Wallenius Wilhelmsen ASA (WAWI) Earnings Call Transcript & Summary

Good morning, and welcome to the second quarter presentation for Wallenius Wilhelmsen, very happy to have people here in the audience and also thank you for following us on the stream. As always, we will have a Q&A session afterwards starting in with the audience and then also take questions in the chat from those who are watching online. So let me start with saying that the second quarter was very strong for Wallenius Wilhelmsen, both financially, operationally and commercially. And also, we took the first step in renewing our fleet towards a Net Zero emission future, and we will come back to you all that. So let me start with the biggest highlights. We saw a very strong financial performance in the second quarter, yielding an EBITDA of $477 million and a cash flow of close to $400 million. Shipping delivered a very strong and historically strong result, and that's partly due to volumes, very efficient trading and also operational improvements and cost improvements across the operations. We see an increasing and a persistent strong demand for our logistics services around the globe and particularly improving in the U.S. And in our government business, we're still seeing strong volumes from U.S. government in supporting their operations in Europe and the Europe area. We have also signed a multiyear contract so far in the quarter, and we are working on several, and are close to completing several multiyear contracts during the quarter, reflecting the current market conditions. And I'm also very happy to report that we see improved performance across all of our sustainability KPIs, most notably and most importantly, on safety and also on environment and emissions. And then we have taken a step towards renewing our fleets by writing an LOI for 4 newbuildings and 8 individual options for the next generation of vessels, and I will come back to that in more detail later. So before we go into the details, let me also take you through a couple of the key financial highlights from this quarter. Looking at EBITDA and return on capital employed, and we have in this illustration shown the rolling 12 -- last 12 months on EBITDA and return on capital employed. And as you will see, the rolling 12-month average is increasing steadily on EBITDA and is up 58% year-on-year. Also, return on capital growing steadily, and we are now at 16.5%, up 2% from last quarter and up 8 percentage points from the same time last year and well above what we have said is our financial minimum target of 8% return on capital employed. So all financial parameters are pointing in the right direction, and Torbjorn will give you all the details you need about that a bit later in the presentation. All right. So we will follow the normal agenda. I'll talk you through the markets. Looking into the shipping segment, Logistics segments, sustainability. Torbjorn will do the more deep dive on the numbers. We'll share how we see the future, and then we'll take your questions. Starting with the auto market. In the quarter, we saw another strong growth in the deep-sea volumes transported, and these volumes grew by 5.6%. And the overall sales of new cars grew by 5.1%, meaning that there was a bigger growth in the deep-sea volumes than in the sales volumes, and I'll come back to part of the reason for that. Our outlook for the global sales of vehicles has not changed since the last quarter, at least just marginally. We are still expecting a total sale of 84 million cars this year, growing into 88 million next year. And these are quite close to consensus numbers across the industry. Notably, you can see in green, that's the deep-sea share. So the one relevant for shipping activity, that's the green where we are moving vehicles across the globe, while the gray one is also relevant for our logistics, where we are doing a lot of processing for domestically produced cars. And as you will see on the deep-sea, there is not a significant growth in the absolute numbers or relative share of deep-sea volumes. So one main reason why the demand for deep-sea transportation is so strong is China. And on the right-hand side, you can see the numbers for China, growing steadily -- or since 2020, it has grown by more than 6x, and this is exports out of China. So a very important driver for the demand in our market, our long distance transport of vehicles exported out of China. Another noteworthy thing in China is that they have about 2/3 of the car they are exporting to Europe are electric vehicles. And on the left side of the chart, you can see the development in electric vehicle sales and the prospects. And this is upgraded more or less every quarter. And in general, we can say that the development and the penetration of electric vehicle cars are going faster than most players expect. And I will note also, certainly outpacing and replacing a lot of volumes on the hybrid segment. So in many ways, you can say that China is extremely well positioned for this EV market that is growing. The EV growth is also very relevant for our business in logistics as we are with these new players, processing and delivering new services, and I'll come back to that a little bit later on the logistics update. High & Heavy, still see very strong volumes. In general, we can say that the -- there is not enough transport capacity to support the export of high and heavy goods around the globe, and we have customers we talk to every day that are not able to move all the products, they want to move. There is still a big backlog of orders for all the different segments, and this is the main driver for why we see the strong volumes as we see it has somewhat slowed down in new sales. If you look on each segment, we are supporting the -- principally 3 call it verticals. In the Construction segment, due to the financial conditions of the world, the residential construction activity is slowing down, particularly in Europe, but also in general. But this is more than replaced by infrastructure investments in the same areas, also in the Middle East. So the general demand for high and heavy equipment, excavators and all different equipment is strong for construction. Mining, still going strong and the interest for new investments is still strong in that industry. And noteworthy there is also we see a very strong drive for autonomy. And due to new technology and lower -- higher efficiency, we now see that even smaller mines can use autonomous operations, meaning that the replacement of vehicles and equipment goes faster than historically. On agricultural, we clearly see a softer sentiment on new orders. Farmers are careful in investing in new equipment when interest rates goes up and the price -- per sheet price at least of equipment is strong. But also in that segment, we have a very strong backlog. And as I mentioned last quarter, John Deere has told us that they are -- and the market, so it's not a secret, that they are completely sold out already for 2023, and they are starting to get very strong numbers also into 2024. So in general, we can say that the demand for services, both from vehicles and high & heavy is very strong partly due to backlogs but also due to new orders. Looking at High & Heavy going forward, we expect a somewhat increase in the global sales of high & heavy, but with an average price increasing, we also expect a somewhat lower number of vehicles and equipment to transport it. Having said that, there is -- and as an open, there's a big buffer between what our customers need in terms of transport and what currently the market is able to provide of deep sea capacity. We are also using this market actively to partner with our customers and renew our book of business. And we have announced that we have 1 big contract that we have made in the last quarter with both deep-sea engagement and also actively using our logistics operation. And not least, partnering with us on the road towards Net Zero and already now paying a premium for biofuel used on our vessels. We are working on several multiyear new contracts at the moment and we are renewing the book of business as we speak. And as we have announced earlier, we have a strategy of partnering with customers that want to join our journey, meaning that they are using the whole network we have from vessels to logistics and also partner with us on decarbonization. And just to give you a feel of the magnitude of what we are working on, we are this year, renewing around $850 million of -- worth of business as compared to 2022 numbers, and this represents approximately 18% of the volume. Next year, we will have around $1.2 billion of 2022 revenue, and as much as close to 35% of our book -- our volumes. The main reason why the number is much bigger next year is that, as announced to the market previously, we are next year renewing our contract with Hyundai/KIA, which is our biggest customer in the portfolio. More or less, exclusively, these contracts are for 2024 and 2025 onwards. So the effect of these contracts will be seen in next year's numbers and onwards. Last on the newbuilding markets. There has been new ordering activity also through the second quarter. These are just including the numbers that happened in second quarter, also a few orders after second quarter, and we are now seeing an order book by the end of second quarter of 29% of the global fleet. This sounds like a lot. But looking at the historical development of the fleet, we had 0 growth in this fleet for many years, as you will see. And in our view, with this fleet order that we have today, we are getting back more or less on the long-term trend on the need for vessels. And there is also a significant potential for phase out at the second half of this decade, with vessels getting older and certainly new requirements coming in, in terms of CII and others. So in the long term, we see that this fleet renewal is needed. Still, there is a challenge with poor congestion around the world. And I think this is something that we are used to now in the industry, and we need to get used to. There is simply very tight margins on capacity all around the globe when it comes to the ports and terminals. We had a big issue last year in Europe. First quarter this year, it moved to Australia. It's still a problem in Australia, but the absolute number of waiting days goes down because there are less sailings to Australia. The problem is still there. We are now seeing that the congestion is growing on the U.S. West Coast and on the Canadian West Coast. This is largely because operators are turning their vessels on the West Coast instead of going to the East Coast, and land bridging into the markets in the U.S., but there is simply not enough railcars and trailer cars to move the vehicles. A new element that came up recently is also the Panama Canal, where they have more limited water they've ever had historically, meaning that they have less capacity on transits, and we see an increase in congestion also there. All in all, this quarter, pretty similar to last quarter, we had 10% -- give or take, 10% of our fleet sitting and waiting at ports at any given time during the quarter. So then let me move into the shipping update. And as we said last quarter, we were affected by the Australian congestion that came strong and abrupt during the quarter. So we had less sailings for instance, out of Asia. A lot of this were solved during first quarter, meaning that we have had very strong volumes out of Asia during the second quarter and more than catched up for the effect in the first quarter. Looking more into the details of the numbers. We increased the volume transported quite significantly with close to 10% during the quarter. And the main growth in volumes came out of our best-paying areas, which is Asia to Europe, Asia to North America and Asia to South America. The cargo mix is somewhat stable, a little bit down to 28% in terms of volume. This number has been somewhat higher earlier, but as we said in Q1, now due to the softening in container, we see that a lot of volume on breakbulk is moving back to container. These were volumes that came into RoRo during the container -- strong container markets, but these are now going back to container, but we are still having the structural volumes on breakbulk that we have had for many years, and we still have a solid breakbulk business, but very limited spot activity in that area. The net rate is down from $51 to $50 on a CBM basis. This probably sounds a little bit strange as we are delivering very strong results. The net rate is partly affected by a one-off in Armacup and I'm sure you will cover that. But there's also a lot of factors affecting the net rate. It's the exact customer mix during that quarter. It's which trades we are in. It's the cargo mix. There are a lot of factors. But the general impression we want to leave is that our vessels are completely full, and we are delivering more volume than we have done more or less ever before with the same amount of vessels. Maybe more notably, you can look at the time charter earnings. This is basically what the vessels earn every day. And as you can see, this is steadily and clearly improving across the last few years, and it's up 34% since the same time last year. So this is another indicator of our earnings that is probably more relevant looking at our earnings potential than the net rate, which is affected by a lot of factors, which is not that easy to follow quarter-on-quarter. We announced today that we have made an LOI of 4 new vessels, and this is part of our fleet strategy. In our strategy, we have said that we want to continue to be our customers' first choice in shipping, and that we want to shape the journey towards Net Zero emissions and have an ambition to be able to deliver a Net Zero service in 2027. And both of these have been guiding post for us when we have now designed a fleet strategy and taking the first move on fleet renewal. We believe that we should maintain the current fleet size we have of about 125 to 135 vessels. And this is back to the strategy point number one, that we want to be our customers' first choice. Then we need a certain network and a certain regularity within our trades to be able to deliver on our customer needs. So we do not have a strategy of significantly growing the number of vessels, but as the average size of the vessels will increase, we will also somewhat increase our capacity going forward. We have a very clear strategy saying that all new investments needs to contribute towards the Net Zero agenda, and we are very serious about driving and shaping that. We do think that the current time charter market is very high, and we are very cautious on making new time charters. And last but not least, we cannot make this transition alone. So we need partners, and I'll come back to some of them, but I've already covered our customers that are really now leaning in and partnering with us to make the efforts to start the journey towards Net Zero. To the LOI itself, this is a nice illustration of the new generation of vessels. As we said, we want to shape the journey towards Net Zero, and that's why this new class of vessels will be called the shaper class. They have a capacity of 9,350 CEU. They will, upon delivery, be methanol capable, meaning that we are able to run on green methanol or biomethanol from the day of delivery. And this is key for us to be able to deliver on our strategy of Net Zero service in 2027. In addition to the 4 firm vessels in the LOI, we have been able to secure 8 individual options declarable in 2 batches, giving us a lot of flexibility and optionality going forward on how and when we renew our fleet. The vessels will be built at Jinling in China. We consider that being a very capable yard, and maybe the most experienced yard in building these type of vessels. We have also, of course, done a very thorough ESG due diligence and we see that they are running an operation that is very comfortable to the standards and the needs we need when it comes to environment, safety and all other part elements of governance. These vessels are specifically designed to support our trade, meaning that we need a lot of flexibility with liftable decks. We need to be able to do high & heavy and breakbulk and cars and they are certainly also fitted for the future, which will be dominated by EVs. These vessels are made ready for ammonia, and we do have an agreement with the yard that if we see that we want to have some of these vessels, probably not the first ones, convert it and built to burn ammonia, we will be able to do that and decide on that at a later stage. So by this LOI, we believe we have taken a first step towards renewing our fleet, doing so, also delivering on our decarbonization strategy and creating very good optionality and -- in terms of possible new vessels in the future. And as I said, we cannot do this alone. So when we are now moving towards our strategy of Net Zero, we need partners. We have -- we need partners that can help us with providing these new green fuels. We need partners that can help us with developing and deploying technology that makes the vessels even more energy efficient. The only thing we know with the transition is that it's going to be more expensive than what we burned today. And the Oceanbird partnership, which we call the Orcelle Wind, it's one example of technology partners, where we work actively together to see how can we deploy a new strategy -- new technology. And not least, when we are now having our customers paying for decarbonization, we need trusted verified data, so all parties agreed to the emission accounting that we are proposing. We have -- so then on the fleet, as I said, we have a cautious approach to time charters. We have redelivered 2 vessels over the last quarter, but we have a relatively stable fleet. We are considering, of course, also time charters, and there will -- we will need to do some renewal of time charters, but we are very cautiously looking at the spec of the vessel, the CII performance and also how it fits into our trade. Moving on to logistics. This is a picture of our Orcelle terminal opened in Zeebrugge in Belgium this year, earlier this year. This is a -- what at least we call a state-of-the-art terminal, especially made to support the growth in EV vehicles. And this is very key when we now look into the new contracts that we are renewing. And as you will see with -- and as you know, with a lot of the new EV players, they do not have dealers and they depend on a player like us that can cover the whole scope from picking up the vessels basically from the factory, bringing them into Europe. In this Orcelle terminal, we are processing them, meaning we're putting in the accessories that is needed in addition to the standard model. We are cleaning them. We're inspecting them, and we are making them ready. And basically, for the customers we're now doing contracts with and that use Orcelle, they -- we deliver the cars more or less directly from the Orcelle terminal to the consumer. So this is a very strategic development for us in Europe, where we see EV demand is growing fast. Very happy to see that the activity and the numbers across logistics are strong. There is an increase in the activity and volume in the U.S. that's around 3% volume increase, but the revenue increase is 4%, meaning that we are adding even more value into the cars and processing them more than in last quarter. High & heavy volumes also strong in the U.S., but also very strong in Australia. And I must say our team down there has done tremendous in supporting customers and winning new processing business for high & heavy. Terminals, a little bit down, but that's due to an exceptional first quarter this year in Australia, where we had a lot of biosecurity activity. And now as the volumes are decreasing due to congestion, there's also a somewhat decrease in the activity on that terminal. But generally speaking, our terminals are very busy and are doing well. And we're also very happy to see that there is a development in the inland. That means all the distribution and orchestration we do to transport the vehicles and high & heavy of the terminal to the dealer or to the consumer. And one of our companies that we are now fully owning is Syngin in the U.S., which is a leading digital orchestrator of moving used cars around in the U.S. market. And we still believe there is upside to the volumes in the U.S. We have a very strong activity base in the U.S. We are still not up to pre-pandemic levels. And there is a very strong investment into new EV factories in the U.S., and we are well positioned to support our customers in both operations. And as you might know, we have a significant activity we called end of factory line, meaning that when the car is close to finished, we do the -- we finish off the car, we make it ready for shipment, and we ship it off, and we see those services are certainly also needed in the new factories now coming up in the what I call the EV belt in the U.S. Let me close up with sustainability. This is not last. This is very first in our priorities. Safety is very key for us, and I'm very happy to see that we had no lost time incidents in shipping last quarter. We saw a very good improvement in our logistics activity, and we will keep working very systematically on driving safety culture across our company. Also happy to see that we are improving on emissions. This is partly due to a strong volume, but certainly also because we are actually reducing fuel consumption. And during last quarter, we were able to reduce absolute fuel consumption on a comparable basis with 4%, which is quite significant. And we have started and we are now already transitioning into new fuels. We have secured a contract for biofuels that we announced earlier this year, and we are now in talks with suppliers of green fuels. And most notably then, methanol, both biomethanol and green methanol, and we are seeking out for new partners to make sure that we are able to deliver on our strategy of Net Zero service in 2027. And with that, I leave the floor to Torbjorn.

Thank you. Thank you very much. Good to see everybody. I see a few tan faces, so I guess you've either been in Northern Norway or somewhere abroad. Very happy to be here to present the financial highlights and financial details for the second quarter. In short, Q2 was a really, really, really good quarter. We had a solid improvement in revenue and EBITDA across all the segments. The adjusted EBITDA came in at $477 million, which is up 20% quarter-over-quarter and 56% year-over-year. Net profit came in at a strong $332 million, and thanks to the net profit, this basically offset the amount of money that we paid in dividends, hence leading to an increase in the equity ratio in the quarter. We see that the scheduled debt repayments that we have done in the quarter has led to a reduction in net debt. And when it comes to the financial targets on the right, we're hitting new records in terms of all the parameters, ROCE notably being more than double the minimum target that we have set. So going into each of the segments. Shipping delivered a very solid quarter, and we saw an all-time high EBITDA margin in this segment. Total revenues came in at $987 million, which is up $31 million or 3% quarter-over-quarter. And again, this is very much driven by the increase in volumes that Lasse talked about earlier. The EBITDA came in at $402 million, up 18% in the quarter, again, on a higher volume, but also on a favorable trade mix and improved voyage efficiency. Voyage efficiency, meaning we had more laden voyages and we also had increased CBM per port call. Year-over-year, the EBITDA is up 44%. And again, this is very much driven by the tight RoRo situation and a repricing of the book of business on top of all the volumes. Logistics in the middle has had another good quarter, and we see good, strong, stable volumes in this area. Total revenues was $283 million, which is up 2% in the quarter. Again, it's mainly on strong auto volumes in the Americas. The EBITDA had a jump to $47 million, which is up 29% in the quarter. The percentage increase is in part driven by the fact that we had a lot more high-margin business type accessorization that Lasse talked about. But also because when you're calculating the percentage, the Q1 number was a bit lower due to the payment of a $6 million one-off bonus to employees for all the good efforts in 2022. So if you were to adjust the EBITDA in Q1, a comparable number will be $43 million. Government delivered strong results. EBITDA came in at $30 million. So it's up $7 million in the quarter. And again, this is very much driven by the high demand for U.S. flag cargo. We have had strong growth, both in the quarter as well as year-over-year, thanks to the U.S. and NATO response to the Russian invasion of the Ukraine. And we have seen high U.S. flag cargo since the third quarter of last year. Looking at the revenue and EBITDA bridge. If we start with the revenues, you can see that overall revenues is up $47 million in Q2. The volume effect is $73 million, then due to slightly lower revenue per CBM that takes away $21 million and fuel surcharges were $20 million lower, demonstrating again that it was really the volume that drove things in this quarter. We also saw a $16 million increase in other revenues, roughly $7 million in logistics and $7 million in government. On the adjusted EBITDA improvement, this was $79 million quarter-over-quarter. And if you look at sort of the percentage contribution to the improvement, roughly 78% of the improvement is shipping, 13% logistics and 9% government. And again, here, we saw the EBITDA improvement in all segments. We did see a $31 million reduction in the fuel cost in the quarter, which leads to a $11 million decrease in the net fuel cost quarter-over-quarter. I touched briefly on it. As you can see in the top chart, the net fuel cost declined $11 million in the quarter. The -- if you were to strip out the accounting effects that we had in Armacup, basically, what we're doing is we are harmonizing the accounting standards in Armacup to that of the rest of the group as part of the integration effort. We own 65% today. We will own 100% at the end of 2024. And as part of that, we've had some movement between net revenues and fuel surcharges as well as some periodization effects from Armacup. So -- but if you strip out the Armacup effect, essentially the change in net fuel costs quarter-over-quarter would be flat or 0. So it will be the same level. We do expect that the fuel surcharges will continue to taper off, but they are expected to stabilize in Q3. Cash on hand decreased by $93 million. This is total cash. This is driven by a large dividend payment in the quarter as well as regular debt service, in part countered by the solid operational performance we saw. If we start on the left, we can see that we had operating cash flow of $396 million. This represents a cash conversion ratio from EBITDA of around 83% in Q2. The net CapEx that we have includes dry dock, vessel maintenance and other investments. We paid out $270 million in dividends in the quarter, of which $219 million was paid to the shareholders of Wal Wil ASA, while the rest was paid to a noncontrolling interest such as the HMG Group in EUKOR. Net debt includes scheduled repayments on bank and lease debt. And at the end of the quarter, we had undrawn credit facilities of USD 397 million. As shown by Lasse, we've had a steady improvement in operating cash flow if we look at it on a rolling 12-month basis. And the percentages you see above the operating cash flow remains the cash conversion on an LTM basis as well. If you look on the right side, you can see the cash flow. If you take operating cash flow, you take away the amounts invested, take amounts of debt repaid that leaves you with what we can call cash flow to equity and dividing that by share -- by the shares outstanding, excluding the shares that we hold on our own books, you can see that we've had a steady improvement of free cash flow to equity per share for a long time now. Finally, we end the quarter with a robust balance sheet and a strong liquidity position. The net debt declined to $2.46 billion on the debt repayments that I talked about earlier. We have no bond maturities until September 2024. And as announced this morning, we are now contemplating a bond issue. The net proceeds from the contemplated bond issue will be used for partial refinancing of existing debt. And as part of this, we are considering buyback in next year's bond maturity and that you can see as a gray part of the 2024 bar on the right there. We also have some maturities of vessel refinancing that will be repaid with cash during the year. And finally, we are in the midst of refinancing a revolving credit facility of $303 million which is well progressed, and we expect to conclude that well within Q3. So with that, I will stop and hand it back to Lasse for the prospects.

Thank you. Thank you, Torbjorn. Yes. So then let me close up with how we see the future on a high level. In general, we're following a strong first half, we see a similar market and a similar performance for the second half of this year. The demand is still strong, and we have a pretty good visibility on the activity later in this year. And we expect a second half similar to first half in 2023. We are also, as I said earlier, renewing contracts now that, to a large extent, will hit our books in '24 and onwards, and we are doing this at significantly higher rates than what we had in the previous contracts. We still believe, despite a strong newbuilding order book that the underlying fundamentals in the industry is strong, and -- but of course, moving further out, there is large uncertainties, not least on geopolitics. And as I said, China is a key element to this -- also this market as to all shipping markets. And that's the situation we need to follow closely. But overall, we see that we will continue to strengthen our financial position and make sure that we can reinvest in our business and also delivering on our dividend policy. So those were the words in the presentation and then we open up for questions. And Anders, do you want to join us on the stage? Do you want to introduce Anders, Torbjorn?

Yes. Very happy to introduce Anders-Redigh Karlsen, who recently joined us as our new Head of Investor Relations and Market Insight. Joined us from Kepler Cheuvreux, has covered us as an equity analyst, so knows us very well. So very happy to have Anders here.

Thank you.

And Anders will follow the questions coming in on the chat. So let's see, are there any questions in the room first?

Okay. So this is a personal record. We have been able to tell everything. Very good. Seems not to be, you can chip in later, if you want. Any questions that has popped up online, Anders?

Yes. We have a few questions from Petter Haugen at ABG.

I'm sure.

Yes, not surprising. The first question goes on the breakbulk cargo. How important is the breakbulk cargo going back to the container market for the development of net rate in shipping?

Yes. That's -- it's important. Period. And rule of thumb, a CBM of breakbulk pays 3 to 4x more than one of auto. So it's certainly a high-paying segment. But we need to look at breakbulk in 2 different dimensions. One are the, call it, structural volumes that are transported with RoRo and have been for a while. We have a very strong position ex Japan on machinery. And there are also big pieces like railcars and other things that fit into our service. While we also saw when the container market was really strong that we came a lot of new cargoes into our segments, that is now going back to contain. So in our view, the break book segment is normalizing back to the levels that we saw prior to the container -- very strong container market in '21, '22.

Okay. Next question from Petter goes on...

But having said that, all of these effects are already in when you look at Q2. So there are -- we don't expect any big change in the breakbulk picture going forward.

Next one goes on the guidance. And he's -- Petter is asking second half similar to the first half 2023. Does that mean same EBITDA in H2 as in H1?

Well, we are not guiding specifically on EBITDA, but we see a strong market. We saw that we had a somewhat lower Q1 due to some one-off effects in Australia. We have a very strong Q2, and we believe that, in average, the first half is representative from what we expect in the second half.

Okay. Going back to the rates, there is a question from Erik Hovi at Nordea. Can you talk about the net rate and TCE?

Yes, I tried. I can try again. So the net rate, as we said, is basically, if you take out one-off effects that Torbjorn mentioned on Armacup as we are aligning our accounting practices, they -- it's basically flat. And following the net freight quarter-on-quarter, it's quite challenging as it has all different elements into it. But generally, when you take out all the quarter-on-quarter effects on net rates, the net rate is slowly increasing. When we look at the contracted rates, what we actually had in the contracts that we performed in 2022 were 10% higher than what we saw in 2021. And when we are now renewing contracts in 2023, we see strong improvement in rates to levels that we believe are sustainable for us to reinvest in our business and also deliver on our dividend policy. So I think that's as much as I can say about that. When it comes to the time charter equivalent, of course, the number we have now included in the presentation because we think it's a very relevant one. And that's really where you can see what the shipping operation is yielding of returns. And that is slowly and steadily increasing, partly due to high utilization, partly due to a good trade mix, meaning that we are in the right trade areas, that we are filling up the vessels, that we are filling them up also with high & heavy and not least that the team is doing a tremendous job in increasing voyage efficiency, reducing fuel costs and also managing extremely well the difficult congestion situation we have. And it's not a coincidence that we see good low congestion numbers in Europe. That's real hard effort. So that's why we're including the TCE because we think that it tells that the underlying earnings of the vessels even though the net rate picture is a bit good, shows a continuous and steady improvement.

Okay. Then there are multiple questions on the newbuildings and the LOI, and many of them are linked to what price are we paying? What is the delivery schedule? And what kind of payment terms are we looking at here?

So unfortunately, as in most contracts, a lot of the details are confidential, so we are not able to share. We cannot share the exact price, neither the payment terms. What we can say is that we are really happy with having Jinling and China Merchant Group as our partner. The vessels will start to deliver from 2026 and for the firm program, they will deliver into early 2027.

Okay. Then there is questions around are we planning additional newbuilds? Is this sufficient for our fleet renewal or how are we looking at that? Is this the start of something bigger?

Well, what we have been really concerned about in this LOI is to create optionality allowing us to make decisions later when we see how the fleet need is and how market developments are. So we're very happy with having options in 2 batches. We had quite a good time spread after we have signed a -- if we sign a contract and after we have potentially signed a contract, allowing us to make these decisions in stages. We will not -- we're not able now to say what we'll do in the future in addition to this but the only firm agreement we have now in terms of the LOI are for 4 vessels. Having said that, of course, we have a fleet renewal need going forward. We have an ambition to develop towards Net Zero, and we will reinvest in the fleets, but will do so cautiously and also with the view on the overall market and certainly also how we are phasing out our own vessels. So that's a very round answer, but that's basically where we are.

Yes. And there is also questions around TCE and [ oh yes ], also evaluating that as an option.

Yes, we need to, always, we evaluate it every day, every hour. But very often, we end up saying no because it's -- the current TCE rates, in our view, are not sustainable. Having said that, we have core vessels in our fleet, which we have on time charter, where we certainly will look at renewing, also looking at time charter for vessels that can really provide value in our fleets. But in general, we are cautious, and we will not use the time charter market to grow in this market. And we have a strategy of keeping the fleet size we have today and not significantly growing it.

Okay. Then there is a question more on the strategy behind the newbuilding order, what our thoughts are before making the order? Can you say a little bit about that?

Yes. Well, we talked -- I talked about it. First of all, is that we would like to maintain the product we have to our customers. And then we need vessels. And we have a quite unique trade, and that means that we need unique vessels. So we cannot just turn to the market and take a standard vessels of the market or from a new building yard. We need to design the tools we need for our vessel, for our shipping activity ourselves. That's what we have. So these vessels are bigger. They can carry more cargo. They are more flexible and they are certainly more energy efficient. So all of these elements have been important when we are designing new vessels, also making sure that they can adapt to a new market of EVs. On the energy side, we have studied this in depth, and we believe that shortest and most viable way towards Net Zero today is with methanol, either biomethanol or a green methanol. Only problem with methanol is still has CO2. So it's captured CO2, meaning that we think also that while we transition into new fuels after methanol, and that's why we want to have optionality to turn the vessels into ammonia driven in the future. And we are working actively with now different vendors of fuels to see how can we source the fuel we need in this period. When it comes to number of vessels, there is no doubt that we are at a relatively high cycle in the newbuilding market. So that's why we're cautious in the number of vessels that we commit to now. Having said that though, in the trades we have and with these vessels, they will deliver very solid returns and well above our return requirements when we look at an average market across the cycle. So even though they are historically may be expensive, they are still a very good business case for the business we intend to use them in.

Okay. Then there is some questions from Frederik Ness around the order book, how does it impact our contract negotiations? And secondly, in terms of volumes, how are you seeing contract volumes now are they typically maximum and minimum allowances on the contracts, et cetera?

Yes. Well, we -- I would say, so far, this year, we have not really seen a big impact of the newbuilding order book, and that's obvious because they deliver from second half next year and into '25. Although, of course, customers are watching this as well. And so it's -- in all negotiations, we want longer contracts, they want a bit shorter contracts. It seems that the -- we end up somewhere in the middle. And typically, we are now looking at 3-year contracts starting '24 and onwards with options. And when it comes to the rate picture, we do not see an impact of the order book yet, and we do not expect to see that for the rest of this year either.

Okay. Then there is one for Torbjorn in terms of leverage. What kind of leverage are you thinking about concerning the newbuilds or the LOI?

Look, I think the -- it's -- financing these type of vessels is straightforward, and we have a lot of capital interest when it comes to the refinancing of those. And like most investments, it will be a combination of debt and equity that we will utilize in the financing of this. So as it relates to vessels themselves, it's a very, very established market. We have very good financial partners, all of whom are very keen to support us in financing this. And this is, of course, something that we will explore as we move forward towards delivery of these vessels.

Okay. Then a few final questions here. One relates to Chinese EV exports. Can you quantify the importance of that growth? And secondly, our forward coverage ratio, what kind of percentage of our capacity is committed on the contracts?

First, on the Chinese and the impact of that, as I showed on the previous picture, is very strong. If you see on the average percentage on deep-sea across the last few years, there is a moderate variations. The big factor is Chinese exports. So there's no doubt that the growth in China export has been a very strong impulse in this market. And one of the key reasons why the auto market is strong on high & heavy, it's partly that, too, but less clear. Also worth mentioning that Korea, which is a very important market and customer for us is also performing extremely well, both in terms of sales and in growth, and they have been very successful in penetrating the U.S. market. So there's also increasing volumes out of Korea, where we are strongly exposed. And then there are -- this is countered a little bit by the somewhat reduced Japanese volumes over the last few years. But they are now also really pushing on the pedal for EVs. So we'll see how that develops. But in general, China is very important for the overall demand in this market. And then I forgot your second question.

The second question was what kind of coverage do we have in terms of percent of capacity? And what our [indiscernible] forward?

Let me ask -- answer it this way. We're sold out, and we have very limited space for spot cargoes, meaning that we are very well covered with contracts in the short term, and we are now renewing the book of business in the medium to long term. We are also moving towards more specific contracts when it comes to volumes. Historically, there has been a different structure on the commercial contracts. We are now, to a large extent, only doing contract where we have defined volume commitments in the contracts.

Okay, then we'll have, I guess, a final question linked to contracts. And if there are additional questions, we're happy to answer them if you reach out to us. But it goes on the contract again and this is from Frederik Ness, what contract vintage we're renewing now in 2023 and 2024?

That depends a lot. But typically, we have -- I mean, very few 1-year contracts, but that's a few. Typically, they are 2 to 3 years old. And we are renewing, as I said, around close to 20% of the volume this year, which is a little bit on the low side. We are renewing more next year. But if you look across this year, the next year, we will renew more than 50% of the volume in our business.

Yes, I guess that concludes the Q&A session.

Thank you, and thank you for coming, and see you again next quarter.