Good morning to everybody here and welcome to the viewers online. Welcome to the presentation of Vopak's Half Year twenty sixteen Results. With us here today is our Chairman of the Executive Board and CEO, Ilkka Oksra our Vice Chairman of the Executive Board and CFO, Jack DeCray and our CEO, Fritz Aldrin. After this presentation, there will be an opportunity to ask questions, first by the analysts present with us and thereafter by the analysts dialing in. This presentation will be available afterwards at Vopak's website.
Prior to the start of this presentation, I would like to call attention to our forward looking statements applicable to all information shared with you today. And now I would like to give the floor to Ilkka Hoekstra.
Thank you, Hugh. Thank you everyone for being here this morning. A warm welcome in Rotterdam for the presentation of our half year results for the year 2016. I stand in front of you confident about the results that we've achieved and we had some solid results financially. We had a good operational performance judging from our safety statistics.
We have a strong balance sheet and we feel encouraged to further pursue the strategic agenda that Vobrik has set as the largest independent tank storage company. If you look at the first half year of 2016, there are a few highlights that I'd like to share with you here today and a few effects on our results that give you guidance on how well the company is performing in this particular year. Very noticeable has been the effects of the DES investments and the divested terminals of both The UK and Japan. We've completed the program that we've set in 2014, which we said we would roughly divest about 15 terminals by the 2016. And with that, if you judge the results that we have achieved in the first half years, both on revenues, where if you would look at the numbers which are presented today, would see a 3% decrease.
This number has been influenced by the divestment of The UK and Japan. If you would take into consideration, the company would have seen an improvement of revenues of 4%. Equally, if you look at the EBITDA number, excluding the exceptionals, you will see that we have achieved a 3% increase. But if you would adjust that for the divestments, we would have presented a 7% increase, which underlines the improved performance and the improved business climate. The total worldwide capacity have seen a decrease of 0.7%, again mainly as an influence of the divestment of the terminals.
And to look at the overall environment, we mentioned to you that we would operate our network above the 90% and we're well above that figure with 94% globally. So that underlines the overall environment in which we have been operating. And lastly, important for us is always to judge how we perform our business and that is particularly given in our operating capabilities and our service capabilities. And I'm happy to tell you here today that we had good control over the assets and have improved on our safety statistics. So this sets the scene for the first half year twenty sixteen.
If you look at what factors influence our results, then there are three particular areas which I'd like to highlight. One I already mentioned, and I can deal with that relatively quickly, is the effect of the changing capacity of most notably the divestments in Japan and The UK, which has resulted in a smaller total base capacity that we have operated. If you look at the geopolitical and economic events, there are few that had an influence on our results. Very notably has been the effects of the deteriorated geopolitical relations between Estonia and Russia. Our terminal in Estonia has seen the effects of less rail volume being allotted to Estonia, which has seen a sharp deterioration of that environment in the year 2016 and the first half of it.
Secondly, what has had an effect has been the low oil price and that speaks to mind is that also the OPEC members have not been able to come to a conclusion on how to improve the price level of oil. And that has resulted in a continued low oil price environment with a lot of refining capacity onto market and a lot of liquidity. Thirdly, what had an effect in the first half has been the China environment, which we saw the effects of in 2015, which has continued to play a role in 2016, in which the transformation of the Chinese economy and the relative balance of import and exports has deteriorated our position there. And lastly, the returning of Iran to the world stage in oil production and oil trade has been an area which is closely followed by many. And although we've seen that 1,000,000 barrels more have been coming to the markets in the first half year, the actual visible effects to Vopak have been still relatively modest.
And lastly, if you look at the safety and legislation considerations, I'd like to highlight that because of incidents that we've seen, industrial incidents, particularly in China, the regulatory environment has sharpened and it takes much more effort ultimately to get permits renewed and it also creates a bit of unclarity on how permits are renewed and therefore we've seen that we spend a lot of time on this particular subject. We wholeheartedly applaud the further stringent regulations because we believe that a good regulatory environment is clear, but it leads to a onetime sort of renewal process, which is ultimately something we follow clearly and we have had the opportunity to manage throughout the first half of the year. So in short, changes in our infrastructure and the overall portfolio second of all, certain elements which has, particularly in certain terminals, led to a positive or a negative effect on how much demand there was in our tanks and lastly, the regulatory environment which has led to us managing that process diligently and has spent a lot of our time. So if I would summarize this in hard numbers, 2% decrease in our terminal network, 33,600,000 cubic meters that we are operating revenues 3% lower, taking into consideration the divestment occupancy rate strong improvement of our occupancy across the board and lastly, an EBITDA of €421,000,000 which is a 3% improvement compared to the 2015.
I mentioned it before, safety indicators. I'd like to spend some time on that because I think it's crucial to see the level of control we have over operations. I'm very pleased to see that all the investments in infrastructure, in processes and in people once again has paid off. We've seen that there has been a substantial improvement in our personal safety record. Again, we've seen that the amount of incidents and the severity of the incidents has been low.
So that strengthens us in our belief that if you want to be the world operator in independent storage, you need to demonstrate that you are the best operator when it comes to safety, service and cost. Again, also if you look at the personal or the process incidents, again, we've seen that we've had sort of a stable environment. Last year, the 2015 was exceptional. So I'm glad to report that we've seen the first half of the year also the way that we've controlled our processes was within expectations. So that strengthens us in the ability to serve our customers.
A few highlights on product developments. I alluded to that in the early parts. The oil price and the gas price has been low and that had an effect on how the markets have responded to that. First of all, if you look at the crude and oil products, a bit of volatility, particularly with a low oil price, has resulted in the fact that you've seen that the investments in the E and P have been lower than historically, but similarly we've seen that the profitability in refining has been solid. Refining margins have which were high in the 2015 has continued in the early parts of 2016 and we've seen a lot of product moves in two markets.
We've seen demand in oil going up slightly, of which 50% was taken up by China and India. And as such, we've seen that the overall demand in oil products continued and we have been able to benefit from those movements whereby liquidity was there, movements were there and storage was required ultimately to connect these markets. So a relatively positive view on the crude oil markets and oil product markets. Similarly, the low oil price what we've seen in LNG had an effect and has an effect on how these markets are trying to find to balance supply and demand. We've seen that the first volume and production of LNG in Australia and America is either coming to market or anticipated shortly to come to market.
We've seen that there is more liquidity on LNG coming into the system and as such governments and companies alike are trying to find end markets to sell this LNG into. So there we've seen that also the short term tradability and flexibility is something which is a reality of today. Chemicals and gases, the effect there is also because the low oil price we've seen in the naphtha price, so the feedstock for chemicals has been relatively short or relatively cheap compared to previous years and as such the ability to produce chemicals has been relatively positive. Similarly, we've seen that the operating occupancy of how much chemicals are being produced has increased, so a lot of more product has come to market. So there we've seen a slightly negative effect where in certain markets there was an oversupply of availability of chemicals.
So there has been a positive effect and a negative effect, which has been rebalancing the market slightly. But overall, we have a long term positive view on chemicals for simple reason that population growth, further economic prosperity and urbanization will drive demand for chemicals in the future. Lastly, two effects on vegils and biofuels. On vegils, what we've seen in effect in the first half year is stock taking by several traders and producers because they believe that the El Nino effect would harm production and crops. So we benefited from that in several locations in the world.
And if you look at the biofuels markets, we've seen a fairly stable demand for biofuels, both for ethanol and for diesel sorry, for biodiesel. And also there, we have continuously fine tuned our assets to ensure that if demand was there, we benefited from it. So a relatively stable and a relatively good environment for us in 2016 to operate in. So this has been the market in which we had to find our way and to operate to our best ability. If I look at the if I translate that over environment into how we have operated in the different geographies, we see a few differences but not stark changes to how we ended 2015.
The Netherlands improved its performance, ended up with 96% occupancy which underlines the demand for tanks in Rotterdam, either to export products from the European continent or to import products into the European continent has had a good environment in 2016 in the early part. We've seen that across all products occupancy has increased with the exception of LPG for the simple reason that LPG and naphtha and the dependability because of the low price environment is not as sharp as it used to be, so therefore the opportunities for propane to substitute naphtha have been slightly limited. So overall positive story on how we've operated in The Netherlands. I go to EMEA. 95% occupancy.
Again, the demand for transport fuels, whether it's for maritime purposes or diesel in certain locations has been solid. Demand for chemicals has been solid. Imports of chemicals into Belgium for distribution within Europe. So we've seen a fairly stable environment, but the only exception has been the joint venture that we've operated in Estonia whereby we've been hindered by rail transport, which was alluded to previously. Asia, Asia, 92% occupancy, improvement from previous quarters.
What we've seen is that because of the availability of oil products, either refining in China or refining in The Middle East and further demand in Southeast Asia has seen also Singapore oil environment improving compared to the quarters before. Remains a slightly tougher environment in China, not for the industrial terminals, particularly for the distribution terminals where a lot of capacity has been added and whereby Volpak has to work very hard to obtain the loyalty of its customers and to ensure that occupancy remains high. Americas, 92 occupancy, a solid improvement across both North and South. America, we've seen that distribution of fuels has increased. We've seen edible oils, very stable environment and obviously our assets in North America, which is predominantly related to chemicals, has seen a very stable environment.
So if you look at the business environment across the different geographies, we are strengthened in the fact that our network is performing according to customer demands. Besides having our strong network across the globe, we continually focus at safety, we continually focus at service, so the effectiveness of our business and we focus on efficiency, the cost to which we operate our business. I mentioned already alluded to safety already shortly. On effectiveness, also in the first half years, we worked exceptionally hard to improve our service levels. I'm happy to inform everyone here, for instance, that our investments in improving our fuel oil capabilities in the Europort are well underway.
So there are several investments that we're doing really to create that effectiveness at a higher level. So we believe that we are fitting our network towards better demands in the future as well. So that has been a continuous process whereby in the first half year we've booked some modest results. Pen efficiency, maintain your margins, a big issue, looking at your cost levels, looking at how you are able also to set prices within your network. We've had some good developments there and what you've seen is that we've been able to maintain our margins throughout the early parts of 2016.
So if we look at growth, you are well aware of already the projects which are currently under construction. So the two things which are highlights from the early parts of this year is first of all our expansion in Panama. We were already keen for many years to invest in Panama. We believe that the Panama Canal and the expansion will lead to additional volume that will go through the canal and will also lead to additional demand in fuels and particularly marine bunker fuels. The project was already decided on a few years back conceptually, but we needed to get the permits and the license within our possession to be able to actually construct and execute.
And I'm happy to tell you that we've been able to obtain those. So as a consequence, we will take over, first of all, operatorship of the existing terminal, which is 509,000 cubic meters, which is there for the importation of fuels into Panama. But in addition to that, it is our plan to build another 360,000 m3 in a second phase to be able to serve the markets for marine products in the Panama market. But it's an exciting development whereby this year we'll start the operatorship and in the 2018 we hope to
be able
to commission that large independent storage terminal in Panama. And the second thing is that we believe that also there will be growth of chemical manufacturing in North America. Because of the advantage in feedstock ethane as a gas compared to naphtha, the American industry is poised to become or increase its position as a major player in chemical manufacturing and therefore export of chemicals in the world. Our terminal is well positioned in the Houston Ship Channel and we anticipate to construct another 130,000 cubic meters there, which is a 12.5% growth of that facility to serve both our existing customers but also new customers that would like to export chemicals in that particular part of the world. And we're very happy that we can do that in the next few years.
So these are the two things which in the first half year have been decided to explore. If we all combine that, if you look at our growth projections, what you see is that we currently stand at 33.6 cubic meters and if you take the planned brownfield and greenfield projects that we have currently in our books, we should end up by the year 2019 at 38.1 cubic meters, of which obviously Pengerang is a major part. So to summarize, where I stand in front of you is that we are pleased with the financial results, a very strong performance if you look at how we've been able to monetize and capture the opportunities in the market. We have a strong balance sheet and we have control over how we perform. So we feel strengthened in our ability to pursue our strategic agenda and that is to look at which opportunities are there for Vopak in the next coming years in the four terminal categories, with its industrial terminals, chemical terminals for distribution and oil, with its industrial terminals and with its gas terminals and hub terminals to improve the position that we have.
So I would like to leave it here. I would like to give the floor to Jack DeCray, who will give you insight in the actual numbers and the figures. So thank you very much.
Good morning,
gentlemen and hopefully ladies on the line. Indeed, what we will try to do in the next twenty minutes also to allow sufficient time for questions is elaborate a bit more on the development of our financial performance to put that in the perspective as explained in the Q1 reporting, but also as explained during the Capital Markets Day in July. The topics I would like to address is indeed come back on the outlook, the key figures which we have been able to present in the first half year and how they in fact can be reconciled with this outlook. Capital management remains extremely critical in this capital intensive industry, the growth opportunities and the strategic priorities as reported in 2015 and 2014. Looking at the outlook, if you compare two years with respect to the reporting period H1, there are a number of developments which are critical in understanding the numbers we have been reporting and they can be oversimplified summarized as follows: positive developments, business developments supported by good occupancy rates, good margin developments, positive contributions by expansions and acquisitions, but of course in comparing it on a normalized level, we have to take into account the implications of divestments and foreign currency effect.
And that's the reason why in line with our Q1 outlook we have said, we are operating in a business environment under market circumstances where we are confident that we will be able to operate on a level exceeding the 90% occupancy rate and that takes into account of course management analysis of the likelihood and the opportunities to renew our contracts still progressing in the 2016. If we look at the individual components, we have seen that following the period 2013 and 2014 where we were operating slightly below the 90% occupancy rate for the reasons well explained in that period that we are now moving slightly in the playing field of above 90% with a performance of 94% in the first half year of 2016. And that means that taking into account the duration of contracts that more likely than not, although there might be slight changes, significant changes of course putting our company below 90% are almost impossible for this year. That means that we have a solid basis for our financial performance for the whole year of 2016. Looking at TEM, the derived financial performance indicators resulting from, on the one hand, of course, our global capacity which has been reduced slightly in the year 2016 as a result of the divestment program focused on sharpening and rationalizing our total portfolio.
And on the other hand, starting with new expansions, the combination of occupancy rates, the combination of EBITDA margin management has resulted in a slight drop of our revenues of 3% primarily due to the impact of the divestments because as said when normalized for the impact of divestments, the increase would be plus 4% EBITDA plus 3% as a result of that. If normalized for the impact of divestments, it would be plus 7% EBIT, 3% and net profit, 7%. As you might have seen and I come back on that later that when you compare the H1 net profit profit of 2016, then the 7% is more or less in line with what you might have thought looking at the other indicators. But you can also assume that if you look at the Q2 specifically then suddenly this pattern is distorted because we have the same net profit. There are specific reasons for that which we have explained in the half year report.
So, I will come back to that in more detail when we are dealing with the Q2 performance on a standalone basis. Looking at the total divestments because it has such an impact on the explanation on revenues and EBITDA, a quick summary of what we have been able to complete during the period 2015 and 2016. Total number 17 terminals capacity 2,600,000 cubic meter as a deduction on our total global capacity available for serving our customers and the total net cash proceeds $756,000,000 which has of course a positive impact on this moment on our net debt to EBITDA ratio providing sufficient headroom to fund our growth strategy going forward. If we look at the reconciliation with respect to the EBITDA performance of 3% and we take into account the factors negatively affecting this financial reporting number being the FX effect and the divestments, the total impact on that on a period to period comparison is almost €25,000,000 What you also see is that besides the positive contribution of new expansions that all geographic segments as identified according to our IFRS reporting have contributed positively to the EBITDA development and that results in a plus 3% increase compared to the same period.
One step further, if we look at the EPS development significantly affected of course by the total exceptional items which are equaling €200,000,000 We also have, let's say, explained that we have taken an impairment on our Estonian activities. The reason being is that we have seen such a disruption in the business environment as a result of which it's very difficult at this stage from a management point of view to give certainty about the future developments with respect to the railcar handling of fuel oil coming out of Russia and that means that one specific asset being goodwill had to be, let's say, reviewed again. If there is such an uncertainty under IFRS, if you cannot come up with a more than likely scenario that that will be recovered, you are required, of course, to recognize that particular impairment charge. So we have not impaired the underlying assets. We have impaired the goodwill which was created at the merger situation in 2007 because of the uncertainty reasons with respect to the disruption in the railcar handling flows with respect to fuel oil coming out of Russia.
All the others are familiar to you. So the totaling is €210,000,000 but of course in the comparison with respect to the EPS development, the net result development, it makes quite an impact. Another element I would like to, let's say, emphasize is the net finance costs. You can see that in the including excluding exceptional items that both amounts are equal. So in the notes we have provided in our half year report, we have explained why the net finance cost in Q2 and the first half year have increased compared to the previous year, but it doesn't include any items which we have classified as exceptional items.
First item is of course that we have renewed our revolver credit facility. That means that you also incur some cost, but the most important one in that particular comparison is the fact that we have redeemed the payment of an Asian private placement resulting in a make whole payment of around €4,400,000 which is included in the net finance cost, but not reported as an exceptional item. Then looking at the Q2 figures and that is the, let's say, the introduction to the reason why we report a 1% reduction of net profit in Q2. The reason is that if you look at the net financing costs that have been affected by two elements, if you compare both periods, then we had a lower amount of projects construction and that means that you have a lower amount of allocating interest expenses and capitalize them. But the second one was because of the redemption of the Asian PP with associated make whole payment, that's the reason why you see almost a comparable amount that if you would adjust that of course then the net profit would have increased compared to the previous period.
If you then look at the EBITDA margin development, capacity, occupancy rate and then EBITDA margin are in fact the critical drivers for our revenue development and EBITDA development and still going in the direction as aimed for by our Executive Board and contributing positively to the EBITDA development as well. Then taking the capital components more explicitly into account in looking at the total performance. In line with our previous periods, we are reporting three indicators all with different characteristics. The return on equity, of course, after interest, after tax, we are still operating above 15% return on equity and of course that will be adversely affected because of the divestments, the equity component will relatively increase from an accounting point of view. So, it depends slightly whether we are able to reallocate this operational cash flow available to new projects going forward.
The second one ROCE, return on capital employed, as we have been dealing with that in the last fifteen years is of course affected on the one hand by positive EBIT developments, on the other hand, the capital employed basis is adversely affected from an accounting point of view when you have an accelerated expansion program. So when that normalize, then normally you see that the return on capital employed will operate in a more balanced way and that's the reason why we also added the cash flow return on gross assets before interest but after tax. So it doesn't take into account any financing structure, but just the gross assets as we invest them and we are operating above the 10.3% around the 10.3% reflecting and that was one of the concerns, are we still able to attract profitable projects? And if you see the developments, I think that this reflects that we are still able to attract profitable projects because otherwise this would have been negatively affected as well at a certain point. So, all these indicators are very critical in our disciplined capital growth strategy.
Also take into account one other element of course and that is the sustaining and service improvement CapEx, which have to be intelligently, effectively and efficiently allocated as part of our total value creation journey we are currently making. Looking at proportionate information, long story short, just for information purposes to look at it from another angle because of the complexity of joint venture accounting under IFRS, but not giving any other, I would say, indication or signal that the way we operate our joint ventures from a strategic, operational and financial perspective would indicate that we are using completely different yardsticks, completely different thresholds in managing and aiming for strategic contributions to the whole success of our Vopak global portfolio. Disciplined selective growth, I think we touched based on it very extensively during our Capital Markets Day. We are not going to repeat it, but the only thing I want to emphasize is that we still continue to see profitable opportunities in all the four segments as we have been identifying in 2014 have been worked out in more detail in our global portfolio. The timing, however, is not as apparent maybe as many people would like so that we can give clear guidance on that.
And that means that it will be more step by step approach where we can indicate whether or not we can approve a project or whether we are going to build, yes or no. The announcements we have made, of course, in the last few months are the Panama project, which you were already familiar with. The intention as explained by Ilco to expand our Houston base, our Houston footprint with another 130,000 cubic meters and all the other projects on this overview are in fact starting to contribute positively in the future period like the Fujairah expansion on crude oil storage, the Durban expansion in South Africa. So it's a mixed bag of, let's say, successfully completed divestments to sharpen our portfolio in line with our strategic priorities secondly, to successfully construct new expansion opportunities with positive contributions to be expected in the coming period and thirdly, continuing identifying and also making investment decisions on new growth opportunities in line with our strategic priorities which means that we always try to balance the risk return profile of our total portfolio. If we then look at the total CapEx spend, no surprises over there.
Also no guidance yet as explained during our Capital Markets Day. We first would like to complete our budget cycle for the year 2016. We would like to look on all kind of innovation initiatives we have been taking, how we can benefit from that already in that period, yes or no. And then, of course, we will provide some guidance with respect to the operational free cash flow allocation with respect to expansion CapEx of approved projects, but also the other CapEx elements sustaining CapEx, but also service improvement CapEx and CapEx with respect to IT projects. The headroom, simple story.
The net debt to EBITDA ratio is now at 2.16 providing sufficient flexibility for funding our future growth. Two areas of attention as said, we decided because of the excess cash we had available as a result of the divestment on the one hand to completely redeem the revolver credit facility at that particular moment and at the same time renew the revolver credit facility for the coming five years. We are not using that yet at this moment. Operation free cash flow is sufficient to run our operation. At the same time, because we had this excess cash, we decided to do an early redemption payment of the Asian private placement, which would normally would have expired in the coming one point five years.
And as a result of that, as part of that mechanism, you have to pay a so called make whole payment of the net present value of the future fixed interest rates compared to the current interest rates. That amount is explained, has had an impact on Q2 of around €4,400,000 We are on track. As you can see, the divestment program is on track. We already explained during the Capital Markets Day that the original forecast for the almost three years period 2014 up to 2016 absorbing account an amount of around €800,000,000 of sustaining and improvement CapEx will be absolutely effectively will be reduced with €100,000,000 so we will end up below the €700,000,000 spent levels. We continue, of course, with our strategic growth focus on the four different areas as explained during our Capital Markets Day and we are well on track on the reduction of the cost base, although on the other hand, we are now increasing our cost spend with respect to innovation.
So, if you include that then on the net effect at the end of the year will of course be below €30,000,000 If you would exclude again the innovation, then we are well on track to achieve the original objective. If you take the objectives into account, which we defined in 2014, that was in fact a sharpening of our existing strategy, but also to illustrate that we can substantiate that with and validate that with specific targets on the different components. We want to have an efficient allocation of our capital. I think we demonstrated that with our focus on the reduction of the total sustaining and service improvement CapEx. The free cash flow generation has always been a very critical area in our strategy and that's the reason why we started to report at that particular moment also the free cash flow development with respect to our operations.
Sometimes you see a difference between the EBITDA development and the free cash flow operations and more likely than not that is very often explained in fact by the difference between net result development of joint ventures and the moment of dividend distribution. So if you start up for instance a new joint venture operation then you should assume that the first dividend payment coming from the joint venture is absolutely not immediately the first year. So that could provide a timing difference. Key takeaways, we have the impression that we have created a healthy basis for the remainder of the year because of the solid and healthy occupancy rate. The margin development is in line with our outlook and expectations.
We have created a solid financial position and we are on track with the execution of strategic priorities. And with that, I would like to ask the moderator to open up the floor for any questions you might have.
Thank you, Jack. We will now continue with the Q and A session. Please clearly state your name and the company you represent. We will start on this side.
Good morning, gentlemen. This is Thomas Kempen. A few questions from my side. First of all, why did you not give more confidence on the earnings for the rest of the year? Secondly, could you elaborate on Deer Park?
What will be the timeline of the development and construction? And do you have already any contracts in place? And thirdly, on the CapEx plan, when do you expect to finalize the business plans and when can we expect an update there exactly?
Okay. Thanks, Thomas. Well, first question, I believe we gave a lot of confidence for the second half of the year. I think we mentioned that we said that we would be above 90%. We're at 94% today.
Said that two things that you need to take into consideration is, first of all, the divestments. We've mentioned it in the outlook. Second thing you need to take into consideration is the foreign exchange effects. And we said that the let's say that we expect the markets to behave second half as in the first half. So I think that sufficient confidence has been displayed.
So that's point number one. Deer Park, for Deer Park, let's say we are taking a decision to expand our terminal. What remains is the permits and licensing process. So that's something that we are pursuing today. We hope that by the end of this year, we will be able to obtain those licenses and then you have the normal period of eighteen months to get it into market.
So an estimate I would say is two years from today. But again, I would like to repeat and I'm happy that this is taped, so we have the evidence that the one thing that we cannot really have in our grip is the licenses and permits. So that is our best guess that we have today. And then on CapEx, this may be either Jack or Fritz, if you have any particular thing to add to that to answer the question.
Not really. As we said, if you look at the total CapEx going forward, that's very much dependent on our sustaining CapEx program for the coming years. And what we explained during the Capital Markets Day, we feel that with all the master plans which we have been developing, On the other hand, the focus on smarter ways to even be more effective in maintenance while trying to spend less, that is ongoing. And we would like to combine everything in order to ensure that we can give an appropriate guidance instead of just a wide range. Then the expansion CapEx, of course, that is quite dependent on all the investment decisions we might take.
And the difficulty on that is and it's a repetition I understand. I realize that of the Capital Markets Day that the direction of opportunities is positive. We strongly believe based on a fundamental good analysis of the increasing need step by step of additional infrastructure allow us to make interesting and attractive investment decisions going forward, but that the timing of that is not as apparent. So, there might be in a one to three years period, we absolutely are unable to give you a realistic guidance on that and that's the reason why we reframe from that. So that is a bit to give you the bold perspective of what is might happen in the second half year.
No big surprises, of course, if we are not taking any investment decisions shortly with immediate impact. And for the remainder period, you give us some more time and we come back on that in the course of 2017.
Martin? Good morning. Martin Hendriev, NIBC. The first question, I know you already mentioned something about maintenance CapEx. But if you look at the annual run rate in 2016, it will probably be around €200,000,000 Is that something that we can assume going forward?
And then with regards to contract duration, normally you have a pie chart that depicts how that has developed. Starting the presentation, can you elaborate on that? What is the situation today? What are the changes? And the third question regards the provision for the Chinese joint venture, the €15,000,000 How many other guarantees do you have for JVs that could result in such a provision and therefore also a cash out?
Thank you.
Brigitte, Daniel? Yes. Will take
the I will start with the last one. Very specific situation where we are talking about a situation where indeed we had to provide an additional guarantee, which is normal practice if you have a situation where you are constructing the terminal. Non recourse financing is never possible when you are constructing the terminal. In this situation, we are considering a divestment and that means that at that particular point, you have to judge whether or not you are successful in the divestment, yes or no, and whether or not this guarantee has to be paid, yes or no. Because of the enormous uncertainties around it, you get a conflict with the IFRS perspective which says no, we need absolutely a scenario from you as management where you can say that it's more likely than not that you are successful in a short timeframe.
That is quite conflicting and that's the reason why you see the fine wordings in our report. We have taken this provision, but also take into account that if we are successful in the divestment that it also might be reversed. That is the situation in that, yes. Then you are seeking for the run rate and I find it very complex at this stage. On the one hand, we say we will first want to complete, let's say, our exercise of master planning what we want to do.
So it would be almost inappropriate to give any run rate on at this particular moment.
I can maybe say a few, I would say, general philosophical remarks about it that at least give some idea on how we look at this. First thing is that, obviously, we will never compromise safety and always aim to further improve it. So in other words, there will be no, I would say, reduction of any kind and, if anything, a further strengthening of our standards to which we determine things. Then obviously, it is a function of how much assets do you have in the company. So you've seen the strong growth that we project on the cubes that will obviously put ultimately an upward pressure on also the maintenance element of that same asset?
And then thirdly is how sophisticated are you in executing the right work, I. E, don't do any work that's not necessary to maintain those standards. And the work that you do, how efficiently can you put that into the market? And I think particularly on the so first one, no discussion whatsoever. Second one is obviously the consequence of what is already in progress of being built plus some decisions yet to be made.
And the third one is where we have a continuous effort to become ever more effective and efficient through the use of novel technology, challenging our own procedures and working with the contracting world. And so the net effect of all of that is, I think, the thing that obviously ultimately you want to know and that's a bit early to say at this stage.
And with innovation, you mean terminal management systems that are more predictive in nature?
Yes. So we are moving to something which is known in the amongst the experts as condition based monitoring, which is that you look at the condition of the asset all the time And rather than say, okay, I'm going to inspect every so many years just to be sure, you try to get information that has sufficient predictability about the asset that you know exactly when to repair it rather than, okay, to be on the safe side, I need to do this every five years or every And so that is not yet given the technical state of the art, that's not yet possible for everything. But where it is possible, we are trying to move that way. I expect over the coming decade, there will be significant improvements because of the so called Internet of Things where you can monitor more near the asset at a relatively attractive price.
That's the reason why I made reference when we were talking about the cost base that this kind of innovative approach also results, of course, higher incurrence of costs at this moment because we see it as a smart investment in the future to achieve that other objective.
There's one question left on the contract duration and the pie that we've shown. There's no particular reason why the pie isn't in there. So it's you're very conservative in that sense. So there's also no indication of any major changes to the composition in our contract portfolio. But what we'll do, and that's just with the help of Gil, we will, let's say, dive into that to make sure that the pie is provided and give you a copy and give you all a copy so you have the latest on that.
But also from a substance point of view, we can confirm significant deviations because that was also, of course, I can imagine the objective of your questions. Luke?
Yes. Luke Van Beechtig of Pevercom. Two questions. First of all, you announced in the press release that you scaled back the expansion of Pengerang. Can you give an indication of what has changed in the conditions there that you have to make this decision and if this has an important impact on the profitability of that expansion?
And the second question is looking at the second half of the year, obviously, you mentioned divestments in foreign exchange that we should take into account when making our predictions with it. Are there any other major changes that we should take into account that are foreseeable or that could occur?
I can start with the second one. If we would have expected that, we would have probably informed you on it. So the answer is no. I think the two effects for this year, 2015, is divestments of Japan and The UK and foreign exchange. And when you look at the first half year results and if you look at how we've operated, we don't expect any third element or other issues which will influence the results in a material manner, which should be raised at this particular point.
So that's our assessment today.
Yes? Yes. On your question on Pengerang, as you know, we're very proud and pleased to be part of a development in the Malaysia area that is in total encompassing a $30,000,000,000 range investment. And as you might imagine, as construction is on the one hand already taking place, everybody is still looking at how to further optimize that and get the best suited equipment to ultimately serve the market best and have the best profitability within that. So what is happening is that we are adjusting, obviously, also the tank farm on the basis of the demands that the customer has to serve their complex well a little bit, but we are doing that in such a way that our profitability as such is not endangered.
But obviously, where we can help the customer to have a more effective set of tanks due to changes on their thinking on the complex, we are very happy to do that.
Derek Verbiser, KBC. Question on the comments you made on the oil products market in Singapore. If I understood you correctly, you said it's quite encouraging. Market has improved versus previous quarters. Can you comment a bit further on the visibility you have there?
And maybe also with the recent spike in the oil price and the recurring discussion we have here on contango exposure, how do you see that moving forward? Another question I have is on the although it's not large, but maybe times four, it would be the decline in joint venture results in Asia quarter on quarter. Is there we saw some improvements over the past few quarters, but now it's trading back a bit. Is there any reason that, that trend would continue? Or is it a more sustainable level?
Yes. And also the discussion maybe on the renewal of contracts. You were quite bullish on that Q1. I think you're quite bullish still saying that the second half market conditions are similar to first half. But maybe some additional color on the discussions you have with clients, especially in the high occupancy regions?
Okay. Let me start with the first one, is the Singapore market particularly. If you and this is public knowledge because if you look at the three products which are predominantly stored from an oil derivative point of view, That's gasoline, that is middle distillates and that is fuel oil. I'll start with the last one. You might have seen the report that the bunker sales in Singapore have come to a very high level.
When I'm not mistaken, I think it was about 4,100,000 tonnes alone in the last month. So that gives again the sense that if you look at whether fuel oil is available at the right price, currently, it finds its way into Asia, which has led to quite a strong bunker market in Singapore. The second thing is the middle distillates. What you've seen is that because of refinery runs in particularly in China, which have been very high, we've seen a lot of middle distillates available in Asia. And as a consequence, what we've seen is that because the tradability of middle distillates that finds its way into Singapore, so you see more Chinese material coming into Singapore, which is then distributed and then traded.
And the last effect is that we've seen is that and this is a continuous effect, which is a gradual incline is the gasoline market And with rising wealth levels and population growth, we see that certain economies surrounding Singapore are demanding more gasoline to be used. And there are some very big gasoline markets with Indonesia is continuously growing, but there are also a few smaller markets like Vietnam and Myanmar and Malaysia, which is also growing its gasoline consumption. So that is also driving the gasoline blending market in Singapore. So this is sort of if you look at the effects and all effects are positive, which we've seen actually in the Singapore market giving or ensuring that the recovery, which we saw from the years before is there. So that's and again, you have to say how fundamental is this, how long will it stay.
These are at least the short term effects that we are seeing today. Maybe on the joint venture results in Asia, is there particular comments that come to mind there?
Very generic, would say. There you said it's a small amount and it's the accumulation of, of course, divestments, Japan. You
have to
bear in mind some FX and then you have to bear in mind if you look back at the composition of our joint venture activities, industrial terminals extremely stable, so that's not the impact. Then we started, of course, with a couple of new activities like Pengerang, like Yangpu. That could be small, let's say, deviates from one quarter to the other because you have timing differences, renewal of contracts, etcetera, etcetera. So if I translate your question, is there any structural change in the joint venture with respect to the demand drivers and the financial performance? That's absolutely not the case.
And Pengerang is still fully occupied. I saw yesterday
or Today,
not sure we comment on individual No, launches, no, no.
But
you can derive from my comments previously on how the market is. You can derive from the fact that I believe that the Pengerang terminal is very well equipped to take care of these volumes from a service perspective. And I said already last year that we're very satisfied with the progress we've seen and how we operate and how we can exploit it commercially. So also there, adding to Jack's point, there is no from my perspective, no reason to look any different at our joint ventures in Asia and there is no reason to look any different at our performance in Panera.
Maybe in addition to that, that's the reason why we also provide the information on a proportionate basis that you also see the occupancy rate of the whole group including joint ventures is not deviating significantly from the occupancy rate we, let's say, report with respect to the group companies. So just to illustrate slightly in which bandwidth we are operating.
And then I come to your point of contract renewal, are you are we? Generally, are sort of rationally and emotionally six months back when we had a visibility on how contract will be renewed. I think that hasn't changed. It hasn't deteriorated. It hasn't improved.
We still see, as explained in the presentation, if you look at the fundamental drivers in these markets and if you look at the companies that are, let's say, looking for outlets for product, we still see that the level of engagement, the discussions on renewing contracts, the abilities to find each other hasn't changed.
But it's on the pricing component from your side in these high occupancy regions, it must be quite beneficial or not?
No, but that's highly mixed, highly mixed. So that depends completely on the commodity, on the geography, on the relative availability. You can imagine that for instance, I highlighted that if you look at China, distribution markets is highly competitive. So that's really hard to see any major opportunities there. In other locations where you see high occupancies and availability not obviously, then your dialogue with your customer is sort of a slightly different nature.
So it's too balanced to make a sort of a general comment on that. Thijs?
Thijs Berkelder, ABN AMRO. Three question regions, let's call it that way. So Asia, you sound extremely positive on Singapore, Bangorang. But occupancy in Q2 is one percentage point down from Q1. Where is that coming from?
Is that China? And China is the second one. What to expect from China in 2017 in Yangpu? Did you benefit from strategic stocking in your terminal there? And what do you expect from that strategic stocking then looking into 2017?
Next region, U. S, Deer Park. Can you tell me what the CapEx will be for Deer Park? Can you tell me with the expansion, what kind of market share do you have then in the region in Chemicals? And are you maintaining your, with the expansion, your market share or increasing your market share?
And third region is then Tallinn, Estonia. Can you tell me what the book value is now for Tallinn? And is Tallinn for sale?
Here we go. Asia, on the Q2 numbers and the occupancy, I don't know the numbers exactly by heart, but I would expect that it's indeed China, which is playing an active role. Apart from that, I cannot think of any major changes there. Is there something that you have by heart?
Yes. It's something we I thought we addressed it during the Capital Markets Day is that we said, if you look at the demand for storage for chemical products because of the slowdown in the China economy, then on the one hand that affects some of our distribution terminals in China. That's one explanation. But also derived from that, if you look at the role of the chemical distribution terminals in Singapore itself, the occupancy rates are lower than a number of years ago and then you get small changes in both components. And according to my recollection, that is the most, let's say, important explanation of changes between quarters to quarters to quarters.
Second point is Tags. We're not giving any comments on 2017 nor are we on individual terminals. So I have to disappoint you there on Jan Poule. U. S, Deer Park also do not give any guidance on the CapEx numbers on what we are constructing for.
We'd like to keep that to ourselves for competitive reasons. Second of all, if you look at the market share, obviously, you expand your market share is improving. We will give you the number because that's public knowledge. When I'm on top of mind, I think we have about a 21% or 22% market share today. So that's where we are.
So this is order of magnitude on chemicals particularly. But we will check that number and provide that. Then the last one is Talin. I'll leave it up to you.
The book value is €44,000,000 lower now, but that's not the question I think. So what you have in Tallinn is two components. When we merged in 02/2007, of course, we also acquired additional shares in the combination because the merged party was larger. At that moment, in the allocation of the total value to the terminals and to goodwill, the total goodwill has now been impaired for the reasons I just explained. And you should assume that the remaining value of the assets from a financial fixed asset point of view is maybe less than €75,000,000 €80,000,000 For sale would mean that we officially have decided to put it on sale and that's not the case.
Thomas?
Thomas Adolf from Credit Suisse. This side of the table likes to ask a lot of questions, so I'll do the same if you don't mind. The first question on occupancy rate. I mean you've given guidance for the second half of the year, but I just want to go into a bit of detail as far as oil products are concerned. So if I look at globally gasoline inventories, they're about 65,000,000 barrels above two years ago.
If I look at diesel markets globally, it's on my estimate about 165,000,000 barrels higher than two years ago. So there's a lot of Xs out there. So if we assume a world in which refinery runs stay flat, to get back to two year level for both gasoline and diesel, you need to see demand growth for gasoline of four fifty kbd, diesel growth of 1,100,000 barrels per day. That's quite a substantial number unless of course we see run cuts from refineries. So in light of this, how should I be thinking about the impact to Volpak and the occupancy rate and especially going into 2017?
I have another question on LNG, I won't do that. I'll ask that at the lunch. More on kind of strategic alliances, I mean, when you think about new projects, be it greenfields, greenfields are expensive and they take longer to build. So brownfields are actually nicer, cheaper. So as far as strategic alliances are concerned, obviously, Shell is an important partner.
And they've just taken FID on a big ethane cracker in Pennsylvania. So I wondered whether you're having any discussions with Shell on potential opportunities there. And as far as brownfield opportunities are concerned, what sort of opportunities do you see within your portfolio? Thank you.
Okay. Two quite elaborate questions. We can spend quite a bit of time on this. First, on the what interpret is that you were referring to the stock levels which are currently out there from a historic perspective relatively high. And your question is how long will there be a new equilibrium in which the stock levels are down to historic levels, which should then in effect have again a price ultimately an effect on the oil price.
So that's your and then the impact on occupancy. If you look at our portfolio today and if I take the hub terminals, so that's particularly if you take Fujairah, Rotterdam and Singapore, and you take our distribution terminals, so that's Australia, Jakarta, for instance, South Africa, Canada, what you see is that the inventory levels or the inventories which are out there have a relatively hardly any effect on the business that we conduct. For distribution terminals, easy to see. In other words, that if you look at, for instance, how Australia I'll take a very simple example how Australia is provided of fuels, whatever the demand is there needs to be fulfilled through storage because the refineries have been closed down. So irrespective of whether the price is high or low in the market or even respective whether stock levels globally are very high or low, it doesn't fundamentally change the daily activities that we perform in that particular location.
So that already takes part of the business that we have. What remains are the hub terminals and there you also see is that the we are not engaged in stock taking for to overcome a period of time. Most of our business, again in those hubs, is related to physical movements because of imbalances, and that has to do with surplus fuel oil that needs to go from Russia and Singapore to Asia. It might be with a surplus gasoline that needs to leave via Westport, might be a deficit of diesel that needs to come into Europe. So every continent where these hubs are there are rebalanced through these hubs.
So have not seen any correlation between the relative stock levels globally and either profitability or the activity of Vopak or if it's there, it's exceptionally weak. So stockpiles is not an indication for the, let's say, health of our company. I hope that puts it a bit in perspective. The second thing, you were asked about strategic alliance new players in greenfields. Also there, and you highlighted specifically Pennsylvania, the one from Shell.
Maybe again conceptually to start off with, we do believe in strategic alliances. And I think it's not only Vopak, but if you look around the industry, you've seen a lot of strategic alliances emerge because we believe that there are some key competencies or qualities or assets that might be shared to the benefit of both partners if they combine. We've seen that in Saudi Arabia, tying ourselves to Saudi Aramco makes us and SABEK makes us exceptionally proud because we see that we can benefit from each other's knowledge and capabilities. Petronas is a good opportunity. So we will you can expect that we'll continue to try to be the preferred partner for these large NOCs or IOCs in developing their business.
The industrial terminals, that's particularly what you're alluding to. Industrial terminals is a very important part of our strategy. In our Capital Markets Day, we highlighted the four areas that we want to be active in. If you look at industrial terminals, particularly our market share in industrial terminals is high. In other words, we have been chosen already historically by many companies as being the preferred partner.
You can anticipate that we'll do everything in our power also in the next few years to remain the preferred partner. Unfortunately, you highlighted a project which is less appealing and let me tell you why. Not because it's a nice project and not because we think Shell is a very strong and good partner to have, But this cracker is completely focused on only producing solids. So it means that they want to transport all their chemicals in solids out of their site from Pennsylvania globally. So that means automatically the added value that we can bring to this project is slightly lower than someone who moves solids around.
But if you have projects and any consultant can tell you where there are many liquids associated to it, and obviously the Jabil expansion with Sabik and Dau Saddara is a very good example of that. Obviously, there you can expect that we'll fight very hard to get that done. If you look at brownfield opportunities, I think that we are we're not away the hectares that we have available in particular sites. But what we try to do is a philosophy is in any site, try to have at least excess land available that we have the opportunity to expand. There are a few markets which are very crowded where that's not possible, but there are still a few locations left and we hope part of our growth that brownfield opportunities will be sort of emerging in the next few years that if particularly, I think, the Houston example for me is very strong one.
We try to time it with opportunities when the market requires it and then try to find the ideal sort of window to execute and get it organized. So it will be part of our viewpoint as well. So I hope this gives a sense of where we're looking at.
Morning. Verain Muller from ING. I have three questions. The first one about Tallinn. What has changed in the last half year compared to before?
Because we know since 2014, the hostilities are there in the Eastern European part. And also East Luga was opened I think in maybe four or five years ago. So maybe you can elaborate on that. The second question is about the situation in U. S.
You are going to expand Deer Park by 130,000 cubic meter. I think you are still on an open lot there and you have taken an impairment in The U. S. So maybe you can elaborate on that combination. And then my third question is about Pengerang Hainan.
I remember that last and referring to Dirk's question, last year, we had a discussion about Hainan Pengerang where the costs were quite high at that moment, etcetera. So maybe you can dig a little bit deeper in that question about where were the costs year on year. So in my view, the comparison with last year on the joint ventures in U. S. Were quite easy.
So why is the result not higher in that respect?
Why don't you take the first one?
Okay. So on Tallinn, I think you're absolutely right that we gave earlier guidance that obviously with the worsening relations between Russia and the West, Tallinn was increasingly under pressure. So then there's always a question about what are specific indicators that cause you to take action. I think what we find still today very hard to see is how will this whole situation further evolve. And we experience, I would say, almost on a daily basis changes in the logistics chain from Russia to our Estonian terminal.
And sometimes, these are for good and sometimes, they are for worse. But net speaking, they are slightly worsening over the last period. Particularly, early in the sort of second quarter, we had some very strong, I would say, negative effects there. And as management, we could not identify a plausible scenario that gave sufficient confidence that it would be turned around. So that's the action, I think the specific trigger for also not just raising this as a qualitative concern, but also taking some quantitative action on it now.
To go to your second question on The U. S, the 138,000 cubes, that's we have two locations in Houston. We used to have three, but as you know, we sold one of those locations on the Northern side of the Ship Channel. These locations are very close to each other. One is Deer Park, or we call it Deer Park Main, which basically is our existing chemical terminal.
And that's where we have the expansion on and that's 100% Vopak entity. In the meantime, we have purchased a plot of land a little bit further west of that site, also at the Houston Ship Channel, where we have access to rail, access to water, so we can build jetties there, and we have land available for further expansions. It is our idea to have Deer Park main particularly for chemicals and for edible oils, and we'd like to use the new site either for oil products or for gases. So we've split the focus from a product perspective and that second site is in joint venture. And that's where you've seen in the results the effect of the part of the sale of part of the equity in that particular land acquisition that we did previously.
So that's number one. To my knowledge, there's no impairment in Houston in the report. The impairment that we have there is relates to some assets in Brazil, Alamoa.
And to be more specific, when we were talking about impairments with respect, for instance, to Tallinn, you make an assessment, of course, of the potential scenarios to the future. Sometimes you take an impairment because you invested in certain infrastructure components because you want to change something in your business model, a new service and it might be decided that you are not continuing with that as a result of which you impair the assets as well. So just as a reminder that impairment is not always related to scenarios to the future. Also could be on smaller items that you say the CapEx spend will we will not benefit any more from it because we deviated from the original assumption that sometimes are small amounts and explanations why they could be included.
I think this is related to The Americas, the CuraMarkets, not to Telen.
No, no, no, to The Americas following the indeed the question.
Were asking about the cost structure.
Discussion about the cost in these
two terminals, as I remember. So there was
no I think the comparison with 2015 is quite easy for first half year and for the second quarter especially, as I remember. We don't see an improvement in the joint venture results. And I think Japan might have played a role, it's only one month. So maybe you can elaborate on that somewhat deeper than we have heard just about this joint venture.
Even more details, Okay. You So we are talking about small differences. So something small is large when you have higher expectations. That is normally the case. So you could also refer the questions and say why is Yangpu and Pengerang for instance not contributing even more than in the previous period because we were already operating at quite some good occupancy levels in the 2015 and also in Q1.
Then if you look and you scale it down on all the individual joint ventures, we gave guidance and we said, look, in the industrial terminals, there is just a stable development with one small exception and that was the announcement we made, I believe, last year that because of the disruption as a result of an explosion with one of our customers in China, Haiteng, and as a result of that, of course, you sometimes incur additional costs and that result is different, of course, from the period where we were operating positively and we were generating revenues. So that is I think one of the real changes, not a change compared really to Q1, although there might be some additional costs, but with previous periods, there is absolutely a huge difference. If you then look at the other joint ventures, then there are hardly any other one where the difference could be. So that's the reason why I said divestment small explanation, FX small explanation, this one small explanation and maybe some small EBITDA margin differences dependent on occupancy rates in Yangpu and Pengerang, which might be slightly lower, slightly higher, but all an accumulation of small ones.
And answering then the question, is there any signal of a structural change in those joint ventures? And the answer is no.
Here?
Andre Mulder, Kepler. Two questions. You gave us the proportionate utilization rate of 94% saying it's equal to the reported one. If I look at the three blocks in associates, I think LNG is not in the reported numbers because of the associate character. But I believe that those ventures have a 100% utilization.
So that means that if that one is high, there must be some shortfalls of the others. So speaking at, for example, Europe and Asia Pacific where the other blocks are in associates, how does utilization at those associates compare to the reported numbers that you've put in there for the divisions? That's one question. Second question is, you're doing some operatorship in Saudi Arabia, in Singapore, in Panama. Is that a sort of new policy which would you actively pursue those activities?
I can answer the second question and that will give Gheel sufficient time to look at the details of the first question.
And I can also put some perspective around the LNG question I think that you asked then.
So on operatorship, it's not something whereby and that's something in the Capital Markets Day, which we explained as well. It's not a new strategic direction that we're taking the company or operatorship. The only thing is that what we see is that we have certain capabilities and that's the knowledge and expertise that we have in how to run these terminals efficiently, safe and effective. And what we've seen in these three instances, and this side is already the SABIC joint operatorship is together with Subtank, is one which has been going on already for fifteen or twenty years, so that's not new. We're happy that we started the relationship because I think the relationship of operatorship gave us the opportunity now to co invest with them in the industrial terminal for both SABIC and for Dow, for the DowSudada and SABIC.
So there you see that the operatorship led to something larger. Same thing goes for Panama. I think that we said it makes a lot of sense to integrate our assets with those of Chevron in Panama and again with the philosophy that once we have that, it leads to something better. And in the discussion, Chevron said, well, I want to be owner of my own tanks. So we said, okay, then let's park that particular issue.
Let us then at least operate because then at least we have the synergistic effects in maintenance and operating and safety, etcetera. So that was also something whereby the operatorship has led to something bigger. And then the third one where we've considered it is in Singapore with the rock caverns. And also there, we said that, first of all, we don't know how to operate rock caverns, so there was sort of an enthusiasm to understand better engineering operating point of view, sort of what are the CapEx and operating safety issues there that we'd like to understand? And second of all, we wanted to know that once operating those caverns, what are sort of the next steps and the next thinking by the Singapore government on how to store crude, what's their thinking around how to get it logistically organized.
There are some, again, some synergies for the simple reason that it's sort of directly under our Banyan Terminal. So also there, story short, operatorship is not a thing we'd like to do in itself, but we do recognize that there are a few benefits to it in the long run if you consider it. So this is how we've positioned that.
Yes. Let me take the effect of the LNG occupancy. You're probably aware, we have three tanks in Gate, two in Altamira. Altogether, that's a capacity of 1,000,000 cubes. So if you take 1,000,000 on 33,000,000, that's a 3% effect, which possibly I'm not confirming this as a 6% extra occupancy.
So that explains 3% of 6% is not a very big step even theoretically. And then even in LNG, we do obviously also try to have some flexibility to accommodate new desires that evolve in the market. And of course, for that, we, first of all, have longer term expansion opportunities at those sites, but also we try to be clever, if necessary, with the available physical space today.
All right. Thank you very much for the questions. We will now switch over to the online moderator to enable the analysts dialing in to ask questions. After the session, there's some opportunity for analysts in present with us here today to ask some final questions.
Yes, there's a question of David Mr. Kerstens, please go ahead.
Good morning, everybody. It's David Kerstens from Jefferies. Regarding, first of all, the El Nino impact on your Vagils business that you highlighted, is that the main driver behind the mix improvement that you saw in Rotterdam, in particular, in the first half of the year? Or did you see that effect elsewhere as well? And how material was it and how sustainable going forward?
Secondly, regarding the more stringent safety regulations in China, Did you incur any additional costs in the first half of this year? And do you expect to make that you will have to make changes to your existing operations there? And then I had a final question regarding Mexico. You mentioned Mexico market is liberalizing. You're currently operating relatively smaller terminals there.
How do you see your position develop there going forward? Thank you very much.
Okay. Thanks, David. First of all, Eninho, you're asking me to give a comment on the weather, which is difficult for me to make. But what I did see is that the effect has been very notable in Europe. We do have we do operate edible oil terminals in other parts of the world, also in North America, for instance, and in Latin America.
So we did see that effect in the first half year. I cannot comment because I simply don't know whether this effect will be repeated in the year to come. But what you can expect is that once the effect is once the position is taken, then we do expect that companies will start reducing their stocks again. So it is a onetime play that normally takes place and we just have to wait for the expectation on weather patterns for 2017. So long story short, hard to predict, but we've seen it across the globe happening.
Safety. Cost in China on safety.
So I think, first of all, we highly appreciate that China takes safety very seriously. And as you would expect from a company like ours, as a result of their stringent standards, Obviously, we also are and already were long before any incidents happened in the process of upgrading our facilities to remain a very strong player also from a compliance and an environmental perspective. So in terms of additional direct cost, I would say no because we would have made those costs anyway except for maybe that getting some of the permits now is significantly more difficult. So we have more, I would say, yes, cost incurred in the process of obtaining the permit. But the major cost, which is the facilities cost, I would say, unchanged because it is just in line with what we were doing anyway.
And David, on Mexico, I think the piece of legislation and reform in Mexico is one of the most interesting we've seen in the last few years. It entails both the upstream and the downstream sector. I mean people believe that Mexico will require quite some investments in E and P, so a lot of focus is on that, but similarly to distribute fuels in that part of the world. The main question there is that is how competitive Mexican refining will be compared to refining in The U. S.
Gulf Coast, which is relatively near and probably quite competitive to what they have today. So the general expectation is that Mexico might turn into a net import market for fuels. A lot of companies are looking at that today to see how to translate a new regulation into what type of infrastructure and what sort of the regulatory environment is under which you can trade, distribute, etcetera. That is transpiring this year. We believe as Vopak is that we have an interesting position in Mexico.
It comes from the fact that we have three terminals on the East Coast Of Mexico, which are, let's say, well located along the coastline of areas where imports might be required. We believe that we have also because we have the LNG terminal and the presence for about thirty or forty years in Mexico, a profound understanding of the Mexican economy and way of doing business. Our relationships are strong. So all I can say is that, yes, we do believe that there will be movements in Mexico and we believe on hand that we have a relatively good position to explore, but it's too early to give any indication on what type of plans might transpire, timing of plans and ability to win. So that's where we are today looking at Mexico.
Thank you very much.
Any further questions?
There are no further questions. Please continue.
Can take one or two more questions from the floor.
Any more questions here from the analysts? All right. Thank you very much. With this, we will end the analyst presentation. I would like to invite you all here to have lunch with the Executive Board.
And I would point out that our next presentation will be November 7 for the Q3 presentation. Thank you very much.