Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2017-Q4

[Craig Jasienski, Chief Executive Officer]

Good morning, everybody. It's a windy Valentine's Day outside. Welcome to the Q4 presentation. I'll just jump straight into it and [ hit it ] off the topics. Highlights for this quarter. As you've seen and those that have seen the report overnight that we have an adjusted EBITDA of $182 million, which we're happy with it. It's a stable position to be in. But results have been negatively affected by bunker prices. We do have certain lag effects. We'll touch upon that a little bit later in the presentation. So there is a strong volume growth, but it doesn't necessarily translate directly into bottom line performance or at least into EBITDA performance. We did during the quarter complete the acquisition of Keen Transport in the U.S., which is [indiscernible]. That's all in place now. That company has -- sorry, it was purchased for $64 million last quarter. We've increased the synergy target to $120 million. I'm going to talk more about that a bit later on to explain why and where we're getting that from. And then last but not least, we've increased the antitrust provision to (sic) [by] $140 million. I'd like to talk about that now briefly. This is, of course very regrettable that we've needed to do this. We have constantly each quarter reviewed the position and the situation and the information that we've had available to ourselves. During fourth quarter, new information came to light, and we considered it was just necessary to now increase the provision to $140 million -- by $140 million. It's regrettable but it was a necessary step. We're looking forward to having this behind us. We believe most jurisdictions will be complete during the course of this year. We've had to take a consideration for potential civil claims, but we're really looking into the future and hoping to have this behind us now. So a little bit of bad news, unfortunately, but we, again, believe it was the necessary thing to do. Okay. We'll get into more details of how we're accounting for that during Rebekka's presentation and any questions afterwards, of course. So I'll jump into the business update. What's been happening in the markets around us. You can see here the high & heavy share has actually slipped a little even though volumes are up quarter-on-quarter by 11%. We've had actually more automotive growth in the fourth quarter compared to third quarter, which has driven the high & heavy portion down, but actually, underlying high & heavy did grow in the quarter by about 8%. So it's positive from a volume point of view, but we're just not achieving it in the EBITDA results. Using the next slide here, you can see and you're getting familiar with this slide, in all trade lines from Q3 to Q4, volumes are up. But here in lies some of the explanation aside from just increased bunker costs. You can also look at the trading patterns here from Europe to Asia and Europe to Oceania. So exports from Europe are up by about 600,000 cubic meters, but Asia to Europe is only up by 400,000 cubic meters. So it actually continues to create an imbalance. In our system today we do have an imbalance. We have more cargo leaving Europe than we have vessels coming in. So the more we load ex Europe during the course of a quarter, the more capacity cost we have. So as we've talked about before and we continue to err on caution, increased volumes doesn't always mean a direct increase in the profitability at an EBITDA level. And this picture of trade imbalances, I think, is a very good example and descriptor of that. Again, bunker had an effect, and Rebekka will touch upon that in the financials. As far as number of vessels operated, the purpose of this slide really is to try and give you a picture. We've talked about this before. We try to balance our own capacity situation as best as we possibly can. So we have our own, if you like, balance supply/demand picture. The gray -- the big bars in the middle, that's our core fleet. If you go back in time going back to first quarter 2016, you could see that we're actually releasing capacity at the bottom of those bar graphs there. So we pushed capacity back out to the market. We would charter it out when we don't have a need. Conversely, now as volumes are starting to grow, we have to take more capacity back in from the market. So we're constantly adjusting our fleet. But of course, that comes at a cost as volumes are starting to rise. But this slide, I think, gives you a good picture of the flexibility that we have in our system and how we manage the size of the fleet from quarter-to-quarter. Moving over to rates now. Here we're looking at the average revenue per cubic meter. It's deep down into the fourth quarter. There is actually from quarter-to-quarter there's no real underlying change in prices in the market. There is as we go into 2018, but at least in this quarter, there's no underlying change. This is an effect of cargo and trade mix, so the average revenue per cubic meter actually slips down from 1 quarter to the next. And if you look, again, although I back into the early part of that slide, into 2014, you can actually see the development in the market. Despite cargo mixes and trade mixes, the average of revenue per CBM has been on a downward run. And into 2018, that will continue. I'll also talk about that during the outlook. Synergies. We've decided to increase the target to $120 million. We're targeting -- sorry, we're tracking very well. We had the original target of $100 million. We've confirm $75 million, so we're well on track, very happy with that. We've decided to raise it to $120 million because we have confidence in a couple of areas, particularly on fleet optimization. We believe there's more to gain based on the work that we have been doing, the run rate that we've got, and yes, some of the opportunities that we see. We believe there's definitely room to reach $120 million. When we're looking at the synergy targets, we're focusing on what is it we are doing differently because of the new company we've created in the merging of the activities. General cost savings is not necessarily factored in. What we look at is what we can actually do differently because we're now together as one company. So this has been a very pleasing development. We've got more faster than we expected. And we're quite comfortable to lift the target up to $120 million. We also have some room to go on IT and ship management. That's where we'll be chasing more synergy effect. On SG&A, general, sales, administration, we've probably reached about the most we can achieve there, and probably on procurement. So they're well on track. It's in fleet optimization, IT and ship management will get the rest. Keen, as I touched upon, it's in place. We closed the transaction on the 7th of December. Keen is operating 14 high & heavy vehicle processing facilities across America, including transportation. Interesting operation, connecting very well with the handful of -- small handful of facilities that we had already ourselves on the vehicle processing side. But from an industrial point of view, very similar to the car processing centers that we have in North America. EBITDA earnings in 2016 was $10 million for Keen. So from a pricing point of view, we believe we secured the company at a reasonable price. And we look forward to developing that business in North America but also using that platform to hopefully expand globally over time. Few network developments during the course of the last quarter as well, just looking back into Q4. We've been part of a long consortium discussion in South Korea to establish a logistics park in Pyoengtaek, which is just outside of the port where we already have an investment today. We've committed to purchase 66 hectares of land, and construction we'll expect to be completed in 2023. This is kind of a hinterland off-port logistics facility. We're going to develop a vehicle processing center, which will be an extension of PIRT terminal. This is a very interesting development. We also think that from a property point of view, Korea is not a bad place to put money into property in this context because it's a very densely populated peninsula, and there's always a need for growth in hinterland activities and processing. Secondly, we've expanded the Zeebrugge terminal. We, in fact, signed that yesterday, the actual signature with the port, but it was all concluded at the end of last year. And that's the investment of about $20 million in the next 2 to 3 years to increase our capacity in the port of Zeebrugge. And lastly, there is a new vehicle processing center in Tacoma in the U.S. on the back of a long-term customer commitment. So that's relatively low risk in that regard. And it's about $12 million in infrastructure investments. So this was also completed in the fourth quarter. So a couple of interesting developments there in addition to Keen, which continues to strengthen our logistics platform for the future. So we're quite pleased with those developments last quarter. Okay. With that, I will hand to Rebekka to go through finances. And I'll come back on more on the market moving forward.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Thank you, and good morning, and a happy Valentine's Day to all. Let me see where I push. So let me start then by explaining why the strong volume development in the quarter wasn't fully reflected in the EBITDA performance. First of all, you'll remember in the third quarter, we had very profitable project shipments in the Atlantic. That did carry into the fourth quarter but not to the same extent. And as you might remember, that was around $10 million in the last quarter. Secondly, fuel prices moved up this quarter. We have a lag effect. So around 2/3 of that is recovered then in the next quarter. So that was a $10 million effect. And thirdly, as Craig alluded to, there was a strong volume increase, but it came in less favorable areas, where we had full capacity. Meaning, that we had to charter in space with other companies, causing expenses to rise with around $5 million. So if we could exclude these effects, which we can't, of course, you would have seen an underlying improvement in the results. A few extra items also in the quarter. Firstly, a write-down on the IT portfolio as part of cleaning up the IT portfolio. Some systems no longer in use and some projects that had been halted. It's a $5 million write-down. Also, some severance costs incurring also in this quarter connected to the organizational restructuring. On the positive side, a gain on a sale of our property in the U.S. Tacoma, Washington of $2 million. So that's a net effect over a negative $5 million. Of course, we also had a gain on a sale last quarter, but you shouldn't expect that to be a feature in every quarter. It's a cleanup of some of the landbased activities in the U.S.Adjusting all of this, we have an adjusted EBITDA of $182 million. That's a 5% reduction then compared to the previous quarter, but it is actually a 23% improvement year-on-year. So that's pretty good. Depreciation is stable, whereas the financial costs continue to be positively impacted by a favorable development on the various hedges that we have on interest rates and currencies. We have a policy to hedge 60% to 70% of our debt. And we have renewed quite a lot of those hedges. We did that from August to October last year, around $800 million renewed. And of course, that proves to be a good timing and also means that we are well covered now for many years going forward on that side. And then, finally, a small gift from Mr. Trump, a reduction in the U.S. tax rate to 21%. The short-term effect of that is that the deferred tax liability reduces, so we get a tax income of $27 million. But of course, also going forward, it has a positive impact on tax payments in the U.S. for various companies there quantified to around $6 million, $7 million annually. And of course, it's also beneficial for the Keen acquisition. So in sum then, our net profit, $86 million in the quarter. Annualized return of 5.9%, still of course below where we have targeted it to be at 8%. Going into the ocean results. As we said, there is a strong volume development in the quarter, 11%. And of course, although they did improve in oil trades, as we said, they were strongest than out of Europe to Asia and in the Atlantic, leading to a less optimal trade mix in the quarter and also the need then to rent space for the excess volumes. Also in this quarter, we had a strike in Korea. It took place in December at the production facilities of Hyundai Motor Group. Limited effect. It was 27,000 units in December. And this strike carried into January and ended there. So the total effect is around 45,000 units. These volumes were all recovered in the market but, of course, leading to a less optimal trade mix than we would have had otherwise. And as I mentioned then, for ocean, not the same benefit this quarter from the project cargoes. And we had the bunker effect of $10 million where there is a lag. And that is then the reason for the reduction of $10 million in the EBITDA, where you now see the adjusted EBITDA of $160 million. I think it's worth noting, though, looking year-on-year, there's an improvement of 20% actually on EBITDA, linked very much to the volume development, of course, but also the fact that we do see more high & heavy volumes coming in and the synergies starting to take effect as well. So I think summary for ocean, it's a good trend. Volumes are coming back, especially for high & heavy, but we also continue to see overcapacity that will take time to be reduced. And as mentioned also that you're aware of, we have reduced volumes from Hyundai Kia now taking effect from this quarter. And so that and the rate reductions that are still to take effect will balance out some of the positive effects that we see from the volumes. Landbased. When we adjust then for the sale of the property in Tacoma, very good development in revenue of 10%. Some of that relates to the Keen acquisition, around $6 million, but the rest is linked to positive volumes that came to both the sites and the terminals. For the terminals business, that was only a positive thing leading to better results. But for the onshore U.S. activities, we saw that we had increased inefficiencies in the various sites due to high inventories leading to higher costs. And that is why we see a flat EBITDA development for landbased in the quarter. Year-on-year, still a very good development in EBITDA. And we had a margin of 11% in the quarter. So it's still fairly good. And going forward, of course, positive for landbased that volumes are picking up. We had the ramp-up of the MIRRAT terminal now in January. And also for Southampton, we've had the return of volumes after construction work is finished there. And of course, the addition now of Keen as of December 7 will have a positive impact on results going forward. As Craig said, $10 million EBITDA last year and well positioned in the high & heavy market. Just to show you also what the consolidated figures look like. Revenue ended at $3.8 billion. It's a 6% improvement, driven, of course, by volumes, partly also by compensation. Adjusted EBITDA under at $706 million. That's an 18% improvement. Linked volumes, of course, and also the fact that we now see better cargo and trade mix and the synergies taking effect and also the project shipments that we had in the third quarter. Given also then the positive development on the various hedges, we see then a 35% expansion in the profit/loss over the previous year. So fairly satisfactory. Not too much to comment on the cash flow. It's -- it was down $24 million in the quarter, mostly related to the Keen acquisition, which is most of the CapEx that you see here. Partly that's financed though. So if we had excluded that impact, we would have had a positive cash flow in the quarter. So I think that's worth mentioning. Then on the antitrust provision. You are well aware probably that WWL and EUKOR have been part of antitrust investigations in several jurisdictions since 2012. This process is now drawing to an end. And most outstanding jurisdictions are likely then to reach conclusions during 2018. We had a provision which stood at $300 million at the end of the last quarter, and no payments are currently outstanding. Based on an updated evaluation, where we take into account the possible outcome for the various outstanding jurisdictions and the risk of civil damages claims, we find it necessary to increase the provision by $140 million. That brings us then to $440 million. This is regrettable. It's not how we would like to spend our investors Based on available information and a thorough risk evaluation, it is the necessary thing to do. And as the provision relates to incidents that took place prior to the merger, it is actually accounted for as an uptick in the purchase price allocation. That's means it doesn't affect the P&L, only the balance sheet. And specifically, it increases liabilities by $140 million. And on the asset side, it's an adjustment of goodwill and the deferred tax asset. Probably, a bit strange, but the thinking behind this is that it should be reflected in the valuation of the company since this assessment is still open [indiscernible] was not closed. So while we certainly regret having to make this provision, I think it's important to note that we remain a solid company. And we certainly have sufficient cash flow to handle this increased exposure. Finally, then on the balance sheet, stable development in the equity ratio. It stands at 35.8% because of the increase in the provision. Net interest-bearing debt, that's $3 billion. Goodwill has increased. Because of the provision, it now stands at $375 million. And the Keen acquisition, that is now also come on to the balance sheet It mostly affects intangibles that increased by $37 million, and the goodwill effect to that is only $5 million. Cash position remains strong around $800 million, and we have further capacity in undrawn facilities. And finally, the board did decide not to pay a dividend for 2017 at this time, and this is because they would like to see a further strengthening of the solidity of the company before deciding on any dividend. That's it. Over to you.

[Craig Jasienski, Chief Executive Officer]

Thanks, Rebekka. Okay. Let me use some minutes now on just looking a little forward now beyond the Q4, how do we see the market. Just as a quick snapshot. Yes, all the fundamentals are telling us that we're heading in the right direction. Automotive is growing. High & heavy is starting to recover. And we do see that the supply/demand picture is improving. So there's a lot of fundamentals which are looking good. There's no question about that. But when we get into the specifics, which I'll then talk into, we still continue to err on caution as we have done quarter after quarter now because there are a few other factors which drive our actual results as well. So the fundamentals are good. The future looks great, but it's going to take time because -- remains our key message. But let me jump into automotive. Sales in the fourth quarter increased pretty significantly by nearly 9%, but the big driver there is China. It was a 27% growth in the Chinese market quarter-on-quarter. It has some impact on shipping volumes. This is why we saw more volume moving from Europe into China, Europe to Asia trade, as you noticed. It's of course partly feeding that tremendous growth, but fourth quarter sales were pretty strong. Looking forward, sales in the automotive segment is going to bubble in different markets from quarter-to-quarter, but it's a steady growth of a couple of percent in terms of real sales growth, and ultimately, that will be reflected in shipping and transportation. If we look at the actual shipments or the exports during the fourth quarter, that was up 2.7%. That's a reasonable trend that we could see moving forward, probably a little softer than that, but that's indicative in the increased volumes that we saw. Looking at this chart, you can see that Europe is one that really stands out. Again, good news from a volume point of view, but for us, just creates a bigger imbalance. So the cost of providing capacity to service that need, those increased exports, is greater than otherwise in our normal underlying capacity. So these sudden jumps in certain export areas doesn't always result in a bottom line effect, as I've mentioned. And one to watch looking in the future, you can see China, it's that little bubble in the right-hand side there, top right, growing rapidly from an export point of view. It's a very small base. The percentages look fantastic. But from a volume point of view, it's about 300,000 units, so it's very small. But certainly for us, it's one to watch, especially when you look back on the left-hand side and you look at Japan and Korea and you see that they're either stagnant or retracting over time. So there's -- I believe that China will become a large exporter into the future, but we'll keep our eyes well on that. If I jump over to construction, that's a very positive-looking picture as far as actual mining equipment imports are concerned. It just continues to grow when we look at it specifically by month and quarter-on-quarter. But we need to keep in mind that there's still a high degree of equipment being sold in China for the Chinese market. It doesn't necessarily have an impact on actual shipping for us. Australia is pleasing. It's at a 3-year high as far as construction is concerned, but it's still at a very low base in terms of the actual shipped volume. So again, we see really good indicators on the construction side, but it's not converting directly into more shipments for us that's bringing an improvement in EBITDA for the time being, but a positive trend. On the ag side, it's a mixed bag. It depends on seasonality and the different markets. Not a lot more to say there really. It's a stable picture. We enjoy the seasons as they come. Australia is peak season, which is important for us, is leading up into the latter part of Q2 as far as actual shipments are concerned. So we'll see how crops develop and commodity prices develop or food prices develop and see how that results in actual shipments. But it's a mixed picture really. Mining, a much larger segment. And we are reporting a very strong demand still, which is, again, pleasing to see. From a trend point of view, it's looking pretty solid. Iron ore prices are strengthening. Commodity prices in general are strengthening. That's always good signals for mining. But again, what's really driving the miners today as far as their actual sales are concerned is primarily consumables still. So it's not necessarily resulting in direct shipments. It will come, but we don't see any significant upswings. I'm going to show you this picture here, which I think is probably one of the better ways to have a look at how is, from a mining point of view, which is the largest group that we're carrying, how are the trends per region, if you look on the right-hand side, compared to the last super cycle, if you like, or the peak in 2012, which was one of the strongest years concerned. On the right-hand side, you can see a portion of where are we today compared to how we were at the peak. Again, not to overpush it, but of course, Europe and North America are our important markets. But particularly, Australia as far shipments are concerned, it's still at a very, very low level. So we agree the signals are good. We agree that the trends are in the right -- pointing in the right direction, but we continue to err on caution in terms of the reality of shipments and a very, very low base that we're working off. So we remain quite cautious as far as actual volume is concerned. On the left-hand side, can see a good picture there of the mix of changes from fourth quarter last year looking forward to fourth quarter this year -- yes, this year and how those markets have been trending also 1 quarter to the next to the bottom scale. So it's quite a mixed bag. The key for us is, is how do we see actual shipments moving in between Europe, North America and Oceania now.Supply/demand. I like to talk a little bit about that because, yes, it's improving. It certainly moves in the right direction. But a little bit of sort of walk back in history. Why do we see -- why did we see and why do we continue to see such heavy rate pressure? If we go back to 2012, which was also the last mining supercycle, from 2012, we started to see a softening in demand on capacity particularly. At the same time there was a softening on demand on capacity, there was a degree of both speculative ordering of vessels and just more ordering from the owner/operators themselves. So there was a good ordering cycle, which is generally a healthy thing to be at but probably too much speculation. Then volume started to taper off. We had the drop in oil price, which hit all other commodity prices at the beginning of 2015. From 2015 onwards, we just saw volumes slide down. And that's really what created the oversupply situation that we still live with and we'll continue to live with for some time, but that has resulted in a lot of price pressure. It's definitely heading in the right direction now. The order book is very thin, 3% to 5% of capacity. All that one owner/operator is representing about 30% of that capacity, and most of that is, in fact, replacement. So we would agree it's a thin order book. And we would certainly agree that looking forward, supply/demand will tighten up. However, we still are oversupplied. There is still very strong price pressure in the marketplace. And that keeps us sort of rather cautious in terms of the ability to improve revenue per CBM as we look forward. Talking about -- I'm going to touch upon on the next slide, so I'll talk about it now. Prices in general, as we've said, have been under pressure, and Rebekka touched upon it. We renewed quite lot of contracts during 2017, last year, which we're very satisfied with. Some of the key high & heavy clients in the globe, we've secured up for quite some period. We're very pleased with that, but all of that happened under open tenders with tremendous pressure on prices. We haven't seen the effect of those prices yet in the results because they come into effect during the course of this year. So we need to keep that in mind as well that we have a hit on freight rates that you haven't seen and we haven't seen in 2017 to the degree that we will see in 2018. I can add to that. As bunker prices or fuel prices continue to trickle up, we have a certain lag effect on the bunker recoveries that we have in our contracts. So we would typically have a quarter or 2 before we actually recover the increasing costs. So we sort of keep our minds open in that context as far as underlying earnings looking forward. Okay. I'm going to wrap up in a sec. This quarter's fun fact: we moved a very large piece of equipment, this long pipe of the oil industry. It's as long as a ship this wide, 34 meters. There wasn't a lot of excited faces in the room like we get, so I need to go back to the team and tell them to find some even more sexy cargo than this one. But this is a pretty unique solution. We've used a mix of roll trailers and bogies in order to handle an extremely long piece of cargo. Very awkward to handle. It's a one-off. It's too small to charter a [ BOG ] vessel, but it's all good enough for us to be able to handle it in a quality and effective way. This is our sweet spot in the breakbulk segment, and we're experts in this field. So this is just an example of this last quarter of what we've been able to achieve. But evidently, we need to find something more sexy next quarter. I could wrap up before we open up for questions. As far as the outlook, it looks strong. Underlying results for the last quarter of $182 million. Strong volume growth but less favorable cargo mix. And trade mix, as talked about, more auto, not enough high & heavy growth and a pressure of capacity ex Europe. Acquisition of Keen, and of course, we've increased the synergy target, which we're very happy with and confident that we'll be able to achieve. Looking forward, look, we're happy where are we today at the end of last year, having merged together all of these companies and created one new entity. We're happy where are. We're satisfied. The underlying solidity of the company is good. The performance, we're comfortable with given the market that we're in. We're happy with the synergy effects that we've achieved. We definitely recognize that high & heavy is heading in the right direction, that supply demand picture is moving in going forward. So we're comfortable with all of that. But we do remain cautious. From this year from last month, in fact, the volume of cargo we have with Hyundai Motor Group out of Korea has reduced from 50% of their exports to 40% of their exports per the contract, so we'll see that affect coming into Q1. We have the impact on freight rates, which we've talked about, which we haven't seen the impact of yet and we'll see during the course of Q1 and Q2 and partly looking forward. And we have that risk on bunker as far as recoveries are concerned. We always have a lag. So we remain cautious. Every time we need to access more capacity in the market in order to handle extra volume as it comes, it comes at a higher cost than the existing underlying fleet. So again, more volume doesn't always mean an increased earnings on EBITDA looking forward. So that's sort of outlook, as we said. All in all, balanced, so that's how we how look. Okay. Shall we open up for questions? First hand was there. I think.

[Unknown Analyst]

Just specifically on unfavorable cargo mix and the effect of the higher auto volumes out of Europe. What can you specifically do? And what are you doing to also see those volume -- the results of that on your bottom line?

[Craig Jasienski, Chief Executive Officer]

So firstly, we're absorbing cargo which we have contracted to carry. So as the manufacturers can sell more product to the market, we have an obligation to move it for them. All we can do short term is buy capacity space in the market. We ought to buy space from other operators or we charter vessels. All we can do when we have short spikes is to do that. Once capacity -- sorry, volume demand becomes stable at a higher base, we can put in longer-term capacity into the system. But we don't like to do that until we're sure the volumes are stable.

[Unknown Analyst]

And now you see this as -- what happened in Q4 was more of a short-term spike than anything that should carry on?

[Craig Jasienski, Chief Executive Officer]

Yes. Look, at this point, as far as automotive is concerned, particularly into China, it -- to be honest, it's hard to predict. We really manage the business quarter-to-quarter as far as capacity is concerned. The good news is overall trend is trending upwards, but it spikes in different trade lines. So until we see, call it, a step change that stays there before we really take on longer-term capacity.

[Unknown Analyst]

And secondly, on the reduction in freight rates you're going to see this year, is it possible to quantify that a bit more on sort of on a revenue basis?

[Craig Jasienski, Chief Executive Officer]

I'm sorry. I'm not willing to share that. Obviously, quite sensitive relative to our customers and their contracts.

[Unknown Analyst]

Okay. But it's not going to be 3% to 5% of your ocean revenue?

[Craig Jasienski, Chief Executive Officer]

No, I'm not willing to speculate on a figure.

[Axel Styrman]

It's Axel Styrman, Nordea. I have 2 questions, actually. First one relates to Korean cars actually, and if you can comment why the volumes out of Korea has been -- the export volumes have been on vehicles has been very weak for a whole year actually? And the second question also relates to Korea on, how many vessels will you approximately free up now as the volumes out from Hyundai Motor and Kia declines from 50% to 40%? And do those vessels have built high & heavy capacity?

[Craig Jasienski, Chief Executive Officer]

So to the first question, one of the main changes for Hyundai and Kia is they've expanded their global operations as far as production is concerned over the last 10 years and now, in fact, produce more cars outside of Korea than they do in Korea, around 5 million outside of Korea and 3 million in Korea. So they've kept capacity in essence in Korea for various reasons, and I can't comment on why they choose that. But they basically kept their production capacity to around 3 million, and that's why we just haven't seen growth. What you'll see as far as Korean exports over time is, yes, some decline depending on model mix. There will be periods when it will increase slightly by a few hundred thousand units because they'll produce a new hybrid or a new electric vehicle, which they'll start within Korea for exports and eventually shift the production into other plants. We saw that during last year a big shift into Mexico, for example. So that's the picture we see with Korea. It's a pretty flat market as far as export growth is concerned. To your question on capacity, roughly 6 to 8 vessels depending per 10% of cargo. But as you can see on our volume growth, we just absorbed them in our system. As far as high & heavy capacity is concerned, all the PCTCs and the fleet of pure car truck carries have a fairly standard capacity in the core of the fleet. And then we have the extreme capability with the RoRo vessels.

[Axel Styrman]

You probably need [ all of that ] capacity elsewhere?

[Craig Jasienski, Chief Executive Officer]

It looks like, yes.

[Lukas Daul, Lead Analyst]

Lukas Daul from ABG. You mentioned that the overcapacity went down from 10% to 5% roughly in the course of 2017. If you assume the same reduction during the course of '18, where are we on the sort of the overall fleet utilization globally?

[Craig Jasienski, Chief Executive Officer]

And so globally, it's tightening. It's improving. We see a big shift from month to month, in fact, in quarter-to-quarter. If you look during the course of Q4, we had everything from 30 vessels idle globally to nothing depending on short-term demand in the marketplace from us and other operators. Looking into Q1 already now, there's a lot of open capacity again. So there's lots of fits and starts as far as capacity utilization is concerned. If we look at the macro numbers, we still see an oversupply looking forward for the next 2 to 3 years, but we recognize the order book is very thin. That's clearly recognized by all of us, I think.

[Lukas Daul, Lead Analyst]

But what do you think we are now in terms of if you were to sort of put a number on the global utilization as your [ stake ] or the average for 2017. Is it low 80s or?

[Craig Jasienski, Chief Executive Officer]

Hard to -- so if I look rather how much idle capacity we have is as opposed to fleet utilization because that's an argued number how do you derive that and various brokers have various ways of calculating. But typically, we've been going from 10% to 12% oversupplied to probably 5 to 8 the way things look at the moment. And then we're looking at number of vessels required to move the cargo that's in the market.

[Lukas Daul, Lead Analyst]

And looking at the history, where do you need to move to get a better bargaining power when renewing your contracts?

[Craig Jasienski, Chief Executive Officer]

I think to the point where you don't see the ability for operators to quickly access short-term capacity and release it back in the market again. It's only at that time that you start to see a pressure on prices.

[Lukas Daul, Lead Analyst]

Okay. And you don't want to give a lot of numbers on the contract renewals on the order volumes that are coming down from Hyundai, but how big portion of your contracts did you renew in 2017?

[Craig Jasienski, Chief Executive Officer]

We -- I'll just cover high & heavy. We presented something in the last quarter. In fact, we renewed about 70% of our high & heavy business during the course of last year of the high & heavy contracts, which we're very pleased with moving forward. As far as automotive is concerned, with the exceptional of contracts that we've selected not to renew, we were able to renew all business last year. More questions?

[Unknown Analyst]

Initially, Craig, you mentioned that high & heavy volumes were up 8% in Q4. Could you just clarify was that quarter-on-quarter or year-on-year?

[Craig Jasienski, Chief Executive Officer]

Yes, quarter-on-quarter.

[Unknown Analyst]

So if you adjust it for seasonality, it will be sort of flattish or...

[Craig Jasienski, Chief Executive Officer]

Yes look, to be honest, I couldn't answer because I haven't looked at those numbers in that way, but it was a quarter-on-quarter improvement, the 8%. The general market as we see, it's trickling in the right direction. But again, we don't see any of these large shipments actually starting to move, but the indicators looking forward are okay.

[Unknown Analyst]

And then a second question. As you mentioned, the mining equipment indexes are clearly showing improvement, but this is -- has seemed to take some time. Are there any sort of technological shifts which could give it really a boost going into 2018? We see some of the mining companies, for instance, talking about autonomous rail tracks to transport their commodities, et cetera?

[Craig Jasienski, Chief Executive Officer]

Yes, we see if we take the Australian mining market, Komatsu leading the market as far as autonomous dump trucks are concerned. And that's really taking hold. So we see other OEMs trying to convert existing equipment with some degrees of success using actually Komatsu's technology. And then we see other -- all manufacturers making decisions to rather build autonomous and push it into the market. If you recall back to last quarter, we showed the cycle of where we believe we are as far as truck replacement is concerned. We're at the beginning of the replacement cycle. If you add autonomous, the desire to move to autonomous dump trucks into that, that would bode well for that trend to continue.

[Unknown Analyst]

And in terms of the other high & heavy segments like breakbulk, could you give us a little bit color of the development there?

[Craig Jasienski, Chief Executive Officer]

Yes on the breakbulk, it's a harder market to put your finger on because there's so many different commodities and so many different industries that we engage with, like that pipe you saw. That one's hard to predict. So we have lots of one-off businesses, if you like. What I can say is the marketing organization sales guys and girls they're out on the street really looking hard for that type of business. So we've had pretty solid growth over the years in that segment. We've got the expertise. So we continue to look for the projects when they come. But it's much more project-oriented than it is fixed in regular moves unless it's part of the mining -- a piece of mining or construction equipment. Any other questions? We have one online.

[Unknown Attendee]

So a question from Mr. [indiscernible]. Your return on equity is about high single, low double digit. What would be reasonable to expect going forward?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

I think what we've said on that is that we have a target of north of 8% return on capital employed. We haven't gone off the return on equity target. So naturally, that's where we would be satisfied.

[Craig Jasienski, Chief Executive Officer]

Okay. Thank you very much for you attendance, and have a great Valentine's Day then. Thank you.