Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, everyone, welcome to the Fourth Quarter Presentation for Wallenius Wilhelmsen. As always, we will have 2 presenters today, President and CEO, Craig Jasienski; and CFO, Rebekka Herlofsen.After presentation, we will have a Q&A session. And those of you following us on the webcast can also post questions, we will answer them -- to them. Craig, floor is yours.

[Craig Jasienski, Chief Executive Officer]

Thank you. Good morning, everybody. Welcome to our Q4 presentation. It's also, of course, the end of the financial year. So I'll start with just a quick 2018 in brief before we get into a bit more of the specifics around actually Q4. So, in brief, to wrap up the year, yes, financial results were weakened -- or weaker compared to 2017, largely driven by higher bunker prices, but also volume is down from an overall basis, but underlining is still quite strong, we consider, given the market. We'll come back to that. Rates remained under pressure throughout the year, but we do see over time that market fundamentals just continue to move in the right direction. During the year, we put in a new legal and funding structure in place across the entire group, which we're very happy with. We're also -- we're able to refinance a large of group debt at attractive terms, and so that was a big highlight for us during last year. Towards the end of last year, in fact, in Q3, we were able to confirm the synergy achievement of $120 million, which we're also very happy with. And then, immediately, thereafter, we put into place a performance improvement program in order to continue to yield the improvements that we think we can get out of the underlying business. So that was put into place already at the end of last year. And then, during the course of the year or early in the year, we had the acquisition of Syngin in the U.S., which was really our entrance into full life cycle logistics, which is very much what our strategy is all about. And we -- towards the back end -- sorry, middle part of the year, we established Raa Labs, who were launched to the market officially just a few months ago, which is also a step for us as a joint-venture partner there to continue accelerating in the world of digitalization. So that was, sort of, some of our full year highlights for 2018.And moving to the quarter, that's why we're here, to talk and report to that. We had an adjusted EBITDA of $168 million in the quarter. It was a 10% improvement quarter-on-quarter, but down 8% year-on-year, details which we'll come into. We -- as I said, we had an underlying flat volume development year-on-year if you take the underlying volumes in the marketplace. Slightly less volume for us because of contractual changes, which we'll talk to as well, but the underlying market was basically flat. Towards the end of the year, we started to enter the biosecurity challenges in Oceania, particularly, related to the brown marmorated stink bugs and that had its effect in Q4. So that's -- that had its impact and negative effect in the quarter. We also had somewhat softer project shipments in the Atlantic than what we've had in the past. Landbased segments, overall, delivered basically quite stable performance, particularly Keen, that we acquired back at the end of 2017, Keen Transport in the U.S. We're extremely satisfied with that acquisition. They're performing absolutely on business plan, as per of our expectations. So that's very, very pleasing to see. So they're a great contribution. To the performance improvement program. We can already confirm a bit over half of those achievements, I'll also talk about that later on, but also very pleased to see that we're getting traction in the areas that we've targeted over and beyond the synergies that we'd already achieved. And last, but not least, we're very happy as the new merged entity. The Board has proposed a dividend of $0.12 a share, or equivalent about $50 million has been proposed by the Board, so we're very happy that we are able to present that for this quarter.I will, as always, now go in and do a business update on, specifically, what happened, and I'll start with volumes. The -- so the underlying volumes were flat for us. We did have a 9% reduction year-on-year. So the main factors there is the planned reduction in the Hyundai/KIA volume that was as per the new contract terms. We did talk in the last quarter as well about a choice to walk away from a particular contract to Oceania because we just considered the rate levels and the profitability to be too low. So that, of course, had its impact. And as I said, we had weaker spot shipments in the Atlantic of about 250,000 cubic meters. So those factors that were really our choice and in our control is what drove the reduction of 9% year-on-year. But lastly, with the biosecurity challenges we've had to Australia and New Zealand in the quarter that has had an impact on volume because ships have slowed down, and there has been a bit more of a backlog in the system because of delays on vessels going into Australia and New Zealand. So that's had its effect as well. High & heavy. So that was very much about the order side. High & heavy is actually 5% down year-on-year. The main reason for that is the weaker spot shipments in the Atlantic. We -- also, basically, we had an absence of high & heavy volumes in Turkey because of currency issues there. I mentioned biosecurity in Oceania, that also had an effect on our high & heavy volumes. And we saw generally just lower volumes into Middle East and Africa. So overall, high & heavy was the ratio or the portion of high & heavy to automotive is still healthy for us. It has some way to improve, we believe, but we're down 5% year-on-year.Looking at the trade specifics, I'm going to start with Europe-North America to Oceania in the bottom left-hand corner and I'll just work clockwise around just to cover a few things. Definitely weaker and softer in the fourth quarter, again, partly driven -- if you go back a couple quarters ago, driven by the contract that we chose to walk away from. But we had the biosecurity challenges, and we had a generally weaker close to the year in Oceania. The good news for this trade is, however, we were able to reduce capacity. So underlying earnings in the trade have been actually quite okay, with the ability to make sure we fully utilize the vessels that have actually traded down to Australia. So that picture is a little weaker, but the underlying margins have still been quite okay. Moving up to the Atlantic Shuttle. Biggest impact here was the -- just the weakness of project shipments in the Atlantic compared to previous quarters. So no sort of real big news there, just a little softer. Moving up to Europe-Asia. We had a weak Q3. And, therefore, we saw a stronger lift into Q4. Solid growth, generally, in that trade. Not so much into China, but into the Korean market and Japan. I'm going to talk a little bit about China in a minute as well. Asia to Europe to move across there. We had better volumes in the fourth quarter. And this is one of the areas where we've been able to really maximize fleet optimization and improve the underlying performance in the performance improvement program. So we're able to lift more volume with too less vessel positions than we had done in the past. So utilization of the fleet and the optimization in that trade has been very good in fact. So quite pleased with the development, Asia-Europe.Asia-North America. The main story here is just declining water volume, particularly into the U.S., more driven by just an underlying weakening in the U.S. market. Sales are pretty flat in the United States. Inventory seems to be rising. And that's reflected in the automotive shipments we see coming out of Japan and, partly, Korea. But that picture there, Asia and North America is in line with the flattening sales picture we see in the U.S. Nothing special there, Asia to South America West Coast, not much huge volume. Tends to slow towards the end of the year, so a little weaker, but seasonally as we expected in general. Moving to fleet. We have reduced the fleet slightly during the last quarter, sort of trickling down as the volumes were reducing. We're also reducing capacity, as we've talked about before. So that's the flexibility that we continue to have and exercise. So one less vessel trading at the end of the fourth quarter than when we entered. As far as flexibility is concerned, you can see that short-term time charter vessels we don't have any left in the current operation. So that leaves us a little bit more challenged during the course of this year in that the short-term capacity is out. We have been able to, however, charter ships out in the market, as we did in November or December, so there is some market out there to release capacity when we need to. But I think, more importantly, when we move into 2020, we gain a lot of flexibility, again, where we have up to 12 vessels, which can expire during the year. We still have 3 vessels in construction in China. 3 Post-Panamax. We expect 2 to be delivered this year. And the last one will come out next year, and that's reflected in our overall fleet position.Moving to rates. We've talked about rates a fair bit. And the underlying story here is, that they do remain under pressure, undoubtedly. I think the good news here is that as we enter 2019 the impact of rate reductions is around about $10 million compared to $30 million impact that we had going into 2018. So still an impact, still negative, but less so than when we moved from 2017 into 2018. We have -- if you look at the -- it's hard to ignore that graph there because there's 2 big gray boxes in the left-hand corner, which indicate that we had a couple of large contracts with a relatively high-dollar impact of rate reductions, which is correct. But what I'd like to highlight, specifically, with those 2 big gray boxes is, those contracts were also renegotiated to improve the contractual performance. So whilst the rates are down to these values, the underlying profitability of that business is, in fact, improved, and that's a big part of the contribution to the performance improvement program. So I would say, and this is one of the cases and they're several in this mix here where, as we've said before, we've really set out to renegotiate contractual terms with customers, renegotiate performance requirements or performance criteria and make sure that we're getting more profitability or improved profitability out of those contracts. So I would say that's been quite successful for us, very happy with that development even though we've seen a pretty heavy continuous rate pressure in the market, so I would say we've been highly appreciative of the support of a few of our very key clients in helping us to adjust contractual performance criteria to everybody's benefit in the end. We see as we get into 2019 based on how we see it for today, a net improvement or contribution of $25 million, based on the contractual improvements in terms of performance criteria on all other things being equal. Various -- we'll have variables during the year, but all things are being equal, it's a $25 million impact coming into 2019. So all in all, we see them, in our view, market rates -- should be at the bottom because it's at unsustainable levels, but our focus really is when we do renew contracts, rates are an important factor but probably more important to us is the performance criteria and making sure that we have businesses that we -- or contracts that we consider to be profitable and worthwhile entering into. If not, we're willing to walk away, as we did last year, as I mentioned. Lastly, performance improvement program, before I hand to Rebekka. Extremely good traction. We established this in the end of Q3, as you know. Very happy with the development. The big chunk here is the contractual improvements I just talked about. So that's had a very positive start. They're big chunks, they do show us that we were able to get more than half of the improvement program very, very quickly. But that doesn't indicate that every quarter it's going to keep jumping up by another $50 million. There's quite a tail here to get to the rest of -- the contractual changes do have a solid effect and that's recognized here. I talked about improvements in, particularly, the Asia-Europe trade where we're getting much better utilization of the fleet, improving the earnings. That's where we see an impact from voyage optimization. So we're doing much better to work with the customers with the 2 main operating entities at WW Ocean and EUKOR to really maximize the capacity leaving Asia, particularly into Europe. And that's really starting to yield its benefits. And, again, that's thanks to the merger that we have and the organizations working together in the way that they do. Overall, we have an annualized realized effect of about $5 million in the quarter in Q4, which means a $20 million annual effect of what we've realized. The rest is confirmed and should be realized in the quarters to come. Okay. So that's the brief on the Q4. I know you want to get into numbers. So I hand to Rebekka.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

I guess that's why we're here to have a review of the numbers. So let me start them from the top, as usual. Revenues ended at $1 billion and by the look of it, a fairly flat development that you have to dig behind the numbers and you'll see that we had a net reduction on the freight side of 9%, but that was offset by a positive development on the surcharges due to rising bunker prices and also a good development on the landbased side. This reduction on the ocean side is, of course, related to factors that are well known to you. It's the Hyundai/KIA volumes that reduced at the beginning of the year. It's contracts that we have chosen to abandon. And also, actually, in the fourth quarter last year, we had very strong project cargos in the Atlantic and that didn't materialize to the same extent this quarter. And, of course, as you know, rates have been lower this year than last year.It is pleasing, though, to see a positive development on EBITDA, especially compared to the previous quarter, even with flat revenues. And, of course, this is related mostly to the performance improvement program, where we're starting now to see initial effects of that program. Still comparing year-on-year, EBITDA is down by around 8%, a lot of that explained by bunker prices. Worth mentioning this quarter is a new derivative that has found its way into our accounts. There is a shareholder agreement between Hyundai/KIA and ourselves, where there is a put and a call that are symmetric. Meaning that we can see them as a net derivative for accounting purposes. This, both the put and call became exercisable in 2018 because that's when the contract reduced to 40%, and that means it needs to be recognized on the balance sheet. It has been recognized with historic effect. And that is why you see a change in the fourth quarter itself where we have a gain. The reason for the gain is really that the put is subject to a very technical evaluation. And at year-end, you have tax depreciations and that results in a lower put value. It sounds very technical and, in fact, it is because it's evaluation that is done in accordance with the Korean inheritance tax, which is not unusual in Korea. And, I think, what's worth done -- taking a note of is that this results in quite a low valuation of the put, which is why we actually have a net asset on the balance sheet as a result.In addition to that, the minority shareholders have never signaled any intent of wanting to exercise this put. So you should not read this recognition as any intention of either putting or us calling these options.Moving then on to net financials. A higher number this quarter than we've had before. The underlying interest expenses are flat. So this has to do with derivatives. Most notably it's the interest rates derivatives that had -- saw a reduction of $25 million this quarter. And we have a new element, a bunker hedge, where we also had a $7 million loss because of the fall in the oil price this time and which also led to a slightly narrow spread between HFO and MGO. We entered into a spread derivative in the fourth quarter because of the transition to IMO at the end of the year. So we've essentially hedged 1/3 of our bunker volumes with a hedge between HFO and MGO from the end of the year and into the beginning of the next year. And with -- the spread that we locked in is around 330 per tonne. And then, you see a positive tax element this quarter of $11 million. Several factors behind that, one is that when we translate debt into NOK, we get currency effect, so we get higher tax deductions. And also, in MIRRAT, which is now profitable, we are able to record tax losses going forward as a tax asset. So none of these are cash elements. So this leaves us, then, to a net profit for the period of $45 million, it's an improvement. It's still a return below where we'd like to see it. It's at 5.5%. We have some one-offs that you know of, the put/call derivative and also the interest rates and bunker changes. So if we adjust for that it's still a positive result of close to $40 million.Going then, into the Ocean segment first. Revenues of $807 million. It's a slight decrease both of the previous year and over the previous quarter. And as I said, if we eliminate the fact that we saw a positive change to the surcharges due to bunker prices, there was an underlying reduction of 9%. Now you saw just before that volumes also fell by 9% in the same contract -- same period. So that is the main explanation. It's the HMG volumes. It's volumes on the Europe to Oceana-Asia trade, where we passed on some contracts. And it's also related to the fact that we had stronger project cargo in the Atlantic last year. And the effect of that on results in isolation is around $10 million. So underlying, there was actually a flat volume development, and that's in line with our strategy to relinquish volumes in order to contribute better to profitability. The effect on lower rates that were mentioned, amounted to around $5 million this quarter. And as Craig said, then going into 2019, the effect will be around $10 million, which is much lower than what we had in 2018. And as I said, still pleasing to see an improvement in EBITDA quarter-on-quarter despite lower revenues and despite biosecurity challenges where we had a $3 million cost. And this is largely attributed to performance improvements, but also quarterly effects around trade mix and cost of mix in the quarter. But, of course, compared to previous year, it's still down. That has to do with all the effects I mentioned, but also, of course, the bunker costs.This slide also just to explain the bunker costs for the quarter, because, by the face of it, it looks like we have a positive change year-on-year this time. But this is mostly explained by lower bunker consumption in the quarter due to reduction in the fleet size. So if we adjust for this, we still have a negative effect of around $10 million due to higher prices. Now I know many of you thought that we came into the fourth quarter and prices came down. And as you can see from this chart, they did, but they started at a very high point. So if you take into consideration the effect that we had bunkered for up to 90 days, the average price was actually higher in the fourth quarter than what we saw in the third quarter. So if there will be any positive effect from -- before the prices, you're more likely to see that in the first quarter this year than in the fourth quarter.Then going into landbased. 6% improvement in revenue year-on-year. The auto business and the business in the U.S. is still going well, developing steadily. That's seen good activity through the year. They had the benefit of Syngin coming into their numbers in the fourth quarter, as we saw a revenue expansion there. But the main factor behind the improved revenues for landbased is the high & heavy handling business in the U.S., mainly the Keen acquisition where we tripled the revenues, of course, from a very, very low level. And, finally, also the terminals had a good development through the year, most notably Melbourne, but also the Baltimore terminal in the U.S. did well. But we decided, at the end of the year, to close the Kotka terminal in Finland because St. Petersburg has become the main entry point to the Russian market. And we had a $1 million cost in relation to that. But still even with a positive revenue development, the EBITDA doesn't improve to the same extent, and main reason for that is internal cost allocation that we did in the first quarter, that we've carried with us through the year when we compare it to last year. That has a $3 million effect. But if we adjust for that underlying, there was actually an 8% improvement.So since we're at the end of the year, it gives us opportunity to sum up the year as a whole. And even though we saw lower volumes, we relinquished some volumes during the year. We saw lower rates. We still hit the $4 billion mark on the revenues, which is, of course, mostly related to increased surcharges, which was $120 million increase and also the revenue growth we talked about for landbased, which was over $100 million. But, unfortunately, costs were also up this year, most notably for bunkers. And it went up by more than we were able to charge in the surcharges to the customers, leaving around $67 million that we didn't cover through those. In addition to that, we had some currency effects, mostly at the beginning of the year. Biosecurity challenges came to $6 million. You'll remember we had them also in the first quarter this year. So even if we had very good gains from the synergies and the performance improvement program, that was not enough to offset these costs. When we compare with 2017, keep in mind that was a very special year. We had very high restructuring costs around $30 million. So we adjust for that. And when you look at the adjusted EBITDA, the shortfall is actually around $100 million year-on-year. Bottom line then ended at $58 million. On the EUKOR put and call actually, there was a negative change when we see -- look at the year as a whole of $12 million. So if we adjust for that, the net profit will then be $70 million.Then onto cash flow reduction this quarter, we had quite a bit of CapEx. On the Ocean side, quite a few dry dockings, but we also changed the -- or implemented ballast water treatment systems and scrubbers, so we've had some CapEx there. On the landbased side, there is a development ongoing in Zeebrugge, where we're expanding on the land. And we've had CapEx related to that. On the debt side, a net reduction of $100 million and 7 vessels were refinanced in the quarter.Then, moving on to the balance sheet. The most notable thing which happened on the balance sheet this quarter is, again, this recognition of the net put and call derivative. It has a positive value of $94 million. The reason being that the fixed value, technically, is very low, but the commercial valuation is much higher, and so we have a positive value on it. We also adjusted the PPI as part of this exercise and the goodwill was then reduced by $52 million. Equity ratio, cash position all remains strong. We're in the process of refinancing a large facility on the landbased side and interest is very good, and we expect to continue to get competitive terms.Then, a new feature, which will come. You know all about IFRS 16 and the fact that we have to recognize leases also on balance sheet. And in the fourth quarter, we've come out with what the effects are likely to be and you see them here. The balance sheets will then expand by $900 million. It relates mainly to land leases on the landbased side, but also chartered in vessels over 12 months, which we have quite a few of. On the income statement, it's really more of a redistribution of the line items going from an OpEx to depreciation and a financial cost. But in the beginning, we typically then start off with a negative effect, which will even out over time. The main effect is on the equity ratio, which will drop by 4.5%, which is really as expected.Then finally, today's good news that we're very pleased to announce what feels like our first dividend is the first dividend proposal since the merger. And we've remained very committed to the policy that we came out that we want to pay out 30% to 50% of our net profit over time. This is way above that, but it also is a reflection of delivering relatively low results and the fact that there hasn't been any dividend for quite some time. So we will be proposing up to $0.12 to the AGM, half of that payable immediately thereafter, so in May. And the rest then to come probably in November but subject then to final board approval.That's it for me. Thank you. I'll leave it to Craig.

[Craig Jasienski, Chief Executive Officer]

Thanks, Rebekka. I've got to add one thing, by the way, when I talk about fleet and flexibility we -- we don't have any short-term charter vessels in the system now this year. What we've yet got up our sleeve is slow steaming just to keep that in the back of your mind, so we have flexibility. We don't have the ability to redeliver ships, but we can certainly slow the fleet down if need be to take capacity out. So just -- I forgot to mention that earlier, apologies. I'm going to move over to market outlook.Just to talk a bit about how we see everything moving forward, excuse me while I find my pages here. All right. So generally speaking, there was soft auto sales in the quarter, as we've all read in the papers, down -- sorry, seasonally up from Q3, excuse me, in a specific quarter, but year-on-year down 4.6%, particularly driven by slow sales in China and Europe. China with just a general drop in consumer confidence. And also Europe, clearly, there was a much bigger effect from WLTP during the back half of the year than was probably anticipated by most of the market, so they've been sort of a couple of the key drivers. If I stick on the year-on-year perspective, if we look at the U.S. North America, it's actually retracted 1.4% year-on-year. So U.S. market is definitely slowing down, probably and possibly independent of trade barrier concerns because that's creating a market sentiment issue. But as far as actual underlying sales in the U.S. market, financing costs were increasing. It was harder to get money for consumers. So that seems to be one of the core reasons, we believe, that the U.S. market actually contracted year-on-year. Now Western Europe contracted 5.2%, primarily driven by WLTP challenges with manufacturers and diesel engines. We've been reading a lot of that in the press recently as well, particularly around one of the U.K.-based manufacturers. So that's had its impact in overall sales. And China is also down 10.4%. So China really has started to fall off for the first time in close to 20 years, in fact, as far as year-on-year is concerned. So that's the overall sort of the 3 big drivers that we see, that's hit the year-on-year global sales. If we move into the quarter, if you look at the U.S. market, basically from quarter-on-quarter, it's been relatively flattish, which matches what we seen year-on-year. Stocks seem to be increasing a little bit. So some concerns around the sales in the U.S. market clearly. Western Europe is down, and China is down, as I talked to. Russia and Brazil, actually, have quite solid growth, has very little impact on us, unfortunately. But those 2 markets are, in fact, growing quite well and that has an alternative effect on consolidated annual global sales if you look at it that way.But looking more into actual exports, which is what we tend to be more interested in because that's there where we see shipments on water and imports. Global light vehicle export per quarter is a bit improved from Q3 to Q4. Year-on-year it was a 2.5% growth. So the whole market from an export perspective has grown. As we said for ourselves, we saw a flat underlying -- flat development. So that kind of matches very well. But Japan and Korea did decline slightly. They -- both those exporting nations have had a very small decline year-on-year. China had a huge growth, 40%. It's a small base, of course. So it sounds attractive when it's a 40% growth, but clearly, it's -- we see that China is getting itself a stronger and stronger position as an exporting area into the markets. And we think that's a trend that will probably continue over time. Moving over to the other side, light vehicle per quarter. North America, yes, there is some concerns around tariff. Of course, that creates certain weakening. But as you see, their sales really just started to flatten out. We believe more to that around financing, as I talked too. As far as imports are concerned, Europe import growth was 7.8% despite overall down -- market down 5%. So there's more units being shipped into Europe than there is actual sales. Good news for the overseas producers. If we look into China, despite declining sales, actually, import picture has been actually quite flat and that's been reflected in our numbers as well, as to the export, particularly we had from Europe into China. So there is some more imports going into that market compared to the overall sales. Australia started to slow. As far as growth is concerned, a little bit of a negative a dip in Q4. That's, we think, partly seasonable -- seasonal, but it's still been a market that's been in growth during the year. So all in all, some of our key markets have performed a bit of mixed bag, but no major concerns at this point as far as imports are concerned, with the exception of China given the overall reduction in sales in that market. But that's, again, looking a little in the rearview mirror. I'd like to look forward now, which is more -- probably more important.There are lots of different views on what's going to happen in the auto market. Looking forward into 2019 and beyond, it's a mixed picture of viewpoints. We saw some information from our IHS Markit, as you well know. Looking into their numbers, one can expect relatively flat Q1 and Q2, with I wouldn't say, call it a hockey stick, but with an improvement into Q3 and Q4, that's the general perspective. The fact is that we see a kind of fueling the short term and the medium term and a lot of it has to do with sentiments as well, but there still remains the risk of trade barriers that creates a certain concern in the markets generally, particularly amongst the auto manufacturers, perhaps reflected in some of the statements that they've been coming out with recently. So trade barriers remains a factor. We're yet to see any real real time negative impacts for us. But in the market looking forward, it remains a factor. As far as Europe is concerned, WLTP definitely had a distorting effect during 2018. That -- appears that it will continue to be the case as we go into 2019, so that's a factor. Brexit remains an uncertain outcome, and it remains uncertain as to what does that mean for either car sales in the U.K. markets or exports out of the U.K. That remains an area of uncertainty. And again, I'm talking about general uncertainty in the market and how various analysts view it. The momentum in China definitely softened and weakened, as I mentioned. The government has talked about some stimulus programs more into the regional areas. They talked about that last quarter as well. No real decisions yet, but there's a consideration of some stimulation packages. But those stimulation packages will typically be for local production. That's not going to do an awful lot for imports or the type of business we're involved in from a shipping point of view. Higher vehicle prices in the U.S. seems to be a trend with higher financing costs, so that's putting some pressure on the U.S. market. As I mentioned before, we recognize that inventories in the U.S. are starting to decline, which is not a great sign. So there is some flattering, clearly, in the United States. As far as emerging markets are concerned, there is just a general macroeconomic uncertainty that prevails. So that's one of the underlying, also, backdrop factors that seems to have an impact on sentiment. So if we take all of those external factors, we cannot hide from the fact that there is uncertainty out there. OEMs are announcing production cuts, they're announcing layoffs. Some are even taking write-downs because of very, very -- suddenly very slow sales. There's uncertainty out there, we can't ignore it. We expect the next few quarters to be relatively flat based on what we see in the books today, in the booking and the forecasting cycles. So we're not overly concerned in the next 2 quarters. I think the key is, how does Q3 and Q4 develop. Will it really start to lift up, as IHS Markit would indicate, or has it generally stayed flat. That's yet to be seen. So for us, it's very much a watch the market and watch this space, as we look into the calendar year 2019. The reason why I had to remind ourselves and remind myself of the -- the point around the fleet, if there is a further weakening, we do have that ability to absorb capacity in the system [ outside ] of steaming, so that will only be positive from a fleet balance point of view, in case we see an actual decline, real decline in underlying shipments during 2019. But again, the macro sentiment is, it's a little weaker now than it was a quarter ago when you listen and look at what analysts talk about. It's very much about auto. I'm going to move to high & heavy. Global construction is definitely slowing down, it's not declining, but the growth has started to slow. Not unusual with infrastructure projects that were announced years ago have been well supplied. So we see the construction segment starting to slow down as far as growth is concerned, as we really expected. Mining is yet to see the replacement cycle that we've talked about previously. So mining shipments continue to trickle along at a reasonable pace, but we've yet to see the beginning of the large truck replacement cycle and that's yet to come. So we still have a positive view on mining looking forward, at the same time as we see that construction is slowing down from a growth point of view. On the right-hand side, in the agricultural segment, we see it pretty flat. As always, a bit of a mixed bag depending on the climate in various large continents and nations but our view on ag is it's a relatively flat picture. So slow in construction, improving mining over time is our view on high & heavy looking forward.A bit more to the supply and demand picture. Then, if we start to look at market fundamentals, which we still see are improving. They're moving in the right direction. The order book remains very, very low still. There are 16 vessels in the order book today. We questioned 2 of those, we think 2 of those will probably disappear. So the order book will probably come down to 14. That's less than 3% of the current global capacity. So it's pretty much the same picture we've been talking to for many quarters now. It's a thin order book. And neither owner or creditor, such as ourselves, or speculators or third-party providers of tonnage are putting their neck out and putting orders on for the time being. We think that's okay because we still need time to absorb the capacity that is in the market for today because we still have a general overcapacity situation, which has been the rate pressure we've talked to many, many times. So with a very, very low fleet growth, eventually coming down to basically no fleet growth by 2021, or 2022 if nobody orders. That's a positive picture relative to how we see demand developing over time. So demand, even if it may be flat during the course of this year, with a very small order book, we don't see that necessarily poor from a macro perspective in terms of supply-demand. Over time, we do expect global automotive sales and shipments will be growing on average at the 2% to 3% range. And automotive is still the primary driver of capacity in the industry. So with the 2% to 3% growth profile on automotive exports over time and eventually, basically, in our order book, the fundamentals will continue to move in the right direction. So that's the trend that we continue to follow. Utilization, overall, is still lower than it has been historically. So that still tells us that there's a bit of flex in the global fleets. And that's what we'll see come out over time with that extremely low order book.Okay. With that, I'm going to close with just a very quick outlook summary and then we'll open the floor to questions. So as I said, increased uncertainty compared to last quarter because of those -- the macro picture I talked to. We believe that market rates remain at very low level, but the tonnage balance is gradually improving over time, as we talked to. Rebekka touched upon low bunker prices in this quarter, they -- we expect to have a positive effect to a degree. There is a lag. It's yet to be seen what that lag will result in numbers that we'll see at the quarter, but we do have a lag effect, which is in our favor this time. All of last year was in our disfavor.Biosecurity challenges will continue in this quarter. The season is not yet over in Australia or New Zealand. So that will have an impact on us into Q1. Rate reductions of $10 million we're carrying into 2019. So that has its impact, but it's below -- well below the $30 million effect that we saw coming into last fiscal year. And then, lastly, we've got very good traction on the performance improvement program, good traction, many things to get to during this year to achieve $100 million, and that's a lot of focus there. At the end of the day, the market is delivering what the market is delivering. It's our job to take everything that's in our hands and in our control and do the best we can out of it. And that's exactly what we're focusing on, and that's exactly what we're doing. So with that, I say thank you. And open the floor, ask Rebekka to join me for the hard questions. We open the floor. Thank you.

[Unknown Analyst]

Landbased is just now picking up to quite substantial volume, what's the market outlook there?

[Craig Jasienski, Chief Executive Officer]

So market outlook, and we're -- main business is in the United States if we take the vehicle processing activity. So that's a flattish picture. When sales reduce in the U.S., 2 things happen to us with the vehicle processing, the actual accessory fitting will shrink because overall sales growth will shrink; but storage improves because inventory levels go up. And then, they need to start repositioning units around in the United States, as manufacturers ship stock, has a positive effect. So generally, the U.S. market is flat as far as vehicle processing is concerned, autoprocessing. Let me get into high & heavy processing, and particular, Keen. We just see continuing growth there. And that's a very positive picture. And we've actually, just to add to that, we've taken the Keen platform, which is very strong in the United States and applying the processes in the systems in Australia and they're really starting to get some traction in new business over time as well. So on heavy equipment processing, we see it positive.

[Unknown Analyst]

Just a couple of questions. First, seems to me you're a bit uncertain about the cycle if we are at the bottom, or -- but you've -- sort of [ interested ] statements that you're maybe biased a bit towards the downside. Still, you're introducing the dividend. So if you, please, can explain how you substantiate that?And second question is related to contracts, you have entered into at lower rates, but still increased contribution compared with last term's debt. Difficult to understand, actually, how that comes. If you can go a bit more into the details, perhaps something to do with the cost side or... And then, thirdly, what about the high & heavy volumes in -- other emerging Asia and ex-China? How is that developing at the moment? Do you see any changes since the last quarter?

[Craig Jasienski, Chief Executive Officer]

So I'll take the last one first. No, we don't see any changes in terms of ex-China at this stage. Depending on how the mining cycles develop, but we still see the large equipment and the big machines that are produced in North America and Europe, mainly North America. So we don't see any changes from what we have reported previously. I'll take the second one now, and then I'll leave the first one to you -- on dividend. On the second one, sorry, what was that actually. Don't know what it was.

[Unknown Analyst]

Contracts. Really [indiscernible]

[Craig Jasienski, Chief Executive Officer]

Thank you. So the main change we make is the number of ports that we need to call. So the volume is the same, but we start to consolidate ports. So driving out number of port calls is one of the first things that we look. Changing transit times also has an effect on consumption and rotations with the flexibility to how we can move the fleet in the different trades. But consolidation in ports is the primary driver. That's where we can really see a positive impact in contracts. So a discussion with the manufacturers is all about, yes, if you see a need to reduce your costs you need to help us reduce our operating expenses as well. If we can do that together, and it's good for both, we're happy, and then we're less worried about the actual rate levels even if they're under pressure. And I'll leave it to you.

[Rebekka Glasser Herlofsen, Chief Financial Officer]

Yes. On dividend, many factors, of course, that contribute to such a decision, also the liquidity position. The fact that we refinanced so much debt and freed up cash from that as well. And I think comfort in the fact that we deliver stability now and we're able to reduce costs in challenging markets as well. So there is some confidence coming from that.

[Unknown Analyst]

So can we expect that in [indiscernible]

[Craig Jasienski, Chief Executive Officer]

Confidence continues, unquestionably. Look, we -- I'd like to answer that point. We have seen the ability to draw out synergies from the business, we've seen the ability to apply and improve the program and get real gains. We think there is -- we're already doing what we believe we can get to. We continue to work with the manufacturers to improve the contractual portfolio back to operational efficiency. So we have absolute confidence that even with that pressure on rates, and even with an uncertain market, our focus needs to be on the contracts that we have and how we can improve the performance of that. And also, as an organization, how we continue to improve how we work. So that's a relentless focus, and that's the confidence that we have moving forward. Other questions?

[Unknown Analyst]

24,000 CEU of new capacity and the volumes being flat across the board. You said or you mentioned twice that you can slow steam. Will you be able to offset that increased capacity by just slow steaming?

[Craig Jasienski, Chief Executive Officer]

So for us, yes, we're quite comfortable with the position we have from a fleet point of view if we take our own perspective. Because in 2020, we have the ability to start releasing capacity, so managing our own fleet balance, we're very comfortable with. As far as the macro or the overall car-carrying market is concerned, and what we don't show here is the recycling picture. So there's a number of vessels over the next 3, 4 years to be recycled out of the system. So apart from a very low order -- very thin order book, we also have recycling and retirement of vessels. So that will have a positive effect over time. But for us taking on excess capacity that's matching with our long-term plan with other vessels, which are due to expire on charter in 2020. So no concerns there. Any other questions? Anything online?

[Rebekka Glasser Herlofsen, Chief Financial Officer]

No, actually.

[Craig Jasienski, Chief Executive Officer]

Good. Okay. Thank you for joining. Thank you for listening.