Good day, ladies and gentlemen. Thank you for waiting and welcome to the Royal Vopak Q3 Results 2015. At this moment, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. I would like to hand the conference over to Mr. Jack de Kreij, Vice-Chairman of the Executive Board and CFO of Royal Vopak. Please go ahead, sir.
Very good morning, ladies and gentlemen. Welcome to the Q3 update of Royal Vopak. Before starting the presentation, I would like to emphasize the forward-looking statement, where, of course, as stipulated in the past, we have indicated the consequences of certain assessments we have been making with respect to the future. What I would like to do today, and I'm on sheet four for your presentation, I would like to address a few key topics which are considered to be relevant for our year-to-date results, but also for the outlook for the whole year of 2015. A quick update about strategic priorities, the business highlights year-to-date, of course, the key figures for the third quarter, the selective growth strategy we have been implementing and executing, some subsequent events, and of course, as usual, our outlook and closing summary finalized with a question-and-answer session.
We will have up to 11 hours, so that means that we have one hour available. I would like to keep the presentation within 30 minutes to allow as many possible questions you may have. When I switch to sheet six, where we have summarized, in fact, the key message included in our July 2nd, 2014 update, I would like to give you a brief summary of the status of the execution of the strategic priorities for 2016. First of all, the free cash flow focus. As you know, in a company where there is quite a capital intensive allocation and investment decisions to be made, the free cash flow focus is critical in the way we execute our business. As up to now, it is more or less in line year-to-date with previous year.
There is always a timing difference with respect to the difference between EBITDA and cash flow, and that relates to the distribution of dividends by joint venture, but also the difference between the consolidation of group companies, where there is so-called non-controlling interest and the cash flow consequences with respect to the distribution of dividends to either the minority entity and the major shareholder. Long story short, more or less in line cash flow cross basis with the previous year. Our divestment program. Up to now, we have divested nine terminals. You are familiar with that. Sweden, Finland, some terminals in the U.S., two plots of land, total proceeds, around EUR 300 million. Of course, that is immediately allocated to our growth strategy and reduction of our net debt EBITDA ratio to provide the necessary flexibility in our headroom for supporting our growth strategy going forward.
The other topic we addressed in our strategy update of July 2nd, 2014, was the objective to reduce the sustaining and improvement CapEx in a very intelligent manner without jeopardizing, of course, our objectives with respect to safety and service improvement. The total program defined for the period H2, 2014 up to 2016, was reducing the total program between EUR 800 million up to EUR 700 million, and we are completely on track in realizing that. The cost basis was critical because taking into account the challenges to operate our business model, either between 90%-95% occupancy rate and 85%-90% occupancy rate, while maybe realizing that we might not be able to increase our rate significantly beyond indexation. Cost management is critical in our business model also to support the return on our investments, taking into account our free cash flow focus.
What we can say now is that if you look at our EBITDA margin development, that indeed that all the objectives we have been defining in order to maintain a healthy EBITDA margin is also on track as anticipated and as, let's say, defined in our July 2nd, 2014 message. The last one. After having, let's say, moved sideways with respect to the EBITDA development since 2012, the whole objective was to start exceeding the EBITDA level of 2012 again at the latest in 2016, and taking into account our year-to-date results and our expectations for Q4, it's very clear that we are going to realize that already in 2015. A long story short, we are on track with respect to the execution of those objectives defined in 2014, and that provides a sound basis for the continuation of our focused growth strategy. Going to sheet eight.
Before I go in more detail with respect to the year-to-date results, it's very clear that the developments in Q3 and also the expected developments in Q4 are fully aligned with the business development assumptions We have made when we presented the H1 year results. We haven't identified any significant deviation from those assumptions made at that particular moment. We also were able to slightly improve our occupancy rate in certain locations, specifically performing high occupancy levels in Western Europe, around 90% in U.S., and slightly increased occupancy rates in Asia and China. Going to Sheet nine, if we then look at the year-to-date Q3 business developments, of course, we just covered the occupancy rate development. We are slightly above 90% now. The revenues have increased with 5%.
Cash flow, more or less in line with the previous year, but also, of course, affected by timing difference with respect to differences in dividend distributions and non-controlling interest. The EBITDA and net profit development is reflecting a 5%-6% growth compared to the same period in the previous year. Going back to Page 10, of course, if we look at the top line, which is contributed by the group companies and, of course, not by the joint ventures because of the IFRS accounting, we see that two regions are quite significant in our total network, that is the Netherlands and the Asia developments. The revenue developments, of course, are primarily driven by the developments in the West European region and the Asian region, whereby the Americas have been a solid and steady performer in the last few years.
In analyzing the revenue development, of course, the foreign currency effect is absolutely critical. If you compare that with the year-to-date period, we have been benefiting from a positive translation effect, whereas in Q3, when you compare it with Q2, we have the opposite situation because of the depreciation of certain currencies compared to the previous period. That is more or less inherent explanation of the revenue development, but more important is that what we have experienced in the last 10 or 12 years is, of course, very solid demand for the oil storage terminals driven by the physical needs for transportation resulting from the imbalances. That is undiminished the case. Secondly, we have been benefiting and leveraging on the demand for the storage of chemicals, taking into account our well-positioned terminals in the total supply chain and, of course, supported by the long-term contract for industrial terminals.
You could say that a huge percentage of our total business model is driven by solid and robust demand. The area where we are currently experiencing, of course, volatility is more in those locations where either you have quite some macroeconomic changes like China, India, and Asia. We also have experienced in the past some changes in Western Europe. The whole question is: Are we able to manage that going forward in such a manner that we continue operating in an 85%-90% playing field at the minimum? Secondly, are we able to convert certain challenges and opportunities to enable us to operate, let's say, above the 90%? That is, in fact, the whole critical area of intention when reading the year-to-date results, taking into account the opportunities we envision going forward to the future.
Looking at Page 11, that is exactly the reconciliation with the topic I wanted to address, was that taking into account the development in the last 11, 12 years, we have not operated, let's say, significantly below the 85% occupancy rate, despite all the changes on a worldwide scale. We have gone through an economic crisis since 2008. We have geopolitical changes on which we have to elaborate on. We have seen a slowdown in the economic growth in China. We have seen some challenges now in Asia. More important than that is that some parts of our business model, like the long-term contracts we have in our industrial terminal, are not affected by those volatility factors. Of course, the fundamental demand for storage for chemicals and oil products resulting from imbalances or supply chain positioning is absolutely intact and very robust.
Indeed, if we are talking about the range 85%-95% occupancy rate, then other factors come in place, and that is exactly what we have tried to address at our presentation of the H1 figures, where we said, look, taking into account the slowdown of the economy in Asia, taking into account the uncertainty, what growth levels we might expect going forward, and taking into account the fact that new capacity expansions have taken place, that part remains uncertain how we could position ourselves in that particular timeframe. On the long term, we remain, of course, undiminished enthusiastic about the role we play in the China market and in the Asia market, that is absolutely in the long term because of the imbalances as just stipulated and the expected increasing demand for volumes for the storage of chemicals.
Long story short. We are now operating slightly above 90%. That means that based on that, we try to develop and continue our strategy as stipulated in July 2, 2014, focusing on the free cash flow focus. Trying to sharpen our network position by divestments and of course, additional new investments in growth opportunities, where the risk-return profile is contributing to our overall objective, while continuously looking for opportunities, how we can further improve the free cash flow generation and the return on investment in quite a complex environment. That is something which, of course, is not new for you. Looking at page 12, if you look at the occupancy rate development, it is clearly shown that, of course, that the Asian area has experienced the huge significant swing, while the Netherlands has experienced the other swing in the other direction.
That is part of all the dynamics we are experiencing, of course, on a worldwide scale. As said, we should not overlook one factor, and it is that the fundamental drivers for demand of storage are intact. The only question we are trying to address now is that what is needed to, let's say, sustain a certain occupancy level in a certain region above a certain threshold? A lot of, let's say, the storage demand is still intact, is robust, is solid, but the main focus area is indeed what is the swing factor between 85% and 95%? And what is determining that swing factor in that particular region? What can be done by the company itself? Where do we have to be patient? What is, let's say, an alternative we could explore? What could be another way of looking at that?
That is exactly, in fact, the message, the key message of our focus of the strategy in July the 2nd, and we continue doing that. Looking at page 13, as said, year-to-date, 6% increase of our EBITDA development, and you have seen our outlook that we have come to the conclusion that when we made our analysis at H1, that exactly in line with the business assumption that we have seen Q3 development in line with those expectations, and we expect a similar pattern for Q4. That means that if we add the same EBITDA performance of Q3 as a kind of indication for Q4, that we expect to realize a total EBITDA around EUR 795 for the year 2015, exceeding, of course, the 2012 level of EUR 768.
Going to page 14, more important than only EBITDA, of course, is also cash flow, occupancy rate, the return on investment, and also the EBITDA margin. As demonstrated in this sheet that taking into account all the challenges and opportunities we have been discussing during the year, that we have been able by also good cost focus, by good management of our contract rate development to maintain one of the important drivers of profitability being EBITDA margins. Page 15, a more detailed analysis of the differences between year-to-date 2014 and year-to-date 2015. Of course, as said, one of the important explanations for the increase of the EBITDA compared to the previous periods is, let's say, the foreign currency positive translation effect.
If you take and normalize that constant currency analysis of EUR 604, and you compare that with the EUR 602 we report, there are many factors which have affected that development. The first one is a combination of positive and negative factors. Positive factors, new small investments. Negative factors are divestments. The consequences of divestments because, of course, we cannot continue generating those EBITDAs anymore. We also shared with you as part of our guidance that we have had some startup projects in Q3, also continuing in Q4, where the startups would start contributing negatively to our result development. These startups have been included in some joint ventures. The total impact is more or less EUR 10 million negative on that constant currency number of EUR 604. The positive developments in Netherlands, EMEA, and Americas, we have already explained that in our H1 presentation.
No significant changes there, also no significant changes expected for the remainder of the year. Of course, one big change, that is Asia, of course, the other costs where we also had to incur in 2015, quite some higher pension charges according to IAS 19 accounting. Asia, I think we have covered that quite significantly during our H1 presentation. I will come back later in this call on some of the developments in Asia. For this moment, I would like to continue with the sheet 16. In sheet 16, we have now included the non-IFRS proportional information.
As you can see on the proportionate EBITDA development, we have a kind of similar development, although a slightly higher EBITDA because of the addition of some of the joint ventures which on a net result after tax basis are, let's say, contributing negatively, as a result of which it has a negative impact on the EBITDA we report on an IFRS basis. Of course, on a proportionate EBITDA basis, the number would become positive, as a result of which it fuels a higher increase of our EBITDA on a proportionate basis. The Cash Flow Return on gross assets, which is a simple calculation after tax, I have to emphasize that, after tax, is still exceeding our 10%, let's say, ambition level. The whole next step, of course, is whether or not we could increase that while not negatively affecting the risk-return profile.
That was another element we have discussed in our previous meetings. Trying to realize an attractive return on the investments is one thing, but what are we doing to ensure that the risk management associated with running our operations on the one hand, and selecting new investments on the other hand, let's say, remains balanced? What we have seen in the last one and a half years is that we have approved a few new projects, some of these projects, or most of these projects, are the so-called industrial terminal type of projects. As explained during our Capital Markets Day, we strongly believe we have quite a unique position. It provides us an opportunity to really liaise with our key accounts.
Secondly, while not taking any timing risk with respect to the development of volumes, it also provides a stable contribution of cash flow improvements in our total network. That's the reason why in the last half year and last year, we have been able to approve a few new projects. You know, the Pengerang project with respect to the industrial terminals. We also are now in the process of completing a transaction in the Middle East with respect to PCQ2. We strongly believe that with the focus on the one hand on hub terminals, on the other hand on import and distribution terminals, and on the third hand on industrial terminals, we continuously in fact improve the risk return profile of our total network, contributing to a healthy return on our investment. Going to the key figures of the third quarter.
There we see a slight change from the year-to-date numbers, page 18. The reason being is that, of course, the divestments have quite an impact on the EBITDA development. Secondly, although you have an occupancy rate improvement, it's also about portfolio mix changes. Let's say if you have an opportunity to improve your occupancy by crude oil storage on the one hand, but on the other hand, you are losing a few contracts in the storage of, for instance, specialty chemicals, then you have a mix change. As a result of which it could have an impact on your EBIT. It's fully in line as we had expected when we explained our H1 developments and take into account our expectation for the remainder of the year. As said with respect to Q4, we expect that the developments in Q4 will be in line with the developments in Q3.
Page 19 give you a bit of a snapshot about what is happening in Asia, and the dynamics are quite significant, of course, in that market. On the one hand, I would like to emphasize that Asia is quite an important region for our total network. On the other hand, I also would like to emphasize that in Asia we have quite some industrial terminals supported with long-term contracts. You might recall we have operations in Kertih in Malaysia, we have operations in Thailand, we have operations in Caojing in China, we have operations in Singapore. We are going to add industrial terminals in Pengerang. These dynamics in the Asian world are absolutely not affecting the cash flow generation of those terminals because of the role in the supply chain, integrated pipeline linked storage, and facilitation of feedstock and end products to our, let's say, petrochemical customers.
That part is not affected. The second part, if you look at oil products, the main driver for demand for storage and handling of oil products remains imbalances. That imbalance is undiminished the same. There is nothing changed in that playing field. What has changed, of course, is that in that playing field, what we have seen at H1 is that because of the slowdown of the economic growth, that the volumes were not increasing maybe to the levels which you would have expected when we looked at possible growth scenarios a couple of years ago. When you combine that with increased tank terminal expansion in the region, that in the current time frame it's very difficult to really utilize the assets at higher levels. The robust demand drivers are still in place.
What we are talking about is indeed if we would like to utilize our assets at a higher level, also in oil between 85% and 95%, what type of growth level do we need? What time frame do we expect needed for? That is currently highly uncertain. Within that business environment, we see now that in the short term, we have been able to improve our occupancy rates, and that is specifically because we have a diesel surplus in the Asia markets. We also see on the other hand that, of course, because of the additional capacity in the market, there is sufficient capacity available for many of the customers. On the other hand, we also see that the high utilization rates at refinery means that there is also increased demand for crude oil storage, et cetera.
Very dynamic world, very robust demand drivers, but absolutely sufficient capacity in the market to accommodate that. The question is, what is the time needed to align demand and supply in such a way that we would be able to operate structurally above the 90%? That is currently an uncertain factor, which we find difficult to translate from a timing perspective. On the chemical side, in fact, we are not talking about primarily imbalances, but more about GDP development, volumes of chemicals needed in the production of consumer goods, automotive industry, pharmaceutical industry. What we see is that because of the enormous slowdown in the growth prospectus of the China market, in combination by the additional capacity there, we see that indeed, quite some changes have occurred. Also there, the timing factor is quite uncertain.
As said, based on our analysis, we feel that at least also Q4 will be in line with Q3. We think that we have quite a balanced view of the current developments in the Asian region. Going to the growth levels. Long story short, we are currently operating at the end of 2014 at 33.8 million cubic meters of capacity. If we add all the changes in 2015, we are now at 34.1. When completed in 2019, we are heading to a total global capacity of 38.7. As said, in the additions, we have also included now some additional industrial terminal projects which are fully covered with long-term contracts. When looking at the growth opportunities on page 22, we always give a summary. Where are these capacities operated? We see a slight shift from the total capacity operated in group companies versus joint ventures.
That indeed in the last two or three years, we have been focused very much on strategic alliances in very interesting and very, let's say, attractive product market combinations in the Middle East and Asia with respect to, amongst others, industrial terminals, but also hub terminals expansions in that particular area. 23, a small summary of the projects. We have been divesting in the U.S., in Sweden, Finland, Europe. We have added some capacity in Flushing. We have added some capacity in Pengerang, in Malaysia, and of course, the new Hanyang terminal has been commissioned. Going to page 24, that gives you a summary of the current projects under construction. The only thing I would like to emphasize here that different from the two large projects we commissioned recently, being the Pengerang SPV 1 project and the Hanyang project.
Most of these expansions, which are currently under construction, are already covered for a major part by commercial contracts. We explained our philosophy about the expansion strategy in Hanyang and in Pengerang. These are, let's say, expansions of either existing terminals or in certain situations, a new operation, but they are covered most of the total capacity by commercial contracts. That means that going forward, when all these projects will be commissioned in the period 2016 up to 2019, that they will positively start contributing to our cash flow and EBITDA development. Page 25, after the divestments and taking into account the positive operational free cash flow, we are now operating at a net debt to EBITDA ratio at around 2.76, meaning that we have sufficient flexibility to execute our step-by-step growth strategy, which we stipulated is still absolutely in place.
We see opportunities in hub terminals, we see opportunity in industrial terminals, but the timing remains not as apparent as maybe you are used to the Vopak growth strategy in the last 10 years. We are very pleased that we have been able to announce this month the PCQ2 investment to demonstrate that we are undiminishing, focusing on smart expansions of a very mean and lean sharpened network on a global basis. When you look at page 27, that is the topic I was referring to. As part of our focus, hub terminals, industrial terminals, distribution terminals in gas market, we have now announced an expansion by means of an acquisition of an industrial terminal supported by a 20-year contract with a total capacity of 348,000 cubic meters in the Middle East. Long story short, page 29.
No big shifts in, let's say, the contribution by different product market combinations. As you can see, industrial terminals around 20%-25%, chemical products 20%-25%, oil products 45%-50%. And the different drivers are, let's say, more or less similar As we have seen them at H1, slightly more volatility, you could say, compared to 2014, but also compensated by other positive developments, specifically contango. Long story short, in the basis, very robust demand for storage, supported by one of the main drivers for, of course, the demand for storage that are imbalances. The long-term contracts for the industrial terminals and effective supply chain positioning in the chemical arena. Of course, with respect to gas products, before I forget it, also supported in our LNG terminal concept, supported by long-term contracts.
On page 30, we expected Q4 EBITDA, excluding exceptional items, to be in line with Q3. That means that more or less we are heading for the total year in the direction of EUR 795 for the year 2015. 31, closing summary. Q3 performance fully aligned with our assumptions and expectations for H2 as stipulated in our first half year reporting. We also have, I think, demonstrated in the last one or two or three years that when we were confronted with swing factors, specifically affecting your occupancies between 85%-95%, that we also have demonstrated some agility to see how we can address that we have been very agile with respect to contango and leverage on that. We are looking at other opportunities. We continue focusing on those areas in order to ensure that our overall objectives remain achievable.
We continue our focus on increasing free cash flow generation. We are on track with the strategic opportunities. The stable margins are still well managed. The outlook for 2015, I think we just explained that we, in fact, repeat our assumptions we made at the first half year. H2 will be lower than H1. At the end of the day, we don't have any other deviations from the assumptions we made at the H1 reporting. That means that I would like to refer now to the moderator to open up the question and answer session.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session. When you have a question, please press star one. For questions, please press star one. The first question is from Mr. Björn Krook from ABN AMRO. Please go ahead, sir.
Good morning, Jack. Two questions from my side. Just a bit more detail on what's happening in terms of profitability in Asia. What are you seeing in EBIT per cube? What has actually been the impact of Hainan and Pengerang opening as a firm number? Should we use this number as a base going forward? When would you expect a negative contribution from these terminals to roll off and move into a more positive territory? The second question is on the oil products side. We've seen more stories emerging that these markets are flipping into contango. You yourself mentioned that the Dutch market is having a positive impact. Are you seeing that in other geographies, or has that more been a theme for Q4? What are you seeing in terms of pricing in oil products? Thank you.
Thank you very much, Björn. To answer your question very simply with respect to profitability in Asia. Profitability always has three factors. That is, of course, occupancy, because that determines, let's say, your top line.
Yeah.
Secondly, pricing, which is critical, and of course, cost management. You should assume, of course, that if your occupancy rate drops from 95% to 85% to 89%, of course, that the profitability per cubic meter is dropping as well, because you will not be able to compensate that with higher pricing or with cost management activities. It's healthy profitability because the return on investments is extremely healthy in Asia, but it's of course lower when you compare it to the previous period.
Yeah.
You then look at Hainan, as said, we are not disclosing the performance of individual terminals. As said in the waterfall analysis we provided in the presentation, we showed you on, I can't recall the exact number of the page, but I will come back to that. I believe it was 21. Let me see quickly.
I'm looking as well.
It's 15.
Yeah.
In 2015, what we have tried to explain on 2015 is that indeed the combination of Hainan, Pengerang, divestments, and positives had around a EUR 10 million negative impact in total.
Your question is, could you please split it up in the individual terminals? That's what we have said earlier. It's not in the interest of our competitive position and also in our relationship with customers to split it up to individual terminals. Answering your question in a different way, in Hainan, and that there was another question, we have experienced, after the commissioning of the terminals, quite some interest from traders. That has to do, of course, with the contango position in crude oil. Your question generically, okay, you have experienced a contango situation in the Netherlands where the available capacity, which we were not able to put in the market two years ago because of the sanctions against Iran.
Yes.
We have been able to put a huge part of that in the market because of the increasing interest by traders resulting from this contango. You see different patterns also in other areas of the world. If you would have crude oil storage available. In Hainan, we had crude oil storage available, so that's the reason why we saw an increased interest. However, I have to be cautious because specifically there, you talk about quite short-term contracts. That's the reason why we say, look, in Q4, we remain cautious that it's more or less in line, but we are not, let's say, becoming bullish suddenly, that that will result in quite an improvement.
For a longer period, we are not giving any guidance at this stage because we really would like to absorb the developments we would like to see in the coming months before we give any specific guidance on that particular area.
Okay. What I'm, of course, trying to get at is this a low point that we've seen? Are all the costs in now, and is it now a question of ramping up to its full capacity however long years it take? I'm trying to find a base number.
Yes. More likely than not, you might have to develop different scenarios for yourself because our guidance is that we say, look, now there is some short-term demand. That means that we would like to see a couple of more months before to any possible scenario. We are not giving any, let's say, specific guidance on that particular direction.
Fully understand. Thanks.
The other question was, because we talked a lot about Hainan, as we said with respect to Pengerang, we said, okay, the startup also a negative contribution because of the joint venture structure and because of the step-by-step increase of the occupancy. With respect to Pengerang, we have always said we find that such a natural expansion of our Southeast Asia hub strategy, that in the long run, that will absolutely start contributing positively. It might be step by step. Also there we would like to see what type of pattern we have to look at.
That's, from a strategic point of view, in fact, a different ballgame than the Hainan terminal, which as we explained in previous meetings, is in fact a not yet proven business case in the sense that we try to create a new market, which still has to be proven in the coming years. Pengerang is an expansion of a very strong demand profile in the Southeast Asia hub region.
Okay.
Okay. Next question.
Sorry, I had a question on the product side as well. The oil products, how that is behaving.
In a specific region?
In general. What I said is we've seen a lot of stories about contango developments in oil products that has helped you in the Netherlands. Is that spreading to other regions? I might not have understood your earlier answer, could you comment on that?
Okay. No, I have to be more clear. Apologies for that. First, coming back to the main driver for our services, that has nothing to do with contango.
It has to do with imbalances. What we see, we see continued, of course, imbalances in fuel oil. We see continued imbalances in gasoline, we don't see any significant changes in those particular demand patterns. That is the main driver for a huge utilization of our assets. On top of that, and that is indeed why sometimes contango could play a role, is that in certain regions, if you have additional capacity available, not yet necessary for covering the extra demand coming from imbalances, then the contango comes in. I would like to take away any perception that suddenly our business model has become dependent on contango, but it is an important factor if in the current business environment you would like to operate at a higher level between 85%-95%. A long story short, we have seen contango specifically in the crude oil products.
We have seen some contango in other products, more likely than not, we were not able to additionally benefit from that because total capacity, for instance, in our Amsterdam terminal, which is specialized in diesel and gasoline, has already been taken up by the demand resulting from these imbalancing factors.
Cool.
Okay.
That was what I was looking for. Thanks.
Okay.
The next question is from Mr. David Kerstens from Jefferies International. Please go ahead, sir.
Good morning, Jack. I have two questions, please. First of all, on your Asian subsidiaries, if you strip out the net income from joint ventures, the profitability goes down slightly in Q3 compared to the second quarter by about EUR 2.6 million, while your occupancy rate increases from 85%-89%. Is that explained by the weakness you see in chemical storage, particularly also in Zhangjiagang? How much is explained by a relatively lower Singapore dollar in Q3 compared to the second quarter? That's my first question. Secondly, on Hainan. You mentioned that this being used by trades currently. I've read there's also interest from strategic storage perspective, and I saw you mentioned that on one of the slides as well. Would you consider using Hainan also for strategic storage?
Finally on Pengerang, is that still making start-up losses now that the capacity has been fully covered with commercial contracts? Those are my questions. Thank you.
Thank you, David. Looking back to your analysis of Asia, in fact, you already covered most of the important topics. One indeed is if you look at Q3 compared to Q2, we have a negative foreign currency translation effect from that period. That's one reason. The second reason has more to do with a mix in the product market combinations. You already referred to chemicals. If you have, for instance, slightly lower storage with respect to chemical volumes, where the contract rates are much higher than in the oil product range, that is also an explanation. You have those two are the most important explanation for the deviation you just referred to.
With respect to Hainan, as said, the original strategic concept we were aiming for was that looking at the future need by different specifications of crude by the oil refineries in China, we have been developing this terminal to test whether or not there would be a demand for different specification and storage of these crude oil products in the long run by putting this terminal in Hainan. Currently, we indeed experience different additional storage needs like the traders, like strategic storage. A long story short, what we are doing, of course, is in the best interest of our shareholders to look what would be the composition of product market combinations, which at the end of the day would provide the highest contribution for our shareholders.
Is that a huge basis of strategic storage with normally relatively lower rates in combination with maybe some capacity available for traders who would like to play the contango game, in combination with some longer term contracts with refineries, who would like to, let's say, structure their sourcing of different specifications. That still has all to be completed. Long story short, we keep open-minded for all these developments in order to do the optimal use of our Hainan terminal going forward. While doing that, we just have to experience some uncertainties in that. With respect to Pengerang, as said, we don't want to disclose any individual terminals with respect to profitability. The fact that we said, look, going forward for Q4, we expect more or less a result in line with Q3.
I, in fact, indirectly answer your question by saying that the combination of contributions by these new terminals, in combination with the divestments, will still be negative also in Q4.
All right. Thank you very much.
The next question is from Mr. Thomas van der Meij from Kempen & Co. Please go ahead, sir.
Morning, Jack. You already mentioned shortly that the dividend distribution from JVs has an impact on the free cash flow. Could you give us the effect related to timing?
I can give it you in a general way because it's a trading update where we are not providing all the details, but the general concept indeed is that if we take the reconciliation between EBITDA and the cash flow generation, there are two factors which might create a difference. You might recall at the H1 presentation, we put some attention to the difference between EBITDA with respect to group companies, where we have a majority interest, which is 100% consolidated. Whereas the moment you are going to distribute dividends by such a group company, you suddenly only get 70% and we have to make an adjustment for the 30%.
Your question is related to the joint ventures, it means that because of the reporting periods, there might be a difference that in 2014, there was maybe an interim dividend distribution by one of the joint ventures which had not taken place, for instance, in 2015. That is the generic answer. Then what we will do at year-end, we will provide you with an analysis of what has been the total joint venture distribution from a dividend point of view compared to 2014. Now within the individual periods, you just talk about generic timing differences.
Okay. We can assume that at year-end, your cash flow development will be comparable to your EBITDA development?
Not necessarily, because as said, that also depends on if I also take into the equation the timing of distribution of dividends by group companies. If, for instance, we did it in 2014 in December, we would do it now in January, that could have quite an impact on the reconciliation. What we will do, we will ensure there is nothing magic about it, that you will have a full understanding about EBITDA development and gross cash flow development. This is just the explanation. There is, let's say, no other story behind it.
Okay. Then on your occupancy in Asia, you benefited from the oil storage. How much capacity do you still have available for oil storage in Asia now?
The detailed capacity you are talking about, because the occupancy rate we disclose is, because it's corresponding with the revenues, meaning of only the group companies. That means that your question is related to Banyan and Sebarok, and that means that you only talk about maybe a few 100,000 cubic meters of capacity available for those terminals.
Okay. That's clear. If I remember correctly, at H1, the pressure on occupancy rate was mainly related to Zhangjiagang. I know you do not disclose individual terminals, is the situation there more stable now, or did you lose more contracts?
No, if you would use the word stable, I think that's a good reflection. Indeed, we gave Zhangjiagang as a good example where, following the enormous demand for additional volumes of chemicals in the Chinese market, because of the slowdown of the economic growth in combination with capacity expansions in Zhangjiagang. Zhangjiagang was an example of a group company indeed, where the total capacity utilization dropped below the 85%. Indeed, we have not seen since H1 any major changes. That's the reason why we said in H1, we remain quite cautious in looking at those developments, and that is what we repeat.
Okay, clear. Thanks very much.
The next question is from Mr. Michel Alfers from Rabobank. Please go ahead, sir.
Yeah, good morning. I have two questions. One regarding your outlook. You provided a relatively broad range for the outlook for the full year 2015, already deep in the third quarter, the second one of August. Now you provide a very exact range. What's the reason that you're so much more confident right now and you're only three months further? If you say, also provide some insight in the underlying volatility going forward.
So the-
Yeah, the second question is. How are you proceeding with the 30 million cost reduction program?
Okay. Answering your first question, the complexity at H1 was that knowing that the volatility factor comes from spot business, we had to make assumptions whether or not certain spot business would be prolonged or would be covered by renewed contracts. We had to make that assessment in August. Taking into account the developments in Asia and China, we didn't feel it prudent enough to make management assessments on things which could also go in the wrong direction. That's what we said. Even if it would be a timing difference, because that's the issue. If you have a spot contract which will be renewed, let's say, two months later than you anticipated, it has already quite a significant impact on that particular quarter you are going to report.
That's the reason why we found it more appropriate to give a huge range by saying, "Look, these are the factors. We have solid demand. We have, of course, long-term contracts, so we can easily build up a business case up to a very high utilization of our network worldwide." It makes a huge difference whether it's 87%, 88%, 89% or 91%. That is the difference between a couple of tens of millions EUR. We are in November, means that we have a good understanding of the first 10 months of the whole year, including October. We also know the expiration of certain spot businesses which have been renewed in the meanwhile. In August, we might have had contracts with a duration of six weeks, eight weeks. Have they been renewed? Yes or no? If they have been renewed, it also might expire only in January.
The long story short is, in now making an assessment of the volatility factor being spot business, is much more based on facts than only a management assumption. That's the reason why we want to be very clear that based on the facts, we feel it absolutely achievable to end up in line with Q3 and Q4. That's the difference.
Do you expect the same volatility to persist into 2016?
That depends on which product market combinations we are talking about. I think in general, the question indeed is, if you look at all the demand drivers, are we going to operate in a 90%-95% playing field, or are we continuing around 90%, or should we assume 85%-90%? That is something, of course, we are going to carefully look at. We are going through a budget cycle. We are going to look at the first developments in January, February. In general, you could say that if you look at one of the factors which might cause some slight volatility, which is contango or backwardation, there are no indications at this stage that contango is not going to continue. The guidance on which playing field we feel that we are going to play on an ongoing basis is something we will determine early 2016.
Okay, thanks.
You asked a question about the EUR 30 million. I've tried to cover that in the summary sheet. At the beginning of the presentation, where we were looking at the status of development with respect to the strategic objectives, that was sheet six. We said, if you look at the EBITDA margin development, if you look at the pricing, you can see that we are also on track with respect to ensuring that our cost base is aligned with these strategic objectives. Included in the EBITDA development, of course, as we have seen that in 2015, is also the progress we have made on that particular strategic objective.
Jack, how many do you expect to realize this year?
You mean in 2015?
Yes.
A significant part without disclosing exactly the numbers. The total objective was on an apple-by-apple basis, which is quite difficult because since 2014, of course, we have also started new initiatives. We have also incurred additional costs. If you would eliminate that all, we still need to take some additional steps to achieve that objective, as a result of which we need 2016 to be completed in order to have the full benefit of that cost base emphasis objective.
Okay, thanks very much.
The next question is from Mr. Dirk Verbiesen from KBC Securities. Please go ahead, sir.
Good morning. Some questions left. On the increase in occupancy in Asia, Jack, what is the visibility of those? If I understood it correctly, it's oil product driven, potentially spot market driven. What is the visibility on that higher occupancy that came through in the third quarter? That's my first question. Second question I have, I think by now, talking about it for a few quarters in a row, you may be providing us the share of, let's say, the spot contracts in the result of those contracts on your group EBITDA level. The percentage of that could be very helpful to us. The last question I have is on the impact of acquisitions, greenfield and divestments, which was around minus EUR nine and a half in Q3. Is that a number that we should include for the next three quarters as well, so including Q4?
Is that a fair assumption also referring to that with the other costs? Will those continue into 2016 as well? Thanks.
You asked me about the visibility of, let's say, the occupancy in Asia. I would like to repeat one thing. That is that if you look about the visibility of the strong demand drivers for imbalance, there is a lot of focus on spot contracts, and maybe even too much, because it's the only explanation why you maybe operate somewhere between 88% and 93%. That is in fact the implicit guidance we give about the impact of, let's say, spot business. You overlook maybe completely the fundamental drivers of demand for oil storage being imbalances, as a result of which we are continuously operating in the last 12 years above 85%. From quarter to quarter, indeed, the volatility on that particular aspect could have an impact.
I think that if you look at our utilization development from 88 to 93, you have a bit of an indication what the impact of spot business could be in certain situations. The visibility about the oil storage is that, as said, when we looked at the oil storage terminals in Sebarok and Banyan at H1, that we had a few spot contracts where the duration was not exceeding the year-end date. Now the visibility, of course, on that point is much better, as a result of which we could be more narrowed down our total outlook for the remainder of the year. Looking forward to the future, I come back to the playing field approach. It depends on a number of factors, whether or not 2016 will be a 90% or 95% playing field, a 90% or 85%, 90%.
At this moment, we are not giving any guidance on that because we really would like to see a few factors to be developing in the coming months. We are well positioned to continue our strategy in any of those three scenarios, taking into account our cash flow focus and other objectives we stipulated in 2014, of course, with potentially different outcomes on EBITDA generation. You had a question about how the combination of divestments, the combination of the startup of the new terminals, and the other factors would work out in Q4, if I understood it well, but I would like to double check that question.
The impact of the divestments that you displayed on the EBITDA analysis in the chart. It was minus EUR 9.5 in Q3. Is that a number that we should include, let's say, for modeling purposes for the next three quarters, as this is basically the first quarter that we see the actual impact occurring?
It's very difficult to answer that because you have to nail it down to each individual component. Divestments, you could say yes, of course, because that's a structural component.
Exactly.
Pre-operating expenses depends on which projects will be commissioned, which will be started. There you have a variable factor. The third one, in fact, which is most likely than not your implicit question, what will be the combined contribution of Hainan and Pengerang together? Whether that will be negative, positive, or whatever. At this stage, I don't want to give any guidance on that when I have not completed the whole budget cycle and the plan years for those terminals. All kinds of scenarios are possible and not always necessarily, of course, the most negative you have in mind.
Okay, thanks.
Ladies and gentlemen, if you have additional question, please press star one. The next question is from Mr. Andre Mulder from Kepler Cheuvreux. Please go ahead, sir.
Yeah. Good morning. Two questions. Firstly, on the Dongguan, it seems that there's a further delay there. Can you make a comment there? Secondly, looking at the further decrease in net debt to EBITDA, what would you consider as a sort of ideal level there?
Starting with Dongguan. It's now anticipated to take place somewhere in 2016. Take into account the developments also in the market, taking into account other developments. With respect to net debt to EBITDA ratio, there are always different answers to that. In a situation where you would not have a growth strategy, I would feel extremely comfortable in managing this network with, let's say, a net debt to EBITDA ratio of 3.0. In a situation where you still have a growth strategy, I prefer to operate below that number, around 2.5, 2.7, in order to have sufficient flexibility in order to allocate capital to new projects. Long story short, take into account that we still have a growth strategy. We see opportunities, although the timing is not maybe as apparent as we had in the last 10 years.
The level where we are operating now, 2.76, slightly lower, is for me excellent level to combine two elements in the best way. Some leverage, still strong investment grade, very solid balance sheet, and secondly, sufficient headroom and flexibility to execute the growth strategy.
Okay, thanks.
With that, Moderator, I see that we have passed already the 11 o'clock threshold. If there is one extremely urgent question, which is also deemed very critical, I would allow for that. Make intelligent use of this option, I would say.
Okay.
After that, I would like to close the session.
Okay. The last question is from Mr. Björn Krook from ABN AMRO. Please go ahead, sir.
Okay. A lot of pressure on this, Jack.
Absolutely.
Thinking out loud now. On the U.K., that has been there since H1, I think, that you've received an unsolicited bid for it. Is there any timeframe you can provide us on that? That was actually the question I had. I had a small question on the EPS. The EPS excluding exceptionals is above the EPS including exceptionals, while the EBIT is actually the other way around. Is there something in the tax or interest line happening?
If you look at the question about the U.K.
Yeah.
It's almost impossible to answer any question in a situation, of course, where you have confidentiality agreements and non-disclosure agreements. The fact that we are still looking at it means that it's still in place, but a timeframe is very difficult to give.
Fair enough.
That's the reason why we're holding. With respect to the EPS, I will ask investor relations to contact you after the call. Is that okay?
Cool. Yeah, sure.
Okay. With that, I would like to thank you all for your participation in this call. I would like to refer to the moderator to close off this Q3 update session with Royal Vopak.
Thank you, sir. This concludes the Royal Vopak Q3 Results 2015 conference call.