Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2020-Q3

[Craig Jasienski, CEO & President]

Good morning, everybody, welcome to Wallenius Wilhelmsen’s third quarter presentation. Today, we have, apart from presenting our results, the distinct pleasure to welcome Torbjørn Wist, our new CFO, who you'll have a chance to hear from very shortly. But before I launch into the presentation, aside from welcoming Torbjørn to Wallenius Wilhelmsen, I'd also like to take the opportunity to thank Per-Hermod Rasmussen, who sat in and held the reins as the CFO for us for 6 months, and not least, Astrid Martinsen, who's leaving us this month, unfortunately, and has been the Head of IR and Treasury with us for the last 18 months. So we wish Astrid all the very best. Moving into the presentation, before I get to the agenda, just a quick reminder of the principles that we've operated with during this entire pandemic period. We stay true to these principles. We're not out of the pandemic yet, sadly. And these are important guidelines for us as an organization as we continue to work through what has been and continues to be somewhat of a challenging period. But then straight to the highlights for the third quarter. We had an EBITDA of $152 million, which is up from $ 104 million adjusted from the second quarter. Volumes and revenues clearly are still impacted by the ongoing pandemic, but the early and bold actions that we took have certainly helped to support earnings and our cash position. Ocean volume is down 23% year-on-year, but auto volumes have rebounded quite strongly, and we'll spend quite some part of this presentation to talk to that and also how we see the market going forward. Landbased revenue was down 21% year-on-year, but EBITDA only 5% down, mainly because of the cost-saving initiatives and efficiency gains that we've had throughout the Landbased business.Cash is up $600 million at the end of the quarter, up from $539 million at Q2. It's been an absolute core focus of ours throughout this period, and it's been all about doing what we can to preserve cash. So all in all, in addition to the deferred installments we have with our banks and the bond issue that we did, all in all, we've shown quite strong resilience throughout this period. The agenda, very familiar to the regular observers. I will talk us through a business update. I'll hand the word to Torbjørn for financial performance update. I'll come back and talk about the market, and we'll move back to an outlook and Q&A. So talking to the ocean volumes, as we mentioned, they were down 23% year-on-year, actually up 33% quarter-on-quarter. There has been a strong rebound in auto. If we look at it from a prorated perspective, our volumes are down 23% year-on-year in the quarter, but the actual unprorated volume was down only 17%. The point there is that the underlying volume push that we saw in Q3 was quite strong compared to the previous quarter. And then relative to a year ago, the prorating effect doesn't see all the volumes come through fully here in Q3. And some of that carries into Q4, which we're also going to talk about. You will also hear me talk, as we go through the volume picture, continuing to err on caution, and I'll use some time to explain why we think that's important. The high & heavy share is normalized at around 30%. We had a spike in the previous quarter because of very low auto volumes. But now we've settled back into, call it, a more normalized balance, high & heavy balance for the time being. Moving into the trade specifics. I'm going to start at the bottom left-hand corner of your page that you can see on the screen and talk about Europe, North America to Oceania trade, and then move my away, if you like, around the world. You can see the Oceania trade, it was a pretty significant drop. It's very largely driven by automotive. And of that automotive drop, a little bit more than half of that impact year-on-year was driven by our own choice, as we've talked about previously, and that was the relinquishment of a couple of contracts that -- or at least one significant contract, which was just simply no longer profitable. And that has, of course, a large effect on driving the volume down. Interestingly, in that trade and positive to read and hear, the high & heavy and breakbulk share remains actually quite stable on a year-on-year basis. Moving around to the Atlantic trade, year-on-year, we're now back to where we were a year ago, very, very strong auto volumes, but weak-ish high & heavy in the quarter when we compare to 1 year ago. Europe to Asia, relatively good recovery in that trade, some lost business in that trade as well which has a certain negative impact on the year-on-year volume. But the underlying lift in the market in the quarter has been pleasing to see. I'll continue around Asia to Europe. A little weaker out of Japan. Again, the volume is down 33% year-on-year, as you can see. We are somewhat weaker out of Japan than we are out of South Korea. High & heavy is down around about 20% from a total relative volume perspective, so a little bit weak there still. But interesting to see in that trade now the beginning of Chinese electric vehicle exports into Europe from Asia. So that's the beginning of a good pickup in the quarter, but it's still a relatively small volumes, but it's a good start to see how those exports will develop over the coming years, in fact. Finalizing around to Asia to North America, quite similar to the Asia/Europe picture. The pickup out of Japan is a little bit weaker than what we see out of South Korea. High & heavy and breakbulk is down almost roughly 10 percentage points from where it normally is, but we expect to see some improvements there going into 2021, the way we see the market on high & heavy for the moment. I'll leave the trade slides, just talk a little bit about the current rate pressure. The picture you see in front of you, as you can see on the left-hand side, as of third quarter, we've renewed 69% of the total business that was to be renewed this year, the remainder to be handled during Q4. The total contract renewals in Q1 and Q2, you can see with the bubbles there, we've bundled them together so it's easier to see. The effect of the first 2 quarters this year from an overall annualized revenue perspective was fairly neutral. However, the contract renewals that we had in Q3 have in fact driven the annualized effect down slightly, so in the roughly $4.5 million range. The point here is, we do see rate pressure in the market. There is a degree of excess capacity still. I'll also talk to how recycling has been going a little later in the presentation, but we continue with some rate pressure and a degree of short-termism in market approach for the time being. And that's leaving us with some pressure that we see continuing certainly through this year. Next, managing capacity, before we move over to the numbers. We continue, and I think this has been an important point we've had all along, we have a very resilient fleet base in that we have our fixed fleet, but we're able to ramp capacity up and down in the market depending on need. We've been able to follow throughout all of these periods that you can see on the screen. And you can see at the -- as of the end of September, we had 5 vessels on short-term charter in order to start to handle the volumes coming our way. We actually had a new building delivered in the quarter, Tannhauser was delivered on the 10th of September. The next and last of the new building programs out of China is due to come out in the second quarter next year. We still retain 16 vessels in cold layup. We retain a degree of prudency here given the forward volume picture, which again, I'm going to come back to. So that was a very fast run through the quick business update. We will spend a bit more time on the numbers and on the market outlook. So with that, I welcome Torbjørn to the podium. Thank you.

[Torbjørn Wist, Chief Financial Officer]

Thank you very much, and good evening to everyone, on the line. Very, very happy to be here. It is fairly intensive 5 weeks in the chair, and I will try to keep out the airline vocabulary and I will try to stick to [indiscernible] this industry. I'll start by focusing on the highlights on Page 11. On [indiscernible] [ 257 ] year-over-year [indiscernible] pandemic. We have also seen a $90 million recovery since the last quarter on the back of rebounding auto volumes. The adjusted EBITDA is down $61 million year-on-year, but we have a $48 million improvement since the second quarter. We see, of course, that the -- both the ocean and the Landbased segments have contributed [indiscernible] to both the revenue and EBITDA development in the quarter. Looking at the middle [indiscernible] that the operating cash flow down $84 million to $145 million.[Technical Difficulty] Okay. Apologies for the technical interruption there. And if we look at the middle section of the chart, you can see that the operating cash flow is down $84 million to $145 million in the quarter. This is a result of the fact that the change in working capital is flat this quarter compared to $180 million positive contribution last quarter. As the activity levels increased in the quarter, both inventory, accounts receivable, payables, OpEx accruals increased at the same time, hence, netting each other out. If we strip out these working capital effects, we had a $61 million underlying improvement in cash flow which incidentally is equal to the change in the net cash position, which ended at $600 million in the quarter. The net CapEx increase mainly relates to a $40 million installment on the HERO 3 vessel Tannhauser as well as certain scrubber installations. Turning to the right side of the chart, it is obviously pleasing to see that return on capital employed is on the plus side. But -- and we ended up at 2.5% in this quarter. But this still is, of course, below our own target of 8%. The equity ratio is marginally down as the increase in cash as well as the increase in the current assets, has increased the denominator in this equation. Net debt to EBITDA came in at 5.9x. And this, of course, is not surprising given that LTM EBITDA now carries with it 2 quarters of results that are depressed due to the ongoing pandemic. But I guess the final notice that this ratio, we still believe is too high, and it's a ratio that we would like to manage down in time. Turning to the consolidated results, revenues came in at $697 million, down 27% since last year. This is because of lower volumes in both the ocean and the Landbased services. As Craig mentioned, the prorated ocean volumes are down 23% year-over-year but increasing 33% since last quarter as the auto volumes recovered. The total revenues did not increase to the same extent as volumes, but was up 15% in the quarter. The lower percentage is due to a combination of factors, including a reduced net freight per cubic meter, which was down $4 per cubic meter to 40, and this, of course, is somewhat natural due to the normalization of the cargo mix as well as lower surcharge revenues, which are down $33 million to $26 million in the ocean business. EBITDA ended up at $152 million, which is a decline of 29% since last year. However, it is worth pointing out that the annual development in EBITDA was supported by cost savings measures, such as a $9 million reduction in SG&A, mainly relating to personnel and travel, a $17 million reduction in charter expenses as 7 charter vessels were redelivered in the first half of the year. In addition, we had a $41 million reduction in net bunker cost as prices are significantly down compared to last year. The quarterly development in EBITDA was up 46% versus adjusted EBITDA of $104 million in Q2, again, with the strong contributions from both the ocean and Landbased. And in the Landbased, we did see a 10x improvement in results versus last quarter. Depreciation and amortization, not shown on this chart, is down $11 million since last year, partly related to the redelivery of chartered vessels. EBIT came in at $40 million which is down 57% year-on-year. Looking at net financials, this expense was down $36 million -- sorry, was $36 million, down from $72 million last year. This improvement is a combination of 2 things: one, a reduction in interest expenses; and the second, that we have a positive impact from unrealized derivatives in this quarter versus a $26 million negative impact in the third quarter of last year. The tax expense was 0, yielding a profit of $4 million or $0.01 per share. If we turn to the ocean side, revenues came in at $545 million, which is down 29% since last year. As mentioned, the decline is driven by a combo of revenue -- sorry, volume development, the freight per cubic -- net freight per cubic meter and the lower surcharges. The revenue was up 10% in the quarter, less than the recovery in volumes, which increased by 33%. And as I mentioned previously, this is a result of a more normalized cargo mix bringing the net freight per cubic meter down, together with a 55% decline in the bunker surcharge revenue, which declined because the BAF was affected by the drop in the fuel price during the first half of this year. Ocean EBITDA was $129 million, down 31% year-over-year, and the decline was mitigated by the cost measures I already mentioned. In ops, the focus has been on optimizing sailings, basically swapping cargo between vessels in order to maximize utilization. In addition, speed adjustments is a good way to manage capacity up and down. And this, of course, also impacts fuel consumption and costs. Compared to the third quarter of '19, the average bunker price consumed is down by $114 per tonne, which is roughly a 27% decrease. The EBITDA was up 23% versus Q2 adjusted EBITDA because of the recovery in volumes and offset by the factors we already touched on. The gross bunker expense remained low as slow steaming and optimizing bunkering, basically fueling bunker at ports with lower prices, meant that the bunker consumed in Q3 still were able to benefit from lower bunker prices in the previous quarter. Cost initiatives such as cold layup and the redelivery of charter vessels had a positive impact on charter expense, which is down some $5 million in the quarter as well as ship OpEx, which is down $2 million. So we're jumping on land. Revenues came in at $175 million, which is down 21% since last year, but up 39% in the quarter. Landbased services benefited from a strong recovery in volumes in Q3, though still well below last year's levels. And this, of course, is -- as production -- we benefited from the fact that production and transportation of light vehicles increased or resumed from June following the plant closures and site shutdowns we saw in early second quarter. The development in Landbased services mirrored ocean in that auto volumes recovered strongly compared to Q2 when auto was hit harder relative to high & heavy. The EBITDA was $28 million, down 5% year-on-year, again, as cost savings and efficiency gains counteracted the impact from the lower volumes. Year-on-year, all segments are delivering lower results, perhaps with the notable exception of terminals, which is up $2 million, due to significant cost savings and efficiency gains, combined with the government subsidies. Compared to Q2, the Landbased improved tenfold from $2.5 million, and the largest driver of the improved result was Solutions Americas Auto, which was up $15 million from a loss of $5 million in the second quarter. And this, of course, is due to the ramp-up after the site shutdowns and subsidies -- sorry, and the production hold. And then terminal volumes, finally, was up 69% versus the second quarter. Right, if we then turn to our liquidity development, our cash position has increased $61 million since the last quarter due to free cash flow of $37 million as well as a net debt uptake, and we also have $282 million of undrawn credit facilities. The net CapEx of $68 million consists of $73 million of CapEx, less $5 million of proceeds from the sale of independents due for recycling. CapEx, if we then turn to the CapEx side, $40 million of this is Tannhauser, as mentioned. Then we have a $25 million scrubber installations and $8 million dry docking and installment of ballast water treatment systems. On the debt side, we had a net increase of $30 million with drawdowns of $260 million and repayments of $230 million. The main activities in this arena was, of course, the new bond of $2 billion, which had about $150 million of net proceeds after repurchase of existing bonds. We reduced the draw on credit facilities of $37 million, and we had regular installment on lease payments of $83 million, and then we had a refinancing of Morning Lady with net proceeds of $1 million. As regards to balance sheet, the total assets are up to $7.5 billion from $7.4 billion in Q2, again, driven by the increase in cash following the bond issue as well as the increase in inventory and trade receivables. This caused a 0.4% marginal decline in the equity ratio. The net debt remains stable at $3.4 billion. And then the final note on the balance sheet is that in Q3, $129 million of antitrust provisions were reclassified. $69 million was reclassified from noncurrent provisions to other noncurrent liabilities. And $60 million was reclassified from current provisions to other current liabilities. This reclassification was due to the amounts no longer being uncertain in amount or timing. $109 million remains classified as provisions, as the amounts and timing are still uncertain. And this concludes the financial section. And I would now like to hand over to Craig for the market update.

[Craig Jasienski, CEO & President]

Thank you, Torbjørn. Thank you very much. Let me now use some time on providing an update on the market and talk a little bit about how we see the situation moving forward. But just a quick recap on where we are as of the third quarter. So auto sales were down 6.8% year-on-year. If we strip out China, which I think is an important point here because China has, throughout this period, driven sales down fast and early and driven them up fast and early, compared to the rest of the world. So with the 6.8% down, if we strip China away, it's a 12.6% drop year-on-year. If we look at Q-on-Q numbers, the whole world's sales have jumped up 31.7%. But if we strip out China, it's actually up 49.7%. So important just to clear out the -- some of the drivers that sit behind the numbers here. I think I'm going to stick to the left-hand side of the page for the time being. There's a number of positive drivers here, undoubtedly, from a sales point of view. There has been a pent-up demand because of the significant drop in activity and sales that occurred during the second quarter. That creates a certain demand that needs to be rebuilt back into the market. So that pent-up demand is definitely there and is clearly being seen across the markets per today and in Q3. There has been a number of incentive programs around the world, which has also helped to fuel the degree of sales. And then thirdly, we generally have operated with a -- more from a societal point of view, a better-than-feared attitude. So there's some sort of very key factors which have been driving the sales up very positively, which is fantastic to see. And of course, we're very pleased with the performance and the results that we have in the third quarter. So it's a great picture that we have in front of us. However, and this is the important aspect when we start to look forward, we have an increasing intensity, particularly across Europe and North America relative to the pandemic. That will have some further impacts as far as sales are concerned, one will have to assume. That may create some pent-up demand later, but it basically will mean that we should continue to expect -- we talked to this last quarter as well that sales will peak and trough. As we typically see sales run down hard, as they recover, they tend to recover in peaks and troughs, and that's something that we should certainly be expecting as we start to look somewhat further forward. Moving to the -- I won't go into the market specifics now, I think I'll leave that in terms of the actual sales of the changes in the different markets because it's now, in reality, behind us. If I look to the right-hand side of the charts, that we talk about the light vehicle exports across the globe. Also been a good growth there. As you can see on a quarter-on-quarter basis, recognized across our numbers. North America, just to point to that particular market, was down 41% year-on-year. So you can see the total North American exports have dropped somewhat more significantly than the underlying of 14% as of the third quarter when I take a year-on-year perspective. Interestingly, as far as exports are concerned, there is still some inbound component challenges in the plants as ramps -- production has been ramping up over these last few months and in the last quarter. So that is curbing and holding back some of the production and therefore, hitting the actual export numbers that we see. I mentioned earlier that it's also pleasing to see that China has begun it's -- the beginning of its electric vehicle exports. We expect that to continue steadily over time and something that we'll be focusing for the forward years for it to be very long in [ thought ] there. Something we've talked about previously as well and I'd like to give an update on that, and that's the fundamental share of deep sea volumes relative to total units sold in the market. The picture you see here is annual figures year-on-year. You can see that significant drop in 2020. We are down -- or we expect it to be down around about 18%, 17.8%, is the prognosis for total sales in the world in 2020. That is an improved forecast. 1 quarter ago, the estimates was 21% to 22% down. So there is an improvement in underlying expectations for the year. But the key point here is that we expect the deep sea share of total sold volume to be relatively stable throughout. But accepting, as I talked to, and my next slide is going to get into that, the fits and starts we see in actual exports. The key and core question here is how do we see real underlying demand developing looking forward now? So with the next picture, we can see, again, Q3 there was a solid light vehicle sales and production rebound in Q3. But to explain this chart specifically, if we look to the dark -- or the black line, the dark gray line, is global production quarter on -- sorry, year-on-year but looking at each quarter. In the second quarter, we saw a very significant drop in production globally. That was driven fundamentally and primarily because of factory shutdowns because of social distancing. So we're right in the period where people were physically not allowed to come to work. Production fell back much harder than underlying sales, which meant -- which is the green line, which means that there was a significant amount of destocking taking place in the market. So stock levels, inventory levels for automotive and high & heavy is actually not very different. I'll come to high & heavy in a minute, but underlying automotive inventories were reduced quite significantly, much harder than sales dropped. The situation we see now in Q3, and you can see the black line running up, production is now working hard to not just meet the growing demand, but actually to restock as well. So we have a double hit. We have an increase in actual sales because of that pent-up demand and some subsidies, which has driven the need to put more production in because of the lack of inventory. At the same time, the need to replenish the inventory at levels that would normally be comfortable for the manufacturers. So the reality is, in Q3 and likely going into Q4, a production overshoot compared to actual underlying demand. That production overshoot results very pleasingly in more volumes for us in those quarters, but it does mean that at some point in time, production will have to settle back down to underlying true demand. And the underlying true demand picture, looking forward on the green line here into Q4 and thereon after is a forecast. But that underlying demand is expected to still be some 10% to 11% to 12% below 2019 numbers. So one has to expect that production will start to slow down again as we enter next year. And that's an important feature that we continue to watch. And it's an important feature that we would -- we certainly ask us all to bear in mind that what looks fantastic right now may not have legs to carry through all the way into the -- into 2021. So what we see, in many ways, in Q3 and Q4 may not translate into real underlying volumes at the beginning of 2021. And it's for this core reason that we remain prudent in retaining vessels in layup. We are able to access short-term capacity as needed in order to cater for the current very strong demand. But we believe it's prudent to keep vessels in layup because we do believe that production will come down, and deep-sea exports will in fact reduce again at the early part of next year. Again, to what degree is going to depend very much on how we see true underlying demand on the sales side actually develop. The final point here, and given that automotive is really driving volume at the moment and driving our production from an ocean perspective, also land, as we ramp up capacity, we do have a higher cost of operation than we would typically have in a normalized period. We are having to speed up in order to create more capacity and fill more positions, which is consuming more fuel. We also -- for the vessels that we charter in from the market, represent an average size which is smaller than our normal fleet size. So the efficiency of the additional vessels is not the same as what we have in our underlying fleet. So these are important points to note that as we look at volume going into the fourth quarter, not every unit of that can translate into the same yield that we may have seen in quarters behind us for those reasons. There is a cost to ramping up capacity. I will move off automotive and change over to the high & heavy story. A couple of quick pictures here. Just to give you a perspective of global trade and manufacturing activity on the left-hand side, the high & heavy story is not terribly different than automotive, but the foundations are a little stronger as we see it. On the left-hand side with the manufacturing activity, what we see is that the consolidated PMIs over -- that are measured over this period accelerated quite strongly in October. What's pleasing there is we have often and always seen a quite strong correlation between this basket of manufacturing PMIs and actual high & heavy sales and volume. So pleasing to see an increased confidence with an above 50-point PMI jumping in October. Moving to the right-hand side, we have 2 positive straight months of export orders. So this is global trade and export order levels you see on the right-hand side. We didn't see machinery orders break the 50 mark yet, so the positive mark yet in September, but that may occur during Q4 and Q1. So the point here is that we believe some of the fundamentals that exist for high & heavy are stronger than what they have been. We don't see the same degree of peaks and troughs from a total volume perspective as we do with automotive, but it's good to see that some of the fundamentals are looking a little stronger than they certainly have so far. Underlying demand per main commodity group will remain to be seen, and I'll use the next page just to try and talk to that a little bit. Overall, not unlike -- very detailed piece of information on this page, I recognize, but underlying what we do see with high & heavy is also good restocking now. So there was a degree of destocking that occurred during the early part of this -- or the previous part of this year. So we've seen good restocking levels. We believe that production and exports bottomed out in Q2. So we still believe that fundamentally for high & heavy. And we do see actually an underlying demand on rise -- or rise in demand, sorry, coming forward from Q1. There's clearly more strength in mining and ag than there is in construction. Construction will take time, depending on stimulus measures, but very pleased to see recently that Australia announced a very strong and generous fiscal package, as an example. But construction will take somewhat more time, we believe, to recover compared to mining and ag, which is looking somewhat stronger going into next year. So looking into 2021, we see it, all 3 main segments ticking up and climbing through compared to where we've seen this year. Interestingly, when you look at, particularly, construction and mining, you can see that the total expectation for this year, total sales are expected to be down quite similar to automotive, so around 19%, whereas ag is actually only falling 8% and therefore, you see a pretty strong uptick in 2021. So it looks to be a little stronger going forward. Closing off with -- or moving to the end here with an overview on the overall fleet. We have seen so far a degree of healthy recycling across the industry, given the significant drop in demand that we've seen. So that's been healthy. We've seen 20 recycled so far this year at the end of this quarter. We expect 28 vessels in the world fleet to be recycled. So more to come for the rest of this year, and good to see that we've -- we're seeing a natural reduction in capacity. We've seen some vessels go out as young as less than 20 years of age, probably inefficient and small, and not part of our fleet. But to observe, it's noted to see that we have a broad range of aged vessels going out. The average fleet size tend to be smaller, particularly with the older vessels. So it's generally average vessel size, smaller capacity that's being recycled, but nonetheless, it reduces the fleet to get closer to matching what you see on the right-hand side, and that has been at significant drop in demand this year. So fundamentally, despite the scrapping, we still see an oversupply in the market. Looking forward for the next few years, we also see an oversupply, which will continue to provide some degree of rate pressure, we expect. Because at this point in time, we have a very, very -- still very, very thin -- sorry, a very low demand-to-growth picture, but we also have a very thin order book. So it will take some time for us to catch back, we think, from a balance perspective. I will leave the market outlook at that. Just move -- wrap up with the summary, if you like. We continue to focus on our employees, customers in the future. That's the clear look forward. The initiatives that we've had in place for the last 2 quarters remain strongly and firmly. We continue to ensure safe infrastructure for our employees, our production sites, taking care of mental health and wellness. It's not -- we're all experiencing that these days. It's not easy to work from home, and that's something we take care of for all of our employees where we can, and also those that are at work in the production lines to ensure that they have a safe environment. We support our ship managers as best as we can with crew changes. It remains an absolute challenge around the world. We'll do what we can, and we continue to do what we can to support. We will match volume demand with capacity through dynamic vessel scheduling, speed adjustments as needed, as I talked to, and we utilize the short-term market to upwardly adjust and to downwardly adjust as we need to. So that remains a very strong focus, which is key for maintaining our control of our cost picture throughout this period. Working closely with our customers throughout, we collaborate intensely with them. There's a lot of demand right now because of this, as I've talked to, need to restock and catch up with the pent-up demand. But equally, as production cools off, we'll also support our customers and adjusting our operations accordingly. So the outlook, if we look immediately into the next quarter, the quarter that we're now in, we do see a continued improvement, not hiding that. We expect it to be around the 5% lower year-on-year. But important to note that our costs of meeting that capacity is higher than it has been up until now. We remain -- if I haven't been clear on it, remain cautious on the medium to long-term output. We do not know how underlying demand is going to develop at this point in time. And we do know that there is a degree of extra production in the system today in order to catch up, but that will cool off. I will close with that. I welcome to Torbjørn back to the podium, and then we open up for any questions. We have Astrid Martinsen. Her gift for her last few presentation is to handle the questions, so -- or at least repeat them to us. So...

[Astrid Martinsen, Head of Group Treasury & IR]

Very good. And we've received some questions online. First from Anders Karlsen in Danske Bank, what are the key cost saving elements in Landbased?

[Craig Jasienski, CEO & President]

So I can take that for you. Yes, the main driver in our -- in Landbased, we have a fairly high variable costs structure. Labor is a high portion or content of cost. So as volumes were reducing at the time, sadly, we had to furlough, but that also meant that we're able to take out a degree of our variable costs. So those costs have been able to come down as well as any inventory costs that we carry, which are minimal, go up and down with volume. Equally why you see the very strong uptick of that operation in the third quarter because we're able to bring, thankfully, our workers back and convert revenue into profit.

[Astrid Martinsen, Head of Group Treasury & IR]

Thank you. The next question is from [ Vilhan Yedidal ]. On Slide 20, that is that -- the quarterly walk on light vehicle sales and production. Could you please elaborate on why you expect demand to remain around 10% negative going into 2021 versus 2019 levels?

[Craig Jasienski, CEO & President]

Yes. So the expectation -- so why does demand stay low next year? We're clearly living with the pandemic globally. There remains real underlying loss of employment. There remains a real underlying concern in society of people's job securities and what impact the pandemic will continue to have on social distancing, et cetera, et cetera. So with that, and until we reach a point where there's clearly a vaccine or a solution, and that's completely dispersed around the world. Until then, we expect a somewhat dampened consumer confidence, and that will drive automotive sales.

[Astrid Martinsen, Head of Group Treasury & IR]

Next question is from Lars Bastian Østereng in Arctic. You were able to burn very cheap Q2 bunker in Q3. Do you expect that to reverse in Q4 as prices are obviously up significantly since Q2?

[Craig Jasienski, CEO & President]

Yes. We, of course, we're paying the price in -- at the pump, if I can put it as crudely as that, as it comes. So yes, as fuel prices are rising, we will carry those extra costs in. There's always a lag effect, both on the actual consumption, the fuel that we buy and when we consume it, of course. But importantly, there's a lag effect on the recovery that we get from our customers through the bunker adjustment factors. So as we've talked to before, as fuel prices increase, we often see a lag, and we will often see a quarter-on-quarter shortfall. But eventually, when the fuel price stabilizes to a new level, we catch up. So we equalize. Conversely, when fuel prices reduce, we have an overshoot on BAF collections before they adjust back down to the new fuel level. So that's a fact -- feature of our business. So it's often some catch-up before we get recovery in the -- on the revenue side.

[Astrid Martinsen, Head of Group Treasury & IR]

Next, we have a few questions from Lukas Daul in ABG. First, total operating expenses per CBM, even when adjusting for surcharges, is at an all-time low level of USD 31 per cubic meter versus a historical average of $35 per cubic meter. How sustainable are these cost cuts?

[Craig Jasienski, CEO & President]

So one of the key features in that lower cost, let's call it our production cost per cubic meter, is given a significant rundown in volume, we've been able to relax a lot of the contract commitments that we have with our customers in terms of frequency and transit time, which are drivers of cost. So being able to relax those constraints in concept with our customers, we've been able to operate very efficiently. And that really connects with my point that as we ramp capacity back up now, we move into a more normalized operation. We're going to see a more normalized cost base.

[Astrid Martinsen, Head of Group Treasury & IR]

Thank you. And next question from Lukas is net freight per cubic meter has fallen to the lowest level of the available data points whilst the high & heavy share still remains at 30% which has historically implied higher profitability. What is the reason for this decline?

[Craig Jasienski, CEO & President]

One of the core features with the net freight per cubic meter, it's also not just cargo mix, it's also trade mix. Each of those core trades that we talked to that the foundation trades that I referred to in each quarter, the rate level per cubic meter is quite different in each one of those trades. So the variation in trade mix also drives that average revenue per CBM.

[Astrid Martinsen, Head of Group Treasury & IR]

Thank you very much. And there was a final question from Lukas regarding the exact level of the government subsidies impacting the Landbased division, which I think we can get back to after the presentation. Next question from Jonas Shum from Swedbank. You noted that you'll find your leverage of 5.9x as high and that you would like it to move lower. Do you have a target in mind? What is the level you would be comfortable with?

[Torbjørn Wist, Chief Financial Officer]

Yes. No, we have not communicated an external target. And of course, now we are in somewhat of an unprecedented situation where you're carrying with you 2 quarters of results that are affected by the COVID-19 pandemic. But as a general note, managing down leverage to more sustainable levels will always be at top of my agenda. But I'm going to be careful and commit to a target this early on together with the rest of the management.

[Astrid Martinsen, Head of Group Treasury & IR]

Thank you. And then we have a few questions from Petter Haugen in Kepler Cheuvreux. Firstly, could you comment on the antitrust situation?

[Craig Jasienski, CEO & President]

There's been no development in the quarter, so there's nothing more to report in that regard.

[Astrid Martinsen, Head of Group Treasury & IR]

And secondly, how do you choose between putting cold layups back into trade again versus chartering from tonnage providers?

[Craig Jasienski, CEO & President]

Two core drivers. The first is to see a -- the first and most important is to see an actual stable demand picture in the markets to ensure that we have a stable sales perspective or sales picture because that will translate in a more stable production and therefore, volume perspective. So that's number one. Number two is the general cost of capacity. As long as there is a high degree of free short-term capacity in the market, it comes at a relatively low cost compared to operating your own fleet. So that's also a driver. As that market tightens up and those charter rates increase, it then becomes more attractive to reactivate.

[Astrid Martinsen, Head of Group Treasury & IR]

And for now the last question is received from Jørgen Lian in DNB. He writes, we're back to normalized high & heavy share of about 30%. What is expected for Q4 as we have a continued rapid recovery in autos? And would it be fair to expect that high & heavy volumes will lag and that we get an unfavorable product mix the next few quarters?

[Craig Jasienski, CEO & President]

It's -- at this point in time, it's hard to judge looking forward how that mix will shift. It's going to depend very much on the automotive demand. We see strong demand going into Q4, both on automotive and high & heavy. That's a common picture in Q4. It's very hard at this point in time to predict how we see Q1 and Q2 developing. But clearly, the biggest driver we've seen so far this year in the change in portion has been the shift between big drops in automotive and big increases in automotive.

[Astrid Martinsen, Head of Group Treasury & IR]

Thank you very much. And that concludes the questions we've received online.

[Craig Jasienski, CEO & President]

Thank you very much. With that, we thank everybody for your attention and attendance, and we close this session. Thank you very much.