Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2019-Q3

[Astrid Martinsen, Head of Corporate Finance & IR]

Good morning, everyone. Welcome to everyone here in the room and also those following us on the webcast to this third quarter presentation of the results for Wallenius Wilhelmsen. Today, we also have the pleasure of hosting our Capital Markets Day. So after the results presentation, there will be a break, and then we'll start the capital markets presentations at 9:30. If you are following on webcast, the Capital Markets Day presentations will also be shared on webcast, but there will be a new link, so please join again then at 9:30. But first, our third quarter results for 2019. As usual, we will have 2 presenters, CEO and President, Craig Jasienski; and CFO, Rebekka Herlofsen. Following the results presentation, there will be the possibility for questions. And those following us on the webcast, you can post questions, and we will aim to cover those at the end. With that, turning to Craig.

[Craig Jasienski, CEO & President]

Thank you, Astrid. Good morning, everybody, and welcome to our Q3 presentation. We'll jump in straight into it for interest of time. Highlights for Q3: We had an EBITDA of USD 213 million, which continues a solid performance in what remains to be still a tough market in all respects. Ocean results have been driven by a higher net freight per CBM, and we also have a better -- more efficient operations. Some of that detail I get into as we talk through the slides and also a lower net bunker costs in the quarter. Ocean volumes still declined 7% year-on-year. Some of that is still very much by own choice, as we've talked to before, but also the markets are slowing. That's very clear. And we'll also show that in somewhat more detail. Because volumes are shrinking, landbased performance is also starting to shrink down a little bit, and that's reflected in the numbers, but we still have very good progress on our performance improvement program. And that's -- we see that through all the way through the bottom line. So all in all, we're actually very satisfied with the quarter, given the market that we're in, and we're also very happy with the effort that we're putting into controlling the things that we can control. And last but not least, we then approved yesterday with the Board the second dividend payment of USD 0.06 per share. So very happy with that. I'll move straight to -- clicker's off, laptop's stopped. It's all stopped. It doesn't want to get away from the highlights, you see. It doesn't want the details. Perfect. Thank you. So the agenda is the same as always. So I'll move straight into just a quick overview. As far as volume development, you can see very quickly here that automotive has shrunk compared to previous quarter and also from a year-on-year perspective. High & heavy slightly reduced. One quick point of clarification. There was a minor error in the Q2 number for high & heavy. It came up as 29.1% last quarter, it was actually 30.5%. This quarter, it is 29.5%. So we apologize for an error in the slide last quarter, that's now corrected here. Basically, high & heavy still hovering around about that 30% share of the total. Moving into the trades, and this is somewhat more interesting in terms of just the shift between the trades because it's had a certain drive on net freight per cubic meter. Overall, if I'll start with the Atlantic Shuttle in the top left-hand corner there. You can see a general volume decline. Most of that was self-chosen. As we've talked to before, it's contracts that we've already contracted, we chose to not renew because it was not profitable. So there's not so much a market impact as it is what we've chosen ourselves. Now moving over to Europe/Asia. Just a general slowdown in China has had a drop -- cause of the drop in volumes in that particular trade. And then Asia/Europe, still relatively stable. But what's good for us, Asia/Europe trade, particularly, we've now been able to rationalize the service product even more so in that particular trade between our 2 main ocean carriers. So even though volume is relatively stable, we're actually rationalizing voyages and the amount of capacity that's needed to service that trade. So that one's developing actually quite well. Asia/North America, nothing to say. It's flat continuing around the clock here. Asia to South America, West Coast is also generally okay at a low level. And Europe, the North America to Oceania are slightly up, as you can see there. But also if you look into last year, it was a particularly strong year and the Oceania market has, in fact, shrunk a little bit this year. But more importantly, when we look at that trade mix, and see how that's impacting the net freight per cubic meter because we have either sustained or greater volumes in typically higher paid trades, and we have reduced volume in particularly lower paid trades, that's helping to increase the actual average revenue per CBM, as you can see on this slide here. Look the trend -- draw a trend line, it's where we're satisfied with. It's moving in a good direction. It's very much a choice of the contracts that we're entering into or not entering into as the case maybe. And it's partly driven by trade mix, as I said. We still don't see any underlying shift in change in pricing. I'm going to talk to that as well later on, or very shortly. So I just -- as we did a couple of quarters ago, now that you see this little uptick, don't assume that will continue. We're going to see these quarter-on-quarter jumps up and down and that's always going to be driven by a combination of cargo mix at any given time, but also trade mix. So the real message here is that we're happy that it's improving. And it's improving because we're aiming to improve that, but it's not because we see any real change in underlying prices in the market currently. I'm moving pretty quick today because we have a big Capital Markets presentation later on, so we're going to move through this part more swiftly than we normally do. As far as the fleet flexibility is concerned, we continue just to adjust the fleet month-on-month, quarter-on-quarter, depending on our own demand. We're looking at an environment today where there seems to be more and more negative sentiment looking forward. And I'm just referring to what we can all read in the newspaper. Given that, we just want to reaffirm that we have downside flexibility should we need it. We still have room to redeliver up to 12 vessels as -- at the end of contract during the course of next year. So in a weakening market, we're still quite comfortable in terms of our ability to release capacity and release fixed costs. Alternatively, if the market ticks up a little or we able to secure some more business, there is available capacity in the market. So we're equally not concerned about that. But overall, let's say, it's a stable picture for us currently. We just adjust, as I said, quarter-on-quarter, month-on-month. So to the contracts, and I'll get now a little bit more specific. On the right-hand side, this becomes a really busy slide, we know, but we're just continually trying to be transparent in showing everybody each quarter what's the change of the contracts that we've renewed in that period and what effect it's had both in terms of the actual dollar impact for the -- on an annualized basis and also the percentage shift. So the green, our favorite sea green color, is what we've renewed and is noted here for Q3. What you can see pretty quickly there I hope is that this basically clustered in the center of 0. So no real change in rate and no real negative impact. There is 1 outlier there, which is then had to -- we had to base a rate reduction. We chose to do that. We chose to retain that business, and we chose to follow the market price down. But for all the others, at least we're able to retain the rate levels as they were. In this mix here, there's a total of 8 contracts renewed in the period. Moving to the left-hand side. There's a few things that you'll pay quick attention to. There's still a large chunk of business that's yet to be renewed. Yes, that's Hyundai/KIA and a handful of other contracts. As far as Hyundai/KIA is concerned, that's still tracking very well. We still remain very confident. We have an excellent dialogue and excellent relationship in the 17-year history together. So we're not concerned, but we have no news on that today. Now the other thing you might like to need notice at the bottom is one little bar of something that was not renewed, that was by choice also. It was in a normal contracting tender round. We chose not to chase the prices down, to end up with a piece of business that will be basically unprofitable. So that was our choice, so we chose to let that business go. So we do not feel like we've lost it, we chose to leave it be, and we're not willing to carry business below cost, quite simply.Performance improvement program. We've had -- it's continually tracking well. We've changed the terminology here in the dark gray box. It used to say centralized voyage in vessel management or centralization. Really, what this is about is digitalized operations. We're going to talk more about that during Capital Markets Day. So I'm not going to go into depth on that now. But I'm really happy to see that we're actually now starting to track some of the improvements that we've been aiming for by digitalizing all the activities around the vessel itself, so more on that later on. But the message here is, we're tracking well. We still have some way to go, and it will still be somewhat of a comet's tail as I've said before, because a lot of the remaining effort we have left is dependent on bringing in new systems or digital tools, changing processes and changing the way we work. So it will take a little time to wash through, but we have all confidence that we'll reach our target. Next one still remains a very important topic for the industry and also specifically for us, and that's the shift to the new sulphur regulations sort of legally from January, but practically now because we're having to prepare the vessels with the right fuel type. And the only thing I'd like to highlight, and we presented this last quarter too, the only thing I'd like to highlight is what's changed and also what impact we see in Q4 because of the need to purchase the higher cost fuel. But firstly, in the middle there, fuel availability, last assessment we said that was the medium. We had some concern about the actual availability of the correct blend and the quantity that we needed. As we're now moving closer to time, we're now purchasing some of that fuel needed as we start washing it through the vessels. We see that as less risk than we thought, so that's good news. So that's really the main thing there. And also Updating BAFs, you'll see we've moved from medium risk to low. So like most things, fortunately, as you get closer and closer to Christmas, as it is in reality, all good things start to come. So where we've had some lagging discussions with customers, they're accepting as we're getting closer to time that, okay, this is a cost that we have to share. So we're quite comfortable where we're heading from 2020 onwards. But the reality is in Q4, we're likely to have an impact of around about $10 million because we are having to purchase the new fuel type before we are legally putting it in operation before actually we recover the money. So that's where we estimate the gap to be in Q4, just to look into the next quarter. But overall, we're -- from an overall assessment, given significant shift that brings to the industry, we're quite comfortable where we are right now. We expect to have roughly around about 90% coverage as we go forward, so in terms of that coverage for the new fuel types. So that's a comfortable place to be. We'd love to be 100, but that's not reality. It was never like that before either. We've always been under 100 in terms of recovery in fuel price fluctuations. Okay. With that, I'm going to hand to Rebekka to run through the numbers, and I'll be back with our market outlook.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Thank you, Craig. Good morning, everyone. Thank you. I will also be relatively quick in interest of time and the fact that there's not too much to explain around the numbers this time. But starting from the top, revenue of USD 955 million, that's down, it's a 7% reduction year-on-year, that comes mostly from ocean and is explained by the lower volumes. As Craig explained, volumes are down, both for auto and high & heavy. For the auto side, as you know, it's partly by choice and on the high & heavy side it's also partly explained by the fact that we had lower project cargoes in the Atlantic this quarter than we had the previous year. But underlying those things is a softening trend in the market for sure. EBITDA, USD 213 million. It looks like a great improvement over last year. But as you are aware, IFRS 16 impacts the numbers. But if we deduct for that fact it's still a $20 million improvement in EBITDA. There are some negative elements affecting EBITDA. Volume, of course, is the biggest one, but we're also carrying a rate impact from last year into this year, that's around $3 million impact as well. As I said, less project cargoes in the Atlantic this quarter. But all of these negativities were more than offset by positive developments. And there were 3 factors all with kind of equal importance. First, the performance improvement program had an effect of $17 million this quarter. And as Craig explained, an improved net freight per CBM as well due to better trade mix had an equal impact. And then finally, it's bunker, where we had a positive price development for this quarter, so it's kind of the lag effect went in in our favor. So that kind of explains the underlying improvement, which is good in challenging markets. If we then compare with the second quarter, it's a $2 million improvement, not so much. But as you know, the volumes were also down by 5% quarter-on-quarter. So that explains kind of the negative development, but that was then more than offset by the net freight improvement and also a positive bunker quarter-on-quarter.So moving below EBITDA, we will continue through the year to be a little bit challenged by IFRS 16 when we compare numbers. So depreciation has increased by $37 million and interest costs are up by USD 10 million. But if you exclude those effects, that has a stable development. And as for the previous quarter, we do have a negative development on the hedges. The interest rate hedges and the FX hedges were down this quarter, but they were partly offset by positive developments on the bunker hedges, where we have hedged the spread between MGO and HFO for the fourth quarter and first quarter. So that's been a positive development. But in sum, it's actually a negative development by $29 million, same as we had previous quarter. Then some good news on the tax side. We've had for a number of years a case going in Korea related to withholding tax, where our case has been that we should only be paying 5% withholding tax. We now have won that case in the Supreme Court, meaning that we will have cash returned to us of $12.7 million, and we can also reverse provision we've made for the year '16 to '18. So all in all, actually, USD 19.4 million in a one-off tax gain, but also going forward, it means a lower tax rate and dividends out of Korea. So that's quite a positive development. So finally, profit for this period ended at $36 million, if we then exclude the kind of paper effects on the hedges and the one-off on the tax, it would be $46 million as a positive. Return on capital is 5.2% this quarter. So it's moving in the right direction, but it's still not in the terrain that we would really like it to be, of course. Two words on ocean. I think I mentioned many of the items, but we delivered an income of $773 million, that's a 6% reduction over last year. And again, that's explained mostly by volumes. There's also a reduction in other operating income, mostly related to income from TC, bareboat vessels, but then again, we had a positive impact from net freight per CBM. And comparing that to the previous quarter, also a reduction for ocean of 3% related to, of course, negative volume developments. But here, it's more also about seasonalities with, of course, the summer season having been in the third quarter. So this leaves us with an EBITDA of $188 million for the quarter. If we exclude IFRS, that would be $157 million. That's a $25 million improvement or actually 19% over the previous year. So it's actually quite a good development. But as explained, that's related then to our own initiative to reduce costs with the performance improvement program. It's the improvement in net freight, but also the bunker development. The net bunker cost improvement is $26 million. But when we kind of take out the volume effects on bunkers, we have a price impact of around $18 million in our favor for the quarter. And performance improvement program, as I said, $17 million. And you will find that when you go through the accounts, mostly on chartering expenses, cargo expenses and also, of course, bunker expenses, so it had a positive impact on volumes on bunkers. Compared to previous quarter, 2% EBITDA improvement. So less than year-on-year, but this is explained by the same factors as mentioned before. Then on to landbased. Revenues down, not so much year-on-year. That's a relatively flat development, a 2% reduction. But of course, when you look at it quarter-on-quarter, there is quite a drop in revenue of $14 million. That's also linked to the volume development, less volumes coming through the terminals, and we're also very U.S. centric. So when volumes fall in the U.S., it also impacts the business and that has happened, but we also have a very positive development in the high & heavy business that they have in the U.S. EBITDA is, of course, again distorted by IFRS effects. We have a lot of leases both for offices and land, but excluding that it is down year-on-year, $5 million and almost the same if we look at it quarter-on-quarter. So yes, there are some variable costs coming out when volumes fall, but we also have quite a lot of fixed cost. It takes time to adjust the cost base to lower revenues in this segment. Cash positive development of $526 million. We continue to have very good free cash flow, a limited CapEx. It is all known things. It's dry-docking of vessels, installment of ballast water treatment systems, some installments on new buildings and some expansions in solutions. But more notably, we have been reducing the debt, came down by $150 million this quarter. And the net debt is now down to around USD 3.6 billion, so we're keeping our promise of reducing the debt gradually. Finally, then the balance sheet. Not too much to say about this. That we keep improving our solidity. It's now up to 36.3%. We have a very good solid cash position, now above USD 500 million and quite a lot of undrawn credit facilities that we've been reducing lately as well. And finally, as mentioned by Craig, we have now announced the second dividend for this quarter, $0.06, that will be payable around November 21. So with that back to you, Craig.

[Craig Jasienski, CEO & President]

Thanks, Rebekka. Let me go into market outlook. Pretty much the usual slides and sort of show of how we see things looking forward. Auto sales are actually year-on-year only slightly down by 1.1%, and deep-sea volumes on the right-hand side is down by 1.4%. So year-on-year, there's, in many ways, a kind of a minor decline. But when you start to look at -- and I'll go into some of the countries now. But when you get into some of the specific areas, if we look at India year-on-year, hasn't got a big impact on us, but it's just sort of reflective of the market, it's down 22% as a market. China is actually flat year-on-year. Whereas year-to-date sales, if we take the entire global market are actually down 4.6%, taking it year-to-date. So it just sort of indicates that there's different speeds in different economies. And it sort of leads a little bit to the -- a lot of the turmoil we like to read in the papers, and that we can still see in the market around us. What we continue to focus on is where we're operating and what are we moving and how is it affecting us. And that's not been too dramatic really. But it does appear that there's a general weakening off still relatively high base as far as automotive is concerned. Year-to-date exports. So this is quarter on -- sorry, year-on-year is 1.4%, but the year-to-date is actually 2.2%. So there is a automotive weakening overall. If I move to North America, still off a very -- actually relatively high base. Year-on-year, basically flat. So North America is actually holding up quite okay. There's a quarterly drop, but nothing overly dramatic. Inventory is actually reducing, it's down to, as of end of October, 68 days. It was up above 80 previously. So inventory levels are actually -- sorry, beginning of October, are actually starting to reduce. And interestingly, dealers are putting their own incentives in now to move stock because they're carrying some previous year model stocks as last year's model stocks -- in this year, sorry, 2019. They're trying to clear that before the 2020 models coming on stream now. So dealers are, in fact, themselves, starting to put forward incentives just to clear out. So that's helpful as far as destocking is concerned. As long as interest rates remain low, which we expect them to do, we think that lending costs will stay competitive for the consumer. So we don't expect to have any sort of negative consumer confidence in the U.S. market as things look currently. Exports, looking over to the right-hand side have actually reduced. Most of this is, in fact, relative specifically some business from Mexico to Europe, where there's just a change in product cycle. So even though it's a drop, it's actually not dramatic when you get into the numbers and have a look behind. It's a product at the end of its life cycle, and that's what has resulted in any drop, that specifically something produced in Mexico for the European market. Western Europe. A little bit different story when you look at the bar graph on the left. WLTP continues to create a degree of fluctuation in the sales volumes in Europe, up and down, up and down. I've got a whole page of information here. I was going to stand here and explain how the whole WLTP regulations works, but I've decided against it because there's a lot of details. But I think the fundamental thing is we see, particularly now we had a big shift in September last year for new registrations of existing models, where manufacturers had to go from 6C to 6D temp -- sorry, from 6A to 6C. Now in September this year, they had to go to 6D temp, so there was an impact in September last year, but there's also an impact in September this year, and that's what's driving these big fluctuations quarter-on-quarter. New types of vehicles, so new models, basically, have been on 6D temp since 2018, in fact, and that will continue until the end of this year, 2019. And then from next year, new models have to go to 6D full. I'm just saying that so we look into Q1, we're probably going to see this type of quarterly up and down for a little while yet until Europe settles down with implementation and regulations all the way through. And we'll talk about Euro VII in 2023, but not before then. At the moment, we're moving through different cycles of various phases of Euro VI and it's different versions for new registrations and new vehicles. Actual exports, looking over to the right-hand side, which is really more interesting to us because that's where we primarily play, nothing dramatic there. A little bit drop in North America, primarily because of the model shift again. So no real underlying drop in sales, just a change in product cycle. China, year-on-year sales are, in fact, flat, but we know that China has been just decreasing and slowing down throughout most of this year. Real GDP growth is expected to slow. 6.6%, 2018; 6.2% expected this year and forecast are currently 5.7%. So one can assume that the Chinese new car market will, in principle, continue to shrink slightly. And the question is how many incentives are put in place by government in order to stimulate. Dealer inventory index has also gone down in the period. So there was a degree of extra stock in China, so that's healthy. It's good to see that inventories are reducing. So hopefully, we'll see to a degree of flattening just from an overall perspective. And again, we'll see what type of incentives move forward. On the right-hand side. Exports from China have, as you can see, over this period, they've been slowly growing, a little dip. Now nothing major. Interestingly, despite the trade concerns and trade wars between U.S., Chinese exports have actually been holding up relatively okay. So we also don't see anything underlying dramatic there. A few other markets that are not on the screen here. If we just look at sales overall. And this is where we do see a mixed bag. Brazil is up over 5% year-on-year. Argentina is down nearly 31%. And Russia is up 2.4%. And as I said earlier, India down 22%. So we're seeing these different speeds in different markets to a relatively high-degree impact. Slightly different format on this page. So this is Japan on the left and Korea on the right, it's only exports. We don't focus on the sales in those markets for this presentation because that's not so relevant to our operating businesses. But principally, what you can see here is that Japan exports are relatively stable, a small drop over both year-on-year and on quarter. Most of that, again, is actually model shift. There's one particular model that was produced in Japan, which is now being shifted to North America.So that's no longer being exported. So you can look at Japan exports as being, we'd say, relatively stable. Korean light vehicle exports have also reduced at a slightly higher rate. Again, there's a degree of model shift changes here. There are some older models, which are being cycled out, which are not being exported, so that's having an impact on exports out of Korea. Some of that is probably WLTP-related imports to Europe where, those models aren't going to meet regulations, so the product cycle is being stopped. And that's what we see, particularly in the last year-on-year numbers, it's basically model changes or reducing shipments of older models. But still, overall, a little weaker than what it has been. And of course, for us Japan and Korea had been 2 very key export markets for our business out of the Far East. So prospects. I'm still in automotive, I'll come on to high & heavy in a minute. Prospects is -- there's still a degree of continued market uncertainty. We can't shy away from it. Short term, we see automotive flat to weakening. That's our view, particularly when I talk to those different markets, and you see the very different speeds, of which sales are developing in different marketplaces. So when you aggregate that up and look at global volume change, we expect it to be flat to weakening is really our view looking forward short-term and that's also coming off of relatively high level. Car sales have never been so high as they were a couple of years ago. So it's weakening off a high level. Looking forward, when we get off the short term, analysts still see when you look longer term, there will be growth. Yes, we have to believe that the middle class of the world population is growing over time. So looking forward, there will be growth in the automotive segments, but probably short term, a little weaker. Our expectation is more flat. High & heavy. High & heavy also come off steam a little since last time we talked to it. Construction equipment is from an overall export, sales data perspective is weakened down to basically no growth, as you can see on the left. Europe is doing okay, but North America and Asia are down, and that's had an impact on the aggregate numbers, but actually, Europe is holding up quite okay. But we do see construction has really slowed down to a flattening. Mining. I'd like to talk about that in a little bit more detail. It's definitely come off steam. It's in the center there. Exports and shipments of mining machinery is slowing, but it's still at a growth rate. So the growth rate has just slowed down. We still see there's a very large need for CapEx in the mining industry. If you look back into both historic cash flows and CapEx, we were at pretty low levels; we were at high levels of cash flow and low levels of CapEx, comparatively speaking. So back in 2013, free cash flow for overall mining was about $15 billion, now it's $43 billion, at least it was in 2018. CapEx on fixed assets, however, has gone from $25 billion in 2013 down to around $10 billion currently. So there's a lot going into reducing debt. Debt's come down significantly from over $150 billion to $50 billion for the mining segment, all companies included. So whilst free cash flow has improved, CapEx has come down considerably. Debt has been reduced. Dividends have been increased. Some miners are building capacity. With an overall general economic uncertainty, obviously, there's some degree of holdback. There's not a lot of new projects coming online. So replacement CapEx isn't really there yet. And we've talked to this a lot. It will need to come, but it's highly likely that, that's been pushed forward a little bit further in time. We do expect to still see CapEx from the miners, but it will continue to be very much around maintenance, and that's reaffirmed by some of the big mining producers. They've also talked about in the last quarterly releases. But fundamentally, there is a need for replacement -- equipment replacement. That need has not disappeared, that need will come, but it might be it's pushed a bit further into time. So looking -- now I'm going to take a very short perspective on this, short-term perspective because in the next presentation, Capital Markets Day, Mike will talk about this in a little bit more detail looking forward. But again, our short-term view is that high & heavy growth is probably starting to slow a little. So our view on high & heavy is flat to slightly up, that's our perspective. Ag on the right has basically flattened off. Ag will continue to be driven by some of the climate challenges we have currently. A significant drought in Australia that will have an impact in terms of agricultural shipments. And there's also the impact of commodity prices, and farm income will always be a driver in agriculture. But basically, we see Ag as flat at this stage. Okay. Then moving to the order book. On the supply side, it's still a very, very thin order book. We still think that is healthy. We still think that there's a need to -- for supply-demand to catch together. On the basis that automotive may weaken from an export point of view, that, of course, will push a little bit further into time again -- sorry I should be aiming that way -- push a little bit further into time again before we see a balance, but there is a very, very low order book. So it's a positive picture mid-to-long when we look forward. Okay. I don't think I'll add anymore on that one. So overall, to wrap up, and then we'll open up to Q&A, I'll ask Rebekka to join me, and we'll cover Q&A here on the normal things and we'll take a break and then Capital Markets Day. But overall outlook volume, as we said, it remains an uncertain picture because of the macro situation and continued trade tensions. Expected improvement in tonnage balance, I just talked to that, but it might take a little longer to realize. We still see strong competition for volumes tendered what we talked to before. We will choose not to take business that we -- that cannot be profitable, that will be our choice. But otherwise, we'll be defensive where we can and where we should be in order to retain what we like to have. Landbased is going to be impacted by lower volumes, primarily automotive, you'll see, but still the outlook for us is stable. It will be impacted, but it's already taken a bit of a reduction. We have some operating inefficiencies to bring through. So stable outlook there. Operational efficiency is still the focus, both for ocean and land. There's always more to get, so that continues to be our focus. The performance improvement program, we will continue to chase relentlessly, no question. And lastly, on IMO 2020, we're well positioned. We're well prepared. We've done what we can, and we'll continue to do the best that we can. Thank you. With that, Rebekka, can we open up for questions.

[Craig Jasienski, CEO & President]

Lukas?

[Lukas Daul, Analyst]

Do I need a mic?

[Craig Jasienski, CEO & President]

No.

[Lukas Daul, Analyst]

The slide on the contract renewals, that you were showing, it seems to me that in the beginning of the year the renewals you were doing and you were able to sort of go for better terms or better prices and now it's sliding back down to the middle. Is that a trend, or is there something happened that impacted or is that just sort of onetime?

[Craig Jasienski, CEO & President]

It's more trade specific. So it's just coincidental. So in some trades, there is high degree of competition than others because it just depends on where does your competitor have open capacity and where do they not? So it's more coincidental than any trend.

[Lukas Daul, Analyst]

And then on the IMO side, Craig, you said, when you were introducing the BAF clause process, that clients see the need for sharing the cost of [indiscernible]. But is it sharing? Or is it that they will be [ following ] you?

[Craig Jasienski, CEO & President]

So through BAF clauses the intention is to recover all price changes but -- and it has always been like this through time. As you renew each contracts, you're resetting your anchor points and you're resetting the calculations. So that will continue. So when customers will say, yes, full recovery, yes, in line with the normal way that we would calculate BAFs together. So really, this has been a discussion about changing the clause to represent a new fuel type. That's been a primary issue. So we've never achieved, I don't believe, ever 100% totally ever like forever. I mean constantly for a year that doesn't work. So we believe we're around 90% from a recovery rate point of view.

[Lukas Daul, Analyst]

And then I think you're doing a good job on sort of controlling what you can. But in terms of volumes coming down further from very high levels, down further, I mean. How much more business can you walk away from because it's unprofitable and when do you hit the point where you need to start taking contracts, which [indiscernible] where do you sort of see that going?

[Craig Jasienski, CEO & President]

So it's always a balancing act because we need to retain a large global network. Now if you take this perspective, we're still operating the largest fleet collectively in the world. So we're sitting with a high base. And that's not to be arrogant, it's just we're fortunate we have that. So we had some room to allow a little slip. We will try to retain where we can the underlying global network that we have, that creates the opportunity for high & heavy and breakbulk particularly. So that's where we choose, Lukas, we've become -- if we have a risk of reducing the product in a trade to a point where it's no longer sustainable as a product, we think about that very, very carefully because it's not just that one contract that may be having a negative impact on our ability to perform for other segments like high & heavy and breakbulk. So that's an evaluation constantly. So don't -- we don't just walk away from anything we don't like. It's a very serious evaluation, and we need to retain that, the global network, if you like. But we're in a fortunate position where we have the largest fleet operations. So we're able to be somewhat more specific and consistent in what we're trying to do.

[Lukas Daul, Analyst]

Okay. There's another USD 30 million to close the gap [indiscernible] performance program. So far, it's been driven by contractual and voyage optimization and now digitization. What's the net benefit going to be in terms of since I assume that's also CapEx involved.

[Craig Jasienski, CEO & President]

So if you look at -- I'll just cover quickly on digitized operations, and we'll talk about that in Capital Markets Day. But per today, I think by the end of this year, we'll have only up to 10 vessels connected, roughly. And already, just with those 10, we start to see that little -- the beginnings of that small bar that you can see in the presentation there, a couple of million. So it's a very small portion of our fleet that we've connected so far. And again, to the point we said before, it will take time to get to. It's not massive CapEx, no, but it takes time to connect the fleet. Basically, every ship is different and the systems onboard are quite different. So it's a long program. But once we get there, we'll start to scale.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

It's really sensors and then using tools like [ Power VI ] to analyze data. So that's why it's not that CapEx-intensive to pick up what's [ realized ].

[Unknown Analyst]

Regarding the Asian European project cargoes that you guys had, in Q1, you had a one-off, this is always communicated in terms of profitability and specific cargoes [indiscernible] basin. When we look at all the trades that you guys are in, everything is negative year-on-year other than the Asia/Europe. So can you give us some color on the plus 6% year-on-year. Is that the project cargoes? And also, is that what's driving the profitability in Q3. Is it -- the order, is it only the price optimization gains on the unprofitable [ cargoes ]?

[Craig Jasienski, CEO & President]

The project cargoes for Atlantic or...

[Unknown Analyst]

For Asia/Europe. Asia/Europe, you were up 6% year-on-year. But you claim that there were some project cargoes there. Is that what's driving the profitability gains?

[Craig Jasienski, CEO & President]

One of the profitability gains in Asia/Europe is the rationalization of capacity, primarily. So it's one of the trades where our 2 main brands of EUKOR and WW Ocean are both operating that trade. The voyages have been, to a degree, separate for quite some time. It is really during the course of this year, we've been able to align port calls and contracts in order to rationalize capacity. So that's where the profitability drivers come from. In terms of volume spikes, yes, we will have ad hoc project cargoes. They're unpredicted, they'll come when they come.

[Unknown Analyst]

But that's not the driver of the profitability gains?

[Craig Jasienski, CEO & President]

No, not primarily, in that trade, no.Any other questions from the room? Any questions online? So excellent. Thank you very much for your attention. We'll take a short break now, and we'll return here -- after a coffee outside, we'll return here at 9:30 for Capital Markets Day. Thank you very much.