume development. It's typically a strong quarter, but some of the uncertainty that has been around in the auto markets and the volatility that we've all read and heard about it. We're just keeping our eyes on that now as we move into the fourth quarter.With high & heavy, just to cover that off again, volume is slightly weaker compared to the previous quarter, but just as a good reminder, it contributes positively. We often get the question, why isn't -- why aren't we seeing more of that in the bottom line of the company. Frankly, if we didn't have that growth in high & heavy, you would have seen the impact to the bottom line more negatively. So we're quite satisfied with the position in the high & heavy market and also the volumes. It does contribute quite positively to the business from an underlying point of view.Let me jump onto a bit more detail around the different trading areas. If I'll start with Atlantic Shuttle, top left-hand corner there. You can see year-on-year development is actually pretty solid, it's up 9%. We've had a good development on all customers. One German manufacturer has, in fact, doubled their volume year-on-year in the Atlantic trade from Europe to the U.S. So that's been an overall quite good development, so Atlantic is developed quite positively. Europe-Asia, a little flat. Two main reasons for that. Recently, China imports have slowed from an overall point of view. We moved a lot of volume from Europe to China. So they have slowed down for -- the general Chinese market has slowed, also there's more local production. So we have seen a general slowing, and that's reflected in a fairly flat picture for us year-on-year. But we also did lose a contract last year to China, simply because the prices were just way too low. We're not willing to carry that business any longer. So that had a volume impact as well, if we look at it from a year-on-year point of view. Happy with the underlying performance of the trade, but volumes, overall, are fairly flat. Asia to Europe. Quite a drop quarter-on-quarter. A couple of big reasons for that. We've been rationalizing the services, combining voyages more closely between EUKOR and WW Ocean out of Asia to continue to get fleet efficiency improvements. That's also driven by the fact that there has been little bit lower volume in the market. And also Hyundai Motor Group was pretty weak in the third quarter, mainly because of holiday season. No strike season this year. There was very little industrial action, which was good news, but they still have the holiday periods and the plant still shut down for maintenance and other general slowdown of activity.So we've had a weakness in exports during Q3 from Korea. But we also, from year-on-year point of view, remind ourselves that we have a lower contract portion, again, as we talked about before. So we had less volume available to us. So that picture year-on-year is pretty much as expected.If I move down, Asia to North America. Again, relatively flat picture. Interestingly, if we look over the last 12 months, the growth for us from the Far East to the U.S. is up 46% with new volumes. That's been counted away by reduction in the Hyundai/KIA volume contractually and also general weakness in their volumes, but several of the other contracts that we've entered have -- and the growth of exports from the Far East into the U.S. has seen a substantial uplift for us. So that's basically counted the significant reduction we had in the Hyundai/KIA contract into the U.S. market. So overall, for us, it's quite a flat and relatively good picture. Interestingly, with all the concerns around trade barriers, there is a likelihood there that there's been a push of volume into the U.S. market. So we also are often asked, how have the trade barrier talks affected us negatively. Well, so far, they haven't. So far, it's only been positive. Because we're seeing more volume actually going into the U.S. for the time being. And that's very evident out of Asia. Down to the bottom there, Asia South -- Asia to the South America West Coast, very positive underlying development. I won't say much more there. Just underlying sales are good and strong. Europe/North America to Oceania. Year-on-year, it's flat. High & heavy is improving, so that's underlying -- building those volumes there. Automotive from a sales point of view is pretty flat, but we also did lose a contract last year to Oceania from Europe, and that is reflected in the results here from a volume point of view. We lost that contract for the same reason I talked about to China, the rates were simply too low. We're not willing to continue with that business. So we led it out to competition. So that gives you a quick snapshot of the overall trading patterns from -- mainly from the year-on-year perspective. Looking over to capacity, as I said, when we opened up, we've been able to -- over these last quarters, as you can see on slide, we were able to build capacity as volume is increasing in the market. Equally, we've been able to take it out again. And the breakdown here is specifically the months in the third quarter. And you can see how we've been able to take out the capacity, basically in line with the volume demand that's been in the market. So as we've often talked about, we worked very hard to retain a balanced position for ourselves even though the market is generally relatively -- or generally oversupplied.If you look here down to 124 more vessels in operation in September, a sneak preview into October, we've already taken back in a couple of more vessels from the market because volumes are slightly better in October. We're slightly better in October than September, so that flexibility for us continues. And if we look forward into the next couple of years, we still have quite some flexibility with 17 vessels on a bit -- on long-term contracts that we can release during the period up 2022, and we still have some short-term capacity in the fleet that we're able to release very quickly over the next 6 months. So we have a relatively balanced view as far as capacity is concerned, and we feel quite comfortable where we are for today.Rates. We talked a lot about this, and we continue to provide as much information as we're able to. We can be as transparent as we can manage, but we also have a competitive reason to only provide as much as we feel is prudent. What we're trying to depict here for everybody is a picture of -- in the contracts that have been completed, which is the dark circles. What's been the rates change from a percentage point of view and how is that going to impact annualized profitability. So that's what the picture is depicting. The light gray boxes are new rates that will come into effect from 2019. What -- to explain a little bit around the numbering or the numbers, what we need to remind ourselves of is whilst we believe the worst is definitely behind us as we talked about before from the supply demand point of view, and we feel very strongly about the ability to start -- to stop the negative slide. We are carrying rates from the past into the future and that will continue until we're able to renew the whole contract cycles, as we've talked about before. As such, important to remind ourselves of that. But equally, we have some long-term contracts as they come up for renewal. They're on pretty high rates from historical levels, which means they will be under some pressure from our competition. And we have to work very hard to make sure that we either adjust these service profile commitments to take out variable costs, or we can retain a decent rate level. So service commitments are as important as rate levels. Here, the picture is just explaining what's happening to the actual rate per cubic meter or per unit, but renegotiating service commitments for us is as important if not more important than the actual freight rate itself. Because the service commitments are driving our short-term variable costs around port calls and bunker. And some of the contracts that we've been able to renegotiate now, we've been able to make some pretty significant changes to service commitments in a positive way. So it won't be necessarily reflected in the rates in this slide, but we will see the improvement through the performance of the company. And as you can see at the bottom there, all things being equal and we say that because trade mixes change and cargo mixes change every month, every quarter. But all things being equal, we believe, we have $30 million annualized improvement so far in the efforts that we're taking in the market. So we're -- we're happy with where we are currently in terms of steps forward. And there's more to do. So the contract profile. I'll lead on from what I just talked about now. So what does that really mean and how long does it take us to renew all these contracts? The picture here is the percentage of our volume expiring in each of these different years. This year, we had roughly 10% of our volume contract -- contracts that are maturing, which need to be renewed and negotiated. Next year, it's large because we have the Hyundai/KIA contract, which is up for renegotiation. Hyundai/KIA there represents about 15% of the volume in the overall portfolio. So we have big movement next year, and then you can see there's another 15% in 2020, another 15% in 2021. So it's relatively spread, which is good. We don't want to have everything expiring in a year or a vast majority expiring in a year, but these are the cycles that we got to need to go through to continue improving service commitments and freight levels. And as I said, we had some -- during 2018, we had some very positive discussions around service commitments. I'm very satisfied where we are now on a few contracts, which are now concluded. I won't report anymore detail for competitive reasons, but they're now included, and we've been able to change the underlying performance. We're very happy with that.Synergies, as I touched on. We will now close the program. We've changed the target. No, we're not closing the program because we don't think it's important to keep improving the business. We're going to move over to a performance improvement program, but this will be the last quarter that we report now. We reached the targets. We're satisfied, very satisfied, in fact. And as I said, just over literally 16 months, we've been able to take 5 entities together and take out the synergy effects directly into the bottom line. So super happy with that. We -- as you see in our numbers, we needed that, and it was a good move at the time. We needed it. We have it. And now we need to do more. And what we do more is we need at least just to start with $100 million as a target that we've set ourselves. I will come back and talk more about this in forward quarters, so we'll start to report on this to everybody as well to let you know exactly how we're tracking. But 3 for the moment, these are examples, but 3 sort of very key areas that we have very acute focus on right now. It's contractual improvements that I've just talked to. I won't use much more time on that. It's to continue with voyage rationalization. So we've always been very good at maximizing use of capacity between EUKOR and Wallenius Wilhelmsen Ocean specifically, but now we need to bring more and more voyages together and keep rationalizing wherever we can. Reducing the number of port calls, reducing the number of days at sea, reducing bunker consumption, everything that we can keep doing to tweak and fine tune the operation will be a very strong and continued focus. That work is never done. So we'll always talk about that and the reason why that work has never done is trade volumes are constantly shifting. And volume flows between continents and on routes is constantly shifting, so this optimization need is a constant game, but we also need to be very specific on certain trade lines where we know we have more to gain and make sure we have the organization focusing explicitly in those areas. So that's a key focus, going forward as well. The next one on the right-hand side, you're going to hear a little bit more about that during our Capital Market Day presentation, but it's time to bring our industry into the digital age in a much bigger way than we've been doing so far. We have the absolute vision of having a complete centralized vessel management center, where we can access data from the vessels, from the ports, from across our entire business and bring that information up and manage it in a way more digital savvy way than we have traditionally done in the shipping industry, and that's a huge project that's already been underway for quite some months now. Now it's time to bring it to you, and you'll hear a little bit more about that during Capital Markets Day. But this is also, for us, a very important focus. Not only does it give us efficiency in the operations, it gives us better insight, but it also helps us to manage the operational board the vessels and the use of fuel and weather routine, et cetera, et cetera. So we see this is going to be a -- firstly, it's a very important and necessary step, but it's going to be a link for us to bring this into the modern age, I would say. So looking forward to be able to tell you more about that later as well. Okay. So that's a quick update on the business as of Q3. I'll hand over to Rebekka now to give you bit more detail on numbers, and I'll come back on market.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Good morning, everyone. I hope I speak loud enough, I'm not wearing a microphone. Let me know If I should speak up. And I think it's been an interesting quarter in terms of the markets being more volatile and uncertain. And the share prices have been fluctuating quite a bit as well. But in terms of the numbers, they're not so eventful. And they're in line with expectations. So I won't hold you too long in my presentation today.We will start by the consolidated results. We have revenues of $1 billion this quarter. It's an improvement of 8% when we compare with last year and that's driven mainly by 3 factors. Firstly, of course, volumes did improve by 1%. It would've been 4% if we hadn't had the reduction in the Hyundai/KIA volumes. Secondly, we have the BAF surcharges that aren't picking up related to the oil price, and that's a $30 million improvement year-on-year. And finally, on the landbased side, there's a $22 million improvement in revenue, linked to the Keen transaction and also the ramp-up of the MIRRAT terminal in Australia. Looking then at quarter-on-quarter, the revenues are down, and that's normally to be expected given seasonalities in the third quarter. But as Craig alluded to, we had slightly more weakening, especially in September, than anticipated. So net ocean freights down 4.5% quarter-on-quarter, but this was then partly offset by lowering of cost because we could redeliver vessels and take down the cargo cost.EBITDA $152 million. That's the same as the adjusted number because we don't have any extraordinary items this quarter. Of course, that's quite a big reduction over the last year, it's 20% down. But the main factor explaining that is, again, bunkers, that's $30 million of the reduction. We'll come back to show you picture of that as well. But it's also, of course, the rate reductions that have taken effect that we entered into last year, and it's the reduction in the Hyundai/KIA volume. So no new explanations compared to previous quarters. Quarter-on-quarter, EBITDA down 2.5%, and this is much more of a volume explanation. Volume is down 7% quarter-on-quarter, as explained, but that was mostly offset actually by lowering of costs as well because we were able to redeliver vessels. We were able to take down the cargo cost, but the bunker then worked the other way, unfortunately.Net financials look a lot better than last year. Of course, our interest expenses remain the same, but we keep having very nice gains on the interest rate hedges that's were acted into. So there was a $40 million gain on this quarter, and we've actually realized around $45 million on our hedges year-to-date. So that's, of course, helping the results.So finally, the net profit for the quarter, positive by $30 million, keeps coming up each quarter, but is far from satisfactory in terms of delivering a good return on the capital. And as Craig said, the realization of the synergies has really been essential in safeguarding the results. We do have positive results, and we do generate positive cash flow in what is still difficult markets.And moving down on to the ocean segment. A revenue of $822 million in the quarter. That is a big improvement of 7% year-on-year, of course, large part of that is the fuel surcharges to customers and also in the comparative quarter last year, we had to, say, leaseback vessels in EUKOR where we had some losses, so that explains parts of it, but there was an underlying improvement in the net freight despite lower rates, despite loss of the Hyundai/KIA volumes, because then of improvement in volumes especially and also cargo mix and high & heavy. When we then compared to the previous quarter, as talked about, we see the effect of the seasonalities. Also there's been weather distortions, severe weather in parts of Asia, holiday seasons in Korea, and we've also seen a weakening of demand in China. So that led to weaker volumes, especially out of Asia in -- and in the Atlantic, as Craig also went through. This was especially apparent in September, but we were then able to release massive commitments and thereby lowering the charter expenses. So this is the main explanation for why EBITDA then is down 22% compared to the previous year.Then on to bunkers. When we then compare to last year, we see that the total bunker cost is up by $62 million. That's driven partly by consumption because we have more vessels and more voyage days but also a lot by, of course, the oil price going up each quarter. And in our business, freight rates, they're supposed to cover cost, including bunkers, but we know that there are so many fluctuations in the bunker price, and that's why we have the BAF clauses in most of our contracts, not all. They are there to cater for the fluctuations in the oil price.But as you know, as we talked about every quarter, there's a lag effect because it's calculated on 3 months back in time, with a month also for application period. And that's why when the oil price, yet again, moved up this quarter, we see a lag effect in the results. So the BAFs that we have been able to implement since last year, covered half of the increase here that we have since last year, $30 million. Then there is a small volume effect as well and the rest is roughly equally split between then a lag effect that we will recover in the coming quarter and what we call a recurring element. That's contracts where we don't have the BAF coverage. But of course, as these contracts are renegotiated, we will either get BAF clauses, or we will reset the freight rate to cover for higher oil prices. So they do also eventually get covered. Landbased segment. Big improvement year-on-year by reasons we've talked about earlier. It's the Keen acquisition. It's the MIRRAT ramp-up, but even with a better revenue, EBITDA is down by $1 million year-on-year. That is mostly linked actually to an internal cost allocation that took place in the first quarter. It's also old news. And that was, of course, offset by positive for the ocean side. We've also seen a year-on-year slight reduction in profitability on the U.S. auto side, but that was less apparent quarter-on-quarter. So if we just compare quarter-on-quarter, it's more actually the terminal side, where we saw slightly less revenue this quarter because volumes were seasonally down. But quite a stable performance, I would say, for landbased. The new thing in landbased this quarter is that we have accounted for the Syngin transaction. You'll hear more about Syngin later today in the Capital Markets Day presentation, but we then took it on our balance sheet this quarter. We had an upfront payment of $90 million, but we estimated to consideration for the 70% share to be $30 million and because we recognize 100%, we then increase the balance sheet with $43 million, and that's allocated partly to intangibles and partly to goodwill. And then there is a put option that the 30% owners have 5 years out in time. And that has been valued to $12 million and that sits as a liability on the balance sheet. And there will be a small interest element on that every quarter. You've got to love IFRS, pretty complicated. But Syngin added $1.3 million this quarter.Onto cash flow, which was positive this quarter. Of course, mainly because we were out raising a new bond, NOK 750 million, but also good -- positive cash flow from operations. We had a bit of CapEx this quarter, as I said, the Syngin transaction was 19 of that, some dry docking costs. And then we had some expansions, actually on the landbased side, which are new sites that will commit operation in the U.S. and also some maintenance CapEx in the quarter. But they're positive developments. And then the balance sheet, nothing big to report aside from the bond having joined the balance sheet. We did another big refinancing this quarter, $280 million, and there was a lot of interest, which actually led to a margin of 155 basis points being achieved, which is better than what we achieved last year and because the interest was so good, we ended up also refinancing for the 3 vessels at improved terms over what we had historically, so that will have a slightly positive impact on interest expenses.Finally, we'll be moving over to IFRS leasing as of year-end. What you see of that this quarter is just that we explain a bit more about the assumptions in the notes through the financial report, the next quarter we'll be reporting about the effects and then as of first quarter, you will see a pretty different balance sheet and result as a consequence. We're not alone on this. The whole world has to transition, but it's roughly $1.2 billion being added to our balance sheet. So it's pretty big.So that concludes my run-through, and I will hand it back to you, Craig.

[Craig Jasienski, Chief Executive Officer]

Thanks, Rebekka. So let me jump in and give a quick market outlook. I'll start with auto sales. And here, we'll take a little bit more of a forward view, and I will be reflecting a few times on just the general volatility that exists in the auto markets these days. Various reasons, for that I'll try to talk some of them. But if we start with this picture here, year-on-year and, in fact, if you go back to Q4 2017, which is seasonally strong quarter, there's a certain hurricane effect, Hurricane Harvey effect, we need to remind ourselves of the -- on the top left-hand corner, this is global automotive sales, so Q4 2017 was probably a little spike because of the hurricane effect in the U.S. So we take that out and look from year-on-year perspective, global light vehicle sales are, in fact, down. They're starting to weaken in different markets. At the very bottom of that slide, we can -- we can see we touched upon Russia and Brazil. Car sales are going quite well there. It's good news. That's actually a typical reflection of commodity prices improving, particularly oil prices. And they were the 2 markets that we saw back in 2015 which really took a serious hit, including the Middle East when the oil prices started to run down. So with commodity prices improving, oil prices improving, we'll start to see those resource-dependent economies hopefully improve as well from a sales point of view. But over to the right-hand side, if we look into some of our key markets, U.S. is holding. It's starting to slip. It's at a high-level, anyway, from the sales -- from a total market volume point of view. But you can see the U.S. market is holding. The general forward view is that it's a relatively stable picture, as far as the U.S. sales are concerned. It's going to depend very much on market sentiment and how the economy develops and developments overnight in the U.S., let's see how that impacts what's going on in North America and how that will change car sales.In Europe, Europe suffered huge fluctuations in this last quarter. That was driven mainly by the introduction of the new WLTP regulations where we saw run on sales in August and a serious cutback on sales in September. So that's creating volatility. It doesn't take away -- we don't believe it takes away any underlying sales in the marketplace in Europe. It's just creating a little volatility and confusion in the numbers.China, perhaps a little bit more concerned. China starts to weaken from a growth point of view. It's been a consistent growth market as far as car sales have been a concern for a long, long time. They appear now to be weakening. There's some talks of a new incentive scheme being put in place, it's not ratified or confirmed yet, but has to reduce sales tax from 10% down to 5% for cars with engine size less than 1.6 liters. So let's see if that takes place. Last time that occurred back in 2015, it had a 15% impact positively on sales. So let's see what the Chinese government chooses. But interestingly, that's on internal combustion engines less than 1.6 liters, typically small cars. Electric cars in China are growing at a crazy pace. So probably no need for incentives there, but we will say, we believe a continued positive growth in electric vehicles in China.But looking more on exports, which is where it affects us directly from a ship point of view. As I talked about before, China, specifically, China are exporters, if I focus on that one, they grew year-on-year 43%. We think a lot of that push has been due to the risk of changes in tariffs. Chinese manufacturers and production in China, they're very eager to enter the North American market, but China is also exporting to a number of other nations around the world. So we saw a pretty solid increase in exports out of China from a year-on-year point of view. We expect that will continue, probably not at 43% year-on-year growth rates, but we do expect to see a continued growth in exports out of China, which we think is a positive picture. Moving on to the right-hand side, the North America, as you can see there, if you look on a quarter-on-quarter basis, we enjoyed a good growth in the second quarter. Overall in the market, we also enjoyed that. In the third quarter, it started to slow now, the imports into North America, that's probably centered around the risk of trade concerns and trade barriers. Europe remains in a way a mixed bag, slight reduction again in Q3 from an import point of view. And China, as you can see, they're actually dropped in Q2 and came back slightly in Q3, but not at a very great pace. So in general, we see the Chinese market as relatively flat, overall, from an import point of view. Australia is slowing now. It's had an okay growth rates for -- over the last few years, but now starting to slow and probably become flat.If I move over to the next slide, I'll talk much more about prospects. From auto analysts' perspective, they still see good underlying growth in the mid to long. That's still the underlying expectation for automotive sales globally, but there is some short-term volatility that we definitely see and we experience and we often read about. If you get back into this last quarter, we probably all read profit warning reports coming out of various OEMs. That was very much the feature of the last quarter. Some various factors for that. There's a risk of trade tensions, of course, that's creating an issue of sentiment more than anything else, so that's creating some concern around sales, which is impacting their top lines. There's been a lot of dieselgate issues, there's been recalls because of fires and problems with diesel engines. So the manufacturing -- auto manufacturers were taking some pretty heavy hits in Q3 on market factors around them -- around dieselgate and recalls. And then we had WLTP, the new regulation, which came in force in Europe in September, created a lot of volatility. So there's 3 sort of very good reasons as to why in Q3 auto manufacturers were coming out with profit warnings. And if you really look at which manufacturers were focusing on profit warnings, they would typically center in Europe and generally in Germany, and those 3 factors are probably some of those core reasons. Interesting now, over night, reports start to come out for their views into Q4 and they're somewhat more upbeat. So auto manufacturers themselves are giving a somewhat more upbeat perspective of the fourth quarter than they were giving us all in the third quarter.So it really confirms to us that there is that degree of volatility around auto volumes in the short term. One of the other areas, which we do see we'll share -- give us some short-term concern, that's the issue of Brexit. Jaguar Land Rover and BMW, of course, being the 2 manufacturers in the U.K. for export. What we have heard and seen from them is with their concern of what would Brexit actually mean. They have chosen to bring forward some of their typical summer shutdown periods where they do maintenance and repairs and realign fitting. They're bringing those forward to April next year. So that's of concern, but they seem to be taking those steps in order to prepare themselves for however Brexit ends up, which is still an untold story at this point in time. So it is triggering some of earlier and perhaps longer shutdowns in the U.K. market. So it's not just trade barriers, it's WLTP is causing volatility. The issues around Brexit is causing some concern. WLTP will find its level again. Brexit will be resolved in some way, shape or form. We don't know what that will look like yet, so we'll have to wait and see. The concern around trade barriers remains and will probably remain from the U.S. administration for some time, so that's something that we just have to adapt to and live with. And as I said previously, so far, we haven't had any negative effect in our business directly. We've seen massive volatility in our share price, unfortunately, because of every other tweak that comes out. But in our actual underlying business, we haven't seen any real negative effect so far. But of course, trade barriers is somewhat more mid-term concern. And the key factors are pretty short term. Dieselgate and recalls and fires and quality problems with manufacturers, that happens kind of all the time. There was too much in one go for the manufacturers, but they're also matters that will pass. And I presume that's the reason why the analysts still see a relatively positive picture going forward. Moving over to high & heavy. A little different view than the way we presented in the past, we put all 3 commodity groups into the same slide here. I'll just close off with construction. We have, in the past, looking up and today, seen a relatively strong growth in construction equipment shipments in real life for us. That growth is definitely slowing, which we can see here looking forward based on the various analysts that look at these markets. We see that a little bit in our prospects as well. So no surprises for us there. North America still remains pretty strong. We think Oceania still has some way to go. There's been some big infrastructure projects in Australia. There is some backlog of machineries. So we do expect that will be still trickling through looking forward, but some slowing of growth. And let's remind ourselves that it's a slowdown in growth, it's not a decline, so it's still in our view very good news.Agriculture equipment. It's always a balanced picture. It's driven by seasons and farmer incomes. The only area that I'd say that I'd like to highlight of concern looking forward, Australia has just gone through pretty significant drought period that's an important market from us -- for us from a volume point of view. So there is a risk that some ag sales will weaken in the Oceania market over the next season or two. But let me move to mining. We don't expect to see double-digit growth going forward for mining. We would concur with these views, but it's still a strong growth pace as far as mining equipment is concerned. It's going to grow fast in automotive, which definitely means as well construction, which definitely means that our portion of high & heavy should continue to grow relative to the amount of automotive that's available on the market. It's a good -- we're well positioned in that space still. And the contract position we have with the manufacturer is still very solid and strong going out to calendar years 2020 and 2022. So we consider ourselves to be very well positioned. In the market segment, that still continues to grow and provides us with a positive impact on profitability. So overall, we're -- we still view this as a positive place to be. What's most interesting on mining is, mining CapEx in 2018 is up 27%. Next year, it's forecasted to be up 7% and only 2% in 2020. But there's some catching up to do because sustained maintenance CapEx has been hovering at similar types of levels, but as a portion of depreciation, it's at a 70-year low for the mining industry. So we think there's still some way to go for mining, and we presented that some quarters back now, I can't remember exactly which quarter, but we -- also presented the large mining trucks in the market. They're just entering their replacement cycle. All effort has been made by the miners to extend the life of those units, but we think that's reached the point. We hear that from the manufacturers as well. So there is a replacement need and when you couple that replacement need with the fact that their CapEx share depreciation is at 70-year lows, it has to be a good story, in terms of volumes going forward. So we are not concerned but again, as I said, we don't see double-digit growth, we don't expect that in high & heavy segments, but it's going to grow faster than automotive looking forward.Moving over to supply/demand. We -- again, we'll have a short-term perspective and a longer-term perspective. The order book still remains very, very low. There was, in fact, some cancellations in this last quarter of orders that were in the market, so that's positive from supply-demand perspective. At this point in time, we don't think the economics of the industry justify new buildings, but I would also say there is eventually a replacement need. So again, we're not going to be surprised if there's some ordering in the market from -- in order to create replacement capacity, but there is no real need for growth capacity because we still have an oversupplied market and again, the underlying -- the economics of the car carrying industry is not supporting the building right now, which was probably reflected in the cancellations that took place. The right-hand side is somewhat more micro short-term level. You can see there in Q2, the market was emptied of capacity because there was a lot of volume moving around in Q3. We saw volumes weaken, vessels were delivered back into the market, which is exactly what we did. That increased a number of idle vessels again. You will see in October that will, in fact, come down slightly because there's a push on volume in some markets. So all in all, the month-on-month position will keep fluctuating, but the fact is that we still are oversupplied. It's a very low order book and those 2 would eventually meet. So over time, we think it's positive for the industry, and it's positive for the rate pressure that continues to exist in our markets.Okay. With that, I'm going to close off with a quick summary, and then we'll -- Rebekka and I will answer any immediate questions that you have. After that, we'll take a short break and then we'll start with the Capital Markets Day. But all in all, our message is there is increased uncertainty on auto outlook from a short-term perspective. We don't hide from that for the reasons that I've explained. Some of them will pass. Others will be with us for a little longer. But the longer-term perspective still looks okay. There's a risk of trade barriers. That's the bigger concern. Positive development for high & heavy, still happy with that and is developing well. Market rates are still at depressed level, as we've talked about, but the tonnage balance improvement, over time, will help us. And as I said as well, we're focusing as much on service commitment levels as we are on the actual price. Because we still have competitors out there that are offering prices which are 15%, 20% lower than ours. But we're still winning and retaining business. So I think that's very good news. And it says a lot about our position in the marketplace. Negative rate impact of $7 million year-on-year will follow into the fourth quarter, as we talked about before that's the change contracts that we carry through the whole year. Current bunker prices do indicate $15 million higher costs in the quarter coming up, and we will have a lag effect that we'll carry into Q4, but also have an underlying retained gap that we'll carry into Q4. And then we, as we talked about, we have a new performance improvement program. We set the target to $100 million over the next couple of years. We'll keep fine tuning this. We'll keep focusing on different areas, and we'll continue to report that to everybody over the coming quarters. But all in all, what I say is we had a -- basically, from our perspective, we had a relatively uneventful quarter. We're happy where we are positioned. Where -- we have a strong place in the market. We're very well positioned, given the circumstances that we're under. It is a tough and challenging market out there. We're on the record lower rate levels, and we have an oversupply situation, we have lots of volatility and we're still cash positive. So we believe we're very well positioned, and we're in a good place as volumes continue to improve going forward. Okay. Thank you. And I'll ask Rebekka -- we have one hand up already -- I'll ask Rebekka to join me. Questions, please.

[Unknown Analyst]

Yes, I was wondered if you can explain a little bit more about the rates. Rates were up year-over-year after quarter-on-quarter. And you say that in the fourth quarter, it's going to be linked to the fact from the new contracts, et cetera. Assuming that it implied that rates are going up both year-on-year and also quarter-on-quarter, and how does that lead to your [ counterpart ] suddenly decline. Is the effect from high & heavy? Is there other services that will go up or...

[Craig Jasienski, Chief Executive Officer]

No. And yes, it's that. So when we talk about rate levels, you take an average revenue per cubic meter does also fluctuate quarter-on-quarter. Even if market prices remain absolutely stable, it will fluctuate quarter-on-quarter depending on trade mix because we have different prices, different markets and depending on volume mix and also manufacturer mix. So it will always move as a starting point. But secondly, when we go into new contracts, we don't -- we have no quarterly business virtually. We have 1- to 3- to 4-year contracts depending on markets and price levels. So as we renegotiate contracts in 2018 even though we can report a positive outcome, we don't book any of those impacts until the next calendar year. So that's the reason why you have seasonal recognition.

[Unknown Analyst]

So the average rate per cubic meter, the way we can see it, it's probably going to go up year-on-year in Q4?

[Craig Jasienski, Chief Executive Officer]

Hard to predict because it will all depend on the trade mixes, so I don't want to predict the number. But I think the more important message is that we're focused on getting the price increases and improving service commitments, which is going to drive profitability, which is what we need to be watching as much as the revenue per cubic meter.

[Unknown Analyst]

[indiscernible]. Just a question on your Chinese export volumes. What's your share [indiscernible]? And do you see any development reflecting for more long haul? Or it's just still very much the regional trade?

[Craig Jasienski, Chief Executive Officer]

So we've sit with between the 2 main operating companies roughly 30% share -- 30% to 40%, in fact, of the Chinese exports, very well positioned. Main markets to South America, North America, primarily. There's some regional trades we don't get ourselves involved in, Africa. And that's been a traditional trend, and some into Europe and Russia, but that's been a typical trend for the last decade. That's the same pattern, it's just more volume. What's most interesting is we now see European Chinese manufacturers, Volvo, must be very explicit now exporting Chinese production into the U.S. market, the Volvo brand.

[Unknown Analyst]

So follow-up question on the scrubbers situation. Do you expect the [indiscernible] vessels, these scrubbers to have any impact on [indiscernible] of those vessels?

[Craig Jasienski, Chief Executive Officer]

No. It will be part of the fleet. It's a technical solution to manage our risks.

[Marius Furuly, Analyst of Shipping]

Marius Furuly from Carnegie. The auto weakness in Q3, do you feel that's yet to be seen in your figures? Or is [ that in your ] fourth figures?

[Craig Jasienski, Chief Executive Officer]

So what we're saying, so we saw that drop-down into the end of the quarter, but we've seen an improvement already in October from the volume point of view. So there was a number of these impacts in Q3 that I talked to. And Q4 is traditionally a stronger quarter. We've already seen, as I said, some improvement, but we -- it remains to be seen how November and December develop, so I think that's all we can comment on that for the moment, something you want to add. And that was first, sorry.

[Petter Haugen, Equity Research Analyst]

Petter Haugen from Kepler Cheuvreux. In terms of your last point on that slide, the performance improvement program, is that -- how does that divide between cost and income because you mentioned rate increases as one of the sort of things to improve this. To what extent, does that compare to after other cost improvements?

[Craig Jasienski, Chief Executive Officer]

So I presented 3 different areas. To keep this straightforward for the moment, so 1/3, 1/3, 1/3 from a focus point of view. On an equal basis, as we've said, we expect that we can have a better $30 million positive impact on the contract through changes that we've been going through, during this course of this year, which we'll see in to next year. So that will be 1/3 of that $100 million. The other 2/3 will come out of operation efficiency and just changing the way we work. Digitalizing our business and creating centralized voyage operation centers. It's actually changing our business model. Pretty different way of working. So that will also come into effect.

[Petter Haugen, Equity Research Analyst]

Just a quick follow-up on that because when you then show that -- this is the first time you've shown sort of the renegotiated rates. Are you then comparing them to what they were 2, 3, 4 years ago? Or are you comparing them to -- yes...You're not going to answer. You're not giving us the queue.That is something implying that you need no guide for the 2019 big bubble, that is typically versus, what, 2014, grade levels.

[Craig Jasienski, Chief Executive Officer]

For those contracts versus when those contracts -- it's compared to when those contracts were entered. And again, it's a mix. Some contracts that will renew next year will enter this year. Some of them...

[Petter Haugen, Equity Research Analyst]

There is one big bubble there.

[Craig Jasienski, Chief Executive Officer]

Yes.

[Petter Haugen, Equity Research Analyst]

So that's the point you continue to make...

[Rebekka Glasser Herlofsen, Chief Financial Officer]

That's a good point, as compared to better market, actually.

[Unknown Analyst]

On the cost side, last quarter costs went down quite significantly year-on-year, selling and administrative costs and also other voyage expenses, et cetera. That cost decline was much less this quarter, even if the currency will [ run off ] the right direction. Is there any reason for that?

[Craig Jasienski, Chief Executive Officer]

So SG&A has been synergy program, primarily. So that's where you saw the big gains, previously. Now we've...

[Unknown Analyst]

Basically, behind us...

[Craig Jasienski, Chief Executive Officer]

It's basically behind us. It's behind us. The organization is now rightly manned or balanced and ready to move forward.

[Unknown Analyst]

And in terms of the new programs is that more going to affect the cargo expenses and voyage expenses? And those kind of...

[Rebekka Glasser Herlofsen, Chief Financial Officer]

And chartering...

[Craig Jasienski, Chief Executive Officer]

Sorry, I missed the question.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Where will the new improvement program hit, but also on the revenue side. We will be reporting on that in a similar fashion to what we did on the synergy programs. So give us another quarter. We'll have more data.

[Craig Jasienski, Chief Executive Officer]

So we will break it down into different pockets. So you'll be able to see as we track it.

[Unknown Analyst]

When you're talking about the high & heavy volumes slowing the [indiscernible] you're saying that it's still going to be positive and better than our volumes? Does it mean that you expect the car volume to go up?

[Craig Jasienski, Chief Executive Officer]

We expect high & heavy volume growth to slow. So high & heavy will not decline. It will continue to grow, but the growth rate is slowing. But the growth rates are bigger than auto, from a relative point of view. So we expect to see a...

[Unknown Analyst]

Do you expect a positive growth in auto?

[Craig Jasienski, Chief Executive Officer]

Here in 2019?

[Unknown Analyst]

Yes.

[Craig Jasienski, Chief Executive Officer]

From an overall point of view, yes, we do. The only concern remaining at the moment is trade barriers. The other factors I talked about, we think they're short term. And trade barriers we don't know. But all things being equal for today, we expect to see an improvement.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

And market estimates are for an improvement as well. We just say there's more uncertainty at the moment than we've seen before.

[Unknown Analyst]

And then last quarter, when you were charging extra capacity, at that time it seem to be [ early value debt ]. But you said that you were not taking business at a loss. Now you write that you exited the business. What exactly does that mean?

[Craig Jasienski, Chief Executive Officer]

So let me separate. So we go back to Q2. Yes, we talked on more capacity because it was a big demand in the market. In -- and as we explained then, we have our existing contracts of commitments, so what we've already committed to in the market. As those volumes increase, we have a commitment to support the manufacturing, carry that volume, we need to take in more capacity. And yes, it was not accretive to the bottom line because of the general market dynamics. So that's correct. But, again, we don't leave it in a short-term spot market. We have the vast majority of our business on the long contract. So we have to park the issue to the side. When we look forward and we have a contract renegotiation, that's when we can change the service profile. That's when we can avoid the situation where we have to put on capacity, regardless of the cost in order to handle volume. As we can change the contract improvement, we say sorry, we're not able to do that, or we can change the number port calls or we can change the duration of the voyages. So they're actually 2 separate matters. The challenge that you saw in Q2, the fact it's not accretive by getting more volume is indicative that the contracts are not effective enough, which is why when we renegotiate them, we renegotiate them to be more effective, and you don't see that effect until we reenter the -- enter the new contract. So bringing the 2 together is -- would confuse the picture. You need to look forward as far as contract which changes are concerned. Any other questions? Questions online?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Yes, a couple online. You mentioned lower volumes since September. Has this continued into Q4? And do you have any comments on outlook for Q4 volume development?

[Craig Jasienski, Chief Executive Officer]

So already partly answered. We've seen an improvement in October already. We don't want to give a position on Q4 at this moment because we don't know exactly how November develops -- December is going to develop. There is still short-term volatility around WLTP, around Brexit and still around recalls, et cetera. So we're not predicting a Q4 number at this point.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

One more. Regarding rates, can you please expand on the $30 million net positive effect you mentioned on Slide 8? Is this a $30 million positive EBITDA today effect on an annualized basis? And is this all already reflected in the 2018 year-to-date performance?

[Craig Jasienski, Chief Executive Officer]

So no, it's -- firstly, it's forward into 2019, before we start to see a full year effect, and it's EBITDAR impact. Any other questions?

[Unknown Analyst]

Just one on the bunkering, on the BAF cost. Was that 50% to 60% covered at the moment, something like that, I guess, to look through the figures? To what level do you think you'll be able to build that up and what time period?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

It's slightly higher than that. It's more like 75% to 80% coverage, but some BAF clauses don't cover a 100%. So we'll see a little bit further down. But we're in a position now, and Mike will talk more about that later where we have to change the clauses to cater for IMO 2020, and of course, we have a big push on improving BAF clauses as well.

[Unknown Analyst]

Yes, that's one of my other questions. Well, I'll wait till later.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Yes.

[Craig Jasienski, Chief Executive Officer]

It's never going to be absolutely 100% coverage because in the underlying freight rate, there's an expectation that we're covering the cost of fuel. So the purpose of BAF is just to deal with fluctuations. It's a hedge -- natural hedge. And then we have some business, which we also alluded to, particularly out in the Far East where there are no BAF clauses, and that's what we need to introduce. But they're typically much shorter contracts, they're annual or half year. And that's where we need to improve the coverage, particularly out of China. And Mike will give you an excellent presentation on that. Okay. Thank you very much. With no further questions, thank you for your participation. We'll now close this session. We have a coffee break for how long?

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

10, 15 minutes.

[Craig Jasienski, Chief Executive Officer]

So let's be back in here at 9:45, and we'll start the Capital Markets Day. Thank you for listening.