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 a listen only mode. Later, we will conduct a question and answer session. I would like to hand the conference over to Mr.
Jack DeCray, 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 Valparais. Before starting the presentation, I would like to emphasize the forward looking statements 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 am 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 eleven hours, so that means that we have one hour available. I would like to keep the presentation within thirty 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 07/02/2014 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. And 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 controlled interest and the cash flow consequences with respect to the distribution of dividends to either the minority entity and the major shareholder. So 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 United States, two plots of land. Total proceeds around €300,000,000 and of course that is immediately allocated to our growth strategy and reduction of our net debt to 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 07/02/2014 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 twenty fourteen up to 2016 was reducing the total program between $800,000,000 up to $700,000,000 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% to 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. And 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 07/02/2014 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.
So 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. So 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 United States 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. And the EBITDA and net profit development is reflecting a 5% to 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.
So the revenue developments of course are primarily driven by the developments in the West European region and the Asia region whereby The Americas have been 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 had the opposite situation because of the depreciation of certain currencies compared to the previous period. So that is more or less inherent explanation of the revenue development, but more important is that what we have experienced in the last ten or twelve 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 contracts 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 and 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 as the minimum. And 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, and that is exactly the reconciliation with the topic I wanted to address was that taking into account the development in the last eleven, twelve 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 02/2008. 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, but 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. But indeed, if we are talking about the range 85% up to 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 with how we could position ourselves in that particular timeframe. On the long term, we remain of course undiminished and majestic about the role we play in the China market and in the Asia market, but 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. So long story short, we are now operating slightly above 90% and so that means that based on that we try to develop and continue our strategy as stipulated in 07/02/2014, focusing on the free cash flow focus, trying to sharpen our network position by divestments and of 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 and that is something which of course is not new for you.
Looking at Page 12, if you look at the occupancy rate development, it's 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. But as said, we should not overlook one factor and that 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, robust, is solid, but the main focus area is indeed what is the swing factor between 8595% 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 and that is exactly in fact the message, the key message of our focus of the strategy in July 2, and we continue doing that.
So 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. And that mean 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 $795,000,000 for the year 2015, exceeding of course the 2012 level of $768,000,000 So 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. And 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 then take and normalize that constant currency analysis of six zero four and you compare that with the six zero two we report, then 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 ups would start contributing negatively to our result development. These start ups have been included in some joint ventures.
So the total impact is more or less $10,000,000 negative on that constant currency number of $6.00 4. Then the positive developments in Netherlands, EMEA and Americas, we have already explained that in our H1 presentation, no significant changes there and also no significant changes expected for the remainder of the year. And of course, one big change that is Asia and of course the other costs where we also had to incur in 2015 quite some higher pension charges according to IAS nineteen 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.
So for this moment, I would like to continue with the sheet 16. And in sheet 16, we have now included the non IFRS proportional information. As you can see on the proportionate EBITDA development, 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 of the 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. But of course on a proportion 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.
So the whole step next step of course is whether or not we could increase that while not negatively affecting the risk return profile, because there 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 is let's say remains balanced. What we have seen in the last one point five years is that we have approved a few new projects and some of these projects or most of these projects are the so called industrial terminal type of projects, because 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. And 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.
And so 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 and 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 healthy return on our investment. So 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. And as said, with respect to Q4, we expect that the developments in Q4 will be in line with the developments in Q3. Page 19 gives 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 Kirti in Malaysia, we have operations in Thailand, We have operations in Chongqing in China. We have operations in Singapore. We are going to add industrial terminals in Pengerang.
And these dynamics in the Asian world 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 products to our, let's say, petrochemical customers. So that part is not affected. Then the second part, if you look at oil products, the main driver for demand for storage and handling of oil products remains imbalances. And 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 in 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. And when you combine that with increased tank terminal expansion in the region, that in the current timeframe, it's very difficult to really utilize the assets at higher levels. But the robust demand drivers are still in place. So what we are talking about is indeed, if we would like to utilize our assets at a higher level, also in oil between 8595%, what type of growth level do we need? What timeframe do we expect needed for and that is currently highly uncertain.
And within that business environment, you 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. And we also see on the other hand that, of course, because of the additional capacity in the market that there is sufficient capacity available for many of the customers. But 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, etcetera, etcetera. So very dynamic world, very robust demand drivers, but absolutely sufficient capacity in the market to accommodate that. And 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% and 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. And what we see is that because of the enormous slowdown in the growth perspectives of the China market in combination by the additional capacity, there we see that indeed quite some changes have occurred and also there the timing factor is quite uncertain. But 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 2014 at 33,800,000 cubic meter of capacity.
If we add all the changes in 2015, we are now at 34,100,000 and when completed in 2019, we are heading to a total global capacity of 38.7 And 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 in Page 22, we always give a summary, where are these capacities operated and 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 United States, 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. And the only thing I would like to emphasize here that different from the two large projects we commissioned recently being the Pengerang SPV-one project and the Hanyang project, most of these expansions which are currently under construction are already covered for a major part by commercial contracts. So we explained our philosophy about the expansion strategy in Hainan and in Pengerang. These are, let's say, expansions of either existing terminals or in certain situations, new operation, but they are covered most of the total capacity by commercial contracts.
So 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 were used to the Vopak growth strategy in the last ten years, but 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 the Page 27, that is the topic I was referring to. As part of our focus, hub terminals, industrial terminals, distribution terminals and gas markets, we have now announced an expansion by means of an acquisition of an industrial terminal supported by a twenty 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% to 25% chemical products 20% to 25% oil products 45% to 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. Crodant, 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 and of course with respect to gas products before I forget it, supported in our LNG terminal concept supported by long term contracts. That means that on Page 30, we expect that Q4 EBITDA excluding exceptional items to be in line with Q3 And that means that more or less we are heading for the total year in the direction of $795,000,000 for the year 2,050.
Slide one, 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, in the last one or two or three years that when we were confronted with swing factors specifically affecting your occupancies between 8595%, 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.
So 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 and 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.
But 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. The first question is from Mr. Bjorn Krug from ABN AMRO. Please go ahead, sir.
Good morning, Jack. Yes, two questions from my side. Just a bit more detail on what's happening in terms of profitability in Asia? So 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? And when would you expect the negative contribution from these terminals to roll off and move into a more positive territory? And then second question is on the Oil Products side. We see more stories emerging that these markets are flipping into contango. And 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? And are you what are you seeing in terms of pricing in Oil Products? Thank you.
Thank you very much, Bjorn. 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. 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. So, 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.
If you then look at Hainan, as said, we are not disclosing the performance of individual terminals. But as said in the waterfall analysis, 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.
No, no, me see quickly. I'm looking as well. Yes, yes, yes. Let me see,
it's 15. 15, what we have tried to explain on 15 is that indeed the combination of Hainan, Pengerang divestments and positives had around a $10,000,000 negative impact in total. Your question is, could you please split it up in the individual terminals and 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. So answering your question in a different way, in Hainan, and there was another question, we have experienced after the commissioning of the terminals, quite some interest from traders and that has to do of course with the contango position in crude oil.
So 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. We have been able to put a huge part of that in the market with 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. And in Hanyan, we have 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. So 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. And 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.
Yes, okay. What I'm of course trying to get at is, is this a low point that we've seen all the costs in now? And is it now a question of ramping up towards full capacity or however long years it takes? I'm trying to find a base number.
Yes. And 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. So we are not giving any, let's say, specific guidance on that particular direction. The other question was, because we talked a lot about Hanyan, 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 in but it might be step by step. So also there we would like to see what type of pattern we have to look at. But that's it. 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 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.
I'm I had sorry, I had a question on the product side as well. So the oil products, how that is behaving? In a specific region? Yes, in general. So 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 the general oil products, is that spreading to other regions? I might not have understand your earlier answer, but could you
No, comment on 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. So what we see, we see continued, of course, imbalances in fuel oil, we see continued imbalances in gasoline, and 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 8595%. So a long story short, we have seen contango specifically in the crude oil products. We have seen some contango in other products, but 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 dieseling and gasoline has already been taken up by the demand resulting from these imbalancing factors.
Cool.
That was what I was looking for. Thanks. The
next question is from Mr. David Kerstens from Jefferies International. Please go ahead, sir.
Good morning, Jack. Have two questions, please. First of all, on your Asian subsidiaries, if you step out the net income from joint ventures, the profitability goes down slightly in Q3 compared to the second quarter by about €2,600,000 while your occupancy rate increases from 85% to 89%. Is that explained by the weakness you see in chemical storage, particularly also in Changchakang? And how much is explained by a relatively lower Singapore dollar in Q3 compared to the second quarter?
That's my first question. Then secondly, on Hainan, you mentioned that this is being used by trades currently. I 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? And then finally on Pengerang, is that still making startup losses now that the capacity has been fully covered at commercial contracts?
Those are my questions. Thank you.
Okay. 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, then we have a negative foreign currency translation effect from that period. So that's one reason.
The second reason is it has more to do with a mix in the product market combinations and 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, then that is also an explanation. So you have those two are the most important explanation for the deviation you just referred to. With respect to Hanyan, as said, the original strategic concept we were aiming for was that looking at the future need by different specification 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 Hanyang.
Currently, we indeed, we experience different additional storage needs like the traders, like strategic storage. So 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. So long story short, we keep open minded for all these developments in order to do the optimal optimal use use of of our our Hanyan terminal going forward. While doing that, we just have to experience some uncertainties in that.
And with respect to Pengerang, as said, we don't want to disclose any individual terminals with respect to profitability. But the fact that we said, look, going forward for Q4, we expect more or less 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.
Alright, thank you very much.
The next question is from Mr. Thomas van der May from Kempen and Co. Please go ahead, sir.
Good morning, Jack. Could you give us I mean, you already mentioned shortly that the dividend distribution from JVs had 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 and 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 has not taken place for instance in 2015. So that is the generic answer. And 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.
But now within the individual periods, you just talk about generic timing differences.
Okay. So 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 and we will do it now in January, that could have quite an impact on the reconciliation. But 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, but this is the just explanation that there is, let's say, no other story behind it. Okay.
And then on your occupancy in Asia, I mean, you benefited from the oil storage. How much capacity do you still have available for oil storage in Asia now?
The
detailed capacity then you are talking about because the occupancy rate we disclosed is of course because it's corresponding with the revenues, meaning of only the group companies. So that means that your question is related to Banyan and Sbarroc 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. And if I may remember correctly, mean at H1, the pressure on occupancy ratio was mainly related to Songye Gang. How did that I know you do not disclose like individual terminals, but is the situation there more stable now or did you see like more did you lose more contracts?
No, if you would use the word stable, I think that's a good reflection. But we indeed, we gave Zhangjia Gong as a good example where following the enormous demand for additional volumes of chemicals in the Chinese market, because of the economic growth in combination with capacity expansions in Zhangjia Gong. Zhangjia Gong was an example of a group company indeed where the total capacity utilization dropped below the 85% and indeed we have had we have not seen since H1, let's say any major changes, but 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 Aufers from Raboban. Please go ahead, sir.
Yes, 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, August. And now you provide a very exact range. So what's the reason that you're so much more confident right now and you're only three months further?
Or is this, say, provide some insight in the underlying volatility going forward?
So did
Yes. And the second question is maybe towards base. How are you proceeding with the $30,000,000 cost reduction program?
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, and we had to make that assessment in August. Taking into account the developments in Asia and China, we didn't feel, let's say, prudent enough to make management assessments on things which could also go in the right in the wrong direction. So that's what we said. And 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, then you anticipate it has already quite a significant impact on that particular quarter you are going to report.
So 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. But it makes a huge difference, whether it's '87, '88, '89 or '91, that is the difference between a couple of tens of millions. Now we are, let's say, in November, means that we have a good understanding of the first ten months of the whole year, including October. We also know the expiration of certain spot businesses, which have been renewed in the meanwhile. So 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, let's say expire only in January. So 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. And 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.
And 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% to 95% playing field or are we continuing around 90% or should we assume 85% to 90%. And 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.
But 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, let's say, not going to continue. So but the guidance on which playing field we feel that we are going to play on an ongoing basis is something we will determine early twenty sixteen.
Okay, thanks.
And you asked a question about the 30,000,000 I've tried to cover that in the summary sheet at the beginning of the presentation where we were looking at, let's say, the status of development with respect to the strategic objectives. That was sheet six. And 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. So 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.
And how many do you expect to realize
Mean in '20 Yes. Significant part without disclosing exactly the number. So 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, but 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. Derek Froebisen from KBC Securities. Please go ahead, sir.
Yes, 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 high 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, so the percentage of that, that could be very helpful to us. And the last question I have is on the impact of acquisitions Greenfield and divestments, which was around minus 9.5% 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.
Okay. 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 and 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 8893% and that is in fact the implicit guidance we gave about the impact of let's say spot business and 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 twelve years above 85%. So from quarter to quarter, indeed the volatility on that particular aspect could have an impact and 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 Sbarroc and Banyan at H1 that we had a few spot contracts which where the duration was not exceeding the year end date.
And 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 let's say the playing field approach and it depends on a number of factors whether or not 2016 will be a 90 or 95% playing field, a 90% or 85%, 90%. And at this moment, we are not giving any guidance on that because we really would like to see few factors to be developing in the coming months, but we are well positioned to continue our strategy in any of those three scenarios taking into account our cash flow focus and other objectives, which stipulated in 2014, of course, with potentially different outcomes on EBITDA generation. And then 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. Yes,
the impact of the divestments that you displayed on the EBITDA analysis in the chart, so it was minus 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. Pre operating expenses depends on which projects will be commissioned, which will be started. So there you have a variable factor. And the third one, in fact, which is most likely and not your implicit question, what will be the combined contribution of Hanyan and Pengerang together, whether that will be negative, positive or whatever.
And 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. So, all kind of scenarios are possible and not always necessarily of course the most negative you have in mind.
Okay, thanks.
The next question is from Mr. Andre Mulder from Kepler Cheuvreux. Please go ahead, sir.
Yes, good morning. Two questions. Firstly, on the Dongguan. It seems that there is 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, take into account other developments. With respect to net debt to EBITDA ratio, there are always different answers to that. Situation where you would not have a growth strategy, I would feel extremely comfortable in managing this network with, let's say, net debt to EBITDA ratio of three point zero. 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.
So 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 ten years. The level where we are operating now two seventy six, 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 11:00 threshold.
If there is one extremely urgent question, which is also deemed very critical, I would allow for that. So make intelligent use of this option, I would say. And then after that, I would like to close the session.
Okay. The last question is from Mr. Kruk from ABN AMRO. Please go ahead, sir.
Okay. A lot of pressure on this, Absolutely. I'm 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. And 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. So is there something in the tax or interest line happening?
If you look at the question about The UK, it's almost impossible to answer any question in a situation of course, where you have confidentiality agreements and non disclosure agreements. So but the fact that we are still looking at it means that it's still in place, but the timeframe is very difficult to give. So that's the reason why we are Helden. And with respect to the EPS, I will ask Investor Relations to contact you after the call. Is that okay?
Yes, sure. Okay. With that, I would like to thank you all for your participation in this call and I would 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 twenty fifteen conference call.