Good morning. Welcome to Vopak's Q4 and full year 2018 results. My name is Laurens de Graaf, Head of Investor Relations. Today, our CEO, Eelco Hoekstra, and CFO, Gerard Paulusse, will guide you through our results. Our COO, Frits Oldenkamp, is also here, and he will be available for questions during the Q&A session. We will refer to the full year 2018 analyst presentation, which you can follow on screen and which you can download from our website. After the presentation, we will have the opportunity for Q&A, first by the analysts by us in the room, and thereafter by the analysts that have dialed in. A replay of the call will be made available on our website. Before we start, I would like to remind you of our safe harbor for any forward-looking statements. This disclaimer is also applicable to the entire conference call, including the Q&A.
With that, I would like to hand over to Eelco Hoekstra.
Thank you, Laurens. Good morning, everyone, those who have joined us here in Rotterdam, and also a very good morning all of you who have joined us in the call. Pleasure to have you here and have the opportunity to guide you through the annual results of the year 2018. I will give a short introduction on the strategy and the execution of our strategy, then I'll hand it over to Gerard, who will elaborate on the financial results. Let me share up front with you our key messages for this presentation. Firstly is that given the market conditions in 2018, we delivered again solid results and increased our earnings per share by remaining focused on short-term business opportunities. Secondly, the execution of our strategy is very well on track. Now allow me to elaborate on that.
To meet the increasing global demand for the products that we store, we made significant progress in growth and realizing our digital transformation. I'm excited that we've been able to announce significant expansion projects in the last year, meeting new consumer demands. The execution of the strategy is leading to a further shift in our portfolio towards industrial terminals for chemicals, and terminals for gases, including LNG. Expansion projects in these areas are currently underway in Malaysia, Indonesia, Canada, Brazil, and the Netherlands. End 2018, we acquired a share in Pakistan's LNG import facility. We commissioned the first phase of our Pengerang New Industrial Terminal and expanded our chemical presence in Houston. As such, we delivered 1.1 million m³ of our 3.2 million m³ expansion program to be completed towards the end of 2019.
In addition, we commenced service improvement projects, strengthening our chemical storage positions globally, and initiated investments in our oil hub terminals in preparation for the IMO 2020 bunker fuel regulations. One more reason for excitement is the progress that we've made in our digital transformation. Our new unique cloud-based digital terminal management system is now in place in the Americas and in Asia. I believe that our digital transformation is key to growing our competitive edge and capturing the opportunities of the digital era. In short, we delivered solid financial results in 2018 and look with confidence towards the future. Let me move on to some of our key figures to place the 2018 performance in perspective. EBITDA, excluding exceptional items, was EUR 734 million, giving market conditions in 2018 a solid performance.
We delivered good cash flow from operations, supported by cash dividends received from our joint ventures. Our occupancy rate for subsidiaries was 86%, which reflects oil market conditions at the hub terminals, whereas other product market segments were good. This year, we have grown our global network by 1.1 million m³ with expansion in Houston, Pengerang, and LNG in Pakistan. Projects under construction will add 2.1 million m³ throughout 2019, bringing our global portfolio to 39.1 m³ by the end of this year. Let me recap our view on the business environment. Starting with chemicals, here we focus on operational delivery. We see a growing demand for chemicals driven by increased manufacturing of consumer goods. The good business environment for chemicals resulted in solid occupancy rates and increased throughputs at our chemical terminals.
To keep serving our chemical customers in the future, our operational performance delivery is crucial, and we focus on improving our infrastructure and daily service delivery. Looking at our customers in this segment, there has been an upturn in petrochemical investments in the world, especially in new build integrated petrochemical complexes. These new developments provide industrial terminal opportunities for Vopak, and we target to make one to three new investment decisions in the period 2019 to 2020. In the oil market, we prepared for the uptick. In hub locations, we experienced the challenging oil market linked to last year's backwardation, especially for fuel oil. We're improving our infrastructure and reducing the exposure to high sulfur fuel oil. We're well prepared to benefit from the opportunities that IMO provides in the storage sector. In fuel imports and distribution of clean petroleum products, we continue to see opportunities in major deficit markets.
We sanctioned a second expansion phase in Mexico and will add 110,000 m³ in Veracruz. This capacity already has high commercial coverage. When we look at gas, our terminals experience steady cash flows. The fundamentals of the gas markets are good, and what we particularly like is that we see an improved liquidity in gas markets. This is also demonstrated by the increased volume of LPG and LNG that our terminals have handled. We welcome the long-term contracts at our gas terminals, which underline a strong foundation. Also in this segment, we target to land one to three new investment opportunities in the period 2019 - 2020. In the veg oil and benefits terminals, we reap the benefit of the current market. These markets remain dependent on regulation.
Currently, we see strong imports in Europe via our terminal in the Netherlands, whereas imports in the U.S. have reduced as more biodiesel is produced locally. As a result in the U.S., we have been able to replace the biodiesel business with chemical products. To sum up our business environment, we are positive on the chemical and gas markets and target investment opportunities for industrial and gas terminals, including LNG. In the oil market, we see the early signs of change, and we are fully prepared for the uptick. Moving on with our strategy execution for the period 2017 and 2019. You are familiar with this slide on the strategic objectives, and I have consistently conveyed the message that we are well on track.
We are making significant progress in growth as indicated previously, and I am confident that we can keep our sustaining and service improvement CapEx within the EUR 750 million budget. Vopak is becoming more digital driven by a digital transformation with the rollout of the program that is currently underway. Lastly, we expect to drive down costs and deliver on the efficiency program as promised. In short, we are confident to deliver our 2017, 2019 strategic objectives. Let's focus on our growth briefly. The overview illustrates the projects that we have under construction. We have announced significant projects in the last year, and construction thereof is progressing well, and new projects are being announced, fully in line with the focus on growing our portfolio. Throughout this year, we will deliver 2.1 million m³ , which already has high commercial coverage.
The execution of our strategy in shifting our portfolio towards industrial terminals, LNG, LPG, and chemical is working well. Let me summarize our key messages before I hand over to Gerard. This year, we will deliver solid results, and we are on track to demonstrate growth in 2019, supported by our portfolio of expansion projects and the ongoing cost initiative. With a strong competitive position and a global diversified portfolio, we are very well-positioned to future opportunities and to create long-term value for all stakeholders. With this, I would like to hand over to Gerard to explain more about our financial results.
Yes, thank you, Eelco, and welcome again to everybody. It is a pleasure to talk to you today about the full year 2018 results. I will make some comments about strategy execution. Also today, we published our annual report. In the annual report, you will find a lot of information about sustainability reporting and related special topics, in terms of financial reporting, pensions, tax, et cetera. Let's turn to the financial performance in 2018. Our financial performance in 2018 was solid. We have momentum with value delivery towards 2019, and we look at our portfolio at the future with confidence. Earnings measured as EBITDA amounted to EUR 734 million, reflecting challenging oil market conditions where the business environment for chemicals and gases was good. We delivered EUR 687 million cash flow from operations, demonstrating the resilience of the portfolio.
We increased our growth investments to approximately EUR 1 billion for the period 2017 to 2019, and this includes very recent investment decisions to expand our operations in Vietnam and in Mexico. Furthermore, in the fourth quarter, we acquired 29% of the shares in the LNG import facility in Pakistan, and in January, we expanded that further with a 15% stake to come to a total of 44% shareholding in the facility. The net profit for the year was EUR 290 million, and this results in an earnings per share of EUR 2.27, relative to EUR 2.25 a year ago. We increased our cash dividend to EUR 1.10 per share. Let's look at EBITDA relative to last year in some more detail. Our EBITDA is EUR 734 million. When we adjust that for currency translation effects of EUR 19 million, the EBITDA was EUR 10 million lower than prior year.
The Europe & Africa division and the Asia & Middle East division reduced financial performance at the hub locations due to the less favorable oil market structure. Whereas strong performance in the Americas and China & North Asia were supported by the good business environment in the chemical segment. Moreover, our industrial terminal in Haiteng in China resumed operations in June, and discussions on the financial aspects from the downtime previously resulted in an initial prepayment of the settlement of lost income that is currently being discussed. Other operating expenses reflect the cost for more business development activities and IT. Overall, we delivered a return on capital employed of 11.6% on account of our diversified portfolio across different product market segments. At the divisional level, occupancy rates for the fourth quarter have been stable for all divisions.
In the Europe & Africa and Asia & Middle East division, we have not yet seen an uptick in the occupancy rate of the hub terminals, whereas the chemicals and gas occupancy rates have been very stable, which is mainly noticeable in the numbers of our Americas and LNG divisions. Q4 versus Q3. EBITDA for the fourth quarter came in at EUR 181 million and included EUR 7 million net one-off cost items. The higher operating expenses in Europe & Africa reflected environmental provisions and settlements related to staff costs in the fourth quarter. The first phase of our industrial terminal, PT2SB in Malaysia, positively contributed to this quarter, and this results from the commissioning of part of the capacity, whereas the remaining part will be commissioned in 2019. Furthermore, various divisions saw an increase in cost related to portfolio management and new business development, where we continue to invest.
Looking at the cash flow. 2018 showed resilient cash flow from operations. We delivered EUR 687 million cash flow from ops, which resulted in almost EUR 375 million free cash flow before growth. We have investment momentum towards 2019 and invested EUR 340 million of growth this year. Free cash flow available for financing, debt service and shareholder distributions amounted to EUR 50 million this year. Our net debt position of EUR 1.8 billion resulted in a net debt to EBITDA ratio just below 2.5 at the year-end. In 2019, we have no material movements in our debt program other than the subordinated debt towards the end of the year. Funding under the existing revolving credit facility increased during the fourth quarter and in 2018 overall.
The cash flow from operations combined with financial flexibility provides us the position to invest in our portfolio to create shareholder value. Growth investments will increase in 2019. If we look at the investment phasing, we break down our investments in growth investments and other investments. In the period 2017 to 2019, we expect to invest approximately EUR 1 billion in growth, either through CapEx in subsidiaries or equity injections in joint ventures and associates. In 2017 and 2018, a total of EUR 465 million was spent on growth. You will see therefore a further half billion of investment for 2019. We have access to further growth opportunities that might increase the investment levels further for 2019 and beyond. Other investments, as indicated, cover sustaining and service improvement CapEx, as well as IT investment. The amount for this is unchanged. So far, we've spent EUR 265 million in 2018.
This category of spend also includes budgets for major service improvements, such as our projects in Pengerang and the investment in our fuel oil networks to convert capacity to flexible and low sulfur fuel oil capacity. The net profit. The net profit was EUR 290 million. As I said, it results in an earnings per share of €2.27. Debt repayment in the second half of the last year had a positive effect on interest expense for 2018. The change in corporate income tax rates in the U.S. and Belgium and the Netherlands reduced this year's effective tax rate. Moving to dividends. In December, we updated our dividend policy and stated a policy that says that we will have an annual stable to rising cash dividend in balance with management view on a payout ratio.
To underline the balanced approach between allocating capital to growth, an efficient and robust capital structure, and shareholder distributions, we've increased our dividend from €1.05 - €1.10 for the year 2018. Let's turn to some portfolio developments. As I said, in January, we increased our presence in the LNG facility in Pakistan to 44%. LNG is one of our growth areas where we are very happy to see this achievement being delivered early in the year. Also, on German LNG Terminal, the project is progressing well. We have traction with the market. Yesterday we obtained another commitment for capacity in that terminal. Given the strong market demand, German LNG Terminal will apply for permits with an 8 BCM per annum terminal capacity.
In the chemicals terminal Ningbo in China, we increased our share to 85%. Therefore, going forward, this terminal will be reported as a subsidiary instead of a joint venture. As I said, today, we announced two expansion projects, one in Vietnam and one in Mexico. Mexico is a deficit fuel market that recently opened up. This expansion will support further imports of clean petroleum products and already has high commercial coverage, as Eelco also indicated. Furthermore, I would like to briefly touch on the fuel oil developments. As you know, we are converting and reducing our 5 million m³ of predominantly high sulfur fuel oil to roughly 1 million m³ of high sulfur fuel oil and 2.5 m³ of very low sulfur fuel oil and flexible lineups.
The conversion program is progressing well, and we will be ready well in advance of the IMO implementation on the 1st of January, 2020. Turning to the proportional information, we provide this extra information to give you an insight in our proportional EBITDA and the non-IFRS proportional information, hopefully gives you some transparency in our cash generating capacity. The proportional EBITDA, excluding exceptional items for 2018, amounted to EUR 822 million, and the proportional trend is similar to the IFRS data. Let me recap the financial performance and our key messages. We are well-positioned for 2019 and look back at a solid performance in 2018. Furthermore, at the future portfolio, we look with confidence. Let me close out by looking ahead. We have not changed these statements other than giving you an insight in the moving parts of the additional capacity.
At the end of the fourth quarter 2018, we have commissioned 1.1 million m³, and therefore there is 2.1 million m³ that will be delivered over the course of 2019. And with respect to our efficiency program to support and defend our margins, the EUR 40 million program is on course. It is set to deliver towards the end of 2019. Of course, thereafter, we will continue with a similar program. As a result of the cost efficiency, we aim to reported operating expenses of EUR 676 million, similar to 2017, now for 2019. Of course, this is subject to currency exchange movements, activity levels, and portfolio developments. With that, I think we are ready for your questions. We can start the Q&A, and I will hand back for that to Eelco and to the operator to guide us through that.
Thank you very much, Gerard. I think that concludes our presentation. We indeed will take first questions here within the room, and then we will open it up for questions for those who are listening online. Who has the first question?
My name is Albert Pranger Kempen. Gentlemen, thank you for the presentation. Gerard, you just mentioned in your guidance to the future that we could expect another cost savings efficiency program after the current program ends in 2019. Should we assume a similar amount, ranging from EUR 25 million -EUR 40 million to be, let us say, potentially saved from 2020 onwards?
I think what we first want to do is get ourselves through 2019. We don't want to shift the goalpost too early. We first need to deliver in 2019 of what we've already indicated we would do in 2019. I've also said that at the Capital Markets Day in Houston to everyone. Moreover, we will see quite a bit of portfolio movement, potentially in 2019. We're adding some capacity. We have the four strategic reviews ongoing. As you see today, we're shifting some of the equity positions in some of our entities. Therefore, I would first like to work our way through that before we put a number on it. What I'm trying to indicate to you is that for us it is important that we maintain the cost culture and discipline in the company. It has served us well.
We chose early, even before we knew there would be pressure in the market on revenues from a tough oil market to put a cost program in place. It has served us extremely well to defend our margins and get a solid result in 2018. We would like to maintain that. At the same time, we're also happy to spend good cost, if you wish, for good opportunities. What I'm telling you is we will focus on it, we will continue it. I think we also feel it is serving us extremely well. To put a number on it is too early. Yeah.
Okay, thank you. Basically related to that, I have two additional questions when it comes to margin, because first of all, as you indicate, the anticipated portfolio shifts towards more chemicals and, on the other hand, also to more industrial terminals. I'm wondering what kind of effect that everything else equal would have on your margin, basically just in general, the shift in the portfolio. And as a second of that, I wonder with the digital transformation process ongoing and the first two locations having been completed, do you see already any benefits seeping through on the cost side, but also on the operational side and the way of working at the terminals? And could you perhaps share, if you're aware of the number, how much of the EUR 40 million in anticipated cost savings is related to the digital transformation process?
Okay, it's a whole lot of questions. The last one is relatively easy. The EUR 40 million is substantially not in the IT domain. It's in many other areas. I think I will hand in a second to Frits to say a bit more about what we are doing in the digital space and where the opportunity sits, whether it's efficiency, effectiveness, contract retention or wherever it sits. Digital will come in a minute. On the margin developments, I think what is fair to say is, and you've seen it in 2018 and also in 2017, that the margin impact of the oil market can be quite quick and it can be quite significant in terms of that segment.
Other than shifting the portfolio, I think a large effect, which you sort of have to somehow filter out is because I think you're looking at the structural portfolio strengths rather than market conditions, but you have to filter out that noise that you have from market conditions in oil. Having said that, we quite like the exposure to oil, because when it goes well, it goes really well. Yeah. We just need to be ready for the times where it doesn't go that well and defend our margin, which we're doing with the cost program. I think in oil you see more volatility, certainly in the hubs. In the distribution markets, it's different. It's very market bespoke on what happens in that particular market. Chemicals, I think is, and Eelco will supplement on this, but chemicals is probably more stable.
Certainly, the LNG space is more stable. You also see that in the occupancy rates for LNG. If you look at the breakout slide on LNG, it's very interesting and very boring at the same time. It's just 95% and it ticks along. That also has to do with the capital intensity of that type of facility. You need to lock in more before you're confident to put your money in that segment. We're getting more and more skilled in that, I would say, over the last probably 10 years or so. We're very comfortable with the LNG exposure. All in all, I think the portfolio shift we are seeing are more strategic choices and market choices to make the max out of our assets. If I wrap it up, our return on capital employed is in the 10%-15% range, as I indicated earlier.
I've given you some dynamics. I've not given you the details of the returns in each segment. Perhaps, first to Frits on digital.
Yeah. Thanks for the question on it. I think some of the benefits that we anticipate to see and actually are starting to see in the terminals where we've implemented are fairly wide-ranging in terms of all the areas that we consider important. First and foremost, there's always safety. Everything that we've automated basically takes out the human error. Obviously, in any business, there's a certain cost of error involved in terms of then following up on that and correcting it. There we are very much already seeing the early indications that it helps us to reduce what's already very infrequently occurring to even less often occurring. It helps us a lot, I would say, with what I would call the effectiveness, and that means basically, in our case, the timely execution of orders. This comes in many shapes and forms.
One of the things that we're able to do with the new software is the customer is able to give us parts of their order at different points in time through different channels. They may know that the ship is coming, they may not know exactly what quantity they would want to take out of that at a certain point yet. It used to be that our software could only handle it once we knew everything we needed to know to execute it operationally. Now they're able to just enter data and take it in from various sources as it comes in, only towards the point where we say, "Okay, now it needs to be operationally executed," then we do a sort of completeness check to see if we've got all the required data. That's, as you can imagine, an efficiency improvement.
We have all the data available of all orders. If customers call us about, "Okay, what happened on November 17 to my order?" It's now a question of one screen, our customer service people have all the data at their fingertips to show. Even I, if I wanted to, can look at our truck loading performance. Even I could now see real-time in the terminals where we have this, let alone the people that are managing that on a daily basis. If a truck is waiting for longer than usual. Obviously, that helps us to real-time intervene, as management, where necessary. There also you see an effectiveness and efficiency possibility, I think. In general, what I think it helps us do is work in a more uniform manner across the company because the software enforces that.
That means that we can be on a single learning curve. If we learn something, we can apply it fairly quickly everywhere. It allows us to have much more data on the process, which again, is another big enabler of seeing areas to improve.
Cool. Thank you.
Hi. [Celina Saffari], KBC Securities. I just have one quick question with regards to the global operating costs. For 2018, this was at EUR 54.9 compared to the EUR 38.8 we saw last year. What sort of the run rate we can expect going forward? Because one of the items was higher IT activity, so mentioned as being one of the higher costs. Going forward, what could we see more in line with last year or with 2018 then? Thank you.
You have to help me a bit. Where do you pick up the EUR 54.9?
On page.
I'm sure we're talking on the.
Sorry. On page 16 from the press release
Same data. On the press release?
Yeah. Global operating costs increased by EUR 16 million - EUR 54.9 million.
I'm just trying to find where you are.
Page 19. Sorry.
This is the other box, if you want, which is not in the divisions, right? That's what you're looking at? I don't think we've given guidance on that. There have been some changes in allocations that you see going through these numbers. I think the best thing to do is to look at the quarterly phasing over the last four quarters. Then I would just do that, the rolling last four quarters each time, and then calibrate on that and see how that plays out. Each time you drop off one and you put the next one in, divide it by four, and I would, by lack of anything else, use that.
Right.
It's the best way to do these things, because otherwise we would have to dissect it in detail for you. It's a difficult one to read because there's also insurance going through this line, if I'm correct, yeah? The settlements mess this up, or the insurance claims, that's a very hard one to put your finger on. Therefore, I would do it like that, yeah.
All right. Thank you very much.
Thijs Berkelder, ABN AMRO. Three question topics. First, outlook. Secondly, dividend. Thirdly, potential divestments. On the outlook, I get quite a lot of questions from customers, specifically, what do you mean with significant growth in EBITDA in 2019? What is significant? Is the scale of mock? What is this, the 10%, 20%, 30%? What is significant? Secondly, occupancy rates. Can you give rough and dirty occupancy rates 2019 on average, on total, higher, equal or lower than in 2018? Thirdly, maybe some tax rate guidance for 2019.
What do we mean with significantly? What we use, in our mind, is we link it to the capacity messaging that we've given you. What we said is we would expand our capacity with 2.1 remaining in 2019, 1.1 in the last quarter. That has potential to contribute to the EBITDA, and we've translated that in significant. That's how we look at it, and that's relative to the 2018 performance. We're not going to interpret that beyond that, in terms of which bracket does that exactly sit. We think there's good potential from it, and it will absolutely depend on market conditions, currency exchange movements, and you name it. We qualify it at the same time. We link it to the capacity statement, Thijs. In terms of the tax rate, we had, what is it, 16.5% effective tax rate, 14.5% excluding exceptionals.
Is that correct?
16.5% last year, 14.5% this year.
Yeah. I think that's a good indicator. I would just pull that forward. The most moving part in there relative to the past was, A, we had the U.S. and the Belgium tax changes come in in 2018. Secondly, on account of, and that's a bit of a disturbance factor, on account of the Dutch tax changes, you revalue your deferred assets and deferred liabilities. That has a slight one-off effect in the tax rate that you've seen this year. I wouldn't get too excited about the effect on that. I would just carry it through. The biggest effect is, to be honest, is the composition of the portfolio and where we make our profit. If oil kicks up, it shifts the effective tax rate. I don't think this year is a bad indication, 16% or so. Yeah.
Occupancy?
Occupancy, well, maybe Eelco, do you want to say something about market dynamics?
Well, market dynamics, what you can expect has been mentioned in the presentation on the Capital Markets Day, Thijs. We use the words that we believe there is momentum possible in the oil market. I think that's where your answer is directed towards, because we've said that the industrial, the gas terminals are very stable, and the chemical terminals have indicated strong performance. I think it's really the oil where the concern has been for us in the last two years. We see momentum for several reasons, is most notably is that we are coming out of the period in which the IMO uncertainty has provided downward pressure on the forward curve of fuel oil. We've seen, obviously, fuel oil capacity diminished in the last two years.
We do see that with our program that we've invested the EUR 40 million and we've made some, let's say we guided you there, that we've rented out that capacity in Rotterdam with the two contracts which we were allowed to release. I feel confident about our fuel oil position in the major locations. Therefore, that gives a bit of momentum. The other thing is, and that is purely to see how oil markets will move in general, that we have a light contango, as you know, seen in one or two products, which always gives sort of a short-term relief, but we have to see whether that will continue in the remainder of the year. With that, I think if you look at how we view our position today compared to 2018, it's where the confidence comes from.
We haven't guided on where that number will fall for simple reasons that we will inform you on our performance as it falls. I hope that gives you a sense of where we believe the year will trend towards.
Maybe one supplement, Thijs, is on trying to get a handle on how 2019 plays out, the capacity that comes in. We've given you the, I think, even the quarterly phasing of the capacity in Capital Markets Day. That is also important that you bear that in mind, how the quarters will play out, and how that comes into the numbers. They get a bit of indicator of how that capacity will contribute and when.
Two effects there, Thijs. Sorry to add again to that. I think it's good. First of all, new capacity that comes in, so that you have in your status. There's also some capacity which is down today to prepare for the IMO conversion. What we see in the early parts of the year 2019, that we're taking more tanks out of service for the refitting, and they will come back again in the second half. I think that's what the full year effect will look like.
The new tanks will be on higher than average utilization rates or occupancy rates, I presume. Higher.
What we got is that we have high commercial occupancy for those tanks. You can assume that the industrial terminals are rented, and that's a given. There you see that also, let's say, the commercial momentum for renting out the third-party tanks is for us good. We've mentioned it.
In November, you changed the dividend policy. You lifted the ceiling of the dividend policy from 50%- 75%. There you more or less prepare the market, "Hey, guys. We are going to push dividend maybe up." Then I see now a 1 percentage point rise, still below the 50%. It's not that you lifted it to 75 in anticipation of an earnings downturn to be able to keep dividend flat. What would be the trigger to indeed, really pass the 50% hurdle?
I think it's well observed. It's not a defensive move in the sense of, "Oh, profits are not looking good, so I need a wider range." What we said is we'd like to have more flexibility in that range. As you know, we're investing EUR 1 billion in growth. Last time we met, the amount was EUR 950 million. We find good opportunity to spend our capital. Also, 2018 is a solid year. We, as Executive Board, are very pleased with the results, but it wasn't the best year either. We'd like to get on top of that. Nonetheless, also bearing in mind the context that you just described, we said, "Look, last year we kept the dividend the same. Market conditions are not dramatically different this year, but we do want to increase the dividend.
Otherwise, it's not living up to expectations. We do want to work our way through 2018 and 2019 to see how we further progress. I'm very pleased with the fact that we have increased the dividend. Our earnings per share trend was good. In fact, it was higher than 2017 by EUR 0.02 despite of the EBITDA being lower. That sits in the quality of the EBITDA. It's a bit technical, but it's the associates' income in the EBITDA line. If they are more dominant, you get the double effect in your earnings at the very bottom. At the same time, you have some tax movements below EBITDA that also came through well in the earnings per share. We feel good about it. We feel comfortable and happy with the restated dividend policy, and we'll see how that plays out.
To your last question, Thijs?
Related to the dividend, in the cash flow statement, you have a dividend received line of EUR 9 million. Is that the dividend you receive from your associates? Does it more or less mean that you're not receiving any dividend from your associates? Can you maybe explain why that is, what the reason is behind?
I think Laurens has the answer for this one because this is a specialized item related to Subtank. Is that correct?
This is SubTank, and in here is the dividend related from the
Okay. Yeah. In the cash flow from operating the growth line, the associates are in, but SubTank has a special accounting classification, so you see that separately.
Yeah.
Yeah. I wouldn't get too excited about that.
No, that's included in the growth.
Yeah.
Okay.
Finally, indeed, divestments. You are saying that Cooper is on schedule and in progress. That means that you still are looking at potentially selling all these terminals for a decent price. Otherwise, you wouldn't be on track, on schedule, I presume. Can you maybe now give us, having 2018 numbers
The combined EBITDA number for these terminals you have for sale.
I can be short on that, Thijs. Half year last year, we said during the midpoint of last year, we informed you we are doing a strategic review of those terminals, meaning up for consideration whether we would maintain them or sell them, depending on the valuation that we would obtain from outside parties, third parties. We said that within 6 - 12 months, we would give clarity and guidance on how that process was concluded. That means that we just passed six months, to my recollection. You can expect that we will give more guidance in the next six months to come. The answer is no, we are not giving any particular insights in the individual EBITDAs of those terminals.
Any other questions? Yeah.
Luuk van Beek, Degroof Petercam. First, a question about the cost level, which was relatively high in Q4, also when taking out the environmental costs. I think it's related to new projects and investments. Can you comment on the level to be expected for 2019 regarding pre-operating expenses and other growth-related costs?
The net of the moving parts was EUR 7 million in Q4. That included some personnel, HR-related costs, environmental cost embedded in that number. Also some IT costs, some NBD costs, also some revenues that offset that effect. The net was EUR 7 million. I think in the quarter before, we said it was not really noticeable in terms of numbers. The quarter before that we had EUR 4 million help. I think it's not unreasonable to assume ± EUR 5 million in those numbers. As you can only see from looking back three quarters, it does exactly that. Sometimes it's a positive, sometimes it's a negative. What we're trying to do is break them out for you to be helpful. It's very difficult to time those numbers in the year and say what happens in each quarter. They are one-off, non-recurring.
From that point of view, I have no indication that I can already share with you for 2019, other than it's likely that there will be costs like this and items like this. ± EUR 5 is a normal range. We'll see how it goes. As I said, insurance settlements is one of them. It's highly unpredictable when they fall.
Yes, on IMO 2020, tank operators have now basically made up their minds if they're installing scrubbers or not, at least most of them. Does that already bring some visibility on the return of the speculative demand for fuel storage?
I think we feel very good about our positioning in the market. I think the ship owners actually haven't quite closed their discussions. I think there's now also further discussion and Frits knows this better than me probably, on what type of scrubber. I think open loop or closed loop or hybrid loop. From that point of view, the market is still settling. What we know is that we have flexibility, facilities, blending, pumping speeds, the environmental equipment to handle. We think there will be very good return on that, what is in fact a marginal investment on existing capital. We also take out a significant amount of capital that was not yielding any return. I think we feel good about it, but maybe Frits has more to say on that.
No, not much more. I think in the major hubs, we are prepared to basically be able to handle multiple grades. With that flexibility, I think we can move with the market as required, pretty much irrespective of how precisely it pans out.
The final question is on the solar park you announced today, which is a bit of a deviation of the normal investments that you do. Can you explain why you did such a type of investment and give some rough indication of the size?
I'm happy to say a few words. As you know, Vopak is growing its business today. The heart of our strategy is to look at how we can move that portfolio to really facilitate consumer demands, not only for today, but more for the future. You've seen us investing early on in LNG. We're now the largest independent LNG provider globally with the recent acquisition in Pakistan. We are moving into industrial and chemicals, and you've seen also from the presentation, the portfolio presentation that we shared with you in Houston, is how we view how the world will change, both from a geographical point of view, as from a product point of view. That lies in the heart of our strategy today.
We are also aware that if you look beyond that, so if you look beyond the horizon. It is likely that the energy mix will change to more electrification, so more electricity. Currently, the total energy consumed is about 15% electricity, and there are several reports indicating it might go up to 30%. With that share of electricity, you need, first of all, alternative ways of producing that electricity, but also you need intermittence or storage of electricity one way or another. There you see several technologies that are interesting to follow. Obviously, hydrogen is one, flow batteries are one. You have CCS, obviously, which can be a helpful use if you want to produce blue hydrogen. Also the whole conversion from electricity to a liquid.
This was a unique opportunity, which was handed to us in Groningen, also by our own initiative, is that in Groningen, there's a lot of new renewables that are being developed there. The land was there available, and we wanted to develop a project also to really learn and understand what it's like to be part of producing electricity, green electricity, be part of a discussion on PPAs and so on. This offered for us an opportunity in Groningen, which we were happy to undertake with Groningen Seaports and WytHalen. We are in a joint venture structure there. How you should see this is this is not, let's say, a major capital allocation in sort of a new industry and that we're deviating from what we're really focusing on.
We do see this, and you can expect more of that within Vopak, is that we will try to see if we can partner within that supply chain of producing and storing and transporting energy in any which way or form, try to see if we can find connections globally, learn from that to see what models and ultimately opportunities might arise. This is where you should see that.
The amounts involved are not changing the investment levels. We've given you the ranges, the capacity you've seen in the announcement, 27 MW. If you step back the amount we allocate to innovation, and this is not innovation, this is not in the innovation box, but we have an amount of about EUR 10 million to spend in innovation. We don't always spend that because we need to feel the opportunity is the right opportunity. It's not big capital that goes into these positions, and this particular one is also quite efficient because it's on one of our existing sites.
That's clear. Thank you.
Andre, you had another question, maybe we should go to the callers as well, correct? Sorry?
We have four people on the line.
Andre, we go to.
Andre Mulder, Kepler. First question on your outlook. You said that it's mostly been driven by capacity growth, that's of course a mix of all kinds of activities. You got consolidated operations, got associates, got industrial terminals, got other terminals. Next to that, in the past, you also talked about pre-operating expenses. What kind of amount should we look for in that respect?
I think what you see is, for instance, in the recent commissioning, you see a little bit of a delay of the quarter and the revenue typically with commissioning. In terms of pre-operating expenses, what you typically see in the quarter before, you see some activity in terms of cleaning the tanks, the pipes, you name it, the site, and all sort of related costs. If you want to model something in for that, I would look in a number of couple of million for commissioning, but in terms of pre-operating expense.
You said you're going to take some tanks out related to IMO 2020. Can you give us any detail? How large would that be?
Maybe also on the cost question, Andre, I think the easiest way to look at cost for next year is to look at the disclosure that we made on our cost base for 2019. We said that including EUR 15 million additional cost on growth projects, we still expect in 2017 to not exceed the cost base of EUR 676 million, obviously subject to currency change. I think that gives you at least sort of an idea on where we want to manage the cost lines towards. I was so enthusiastic about talking about cost, and I forgot your second question, Andre.
It was about how much capacity you were converting.
Fuel. Yeah.
Therefore, was not available.
It was not available. You talked both in Singapore and in Rotterdam about several hundred thousand cubic meters at certain stages. Let's say, it's not insignificant the amount that we need to take out for a shorter period of time to convert.
That would basically be in the first half and then back again in the second half?
Correct. We said it in the second half of 2019, we've signed contracts
For fuel oil, low sulfur fuel for the IMO 2020. Expect to have that full program behind us, and by Q2, maybe a little bit more in Q3, but predominantly Q2 next year.
Last question on Ningbo. Why do you do that? Why do you increase it? Should we expect an exit now that you're almost a full owner of that thing? It also doesn't reconcile with the numbers that were given in the financial fact sheet.
What doesn't reconcile?
Here it says there's a stake of 37.5. If you add 35, I'm not going to arrive at 85.
Okay. Well, we'll check that, see whether there's a mistake in there. Why do we take the extra share? Essentially, because we can consolidate in that particular terminal, with a partner who wants to move on to do other things. It's a very effective way to increase our exposure in the terminal where we already have the skill set and the presence and the business contact. That type of opportunity, where you can expand in your own operation if you feel it fits is extremely good. The second best is typically, to buy your neighbor. This is already on your own site, so this type of opportunity is always attractive to consider.
I think the numbers are correct. I think we used to own 50% or 49% effectively or something. I think if you add the share, then it comes to 85. We'll check it. That's what we've been doing.
Okay, great. Let's move on to the analysts that have dialed in. Operator, can you go ahead, please?
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads. Now sent to the queue. Once your name's announced, you can ask your question. If your line's answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Dominic Edgeridge. Please go ahead. Your line is open.
Yeah. Hi there. Just a very quick question from myself. Obviously, you've been fairly active in terms of looking at new projects, expansions, et cetera. Obviously, making no assumptions on the strategic reviews that you currently have underway, can you just remind us to what level you're happy to get to in terms of leverage and how you think about the balance sheet going forward? Because obviously the net debt to EBITDA has risen quite a bit. Would you be wanting that to come down a bit before making any further investments? I suppose the second part of that question is, in terms of timings, if you were to look at things, projects you're looking at today, what sort of timing would we be looking at now? Would it be sort of 2020, 2021 realistically? Thanks so much.
Okay. On the financial framework, what we indicated is a typical range of 2.5%-3% . We're very comfortable to be outside that range, either below it or maybe above it if we see a way back into that range. What I mean we see a way back in, is that within reasonable amount of time, and managing the company as we should, that we can see the cash flow from the investment coming back into the company by which we can bring the balance sheet in the desired range. From that point of view, our desired range, it's not the absolute range, so we don't need to divest to invest, or to fulfill any other commitments. Moreover, if you look at our debt portfolio, we currently have an average debt tenor of seven years.
I think the interest rate is around 3%-4% on average. We have a subordinated debt facility which falls due by the end of 2019. If we were to replace that by funding under the revolver, then it counts in the debt to EBITDA. If we choose to enter into another subordinated debt or another instrument, it might not fall in the debt to EBITDA. There's degrees of freedom into how we fund our growth. That degrees of freedom allows us to move forward and consider where we place our capital without any needs to intervene, Dominic, in the way you indicated. The second [crosstalk] question I think was.
Just the timing. Yeah, timing of investments.
Sorry?
Just in terms of what would we be looking at in terms of the potential investments out there? I mean, realistically, are we looking at sort of 18-24 months in terms of before they would become operative, i.e., we've got a fairly good visibility now over 2019 and most of 2020, I'm assuming from your perspective?
Yeah. At the investment decisions, we said we see more opportunities. There's a very active funnel and portfolio that our commercial and strategic teams bring forward, and which is being discussed. Perhaps the better way to answer your question is for Frits to talk us a bit through the typical project execution cycle. Frits, is that okay?
Sure. Yeah, I think it depends a lot, of course, what type of opportunities they are. Obviously if we acquire something, it can be very quick. If it is on the other extreme, a greenfield project in a new area, there are areas where we have environmental permit procedures that take several years, just to get the environmental permit in place. In essence, there's a huge variance in it. If you had to use a typical number, I would say 18 months to two years between taking the final investment decision and seeing the revenue come in.
Okay. That's clear. Thank you very much.
Thank you. Our next question comes from the line of David Kerstens of Jefferies. Please go ahead, your line is open.
Thank you. Good morning, gentlemen. Also a question regarding the ramp-up of the new capacity and how quickly this will contribute. I understand you have indicated over the last year or so that you have high commercial coverage. I suspect that is different for different terminal types and that Pengerang will likely contribute almost immediately. Can you give an indication what this would be for the other terminals that are not industrial terminals? How long will it take before this capacity will actually start contributing, and when you have reached your desired occupancy rates? The second question regarding the downtime for the conversion of the fuel oil capacity. Is this now only starting, or did this already take place in the second half of 2018 as well, and therefore already reflected in your occupancy rate?
Would you expect occupancy rates to go down further first in the first half of this year? Maybe a question on IFRS 16. You're one of the few companies not talking about IFRS 16 at this stage, and I remember the guidance you gave at the Capital Markets Day. Is that what we should currently take into account? I think you also highlighted that that number could be revised based on material land leases that would be included, so the EUR 40 million-EUR 50 million impact on EBITDA, is that still relevant at this point? Maybe finally, regarding the scope of your project pipeline, I understand that the LNG terminal in Hamburg has a capacity of 8 billion m³ , 8 BCM. When comparing that to Gate, I recall, I think that was 12. Is that roughly the scope in terms of investment, Gate at EUR 1 billion?
Does it imply the Hamburg facility would be at around EUR 700 million in terms of investment with your partners, and how does this compare to the other projects that you have in your pipeline? I recall you said one to three in LNG and one to three in petrochemical. How would this fit in terms of size? Thank you very much.
That was it, David? I thought you were on a nice roll. We have four questions for you. Let me start out with the ramp-up capacity. Indeed, industrial will contribute right from the start. We indicated that on the other terminals, and obviously there are exceptions to the rule, but what you see is that again, the commercial coverage is high, meaning that already from the moment we commission those terminals, we have a good occupancy to start contributing to the bottom line of Vopak. I hope that gives you a sense of the confidence that we have. For fuel oil in Q4, the answer is no, it has not been taken. There will not be a major difference there. Reason being is that you know that we had relatively low occupancy on fuel oil tanks.
I think that you'll see that there will not be a substantial delta in your assumptions for Q4 going to Q1. On IFRS, I'm looking at Gerard, who is our IFRS master. He can give you insights in your question.
IFRS 16, we are totally ready for that. From that point of view, the indications we gave you earlier are still valid. You'll find more details on that in the annual report in Section 9.10, and you also see the operational lease commitments in the same annual report with the annual amount mentioned there in Section 9.6. Meanwhile, what the metrics we gave are not that different from what we gave at Capital Markets Day, apart from the liability. I think the liability we indicated slightly higher than what we now think it will be. We think it will be between EUR 650 and EUR 700, the debt, rather than I think about EUR 750 or so we gave at the Capital Markets Day. That has come down quite nicely. In terms of the EBITDA movement, well, as you know, it improves EBITDA to the range we indicated.
The net income will be, we said neutral to slightly negative. I think that's more or less the same. I expect that to be within the 0 to -10 range. Let's for ease of argument, take the middle of that - 5 in net income. Cash-wise, it is neither here nor there because the cash flows are exactly the same. It's a matter of how you present it. At Q1 we will do our level best to not confuse anyone and show the two numbers rather than one, then we can slowly all get used to what it means in terms of EBITDA.
Good. Frits?
LNG project cost. First of all, we don't disclose what the cost of Gate was. If you make the comparison that's based on your assumption of what Gate did cost. Secondly, I think we are indeed looking at building two world-scale tanks as opposed to three world-scale tanks that we have at Gate. That's one, I think, clear factor. The other factors, though, that do become important are that we still need jetty access and probably redundant jetty access, meaning that you don't want to be on just 1 foot and be dependent on that. Secondly, a key factor to keep in mind for the German project is that this also needs a significant pipeline to connect to the German grid. Those are some factors that we did not face quite the same in Gate.
Is that the largest LNG project in your pipeline? Where are the other two located?
Depending on how far ahead you look of the pipeline, the pipeline has got various things in it in terms of where we've made some progress. I would say the others are of first order, similar magnitude as the German one. The question though is whether our participation will be similar in them or not. In terms of projects, they're similar sized.
Yeah. Great. Thank you very much.
Thank you. Our next question comes from the line of Geert-Jan Mulder of ING. Please go ahead. Your line is open.
Yeah, good morning.
Hi.
Three questions, very short ones. Maybe you can elaborate on what's going on in India, where you have taken a charge. Maybe you can give me some idea about the settlement for Haiteng and how far you are and what time it still takes. With regard to IMO 2020, if you look at the developments with regard to the open loop scrubbers and all the things which are being banned by different countries, are you going to adjust that? Let me say, are you going to consider more investments in IMO 2020 given the developments of the market? Are you saying, okay, this is what we have done, this is our homework, and we are going to wait what's happening now?
Okay. Thanks for those questions, Geert-Jan. Starting with the last one is no, there are no additional investments considered. Looking at how the market is responding to our infrastructure, we are strengthened by our belief that we've made the right choices. That's an easy answer. On the settlement in Haiteng, I think that we want to leave that comment for now because I think that what we need to do first is to go through the motion with the respective customer. We do anticipate that the dialogue will take place in the year 2019 and be concluded within this calendar year. We will have to see if that statement can be sustained, pending developments. That is point number two. On India, quite frankly, I didn't understand. I didn't hear your question, I have to look at.
On India, the question is related to the charge we took, Geert-Jan, I think that's what you're referring to?
That is correct.
We had two opposite movements in asset valuations, one in Vietnam and one in India. In Vietnam, we had an impairment in the past and under IFRS, unlike International GAAP, in IFRS, if circumstances change you reverse. In Vietnam, the market conditions now justify bringing that asset back in. You have a reversal of an impairment in Vietnam. In India, the impairment is taken for a few on, well, the general description is market conditions, but more specifically also when we went into India, we acquired a set of tankage and capacity, and not all of that capacity has been progressed as we hoped in terms of permitting and you name it. Maybe Frits knows more of the detail of that. It essentially mean that full capacity is not yet active.
Therefore, in your valuation, you need to take a few on that and therefore you adjust your valuation. It's not a big amount. As it happens, the two effects are equal and opposite, so they more or less balance out and that's what's behind it.
Okay. Thank you.
Thank you. That was the final question from the phone, so I'll hand back to our speakers.
Thank you very much. Shall I just round it off here this morning? First of all, thanks, everyone, for joining us here physically today and joining us on the call. Very much appreciate it. As you know, for those who have been following us for quite a while, we set our sights on three things, that's find the best location to invest in, because we believe that choice ultimately dictates long-term margins, because that sets out the unique quality of your portfolio. The second thing you need to do, you need to be best in port. You need to run these terminals as safe and efficient and effective as you can. Then you need to be able to connect to your customers in the best possible way.
What I really like about the dialogue that we're having here today, that we have been entertaining the last few years, that we see clear proof points of us moving forward on those three strategic objectives. I think if you look at how we are shaping the portfolio into a network, which I think is really very competitive globally, both from a geography point of view, also from the spread in products point of view, then you see that we're investing and turning that network into something which is really very lasting for the desires of customers today. The second thing is that besides that platform on terminals, we're building what I think is quite a unique platform on our digital capabilities.
We've radiated that excitement, it's not part of our EUR 40 million cost savings today, but I think if you look at the possibilities that it will give us post-implementation, I think that also there, when it comes to operating our terminals best in port, we radiate confidence where we see momentum shifting our way as a strategic investor in the industry. Lastly is that we want to stay close to our customers, there are a few that are looking for further integration of oil and chemicals. They are looking for moving their LNG globally to find markets. I think the context that we have and the dialogue we're having with customers is also one that is widespread and unique.
We haven't mentioned it in our call, but I think if you look at our Net Promoter Score, which ended up, you can find it in the report, at 62- 63 for a B2B company. That is really unique. That means that also the efforts that we do by all the, let's say, thousands of people on a daily basis that perform these services are very well respected by our customers. I think what I'd like to end on is that we have seen the 2017 and 2018 results to be solid, but not to our liking yet. What you can expect in the year 2019 is that this Executive Board will work very hard again to deliver on the promise that we've given. That sums it up for my part.
Thank you very much for being here. We'll talk to each other again in the summer 2019. That's the next opportunity. In the meantime, for the first quarter, I think that you'll be again hosting a call for the Q1 results. Thank you very much. We'll see each other again.