Hello, and welcome to the Vopak Analyst Presentation for the 2018. Answer session. Sir, I'm very pleased to now pass you over to Lawrence. Lawrence, please begin.
Good morning and welcome to Vopak's Q2 and Half Year twenty eighteen Conference Call. My name is Laurence Raghaf, Head of Investor Relations. Today, our CEO, Ilkka Huxa and CFO, Gerard Pauldes will guide you through our latest results. Our COO, Fritz Ullink is here as well and will be available for questions during the Q and A session. We will refer to the half year 2018 analyst presentation, which you can follow on screen and download from our website.
A replay of the call will be made available afterwards. Before we start, Slide two, I would like to remind you of the forward looking statements. This disclaimer is applicable to the entire conference call, including Q and A session. With that, I will hand it over to Elko Hoekstra, who will start on Slide three of this presentation.
Thank you, Laurence. Very good morning, everyone, and thank you very much for joining us on this call. It's my pleasure to present to you the first half year results of 2018 here today. And I will turn my attention to Slide four. In short, I can provide the following highlights.
Financial results delivered in the 2018 are satisfactory given the market conditions to date. Foreign exchange movements adversely impacted our results. While corrected for FX, the EBITDA of the first half year was comparable to previous year in the same period. Cash flow from operations increased compared to prior year. Our efficiency program to support margin development has been delivered, and our cost saving targets for 2019 has increased to 40,000,000 We've successfully gone live with our digital terminal management system in Long Beach and Los Angeles.
And furthermore, we announced new growth projects in Merak in Indonesia and service improvement projects in Antwerp, Rotterdam and Singapore. Let's turn to Slide five for an update on our business environment. Starting with Oil Products. In 2017 and 2018, we experienced a soft short term market in the main oil hubs, Rotterdam, Fujairah and Singapore linked to the backwardation for most products. As mentioned before, Vopak's business is dependent on the price of oil and can be is not dependent on the price of oil, but can be influenced by it.
Our business is connecting supply and demand by facilitating structural product flows. And long term demand drivers for the hubs as we see are solid as oil consumption is on the rise in which we can facilitate further growth in the oil hubs. Although bunker demand continues to grow worldwide, the fuel storage market remains unsettled. Towards 2020, this market is being affected by the uncertainties regarding the IMO sulfur cap. We believe that most that more fuels will be handled and stored, requiring segregation and blending and effectively supporting the demand of our services.
So for that reason, we are improving our infrastructure such as our investment in Rotterdam to support the storage and handling of 0.5% very low sulfur fuel. Last on Oil Products. Fuel imports and distribution of clean petroleum products in major short markets continues to grow. Vopar keeps benefiting from the solid fundamentals in these markets. So our view on chemicals is positive.
We see a strong and growing demand for chemicals driven by cheap feedstock and strengthening of economies. The business environment for petrochemicals is good at this specific moment in time and specifically in The Middle East and The U. S. Due to cheap feedstock. Asia remains the key market for chemicals absorbing the majority of the world's exports.
And in Europe, the chemical industry regained confidence with steady increase in the demand for chemicals. And after years of rationalizations, several chemical companies recently announced investment plans in Europe, providing opportunities for Vopak. The biofuel market has been strong in 2018. Blended volumes of biofuels reached a four year high in Europe, although in The U. S, the biofuel markets markets remained volatile due to anticipated changes in government subsidies.
U. Vegetable oils in key markets like Brazil, Indonesia and India benefited from strong demand for vegetable oils, among others, as feedstock for biodiesel production. Turning to LNG. The strong growth in LNG imports in Asia continued in 2018. Growth for LNG demand is mainly driven by the power generation sector providing opportunities for new import LNG projects.
Global LPG trade further increased, supported by exports and continuing growth of the Asian Pacific residential and petrochemical end markets. We aspire to capture more growth in the LPG and LNG market. So to sum up, we see a healthy oil distribution, chemical and gas market driven by economic growth globally, whereas the oil markets at our hub locations is continued to be challenged. Now let me move on to some of the key figures on Slide six. EBITDA, excluding exceptional items, was €371,000,000 Adjusted for the adverse currency translation effects of €20,000,000 EBITDA was comparable to the results of the first half year in 2017.
We delivered a cash flow from operations of €341,000,000 supported by higher cash dividends from our joint ventures and associates. Our occupancy rate for our subsidiaries was 86%, explained by lower rented capacity at the hub terminals as a result of the continued less favorable oil market structure. Our global network is operating 36,000,000 cubic meters today, spread over 66 terminals in 25 countries. Towards the 2019, the projects under construction will add 3,200,000 cubic meters of storage capacity, of which 2,100,000 cubic meter will be added in Asia. Moving to Slide seven.
The execution of our strategy towards 2019 is well on track. Last year, we announced our strategic priorities with emphasis on growth and productivity improvement. Our capital allocation decisions are shifting our portfolio. I'll elaborate on that in the next disciplined in how we spend our sustaining CapEx as well CapEx on improving the service of our different assets. I'm pleased to announce that we've successfully gone live with our digital terminal management system in Long Beach and Los Angeles, marking the start of our global rollout.
The next implementation will take place at our terminal in Pengerang in Malaysia. And lastly, we increased our cost saving target for 2019 from EUR25 million to EUR40 million. So continuing with Slide eight for some of our portfolio developments of this quarter. I see a shift in our portfolio of terminals. Construction is progressing and new projects are being announced, fully in line with the focus on growing our portfolio in the four strategic terminal types.
In our hub terminals, the priority was to invest for the IMO twenty twenty bunker fuel regulations. I can state that our terminals in Fujairah, Rotterdam and Singapore will be fully ready to support new market requirements. Today, we announced the investment plans for Rotterdam, which are supported by customer commitments as of mid-twenty nineteen. In Saudi Arabia, together with our partners, we commissioned the last part of the industrial terminal of Chemtank. The construction of our new industrial terminal in Pengerang is progressing well, and first commissioning will take place by the end of this year.
Our business development efforts in gas terminals have seen excellent progress. We announced the entrance in the growing LNG market in Pakistan and the signing of two new joint ventures to develop LNG terminals in Germany and in China. And we've made substantial progress in strengthening our chemical storage position globally. Expansions in Houston and Rotterdam are progressing. And today, we announced that we will invest in a new jetty network.
Furthermore, we commenced a major service improvement project in Penduru in Singapore and as well an expansion of our terminal in Meraki, Indonesia. So in total, we currently have more than 3,000,000 cubic meters of capacity under construction. We find this a natural moment for a strategic review and test the market value of our terminals in Amsterdam and Tallinn. This review is in line with the focus of growing our portfolio in chemical and industrial terminals, gas and LNG terminals, distribution terminals in countries with a strict structural deficit and strengthening of our major hub locations. So allow me to summarize on Slide 10.
Vopak's performance and strategy execution is very well on track. Given market conditions to date, the results delivered are satisfactory. 2018 remains a difficult market that provides opportunities in the second half of the year. We will maintain our focus on both short term performance and long term value creation for shareholders and seize opportunities that are being created by the digital transformation and the energy transition. That's why it's important to stay focused on and dedicated to the execution of our strategy and continue building on our global network.
Moving on to the next part of this presentation, I would like to hand over to Gerard, who will explain more about the financial results for this year.
Thank you, Elko, and good morning to everyone. I will update you further on the financial performance. And for more details, I refer you to the half year report, which we've published this morning. So let's turn to Slide 12 on the summary financial performance. In the context of a challenging conditions in the oil markets in the first half of this year and adverse exchange rate movements, our half year 2018 financial performance was satisfactory with solid cash generation through cash flow from operations.
We continue to increase our investment towards 2019 with investments of €900,000,000 over the period 2017 to 2019 with main projects in Canada, Malaysia and South Africa. Our efficiency program to support margin development and reduce Vopak's future cost base has been delivered and the cost target for 2019 can now be increased to EUR 40,000,000. As I mentioned at Q1 for 2018 and 2019, our priority in fuel oil is to invest for IMO 2020 bunker fuel regulations. Our terminals in Fujairah, Rotterdam and Singapore will be fully ready to support the new market requirements in 2020 at the $40,000,000 investment we've mentioned earlier. Let me take you on the next slide through the half year results in a little bit more detail.
EBITDA of €371,000,000 adjusted for adverse currency translation effect of €20,000,000 was just below the prior year, about 1% lower. The Asia And Middle East division and the Europe And Africa Division reduced financial performance at the hub locations due to less favorable oil market structures, whereas our vegetable oil terminals and chemical distribution terminals continues to perform very strong. Similarly, our hub terminals in Houston performed very well. On the back of good business environment for petrochemicals in The U. S.
Gulf Coast. Results in The Americas were further supported by good businesses results in Mexico and Brazil. China and North Asia division improved our financial performance across all chemicals terminals. The industrial terminal in Haiteng in China restarted its operations in June, and we expect that our main customer will restart its production before the end of the year. This asset had not been operating since the 2015.
So it's a very
welcome development. Other operating expenses picked up due to higher costs related to insurance despite a good total cost performance on energy, procurement and savings from The return on capital employed for our business was delivered at 11.9%, and this reflects the diversified portfolio across different product market segments. Turning to the next slide to the divisional performance. Europe and Africa and Asia and Middle East in the second quarter saw a reduction in their occupancy mainly from the hub terminals. The chemicals and gas occupancy rates have been stable, which is also noticeable in the numbers of The Americas, China, North Asia and the LNG division.
Financial performance for these divisions remained strong even though the currency exchange rate, mainly the weak U. S. Dollar, impacted financial performance in Asia and The Americas. Continuing on the slide, Slide 15, where we will look at our second quarter EBITDA comparison compared to the previous quarter. We see a similar picture with strong performance of chemicals and gas.
The category others reflect the impact of higher costs for insurance and IT and intercompany allocations. Including the favorable settlement of legal and commercial positions in Australia this quarter, we benefited across the whole quarter to the extent of some EUR4 million from various items of a one off nature. Turning to Slide 16 for the cash flow. In the first half year, our gross cash flow from operations was over €340,000,000 which resulted in €150,000,000 free cash flow available for financing debt service and distributions. Our net debt stood at €1,700,000,000 resulting in a net debt to EBITDA ratio just below 2.2 for the June.
Solid cash flow from operations combined with financial flexibility in the balance sheet provides us with the position to invest in the portfolio and assets under construction. And this creates investment momentum towards 2019. We've extended our revolving credit facility with unchanged capacity and on similar conditions. For the remainder of 2018, no planned debt repayments are scheduled. Our balance sheet supports our growth.
Turning to investment on Slide 17. We break down our investment in growth investments and other investments. In the period 2017 to 2019, we will invest €900,000,000 in growth through CapEx in subsidiaries and equity injections in joint ventures and associates. In the last eighteen months, euros $245,000,000 has been spent and you will see an increase in investment in the coming eighteen months. We have access to further growth opportunities and our growth investment level might increase further once opportunities in our project funnel materialize.
Our other investments cover sustaining and service improvement CapEx as well as the €100,000,000 we invest in IT systems and technology. At this moment in time, we've spent about €350,000,000 in this category out of the total $850,000,000 that has been dedicated to this in the period 2017 to 2019. This number is unchanged from before, unlike the growth item which we've increased as I just mentioned. Budget for major service improvements projects like Panjuro and the roughly €40,000,000 investment in our fuel oil network, I mentioned earlier, are included in these amounts. Turning to fuel oil and our bunkering network on Slide Number 18.
As Ilkka already mentioned, our priority for this area is to invest in the IMO twenty twenty bunker fuel oil regulations and to convert capacity to the desired flexibility in cubic meters. Today, we announced our investment plans for Rotterdam. We will support a 0.05 very low sulfur fuel oils bunkering market and convert roughly 500,000 cubic meters of capacity to store and handle low sulfur fuel oil in Rotterdam. This investment is supported customer commitments and will be completed in the 2019. In Fujairah, we already converted the number of fuel oil tanks to clean petroleum products.
And as you know, we announced last quarter for Singapore at the Sbarrok Terminal that we're investing in 67,000 cubic meters of capacity for MGO to further strengthen our bunker position. So we've taken decisions to commit that €40,000,000 that I indicated earlier as investment and we're ready for that market. Turning to Slide 19 on subsequent and portfolio events. Events. First, pensions.
Pensions, we've treated as an exceptional item in pensions we will treat as an exceptional item in and we have some related entries in the first half of this year. Vopak has formalized the agreement relating to the new pension plan in The Netherlands and the new pension plan qualifies as a defined contribution plan under IAS 19. As from July, Vopak has the sole obligation to pay a contribution based on the percentage of the salaries. The total expected gain before tax from the release of the pension provision in the third quarter is €19,000,000 including a cash contribution to the Dutch pension fund of €18,000,000 in the same quarter. Euros 3,800,000.0 related to the pensions was recognized as an exceptional item in the first half of the year and reflects the difference between the IFRS defined benefit cost and the actual defined cash outflows for the period.
Our other subsequent event relates to growth projects and portfolio developments, which Ilkka already highlighted. But in addition, I would like to briefly address our position in Venezuela and our operations in Venezuela, which are mentioned in portfolio developments. The economic, social and political environment in which our terminal operates is deteriorating and inflation in Spain and Israelis heading to 1000000%. The increase in the speed of this deterioration triggers us to monitor our accounting position for this terminal and we will go through that exercise in the third quarter. Operations in Venezuela represent a small part or insignificant part of the group and the effects of the further devaluation of the Bolivar are limited.
Current net equity of Vopak in Venezuela is less than EUR 1,000,000 and operations continue. So as I said, our exposure is limited. But as you are aware, we have adjusted equity in the balance sheet relating to Venezuela over the various years and this has accumulated to a position in the balance sheet in net equity of EUR 47,000,000. As I said, the resulting net equity is only EUR 1,000,000, so the exposure is very limited. We will look again at this in the third quarter.
IFRS 16 then, Slide number 20, update on the treatment of leases. We have virtually completed the exercise to make the inventory of the lease portfolio and we will be ready in time for implementation for 2019. Previously, we indicated we expected a negative impact on the P and L and a positive impact on EBITDA. We now expect that the impact on P and L is neutral to positive and the impact on EBITDA remains positive as before. This is the result of the inventory of the lease contracts we have in our portfolio and the adoption of the modified retrospective approach for transitioning to IFRS 16.
As you know, IFRS 16 does not impact economics, it does not impact cash flow, it does not impact our debt covenants, it's an accounting adjustment which we will implement as per oneonetwenty nineteen. Turning to Slide number 21, which gives detail on non IFRS proportionate information. We provide
information on a comparable basis for subsidiaries, joint ventures and associates by means of proportionate consolidation based on the economic interest of Vopak in our entries in our entities. The non
IFRS proportionate proportionate information provides transparency in Vopak's underlying performance and cash flow generating capacity. Excluding Estonia and Hainan, the proportionate consolidated occupancy was 86% versus 91% in the 2017. Including these two terminals I just excluded, the occupancy rate 84% for the 2018. EBITDA, excluding exceptional items on a proportionate level amount to €410,000,000 let me turn to Slide 22 and recap a bit. Given the market conditions to date, the financial performance was satisfactory with solid CFFO.
We've investment and growth momentum towards 2019 and are making our fuel oil terminals fully ready to support new market requirements in 2020. Turning ahead to Slide 23 and looking ahead, let me close out this part of the prepared remarks before we show we go to Q and A. Our outlook for 2018 is unchanged from what we said before. 2018 is expected to be influenced by currency exchange movements of primarily the U. S.
Dollar and Singapore dollar and the currently less favorable oil market structure, impacting occupancy rates and price levels in the hub locations, but we also see opportunity. Given the current 3,200,000 cubic meter expansion program for 2019 with high commercial coverage and in conjunction with the ongoing cost efficiency delivery, Vopak has the potential to improve significantly improve the 2019 EBITDA, again subject to market conditions and currency exchange movements. Our efficiency program to support margin developments and reduce Popak's future cost base with at least €25,000,000 has been delivered and is increased to €40,000,000 To translate this, the cost base for 2019 at current exchange rates, including €15,000,000 additional cost for growth, is expected to be below the 2017 reported operating expenses of €670,000,000 This ends our prepared remarks, and we will now turn to Q and A, and I will hand back to the moderator to facilitate that.
Thank you And there'll be a brief pause while all the questions are being registered. Our first question is from the line of Dominic Edrich at UBS. Please go ahead. Your line is now open.
Hello there. Thanks for taking the question. So two for me, and apologies if you've answered them or if I didn't catch them during the presentation. But firstly, just to clarify, in terms of you're obviously talking about the unfavorable unfavorable oil market. Can you just say, have you seen any I know, obviously, we've been focusing on the fuel oil side of things.
Have you seen any expansion of that weakness into other product groups? Or is it still the same as where it was effectively the downturn in occupancy is just, let's say, an extension of the existing trend? And then the second question was on IMO 2020. Can you just discuss, obviously, there's been a lot of debate about what products are going to be available, whether how fungible these products are, what the oil companies are going to produce. Can just say in terms of how you've come to your decision, what sort of contract backing you have for that?
And are you do you see some splitting of your facilities between zero point five percent and three point five percent fuel oil? Or do you see yourselves shifting over to one product only? And how do you see that sort of happening in the market given, obviously, the splitting of the market will slightly complicate things logistically, I suspect? Okay.
Dominik, this is Ilkow. I'll address your question. If you look at the climate of we call unfavorable, let's say, circumstances to store, what we've seen in the last eighteen months or two years, we've seen, by and large, in the high ends, middle distillates and fuel oil, a higher pickup. So demand has been growing globally. And we've seen that the markets have been, let's say, a little bit tighter on supply.
So we've seen overall liquidity diminishing a bit at our terminals. And I think the most notable one is, for instance, fuel oil. We've seen sort of growing demand in fuel oil, but the amount of, let's say, molecules that were available were less. So there's been a bit of there was more tightness in that market as we've seen. I think there are early indicators, but no proof points yet that we might be changing into a new era.
And reason being is that on the demand side, you've seen interesting dynamics happening with, obviously, OPEC in The U. S. Predominantly delivering the products. And we'll get some, let's say, questions now about the market is how will sanctions impact the supply of oil post for November. And similarly, I think the question that hangs over the market is how will demand be affected possibly by the sanctions which have been imposed on the, let's say, both in The United States and China regimes.
I think that uncertainty, already what you see is that people are starting to position themselves for possibly changing, let's say, supply chains, changing logistics. And also there, we see early indicators of people taking new positions. This is both in the oil sectors and the chemical sector. So we see this as a higher level of volatility, which, by and large, supports the, let's say, possibilities for traders both in oil and chemicals to take positions. Having said that, I think it's hard to predict, so it's hard to see how that will play out.
I think a very good example is the IMO 2020 regulation. Again, there, what we see is that the relatively benign environment will be changed over by new regulations imposed. People will need to take positions on where they supply from and which markets they will deliver. And I'm encouraged to see that already we are signing contracts, and the one in Rotterdam is very, very clear, of approximately 5,000,000 cubes mid-twenty nineteen to start supplying fuel into that market. So long story short, no proof points yet judging from where we are today and what we have indicated in our results in Q2.
But we are therefore that's why we've said we see that this market will provide opportunities. So that's the story there. With IMO twenty twenty, I think what you find is that we've done an elaborate, what we call stress testing of our assets in the major locations for bunker fuels. Also, exactly to ask that question that you just raised is what type of fuels will be supplied at what price points and sort of what are the dynamics that we can expect in these different markets. And then the second question is which type of assets do we have to provide these services?
Our initial indications is that we expect that there will be a multiple of fuels supplied. I think that underscored by several shipping companies that have informed the market that they will stick to the 0.5% fuel oil, so the low sulfur fuel. Several shipping companies have announced that they will use scrubbers. I think what you see, and that's where we are preparing for, is mainly to have the ability at our terminals to segregate better than we did in the past and more, I would say. Second of all, to have the capability to blend more and basically provide a more sort of flexible pallet of services at our terminals.
And I think what we can say today with confidence is that we have sort of completed our review. We've taken the initiatives to invest a total amount of approximately €40,000,000 And we have quite high level of confidence that we can that we are ready and equipped for the markets to come. Our
next question is over the line of David Kersten at Jefferies. Three
questions, please. First of all, regarding your contract portfolio in fuel oil storage, can you indicate how much is now spot and how much is still on the long term contracts that and how long you think it will take before they have moved to spot business? In other words, when do you expect the downward trend in occupancy rates to bottom out and perhaps at what type of level? Then secondly, regarding your repositioning of fuel oil storage capacity, you said you have now allocated the €40,000,000 in expansion CapEx to projects in Rotterdam and Singapore and Fujairah. Can you give an indication how much of the I think it was 4,000,000 cubic meters of fuel oil storage capacity, excluding Estonia, will be suitable for low sulfur fuel?
And how much is still 40 stores of high sulfur fuel? And would you expect that, that mix could change further and that there will be incremental CapEx required in the longer term? And then finally, on the cost development. I think Gerard mentioned in the call earlier that there was a EUR 4,000,000 positive impact from one offs on your cost base. I think you highlighted in the Q1 call, that was around EUR 10,000,000 and that will reverse in coming quarters.
How do you see cost phasing into the second half of the year? Well,
to answer your first two questions, David, and then Gerd will take the third one. Again, on fuel, I think we are not commenting on our mix of spot contracts and long term contracts. That's for a reason that we've explained to you previously. What I can say, and I hope that that's the sentiment that you feel, is that we see that the confidence in fuel oil is increasing because people are taking positions, let's say, in 2019. And we've seen that there has been a, let's say, short term backwardation has been reversed into contango in current state, at current markets.
I'm sure that you've read that we've seen that the stock taking in fuel oil after, let's say, two point five years of consecutive two point five years almost of steady decline is we see again that stocks for the first time have started to rise again globally. So that's not a Vopak statement but a global statement. So it's too early to tell, again, whether we've seen the bottom, but I do see indications and there are signals for the market to firm up a bit from our point of view.
And then in terms of capacity breakdown, high sulfur, low sulfur?
There, again, a very generic answer. I think if you look at the total demand for the total production of high and low sulfur fuel, there's still
a mix
of, let's say, which favors the high sulfur fuel oil. If you look at the total production and what we've done as Vopak is that we've made a, through our stress testing, a very good estimate of how much of that low sulfur fuel oil will move to which markets because of demand particularly falling in certain ports. So we've emulated, let's say, total production and demand in different locations.
So the €40,000,000 is sufficient for now?
Think that the €40,000,000 that's the metric We that you need to think that with €40,000,000 in converting, that's very we've done three We've expanded VGO in Singapore, so to be able to handle more marine diesel. We have, let's say, converted in Fujairah tanks from fuel oil to also clean crude oil and products. And we have moved Rotterdam and investment to be able to segregate better and move low sulfur fuel oil in. And we believe that we are now equipped and very ready to address the market demands that will start to become very visible mid-twenty nineteen.
Okay. So the capital allocation of €40,000,000 has already been addressed. That is what we need and that is sufficient. In terms of phasing of one offs and how does that play out in the rest of the year? Of course, that's always a difficult one to predict.
What I can clarify is what happened in the first half of the year. You're correct, we had a underlying aggregate position where we had approximately 4,000,000 support in the numbers. If you add it all up, it is an aggregate of multiple items about eight items in total that make up that number. We didn't have a specific item mentioned in Q1. We did that spending in Q1 was relatively light to start the year relative to how the rest of the year will play out.
So there was a bit of a pickup in that anticipated with the statements at Q1. But let's not confuse the two. One is a statement on operating cost, which is the lines you can find in our P and L and personnel expenses and other operating expenses. The non recurring comment, the plus four is across multiple items in our P and L ranging from cost to other operating income to other line items. So the plus 4,000,000 is not a cost item only, David.
Okay, great. Thank you very much.
We are now over to the line of Albert Prehner at Kempen and Co. Please go ahead, Albert. Your line is now open.
Thank you. Thank you, gentlemen. I was wondering, as you indicated, market circumstances in oil and fuel oil will continue to be difficult. And if you then look at the quarter on quarter developments of occupancy levels, mainly in Europe and Middle East, should we then expect towards year end to reach, let's say, the low 80s? Can you please share with us whether there are any measures you can take in order to slow this trend down and whether you see a pickup in contracts?
Then on the €40,000,000 investment, just something technical. Is this CapEx included in other investments, in growth investments? Or is it additional CapEx on top of the range you guided for? And then I think my last question for now. With regards to the efficiency program, in what fields do you expect to realize the additional EUR 15,000,000 worth of cost savings next year?
Thank you.
Okay. Let's first deal with the CapEx one. Is it additional and in which categories does it fall? It's not additional. It's absorbed in the numbers that I gave in terms of gross CapEx and in terms of service and sustain CapEx.
It's a little bit spread across the different categories, but the substantial part is in surface and sustain. In terms of the was it, the EUR 15,000,000? Which EUR 15,000,000 was that? Can you repeat that question?
Yes. Sure, sure, sure. You indicate that you will increase the benefits of your efficiency program from EUR 25,000,000 to 40,000,000. And I was wondering where you expect to realize those additional EUR 15,000,000 worth of cost savings?
Okay. So we have a program which is started at EUR 25,000,000. We've now increased it to EUR 40 The easiest way to translate that into where are the real numbers going to be is I've made the reference to how will we operate our company in 2019 at what cost level. So what's the cost level that results after we've completed the €40,000,000 And that cost level we said will be below the cost level that we operated at in 2017, which is EUR676 million. Now included in that 2019 operating cost number, however, is also the new capacity.
So our cost programs allowing us to absorb that new capacity and operate the company at the same level as we did the company in 2017 and that is $676,000,000 Now where We have a manager senior manager partly dedicated to this program. He looks at all the terminals individually and then in aggregate and then shares best practice across the terminals. This may range from energy management to smaller items, how to operate the terminal, but
it
also for instance, do we have a head office and corporate center which is fit for purpose. So it falls in all categories of our company. Most perhaps noticeable cost impact was also the pension arrangements that we have changed for The Netherlands. Now we've come to a very satisfactory outcome, is both beneficial to the employees and to the company. It will also impact our cost levels going forward and that's been absorbed in these numbers that I just gave you.
I don't know Fritz, do you want to mention any other operational cost items that you see in the terminals?
No, think you summarized it. It really goes across everything we do, I would say. So there is not an area that's exempted from this cost challenge. And wherever we see opportunities, we capture them.
Okay.
I think you had one more question, Kevin.
Yes, that is correct. I was wondering occupancy levels, especially in Europe and Middle East because if you follow the quarter on quarter trends, we'll be reaching roughly 80% occupancy in Europe. And I was wondering whether this is a realistic expectation and what kind of measures you're currently taking in order to slow the strength down.
Yes. Okay. Let me give a response on that. First of all, occupancy, of course, is a proxy Our real performance in 2018 year to date on our EBITDA at this lower occupancy is the same performance we actually did in 2017 at the much higher occupancy.
So we're taking measures in our cost management and our commercial focus to manage the effects of the lower occupancy. And on a like for like basis, as I said, the lower occupancy this half year did not follow through in our EBITDA because we kept that at the same level. Also our has been higher than a year ago. So our cash flow from ops is €330,000,000 and that is higher than what we generated in the first half of 'seventeen. And also our free cash flow is higher than what we generated in the 2017.
So we are managing that low occupancy quite well. That's hard work in a difficult market and that's why we call the outcome of all of that satisfactory. We almost don't get full benefits of all that effort because of the low market, but we're working hard to achieve it. In terms of outlook of occupancy, we don't give that guidance on outlook. As Ilkro said, 'seventeen, 'eighteen has been difficult market, but we see opportunity now coming into our commercial discussions with customers that will follow through in the periods to come.
Great. Thank you, gents.
Okay. Before we go on to the next question, which is from Tag Helder of ABN AMRO. Sir Taj, over to you.
Yes. Thank you, guys, and congratulations with managing the cash flow so well. Three key questions. You're announcing an additional strategic review of the terminals in Algeciras, Amsterdam and Hamburg. Well, that's a combined more than €2,000,000 of capacity.
Potential proceeds, well, what shall we say, close to €1,000,000,000 What do you expect to really act upon? What is the strategic sense? And what are you planning to do with the proceeds? Secondly, in your slide show, you're still mentioning in the strategic review Hainan, but in the wording on the front page on the market value of the terminals, Hainan is no longer mentioned. Can you explain the reason why?
Thirdly, on the all of the new expansion projects, you again say high commercial coverage already signed up for. What do you exactly mean with high?
Okay. Guys,
on the strategic review, I'm going to have to take you back to our strategic intent. You know that we facilitate these flows on gas, chemicals and oil across the globe on products and particularly the liquids that we use every day. And I think these developments are subject to change over a longer period of time. And I think the strategic intent has always been a faux pas to find locations to invest in where we believe that the let's say, we can serve these markets best. It's a continuous process that we have, and you know that we have been going through several of these thought processes as well in past years.
Today, we have as well 3,000,000 cubic meters under construction. We have also a well, let's say, a well supported BD portfolio, which we mentioned a quarter ago. So we find it a natural moment to do this strategic review of Angi Ziros, Amsterdam, Hamburg and Tallinn and indeed test value. And what I can say is that this review is fully in line with basically the focus of growing our portfolio in these four strategic terminal types. So the announcement today is basically to mark and announce that we're making this review.
The fact that we haven't mentioned Hainan is, I think, if you look at the terminal from the strategic review, we have mentioned that in the slide, but I don't think there's any particular reason for that. You should not read anything into it. In the first quarter, we announced a strategic review of Hainan, and I think we now are just adding the ones that are there in
Europe. And the proceeds? Yes. What I can say about the I think the Hainan logic in our mind perhaps, Thijs, is that what we indicate is the strategic review for the four terminals you mentioned, including AOS or Tallinn. We did not mention Hainan.
The thing we said about these four terminals is also that we will go through a wider process of testing the market for the value of these assets. The Hainan process, which I will not go into detail for, is different from that. And that is why it is not mentioned in the same line. Otherwise, the fact that it's strategic review is fully applicable also to a high note. In terms of the proceeds, what Elko has indicated is, first of all, we start with strategy.
So what do we want to achieve? We want to manage our performance. We want to create value. We grow the company. We have an increased level of investment.
And we have quite a funnel, which is identified hopefully to create further growth and investment in the company. Our financial framework allows us to do that and we manage our balance sheet in such a way that we have flexibility and that we can actually execute what we want to execute at the moment that we want to execute it. And therefore, the market today for these assets also allows us to say, if we test the market for these assets and we don't like what we see, we can still perfectly execute our strategy. So if the value we see in the market is not to our liking, then we will take different decisions. In terms of if we do sell and we do get proceeds in for these assets, we will just put it
Our strategy is unchanged. Our financial framework is unchanged. Our fuel on the balance sheet is unchanged. And we will then consider that when we get to that point and take a look at what's in the funnel, what's on the balance sheet and how do we best deploy that to create shareholder value. I think that's the context in which you should look at it.
You will appreciate I will not comment on the valuation you put on the table just a few minutes ago. I will leave that to the market to play out and see where that takes us. In terms of the commercial confidence in the expansion and more generally how comfortable are we about 2019, I think we probably are more comfortable than what we were at year end 2017 and at Q1. That's simply because the capital allocation, the spending, the progress on the ground for these assets is going very well. The project execution, the capital, the hardware and maybe Fritz wants to say something about that from a project execution point of commercially, we are confident that we will bring good value from these assets to the shareholders with that 3,200,000.0 cubes.
The one thing we do not control is the market in terms of market conditions and currency exchange movements. But overall, our statement is solid. We see upside in 2019 from the capacity. We see opportunity in 2018. We've managed our cash flow twenty eighteen year to date, free cash flow and cash flow from ops.
Thanks for recognizing that by the way, that's appreciated. And we're fighting hard to keep the EBITDA at a good level. Now it may be worthwhile if Fritz can say something about project execution.
Well, I think Sjerd has summarized it very well. I think on all the key projects so far, progress on the ground is good. And as we said to you, commercial coverage to begin with was good and has remained good. So we're there's, I would say, no clouds on the horizon at this stage that we can see. But obviously, some of these projects will only come to their final operation next year.
So there's always the possibility of adverse things happening in the meantime. But the outlook is gives us every reason to be confident at this stage.
Okay. Good to hear. And also good to see that your most important are back on the rise again.
Okay, thanks. Yes, that's the bit we don't control. That happens as it happens. We do, of course, manage the balance sheet from a currency exposure point of view. We take a few on the exposure we want to run-in our equities and the movements of our total balance sheet in terms of capacity.
But on the P and L, the translation effect, it just happens as it happens, yes.
Okay. We have a further question, and that is over to the line of Grain Malde at ING. A
couple of questions on the strategic review and the three terminals being added to the list. First, on Hamburg. If I remember and going back in the past with regard to Gothenburg, there were considerations to build an LNG terminal. But when you stepped out of Gothenburg because of the, let me say, the weak storage terminals there, you also the consequence not to step into the LNG. With regard to Hamburg, you did an re haul, I think, in a couple of years ago with changing of with Tupac, etcetera.
You are now considering an LNG terminal. So what is the background to step out of Hamburg with regard to oil and not and to go forward with regard to the LNG? My second question is on Amsterdam. This is probably one of the best terminals you have with regard to utilization. And of course, with regards to the position of your gasoline because you did a strategic investment in 2008 and you started them in 2011, 2012 with regard to Amsterdam in order to make good returns, and I think you
have done. So what's the
reason to step out there? And Algeciras was part of your strategic review in the last couple of years with regard to have a bigger position in the middle in the Mediterranean, and dealer was excellent position. So maybe you can elaborate on that on these strategic terminals. And certainly, in respect of other terminals elsewhere in the world, like in Latin America, which are much smaller than these ones?
On a general comment, Gerdin, thanks for asking those questions. We think it's too early to engage in a dialogue on this. I think let us first conduct the strategic review. I think that we have a lot of issues to be considered. So we first go through the process, which we think will take approximately six months to complete, and then we'll more than happy to engage in a dialogue on that.
We can make a few comments on LNG, which I think Fritz will make.
Yes. Thanks, Hugo. Yes. Grant, thanks for your bringing up the LNG. I think important to note that although we call it the LNG Terminal Hamburg, it is not expected to be located at the site of our existing terminal.
In fact, there are several sites we have in mind, none of them are there simply because that is too far in the inner port of Hamburg to be practical for LNG usage. So we remain fully committed to the Hamburg LNG project irrespective of what may or may not happen to our Hamburg terminal because let's not get ahead of ourselves there. There is not a decision yet to divest that. It's just a strategic review at this stage. So where is it different from Gothenburg?
Maybe to also explain that. The Hamburg LNG terminal we have in mind would be significantly feeding into the general German gas system and effectively be utilizing and supporting German power production and general gas usage. On top of that, it could play a role in bunker fuels, but I think in terms of quantity that would be substantially less so than the general supply of gas, whereas in Gothenburg, bunkering was a significant part of the throughput of that terminal. And also there was a strong site synergy there, which as I explained is not the case in Hamburg. So there is a difference.
Let me round this off. Just on LNG, there's more developments in LNG that we're actually very pleased with. We've signed the agreement to enter into the JV in Pakistan that will be completing towards the end of the year and then contribute in 2019. That's very pleasing development. The joint venture agreement in Germany and a joint venture agreement in China.
And in China, it is at one of our existing terminals have been signed in the course of the first half year of twenty eighteen. So we're making a good headway in LNG. And more generally, the comment perhaps on Hamburg, on Amsterdam, on Algeciras, I'd like to make is that, yes, these are actually good assets. It's a question of who's the best owner of these assets given the strategy of the company. Given the strategy of the company, we think the timing is right to test the market value of these assets.
So we will do exactly that. If these assets turn out to be valued by the market in a way that compels us to sell, we will sell. If we feel the market is not right, then we are perfectly happy to keep these assets for the same strategic reasons as we currently have our strategy. But we do think the time is right to test that market value. And I think that's how you should think about it.
These are perfectly good assets in terms of their positioning as such.
Thank you.
We have a further question from the line of Andre Mulder at Kepler. Still
a bit of confusion on the strategic market ratio. On the other hand, you're saying, well, maybe it's better to look for a new owner. On the other hand, you would like to keep them. Has anything changed in terms of, let's say, structural profitability of these terminals? And the remaining question, of course, is why these terminals and why others not?
Second question is on the €15,000,000 mentioned in the outlook, euros 15,000,000 related to growth projects. Should we translate that in pre operating expenses? I can hardly believe that that is the number that will be related to the expansions in 2019. It seems a bit low.
It's not pre operating. It's operating expenses related to growth projects that we've identified. That's the first comment. Perhaps on the first question is we will not go into a different position than what Ilkorn has already explained. We are comfortable with our strategy.
Our strategy is unchanged. We focus on four terminal types. We think the moment is right to test the market for these four assets and we will see where that takes us.
The market would very much like to know why these are on the list. Can you give any explanation there? Why not now? And why would you be able to do that in six months?
Well, we will take six to twelve months to get the answer to that question and then we will act accordingly.
Okay. Thanks. Okay. As there are no further questions, can I please pass it back to you for any closing comments at this stage?
Well, just last word from me before I pass it on to Laurence to close it. Once again, thank you very much for being with us here today and giving us the opportunity to comment on the results of 2018, the first half year. And I think that I think I hope that what remains as sort of a final thought in this comment is that we believe that our short term performance and our long term strategy is well on track and that 2008 remains a difficult market, what you've seen in Q2, but it does provide opportunities in the months and the years to come. So, Laurence, please. Thank you very much for listening.
Note that our next event will be the publication of the third quarter scheduled at the November 5, following by the Capital Markets Day November. Thank you
for listening in. Goodbye. This now concludes today's session. Thank you all very much for attending, and you can now disconnect.