Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Analysis

Positive Outlook with Strong Contract Coverage

The company's contract coverage is solid, having surpassed 90%, and is expected to continue to grow into 2024. New contracts are being renewed this year and will be announced soon, while major contracts up for renewal next year are poised to significantly impact financials from 2025 onwards. A stronger financial outlook for 2024 compared to 2023 is projected due to sustained high volumes and increased rates in new contracts. Cost per cubic meter (cbm) is anticipated to decrease as the company is constructing larger, more energy-efficient vessels that are compliant with the highest environmental standards. Despite this, the focus remains on improving the existing fleet, which has seen a 10% reduction in absolute emissions without compromising production capacity.

Strong Quarter with Solid EBITDA Growth

Wallenius Wilhelmsen reported a robust third quarter with an EBITDA of $478 million, marking a period of strong performance, particularly in the Shipping segment with returns of $392 million. The company experienced high demand for their services across both Logistics and Government segments, indicating positive momentum and expectations of sustained demand into the foreseeable future, extending through the rest of the year and into 2024.

Rising Asian Exports Fueling Growth

The company highlighted the significant growth of exports from Asia, especially from China, which has increased shipping distances by more than 10% since 2020. This growth in volume and distance traveled, coupled with a modest 3% increase in the global fleet size, has created a strong market for Wallenius Wilhelmsen's shipping services. Chinese automakers, in particular, are expanding globally, representing two-thirds of the outflow of vehicles from China, including Western brands like Volvo and Tesla that are produced in China and exported worldwide.

High & Heavy Segment to Remain Strong

For the High & Heavy equipment segment, the company has seen strong numbers and anticipates 2023 to be a peak year. While they expect a slight reduction in volumes for 2024, the forecast suggests the market will remain strong. This steady demand, especially in contrast to the growth experienced in previous years, underpins the company's positive outlook for the segment's performance.

New Fleet Expansion Amidst Market Demand

With market demand growing, Wallenius Wilhelmsen has responded by expanding its fleet. The company finalized contracts for four new vessels to be delivered from 2026 and onward, with an additional eight options for further expansion. This proactive approach to fleet growth, around 7% annually starting from 2024, is seen as necessary to meet structural demand despite a potential for market saturation in the following years due to regulatory changes and phasing out of older vessels.

Ongoing Challenge of Congestion

Congestion has been a persistent concern within the shipping industry, and the company does not foresee this abating soon. Investment in shore-based infrastructure has not kept pace with shipping activity, leading to over 20% increase in waiting time outside of ports since 2019. This trend is expected to continue, which could affect the efficiency of shipping operations and the industry overall.

Expectations for Continued Strong Demand

Summarizing the market conditions, Wallenius Wilhelmsen anticipates continued strong demand, particularly in the Auto segment, for the rest of the year and into 2024. While growth in the High & Heavy segment is not expected to continue, demand is projected to remain strong, prompting a positive outlook for the coming year.

Slight Reduction in Volumes But Higher Earnings

The business experienced a minor decrease in volumes from Q2 to Q3, attributed to seasonal trends and exceptionally high volumes in Q2. Nonetheless, the third quarter still recorded substantially high volumes historically. A notable shift in trade mix to smaller markets like the Middle East, Africa, and South Asia has increased earnings. Net rates rose, and time charter equivalent (TCE) remained relatively flat, indicating that shipping performance strengthened in Q3. Additionally, the company's focus on reducing carbon emissions and enhancing energy efficiency has led to a 10% drop in fuel consumption over the past four quarters, demonstrating success in their environmental initiatives.

Earnings Call Transcript 2023-Q3

[Lasse Kristoffersen, executive]

Good morning, and welcome to the third quarter presentation by Wallenius Wilhelmsen, and later in this presentation, Torbjorn will join me. And as always, we will end the session with a Q&A where Anders will come in and take your questions. So feel free to share your questions, and we will answer them after the presentation.Starting with the boring stuff, the disclaimer. You can read that afterwards. So let me go straight to the highlights.The third quarter was a very strong quarter for Wallenius Wilhelmsen. We had an EBITDA of $478 million. We had a very strong Shipping segment delivering $392 million and also very strong results in Logistics and Government. And we see that we have a very strong demand for our services. We believe this will remain for the foreseeable future, and we will come back at the end with a more specific prospect for how we look at the rest of the year and 2024.Let me take you through some key numbers in terms of EBITDA and return on capital employed. The trend in increasing EBITDA is continuing. And if you track the last 12 months average, we're up quarter-on-quarter and significantly up year-on-year. And same goes for the return of capital employed. So our financial metrics are showing -- is very strong and also showing a positive development.We are particularly happy with the development in our 2 segments, Logistics and Government, and they are now showing a positive trend for quite a while and are now demonstrating the earnings potential in this activity, which is very different from Shipping where we have more long-term contracts and where we are handling units that maybe never see the oceans.So then, jumping into the market. And there is no doubt that the driving forces in this market are increasing exports out of Asia, and in particular, increasing exports out of China. And if you do the numbers since 2019, you see that there's been a significant growth in the volumes out of China, and there has been more or less stable volumes from the rest of Asia. So the total volumes out of Asia has increased significantly over the last years.And the reason why this is important for our industry is that this is adding a lot of distance. So if you look at the growth in the distance travel, this is up 10% -- or more than 10% since 2020. In the same period, the [ world ] fleet, if you take 2020 as the baseline, is only up 3%.So the reason why we have a very strong market now for Shipping is basically that we have structural significant flows of cargo from Asia with a longer distance basically with the same fleet as we had 3 or 4 years ago. And this growth out of China is, in our view, at the moment very robust. There is a significant amount of that going to Europe, but more than half of it are going to other markets in the world. And there is no doubt that the Chinese carmakers are really making a strong impasse in all markets across the globe. The only area where we see that the Chinese carmakers are struggling are with EVs into the U.S., where there is very strong incentives for U.S. produced electrical vehicles, and I will come back to that slightly later in the presentation.The flow of cars from China is basically split 2/3 from Chinese brands and roughly 1/3 from Western brands. And this has been the trend for quite a while. It's just the absolute numbers growing, but this 2/3 and 1/3 split is continuing. So it's not only Chinese brands that are growing, it's brands like Volvo and Tesla producing cars in China, exporting it to markets around the globe.Moving over to the High & Heavy segment. We saw very strong numbers quarter-on-quarter. We expect this year to be very strong for High & Heavy. And if you tap into the forecast for both the Caterpillars and others, 2023 is an all-time high year. And we just met with the top management of John Deere, telling us that 2023 is an exceptional year. We do not think that 2024 will continue this growth, but we definitely believe that 2024 will be another strong year, maybe marginally down on volumes.But then, remember that 2023 surprised with higher volumes than we thought 1 year ago. So we have moved more products -- High & Heavy product this year than we thought 1 year ago. And we see a slight moderate reduction next year, but more or less flat when we look at our forecast for High & Heavy in 2024. So also, the High & Heavy segment is strong, but probably not growing into 2024, while the Auto segment is expected to continue its growth into 2024.There is a lot of discussion around the new building orders, and there are significant orders added. By the end of the third quarter, we were up to 31% of the fleet on order, and this represents roughly a 7% annualized fleet growth, in '24, [ 5% and 6% ]. And this is, of course, a strong growth for those few years. If you look at the long-term trend for the fleet, we are basically just back at the 3% annual growth.So our view is that structurally we need these vessels. But then, of course, the question is, will that affect the market within those years, '25 and '26. And if we break that down, we -- and look at these years, we have added the fleet that we think will be phased out due to [ edge ]. We do believe there will be a result on lower speeds due to CII regulation where vessels will not comply. We do not count for that in '24, but from '25 and onwards.In '26 we have added basically the same deliveries as in '25 because there are quite a few LOIs not firmed up. If you take all that together, you can see that we are in the range of 5%, 6%, 7% growth year-on-year on the fleet. And then we need to keep in mind that currently there is more demand than there is capacity. So there is a buffer in the market today, and there is not enough capacity to serve the current demand. So there will be a strong fleet growth, but at least large parts of this is needed to serve the current demand that we see in the market.Congestion has been an issue for this industry for quite some years. We do not expect that to go away anytime soon. And back to the previous slide, if we add more vessels, or when we add more vessels into this fleet, we will have more activity, but we do not see the same investments on the shore-based infrastructure. So congestion, we believe, is here to stay. We see a somewhat reduction in Q3 and a downward trend through Q3, particular in Australia. This is also seasonal. So we still believe that congestion will be a major factor in our segment.And if you look on the longer-term numbers on the illustration we have put in, the light green shows the time we spent in port, basically cargo operations. That has been more or less stable. But what you can see is that there's been an increase in more than 20% in waiting days outside the ports, which you consider being congestion since 2019.And this is, in our view, a structural representation that there are more activity than there is land-based infrastructure to handle it. And we see this moving around. It started in Australia. We saw it in Europe. We've seen it on the U.S. West Coast. Now we see it in the Panama Canal. We think this is a trend that will be with us for still quite a while.So summing up the market. We see strong demand for the rest of the year, and we also expect 2024 to show strong demand, in particular from cars and a continued strong, but maybe not growing demand in the High & Heavy segment.Moving into our business on Shipping. We are very happy to announce earlier -- well, last week that we have now turned the LOI for 4 new buildings into firm contracts. So these are now contracted, ready for delivery from 2026 and onwards. And at the same time, we firmed up the 8 options that follow this for firm vessels, that needs to be declared at the later stage in batches of 4.Moving into the business. There was a slight reduction in volumes from Q2 to Q3. This is partly due to normal seasonality, but also that Q2 was very high in terms of volume and the highest volume we have on record for our fleet. So still, the third quarter had a very high volume compared to any other quarter in our history. There was a particular trade mix in the last quarter, and we had, relatively speaking, more trades into smaller destinations like Middle East and Africa and South Asia, so -- which are increasing our earnings on those.So we have, as a result, seen that the net rate increased by $2 in the quarter. The TCE is relatively flat, slightly up, and this is partly due to fuel effects. So the underlying performance in Shipping is stronger in Q3 than what we saw in Q2. We are very happy to see the trend in carbon emissions and energy efficiency continuing. We have invested a lot in both operational and technical measures to drive down the energy consumption of our fleet and we really see that coming to fruition. There's been a 10% reduction in absolute fuel consumption over the last 4 quarters.And I must say that this is, in my view, quite impressive and shows dedication over years from our technical team to drive down emissions. And these are both good for the planet, it's good for our customers, and certainly also good for our bottom line. The fleet in total is the same, but we have bought 2 vessels over the last quarter.These are purchase options at the end of time charter periods. These are very attractive options for us and are [ weighed ] in the [ money ] when we are declaring them, and the total value of these options when you compare the strike price we paid, and the market value of the vessel is close to $100 million combined. We are still cautious on adding time charter tonnage. We are, of course, looking into how to renew some of our vessels. But in general, we cannot see that these time charter vessels and these time charter levels are sustainable in our business.Logistics update. As I said, we see a strong improvement in Logistics. This is partly due to volume. I'll come back to that, but it's also due to the work we've done with our labor force. We have seen an extremely tight labor market in the U.S. and in Europe.And over the last year, we have reset our strategy. We have been able to get much more permanent employments. We used to use much more temporary employment and done a lot of things in terms of flexible hours and other measures, allowing us to have a more stable workforce and reducing the cost, and we see that is now delivering better bottom line in that business.And this is also key in our work for safety and compliance to have consistency in our workforce so that we can work with culture over time. So there's been a very good numbers in terms of churning temporary employees into permanent employees and giving us that baseload of workforce that we need to serve our customers.Looking more into the details of the Logistics area. As presented earlier, the Auto segment, basically cars are performing strong. We see both the volumes are going up, but in particular, the accessorization, meaning that we are putting more value into the cars than we did previously. And typically, what we do is that we complete cars and we move cars. And when we complete cars, we are adding everything from a -- heated mirrors to a towing hook or whatever you need to meet a specific customer's demand. And we see that, that scope is increasing, and that's very profitable work for us.In the High & Heavy segment, it's more flat. In the High & Heavy, we actually see a slightly reduction in volumes, but we have more revenues from High & Heavy in terms of storage and longer dwell times, meaning the equipment rest more with us, which is also indicating that the demand on High & Heavy is not growing as fast in the last quarter as it did previously.Terminals, relatively flat, and we are now at a level which is more representative of the underlying business. We had a period with very strong revenues in MIRRAT due to biosecurity. That is more normalized now. And then on the inland, it's a bit of the same trend. We see that there are less inland moves of big equipment, both in Europe and the U.S. due to a somewhat lower economy. But all-in-all, in the Logistics area, the activity level is very high, and we are in particular seeing that the volumes are growing in Auto.And our presence in the U.S. on Auto processing and Terminals is very strong. We have, for a while, seen that the volumes were down. They are now getting back up, but still, there is more than 10% below or 12% below what we saw back in 2019. So there is still a strong upside in the car production in the U.S. There is also a very interesting structural upside in the car production in the U.S.As I mentioned earlier, we see very limited Chinese sales of EVs into the U.S. In the U.S., they believe they should be self-served with EVs, and that is the right side of this chart showing the growth in the car production and the EV car production and the battery production in the U.S.We are -- today, have a leading position with this industry in the U.S., and we believe there are strong growth opportunities for us in Logistics, for cars and equipment produced in the U.S. for the U.S. market. And we believe this is a structural trend that we are tapping into.Then on sustainability. Everything starts with safety in our company, and we saw a somewhat negative trend quarter-on-quarter when it came to lost time [ incidents ] frequency. We had no major or critical accidents in the quarter, which is good. We are still performing below our targets for the year, but in particular, the trend in Logistics where we had a couple of incidents that should have been avoided. We work systematically on how we can avoid in the future.And the work with safety is never done, and we are working now systematically both with technical measures and with safety culture in our fleet and in our operations.Very happy to see the development on emissions. This is partly due to the fact that we are producing more transport work. We're full, but certainly mostly due to the fact that we are using less fuel and running the fleet more efficient. And there is a significant development and a consistent development in our carbon footprint, and we are now tracking ahead of our targets of decarbonizing Wallenius Wilhelmsen.With that, I'll leave you to Torbjorn to talk about the financial results.

[Torbjørn Wist, executive]

Thank you, Lasse. I'm very happy to be here to present the financial results for the third quarter. Good morning to everybody.Yes. As Lasse said, this is a very strong quarter. We delivered an EBITDA of $478 million on the back of strong performance from all segments, which, of course, is something we are very, very happy about. I will come back to the underlying EBITDA development. So we'll not spend too much time on that on this page. Net profit came in at $328 million.Our strong EBITDA margin continues. We had a very positive development in the net cash position and the net debt continues to decline, resulting in a very strong performance relative to our financial targets.If we start with the return on capital employed, not to be confused with the weighted average cost of capital we use for investments. We came in at 16.8%. The equity ratio, 45.5% and EBITDA -- net debt/EBITDA of 1.2, all very, very strong performances relative to our financial targets.If we look at the EBITDA, it is on par with Q2, but it is a strong underlying performance in all segments. If we start with the Shipping. Shipping is 3% down in terms of headline numbers. But if you adjust for the underlying development in net fuel cost, the underlying EBITDA is actually 4% better in Q3 compared to Q2. Surcharges in the quarter were down 15%, while costs were only down 4%.In terms of the decline in fuel revenues and [ fuel ] vessel and operation, EBITDA is up 3% year-over-year. In terms of the Logistics EBITDA, they had another good quarter with more stable volumes. EBITDA increased to $48 million, which is 1% up quarter-on-quarter, and this is driven again by strong Auto volumes, storage and accessorization of cars.Government delivered a very strong result, up 52% quarter-on-quarter due to the continued high demand for U.S. flag cargo. The strong growth both quarter-on-quarter and year-over-year has, of course, been very much linked to the security situation we've seen in the European shores and we've seen high U.S. flag cargo now for the past year.If we look at the revenue and EBITDA bridge, the revenues are up $9 million quarter-over-quarter. Shipping decreased $10 million. And if you decompose that number, we had a $23 million drop due to the volume development. We had a higher revenue per cbm, as Lasse touched on, in all cargo and trade lanes, and that contributed with $37 million.And then as mentioned, we had a decline in the surcharges, which again took away $24 million. In terms of the other 2 segments, they contributed with $18 million in the quarter, $7 million in Logistics and $12 million in Government.The adjusted EBITDA is on par with the previous quarter. Shipping, underlying better as mentioned. We do have a little bit higher ship OpEx, mainly because we exercised the options in Morning Margareta and Morning Ninni..And we also have a little bit higher SG&A due to mainly one-off costs related to the Korean tonnage tax regime. Government, up $16 million and Logistics up, just shy of $1 million. And then we had some holding cost of $5 million mainly related to incentive plan revaluations.As mentioned, in Q3, we did have a net negative development in fuel cost. As you can see on the bottom left, the net fuel cost is up some 45% to $53 million in the quarter, up from $37 million in the previous quarter as we saw a larger decline in fuel surcharges compared to fuel costs. We do expect that fuel surcharges will increase in the future due to the increase that we've seen in fuel costs in Q3, and you're all aware of the lag effect that we have in terms of fuel surcharges coming in.Cash flow development remains strong. On the left-hand side, you can see that the LTM operating cash flow and the cash conversion in terms of operating cash flow divided by EBITDA, continues to develop very positively. And the LTM free cash flow per share also remains very, very strong.Cash on hand increased $232 million in Q3, driven by the solid operational performance. Net CapEx mainly includes dry dock, vessel maintenance and other investments. We also have some interest received, which are classified as investing items. We will be paying the $144 million of dividends now in November.And in terms of the net debt development, that includes scheduled repayments of debt, issuance of the new bond and the partial buyback of existing bond. For those of you who have read the report, we exercised the option for the 2 vessels, and the $20 million exercise price for these are not shown in CapEx.This is included in repayment of lease liabilities and hence, are included in the net debt development. As this is part of lease accounting, we do not restate the value of these assets, and hence, book no gains linked to those transactions over the P&L. Undrawn credit facilities are now at $422 million, a little bit up following the successful refinancing of the WWS facility.Final slide. We have a very strong balance sheet. The equity ratio was 45.5% at the end of Q3, up from 43% in Q2. Net debt declined again due to the debt repayments and the solid cash flow development. In Q3, we completed the issuance of the NOK 1 billion sustainability-linked bond. Of that NOK 528 million were used to buy back in next year's bond maturity.We also signed a new $345 million RCF within the Logistics Services segment in our sort of structured WWS or Wallenius Wilhelmsen Solutions, and $303 million of those were used to refinance the previous facility and the rest is then available as for any other corporate purposes.So with that, I will conclude the financials and hand over to Lasse.

[Lasse Kristoffersen, executive]

Thank you, Torbjorn. And the only thing remaining for me before we bring on your questions are -- I summarize and -- summary of the prospects as we see it. And as this presentation probably have demonstrated, we are optimistic of what we see in the market. We see a tight market balance for the rest of 2023, and we expect our EBITDA for the second half of this year to be at or above what we saw in the first half.And we expect also a strong demand and high utilization into 2024, and we believe in volumes, at least on level with 2023. And we have just run a significant round with our customers and looking at their prospects for next year, which show the same trend, good growth in volumes from Auto and at least stable volumes in the High & Heavy is what we hear from our customers.There are very strong underlying fundamentals, but of course, there are always risks to this forecast, both in terms of the macroeconomic situation, the fleet development and certainly also geopolitical events. We are working now on renewing multiyear contracts. We see at the current market rates, which are significantly higher than the rates that were in these contracts.We will, going forward, announce all contracts above $100 million of value, and we expect to announce several contracts in the near future. So based on the current outlook and how we look at it, we believe that we will see a 2024 that will be somewhat stronger than 2023, given the market we see, but of course, with the risks listed above.So with that, we close the presentation, and I invite Torbjorn and Anders to come and join me, and we are ready for your questions.

[Anders-Redigh Karlsen, executive]

Yes. First of all, if you have any questions, I'll urge you to use the Q&A function on the webcast. Starting off with the first question, which is from Erik Hovi from Nordea. And it's for you, Lasse.

[Lasse Kristoffersen, executive]

Yes.

[Anders-Redigh Karlsen, executive]

With the multiyear renewals and your 2024 prospects, how should we start to think about 2025? Will there be a more muted outlook and sentiment done -- for what is done through 2023 and how much volume is expected to renew in 2024?

[Lasse Kristoffersen, executive]

That was basically summarizing the whole presentation.

[Anders-Redigh Karlsen, executive]

Yes.

[Lasse Kristoffersen, executive]

Well, let's start with 2025 and market forecasts. We are not able to look that far ahead. We see a strong remainder of this year. We also believe in the strong 2024, 2025, in terms of market sentiment, too many things can happen. So we don't speculate on that. Having said that, we are working on renewing contracts this year. A significant amount of volume will be renewed this year at higher rates. Typically, the contracts will start around New Years, late this year or early next year. Typically, they are for 3 years in average with a couple of years' mutual options, meaning that these contracts will take us through both '24, '25 and '26, and we have some significant contracts coming up for renewal next year, which are also affecting the next few years. So we believe that the contract renewals that we have had, the ones we're looking at now and those we expect next year, we will build a very strong fundamental also for '25 when it comes to contracts.

[Anders-Redigh Karlsen, executive]

It leads on to the next question -- part of the question, which is the Hyundai contract. Can you talk a little bit about that?

[Lasse Kristoffersen, executive]

Yes. We are very pleased that we are considered to be a partner to Hyundai and Kia. We are 1 of 2 major carriers supporting them with volumes across the globe. Korean automakers have been very successful. And I must say that Hyundai and Kia in particular has developed impressively well and driven large volumes [ to ] us. We have a huge contract that is expiring towards second half of next year. And that means that we will start renewing that contract early next year, and that will yield from -- I think, from Q4 next year. We cannot say what will happen in those contract negotiations. But of course, also that contract will be renewed in the market that we will have next year.

[Anders-Redigh Karlsen, executive]

Next one is for you to Torbjorn. With interest-bearing debt coming down fast and considering the positive outlook, will you revisit dividend policy and be open to paying a higher ratio than 50%?

[Torbjørn Wist, executive]

Well, that is, of course, a discussion that we always will have with our Board before we communicate to the market. We have today an established dividend policy, which we think is a good one. But naturally, discussions around dividend is something that we do with the Board as a matter, of course, throughout the year. So we have the policy, and we're paying out $144 million in dividends in November now.

[Anders-Redigh Karlsen, executive]

Next one is probably for you, Lasse. It's from Petter Haugen from ABG. When would the delivery of the 8 optional ships be? And what is the price and what fuels are they going to use if declared?

[Lasse Kristoffersen, executive]

Yes. We -- And these are covered by confidentiality, so we can't share too much details, but obviously, they will follow after the [ 4 ] [Technical Difficulty] vessels, meaning that it will be from '27 and onwards. They will have the same design as the ones we have now with methanol-capable [Technical Difficulty] delivery. And then we also have optionality for the later vessels to have them delivered with ammonia, if we consider that being a workable fuel when we move closer to 2030. The price we cannot share, neither on the firm nor the optional vessels, unfortunately. But what we can say is that we are very happy with the contract, and we believe we have got very attractive terms.

[Anders-Redigh Karlsen, executive]

Then on volumes. How much our volumes will be repriced in 2024 versus 2023?.

[Lasse Kristoffersen, executive]

Oh, well, we have typically a book of [ past ] minus 3-year contracts. We have said that more or less 1/3 of our business is turned every year. But if you look at 2023 and 2024 combined, most of our big contracts and our big customers have contract renewals either this year or coming up next year. So a significant part of our book of business will be renewed in [ '23 ] and '24.

[Torbjørn Wist, executive]

And it's worth adding that, of course, next year, we do have the HMG contract.

[Lasse Kristoffersen, executive]

Yes.

[Torbjørn Wist, executive]

Which, of course, is a very large contract within our portfolio. So that will -- may skew the numbers a bit.

[Anders-Redigh Karlsen, executive]

Then there is a question from Eirik Haavaldsen, Pareto. He [ says ]– that -- he is stating that we have significantly higher rates, but he is also questioning about the other terms in the contracts. Are we more firm on volume commitments and all these kind of [indiscernible]?

[Lasse Kristoffersen, executive]

Very relevant question. And both our challenge and our customers' challenge -- historically, this industry has had non-firm volume contracts, meaning that there are percentages of exports. And this is unpredictable for us and unpredictable for our customers. And we are now, together with our customers, changing that to firm numbers and strong commitments. And if we now are signing off a volume to a customer, they need to make sure they perform that volume, and it's an explicit number of cars, number of [ CBMs ], whatever is relevant for that contract.

[Anders-Redigh Karlsen, executive]

Then there is a question from Pal Dahl. Could you elaborate a little bit on your 2024 financial outlook comment? What do you know and what don't you know at this stage? And can you update us on the other contract coverage for 2024?

[Lasse Kristoffersen, executive]

Well, in general, on contract coverage, we see that we are increasing our country coverage, and we are now well -- north of 90% of what we do with our business are on contracts. We expect that to develop, to continue also into 2024. As I said, we are now renewing significant contracts this year that will -- we expect to announce some of them soon. But then we also have some major contracts coming up next year for renewal, which will not yield that much for 2024, but certainly from 2025 and onwards. But the reason why we are now stating that we believe we will have a somewhat stronger '24 than '23 is that we see still strong volumes, but that the underlying rates are increased with new contracts.

[Anders-Redigh Karlsen, executive]

Then a question from Oystein Vaagen. Can you remind us the percentage share of volumes that the Hyundai contract is accounting for?

[Lasse Kristoffersen, executive]

Yes, we don't want to give specific numbers as to that, and that varies between quarters and so on. But what we can say is that it's a significant customer for us. It's our bigger customer, and it's been growing quite substantially even year-on-year into this year.

[Anders-Redigh Karlsen, executive]

Then there is a question around cost savings. Could you discuss the cost savings associated with the new buildings compared to your existing fleet?

[Lasse Kristoffersen, executive]

Well, you have to think about that in 2 main dimensions. One is cost per cbm. And that means that we're building bigger vessels, and that drives down the cost per cbm. The second one is that we are building these vessels to the best of standards and with all the technology we can find to drive down -- or drive up energy efficiency, down emissions. So we see a significant improvement in the energy efficiency profile per cbm and per vessel on these vessels.But then I would like to add that these are only 4 vessels coming in 2026 and onwards. The main work for us is with the existing fleet. And I would just like to repeat that from Q4 of this -- last year until Q3 this year, we've been able to take down the absolute emissions by 10% without reducing our production capacity. So this is really the key to our cost base, what do we do with the existing fleet, and we see a trend that this is going down, and it's stabilizing at a lower level.

[Anders-Redigh Karlsen, executive]

Let's rest a few seconds. There are no further questions, but there might be a delay. So just -- there is one coming in from Frederik [indiscernible]. When you are renewing contracts with firm volume commitments, does it include minimum volume clauses? You probably touched on that. And will the OEMs pay for a certain percentage of the firm's volume regardless of actual exports?

[Lasse Kristoffersen, executive]

We -- of course, we cannot disclose confidential terms with our customers. But in general, we are very clear with our customers that if we commit volume to them, they need to commit volume to us. And that means that we have fair numbers in the contracts. We have minimum performance clauses, and we have mechanisms to be compensated if they're not able to live up to their volume commitments. So in general, I would say we have much firmer contracts when it comes to volume now than what we used to.But having said that, we are a long-term partner for our customers. And we always look at ways to support them if they struggle. But at the same time, we need to hold them accountable to the capacity that we are allocating to them. So this is a fine balance, but we have much better terms now than what we used to.

[Anders-Redigh Karlsen, executive]

That seems to be the final question for today. But if you have any additional questions, please reach out. You'll find our contact details on our web page or on the report. We're happy to answer further questions. But with that, thank you both and…

[Lasse Kristoffersen, executive]

Thank you.

[Torbjørn Wist, executive]

Thank you. Thank you for listening in.