Koninklijke Vopak NV

AEX:VPK

Earnings Call Transcript 2018-Q1

[Operator]

Hello, and welcome to the Royal Vopak Q1 2018 Interim Update. [Operator Instructions] Please note that this call is being recorded. I will now hand you over to Gerard Paulides, CFO. Please begin your meeting.

[Gerard B. Paulides, CFO & Member of the Executive Board]

Thank you, Johanna, and welcome, everybody, on the call, where we will talk about our Q1 interim update. In the next 20 to 30 minutes, I will have some prepared remarks, which you can follow along with the analyst presentation that we have published on our website this morning, and I will reference the slides when I to go to the next slide in the process of my remarks.We have about 45 minutes available for this call, with a little bit of time to run over. The reason why I will be aiming for 45 minutes is that we have a back-to-back AGM to the Q1 results, so we need to manage our time accordingly here.I will spend also some time during the call on the fuel oil markets, given the specific interest of the financial markets and shareholders on this topic. And after the presentation, we'll have time for our Q&A. Of course, as normal, our Investor Relations department is ready to follow up on any further questions you may have that we cannot address fully during the call.Go to Slide 2. I have to point you to the forward-looking statement disclaimer concerning statements that we make with a forward-looking nature to it. You're all familiar with the statement, but please read it carefully and deal with it accordingly.Let's go to the next slide. What are the key messages? The same way as we've spoken about 2017, we can now look at the first quarter of 2018 and qualify it as a satisfactory quarter in recognition of challenging conditions in the oil markets and adverse exchange rate movements.The EBITDA, excluding exceptional items, in fact, there were no exceptional items, was EUR 190 million. And adjusted for currency exchange movements of EUR 13 million, the EBITDA was comparable to the results of Q1 of last year. However, the occupancy rate was 87%, whereas last year was 91%. And no doubt, we'll talk a bit about the dynamics of EBITDA versus occupancy in the course of this call.Also to compare, in Q4, we had an occupancy of 89%. If you compare the Q4 results to the Q1 results, and again, if you exchange for foreign exchange movements, again, the quarters are more or less the same. So Q1 this year comparable to Q4 last year comparable to Q1 a year ago if you ignore foreign exchange movements.Now I said we had pressure in oil markets, in the oil hubs in particular, and a less favorable market structure. The other product-market segments were stable. And the return on average capital employed for the first quarter was 12.3%.In the chemicals business, we announced today that we will expand our wholly-owned Botlek terminal in The Netherlands, with a capacity of 63,000 cubic meters for the storage of styrene. That is a chemical products in the aromatics family of products, and this is to be commissioned in 2020.Just to give you a little bit of bearing, the Botlek location has a total capacity of just over 800,000 cubic meters, so we are adding about 8% capacity, but of course, in a specific product called styrene.Looking -- going to the next slide. Looking at the quarterly developments of our key figures, the financial performance, as I said, was satisfactory. The lower rented capacity at the oil markets is due to the continued less favorable oil market structure.Other product-market segments, as I said, are stable. If you translate that into revenues, the revenues were EUR 316 million in Q1 2018, and that reflects the movement of oil markets and currency movements, putting pressure on that revenue segment. Chemicals and petrol product segments positively contributed to revenue. And net profit attributable to holders of ordinary shares amounted to EUR 73 million for the first quarter. This results in an earnings per share of EUR 0.57.Going to divisional segmentation, looking at the divisions. And we have a revised regional segmentation now because for the 1st of January, our new divisions are Europe and Africa, Asia and the Middle East, then China and Northeast -- North Asia, the Americas and LNG. So 5 segments, and we merged The Netherlands divisions and EMEA and carved out the Middle East, which we now combined with Asia. So China and North Asia are now reported as a stand-alone division. We've restated all the numbers to make them comparable and applied that new segmentation to the presentation.The financial performance of Europe and Africa was stable, although occupancy rate has come down. And the strong performance of chemicals and lower operating costs in Q1 2018 have compensated for the less favorable oil market structure and resulting low occupancy in this division.The Asia Middle East division has reduced financial performance and occupancy rate, again due to the oil markets, in particular, also, Asia and the Middle East is hit by the weak Singapore dollar. So you see pressure from the currency exchange in those results.China and Northeast -- North Asia have been operating at an occupancy rate in 2017 of 70%. That has increased quite a bit in Q1 2017 to about 77%, but you need to bear in mind that this is only a subset of our operations in Asia because this is only the consolidated number, and we run a lot of our activity in that part of the world through JVs. But good momentum in China, good results, good contribution.The quarterly financial performance in Q3 and Q4 in 2017 in that division were obviously influenced by Haiteng. We've discussed that before and, no doubt, we'll discuss it further in the call today, and the impairment of Hainan last year. And therefore, Hainan is now out of the results, and this also helps with the EBITDA performance in Q1 2018.Going to the Americas and the LNG division, they are more or less unchanged, albeit, that currency exchange pressure from the U.S. dollar adversely impacted the Americas division.Going to the next slide. There is the presentation of the EBITDA from Q1 to Q1. You will see that the EBITDA decreased by 6% compared to the same period in the previous year. As I said, if you correct for foreign exchange, as you clearly see on the slides, you have comparable performance as a year ago at much lower occupancy rates.The same presentation on the next slide, but now relative to Q4. You see the same dynamics play out. Foreign exchange not that significant relative to Q4. If you eliminate that, the performance in financial terms goes from EUR 191 million to EUR 190 million, so comparable good performance in LNG Americas, China and pressure in Europe and Africa and Asia and the Middle East. That is all to do with fuel oil and crude oil in those markets.The Americas had some support also from Brazil and Mexico performance. And non-divisional-related operating expenses picked up a little bit relative to Q4 because we had low reported cost in the Q4. However, our cost program is running very well, and we see cost performance play out to our favor over time.Going to cash flow. In 2017, our gross cash flow from operations was over EUR 700 million, which resulted in some EUR 350 million free cash flow available for financing, debt service and distribution. And the net debt position at year-end stood at EUR 1.5 billion, as you can see in -- also in the annual report. And that resulted in a net debt-to-EBITDA ratio of 2.02. That ratio has not changed much over the quarter.In Q1, we saw a gross cash flow from operations of some EUR 145 million and a free cash flow of EUR 70 million being delivered.This solid cash flow from operations and financial flexibility provides us with the opportunity to invest, and you have seen earlier our investment projections over the period '17 to '19 in growth CapEx and in other CapEx leading to capacity additions in '19 of 3.1 million cubic meters.Going to the next slide and quickly touching upon 2 key events in 2018 so far. As I mentioned in our last call, we reached an agreement early '18 regarding a new pension plan in The Netherlands, the basis for a significant number of our workforce. The new pension plan is aimed to qualify as a defined contribution plan under accounting standard IAS 19. And as per schedule, it's expected to be formally implemented during the first half of 2018, the second quarter. And this is subject to the final discussions and the final arrangements being put in place. Once that is done, the settlement of the pension liability that we carry in the balance sheet results in an exceptional gain during 2018, which we will report on when it falls through.And with respect to our growth ambitions, the other comment on this slide, and also our view on the operational performance of our assets, we announced today to expand the Botlek facility in Rotterdam. I've already mentioned that, so I won't do that again. We'll come back to that maybe in Q&A.Going to Slide 10. Slide 10 shows an overview of all the growth projects. The reason why we repeat that here is because it's the important building block to our 2019 outlook. We have good momentum towards 2019. All these projects are progressing to schedule. We've now added Botlek to this. However, please note that Botlek goes online in 2020, so not in 2019. But the momentum is good, and we are, as we expressed before, confident about the commercial coverage of these projects.Going further, fuel oil. Much debated -- much commented on by the financial markets and subject matter experts, but still a very unsettled market where you see that supply and demand, supply on the refinery side, demand on the bunkering fuel oil use into power generation or industrial applications and in trading. That demand and supply is still unsettled.What we've done is we've looked at our major trading hubs -- or oil hubs, sorry, Rotterdam, Fujairah and Singapore, and we've also looked at our entire network of fuel oil capacity, which we have previously labeled as 5 million cubic meters, and made an assessment of how robust is that network, what do we need to do, how can we position those assets that are all in very competitive well-placed locations, except for Estonia, which we've put aside. That's on the strategic review. All the others are prime real estate as far as we are concerned and can compete with any one in port.In order to make those assets ready for the -- what we see in fuel oil supply and demand, we plan to invest, over the next 18 to 24 months, about EUR 40 million. And that will allow us to profitably serve our customers the emerging supply and demand patterns and to have capacity available and the flexibility available in a network that is fit for purpose for what we see in the emerging flows of this market and the flexibility required in those bunkering ports or in those trading hubs.Moving on. IFRS 16, we've mentioned this on several occasions. I just want to repeat it, so that it doesn't disappear from your radar screen. As you know, this accounting standard will be applicable as from January 2019. We already updated the numbers in the annual report, which are involved, which are currently labeled as operating leases. Just to calibrate newly operating lease, expense is about EUR 66 million, and the total lease commitments are EUR 1.2 billion. Those are known. They are in the annual report. They reflect the fuel on land leases, et cetera, including extensions of those leases, and they are the EUR 1.2 billion. That will be converted to a different treatment, i.e., there will be financial leases under IFRS 16. And what that means in practice is that you will see an uplift of the EBITDA. You will see pressure on net profit, that is purely an accounting presentation, because the cash flow, although it shifts in the cash flow statement, the total cash flow is not impacted. And if you're interested on the debt side of the market rather than the equity side of the market, the debt side of the market treats this as what is referred to frozen IFRS. So you're essentially correct for the accounting changes as per your original situation. So the impact on the covenants is none.Now, it depends a bit on how we implement this all. And what the calculations will show, we expect to have those numbers in Q2. And then, once we have them, we will share them with the market, which is yourselves, and then we will implement them in Q4.Going to the next slide, which is a bit of a repeat of the key messages. We feel good about our strategic direction. We are confident about our growth agenda to '19. We have our investment into sustaining and service CapEx to support our day-to-day performance of our assets.We're investing in IT, as you know, about EUR 100 million, a little bit more than that, and we're driving profitability. That's all good. We're confident about it. We understand those dynamics that is contributing to the value of our investment case.The performance, which is in the here and now, EUR 190 million. We're satisfied with that performance in a difficult market. Return on capital employed of 12.3%. Pressure in oil markets, pressure in fuel oil and crude in particular, low occupancy, but compensated by working hard in the spot market, in particular, to catch some of that oil and crude oil opportunity to bolster the results. That also means that, in Q1, we had benefits from that, but we are also more exposed to that, therefore, for the remainder of the year.So what we delivered in Q1 cannot be taken for granted for the rest of the year. We need to work hard to achieve this. That is why we call it satisfactory. The exposure is existing. The oil market is not favorable. The currency pressure is in existence, and we've seen that in the results. We're working the cost also very hard. We have confidence in the cost program and delivering that, which has helped in Q1. But we also see that, in Q1, the costs were somewhat lower, perhaps, than we anticipated from the cost program. It's sometimes difficult to separate what is sustained and what is facing odd activity during the year. So some of that phasing will catch up with us during the course of 2018. And perhaps, we got a little bit extra support in Q1, relative to what we might expect for Q1.However, we're not giving up on that. Of course, we do work the cost really hard. But it is an element we need to take into account for the full year 2018: so oil markets, fuel oil, crude cost, currency and asset performance.Going on to the looking ahead, I won't read this out. This is the same as you've seen before. And actually, it makes a lot of sense in today's market if you see how the Q1 results play out. All of what we've said in these sentences, you have seen in Q1. And we can discuss the segments and divisions a bit further, if you want, in the Q&A, which I'll now open up.As I said, we try to aim at 3/4 of an hour, so we have about 20 minutes for Q&A. If we get a little bit squeezed, then we may give some extra time, but let's see how it goes and open up for Q&A. So operator, if you could open the lines, then we can start the question and answers.

[Operator]

[Operator Instructions] And our first question comes from the line of Thomas Adolff from Credit Suisse.

[Thomas Yoichi Adolff]

Two questions for me, please. Now just on Slide 11. Obviously, fuel oil storage is a high-margin business and you also earned some margin from your blending activities, if I'm not mistaken. So when you say converting capacity to the desired flexibility to profitably serve the bunker market, do you mean, in part into marine gas oil, in part unchanged, and what are your customers saying? And when you say profitably serve the bunker market, do you expect the margin to be largely unchanged after your investments? And the second question, I guess, is just specifically on the ARA hub. There's, obviously a bit more competition now with Haas building a decent amount of capacity. Could we see, over time, occupancy rate actually drop further from where we are today?

[Gerard B. Paulides, CFO & Member of the Executive Board]

Okay. Thank you, Thomas, and good to have you on the call and hear a familiar voice. Let's talk about fuel oil a bit more. So the reason why we use the word profitably is to indicate that we're investing EUR 40 million with the continued, of course, desire to be competitive in the market and generate value for the shareholders. So if it doesn't meet our investment criteria, then we wouldn't be doing it. That means that this investment, in its own right, which is modest in the total investment needs of Vopak and the growth model that we have, competes well for capital. That's an important statement in its own right because that means that, over time, at least in the coming periods, we see that fuel oil can compete in our portfolio. And that is driven by the locations where we are at. First, the major locations: Rotterdam, Fujairah and Singapore, and then the strategically placed bunker facilities that you see on the slide. The exception being Estonia, I would not put that in the same box. As you know, the story on that, about 1 million cubes of capacity in Estonia. So take that off the 5 million we have in fuel oil, you're left with 4 million. And that is what we are addressing with this EUR 40 million spend over 18 to 24 months. And it covers the whole range of what you indicate, Thomas. It's not a single bet on low-sulfur fuel oil or high-sulfur fuel oil or MGO or blending and flexibility. The blending and flexibility will be, of course, determined by the customer. We make an assessment of that. We anticipate what sort of flexibility they might be wishing. Of course, we are discussing with customers what is needed, and we translate that into the layout of the terminal, the piping, the blending, the connections, the sizing of the tanks, the pumping capacity, the heating requirements, et cetera, to treat those flows. And it is truly a mix of all the flows. So it allows us to provide that flexibility and connectivity to the market, which we think will be a feature of the market because the pricing of those flows is totally undetermined at the moment. How deep high-sulfur fuel oil will go or not, whether demand will react to that, how quickly it will react. Is it conversed? Is it blending? Is it something else? We do have a fuel. We take a fuel. That's reflected in the EUR 40 million, but it's not a single product that we convert to, it's across that whole range, Thomas. Now on ARA occupancy. You've seen occupancy for Vopak in total go down from Q4 last year of 89% to 87% now. Q1 a year ago, 91%. So we are in the lower end of the bracket of 85% to 95% at the moment. That bracket is the historical bracket in which we have seen our assets operate in strong markets and in weak markets. So I think, for the total of Vopak, that is probably a fair range to continue to focus on. The pressure, absolutely, sits in crude and in fuel oil, less so or we see stable utilization in the other segments. Good momentum actually in China where utilization bumped up quite a bit. Of course, this is the consolidated assets in China that I'm talking about. But good momentum in China, good momentum in [veg and natural] oils, good utilization in, also, key petroleum products, the whole range of chemicals products. So if you summarize that at the highest level: fuel oil, crude oil, negative. The rest, stable, some pockets positive. That determined that effort utilization of 87%. What's the most interesting point for me, Thomas, is that we keep the EBITDA if I eliminate foreign exchange, which has nothing to do with occupancy. If I eliminate that, and I look at the EBITDA and across that range of 91% to 87% occupancy, we've maintained our EBITDA. That is because of hard work, I guess, and making the assets and commercial activities work at their top levels. So if you want, in terms of effort, it doesn't come automatically, and that also places '18 into perspective that we still need to see how that plays out and whether we can maintain that. It's not easy, but occupancy is one thing, EBITDA is another thing.

[Operator]

And our next question comes from the line of David Kerstens from Jefferies.

[David Kerstens, Equity Analyst]

A couple of questions, please. First of all, on the operating expense development, it was EUR 60 million lower year-on-year. I recall, last year, you did highlight cost related to investments in growth. For example, the Exmar due diligence, and also in technology. What would be the underlying development if you would exclude those factors? I think, at the Q4 stage in February, you highlighted OpEx to be more in line with the efforts of the second half of last year. It doesn't imply that your cost phasing benefit that you referred to in the call was around EUR 10 million in the first quarter, so you had a EUR 10 million positive impact from cost phasing. Then the second question relates to the impact of the impairments on the Estonia terminal and the Hainan terminal. What was the impact from the profit of joint ventures from taking those businesses out? And then finally, on the recovery in China, is there already any impact visible from the start up of the Haiteng terminal?

[Gerard B. Paulides, CFO & Member of the Executive Board]

Okay. Thank you, David. A whole lot of questions into one big question. But let's first deal with Haiteng. Haiteng is undergoing its repairs and getting ready for its commercial operations. The cooperation between the parties involved is very good, including the Chinese regulators and authorities, et cetera. What we expect is, as we said before, that Haiteng will contribute in the second half of 2018, and that is unchanged. So over the summer, that's, I think, a good description of what we expect for Haiteng to contribute again. Hainan and E.O.S., which we have indeed impaired last year. What happens now is that these assets don't contribute to your EBITDA anymore, so they have 0 contribution. Any result that is shown goes straight into the balance sheet rather than through the P&L. As a consequence of the impairment, the negative contribution of those assets in 2017, we don't split out. It's not something we give specific performance numbers for any of our assets. So I won't do that for this 2 item, I'm afraid. But it has been eliminated and it's no longer a feature of '18, but it did give us some support in the quarter. That's absolutely correct, David. On cost, there's 3 things playing out on costs. Where we have pressure on revenue on foreign exchange, we do have benefit on cost on foreign exchange. And that did help purely on the cost line in Q1. What also helped in Q1 is that we have our cost program, as you pointed out, work at full force, so we are getting support from that. And there is an uncertain element in the cost pattern for the year, i.e., how will you face your expenditures during the year. We have a lot of activity lined up. It seems that Q1 is a little bit light on cost relative to what you could expect in terms of cost performance in '18 from normal business. It's difficult to separate out your cost program versus what is that activity-phasing element. But I would be a little bit cautious on fully extending that for the year. Although, we are working our level best to compensate and control that as much as possible. But it could be that there's a little bit of pressure in the year. I hope not, but it's perfectly, perfectly possible. Whether your numbers exactly add up, the EUR 10 million or so, I think, purely on the cost line, it seems like a reasonable number. But just bear in mind that you need to build in that foreign exchange element into it, which is... Thank you, David. Operator, is there a next question?

[Operator]

Yes. Our next question comes from the line of Giacomo Romeo from Macquarie.

[Giacomo Romeo, Analyst]

I have just one more, actually. On the EUR 40 million investments in the fuel oil slide you mentioned, just wondering how much of that EUR 40 million investment relates to in terms of the 5 million cbm capacity you have -- you highlighted. So it's -- if you can provide a little bit more details on how many in terms of how much capacity that relates to?

[Gerard B. Paulides, CFO & Member of the Executive Board]

Yes. So thank you, Giacomo, for the question. To clarify that further, the 5 million is correct, that's sort of the overall capacity that we have across our network. If I eliminate Estonia, so put Estonia aside, that's a different discussion, that's an asset under strategic review, we'll see what happens with that. So if I put that aside, I'm left with, let's say, up to 4 million cubes spread across the major hubs and a multiple of smaller locations. Those locations are involved in bunkering and facilitating fuel oil for application in power generation or industrial use and trading. In order to accommodate where we think that entire batch of capacity, so the entire 4 million, needs to be to reflect our own business insights and views on where the market will settle, which is still undetermined and still needs to play out, but that's a combination of our discussions with customers and other market participants. Then we assess that EUR 40 million over the next 18 to 20 months -- sorry, 18 to 24 months, takes care of that 4 million cubes of capacity. So that positions that 4 million cubes of capacity from where we are now in a dislocated market that is not fully utilizing the assets due to market conditions, backwardation, shipping rates and a whole lot of other elements that go into this market expectations. That positions the entire 4 million into where we would like it to be in terms of flexibility, product range, blending, choices that we make on tank sizes or high-sulfur fuel oil distillates or low-sulfur fuel oil or conversion to other applications like clean oil -- clean petroleum products applications or crude. Of course, we can also take different investment decisions, which have to do with growth capacity or something like that. That's not what I'm discussing here. I'm just discussing that making the fit for purpose that 4 million cubes to where we think it can be profitable and generate value for the shareholder in terms of capital allocation in anticipation for a market that is very unsettled now needs to settle at some stage towards end of '19, '20. Then that will play out depending on how those different elements will be priced, what shipowners' choices they will make, what choices refiners will make. How they react to, no doubt, solar power pricing pattern that will emerge for high-sulfur fuel. No doubt, I should say that, a possible solar power [edged] sulphur fuel oil market. We think with EUR 40 million, we are fine. We can manage that profitably for our shareholders. So it's a total -- so if you translate it differently, it's EUR 40 million for 4 million cubes, so you can calculate the cost per cube.

[Giacomo Romeo, Analyst]

Okay. If I just may go back to one question that was asked before on -- in terms of the impact from Hainan and E.O.S, which we don't see in the P&L because it goes straight to the balance sheet. Is there any way you could quantify how much was that balance sheet impact? Or how much would have been the P&L impact if you hadn't fully impaired those assets earlier than last year?

[Gerard B. Paulides, CFO & Member of the Executive Board]

I'm afraid, Giacomo, that I'm not going to do that, so I already answered the question. We will not disclose individual EBITDA performance of assets. That's not because I want to be unhelpful to you, but I also don't want to be helpful to our competition or to other interested parties in how those assets perform. And that is why we are constrained on that.

[Operator]

And our next question comes from the line of Luuk Van Beek from Degroof Petercam.

[Luuk Van Beek, Analyst]

Yes, I have 2 questions. First, on the improvement in China and North Asia. Obviously, it almost doubled versus Q4 2017, and part of that was related to Hainan. But can you give a rough indication of how much was, say, underlying, what were the main drivers for that? And my second question is on the fuel oil. You indicate that you expected to spend up to EUR 40 million in CapEx. Do you have a rough time line of when you get sufficient -- expected to get sufficient visibility from your customers to take real investment decisions on that CapEx? And do you expect to be ready before 2020 to update most of your terminals?

[Gerard B. Paulides, CFO & Member of the Executive Board]

Okay. First, fuel oil question, while we were sort of still in that mode of the business. So yes, we can be ready in time towards 2020. We have 18 to 24 months window, which I indicated in which we will spend that EUR 40 million. The pace of which we will do that is, from that point of view, not so critical because we have that window to time and decide. We now already have customers making inquiries because of course, everybody sees this sort of market need and uncertainty and vacuum of activity. At a certain moment, that will be filled. That is different from getting commitments. So what you see at the moment is, and I highlighted that, and I will highlight it again, that we are seeing a lot of reluctance to enter into commitments at the moment, so we depend on spot activity more than we would like to. And therefore, market conditions are difficult, so we need to work that really hard to deliver '18 results to the same level as we've seen in Q1. That remains a big exposure. I don't want to be complacent about that. But slowly, slowly, you will see people take positions into, probably, back end of '19, middle of '19, capacity interest, discussions, position. People are careful at the moment. That is the best way to describe that. But the EUR 40 million will be spent in time. We have the opportunity to do so. We know where to do it and what is required. It's not just a number, it's built up with specific assets and choices that we can make. It's not a guess, it's a real number. In terms of China, what's the underlying rate. Again, that will be a sort of a way of eliminating Hainan and Haiteng. I won't do that. I will only say that we had good occupancy momentum, moving from about 70% to 77% on the consolidated assets, that's mainly Zhangjiagang, which is a very big part of our capacity in that region. That's doing really well. So across China, across the activity, it has good momentum. We hope to pick up Haiteng and determine what we will do with Hainan. It's -- on the total of Vopak, it's a relative modest number, but it's a very good contribution in a tough market where every few millions that we pick up is extremely welcome. It seems to be that it is a sustained number, rather than a one-off number and momentum in China. So I'm not too worried about China, North Asia being sort of random in Q1. I think it's a pretty solid number. The exposure in Q1 that we've seen play out and that plays out for the other assets for the year is in fuel oil, oil, crude. It's not in China. It's not in the U.S. It's market conditions, it's foreign exchange, it's fuel oil, it's crude, and it's cost.

[Operator]

And our next question comes from the line of Quirijn Mulder from ING.

[Quirijn Mulder, Research Analyst]

Very short. I would, first, remark here from my side. Thank Anil for his work, because I understood that he's going to do something in the line organization. So thank him for the work done. Then on the question from my side. First of all, on the styrene, I understood that, last year, first half year 2017, was somewhat difficult for this product-market combination. Now, you're going to expand. So I'm interested whether -- what is the reason behind that, the step forward. And yes, whether you have already long-term contracts for that product. Then can you give me an indication about the effect of the lower pension costs in the first quarter? Is that something operational as well besides the good gain? And then on the tax rate, maybe you can give an idea about the tax rate for 2018, given the fact that it's now 18.5% in the first quarter. That's all my 3 questions for this moment.

[Gerard B. Paulides, CFO & Member of the Executive Board]

Okay. Thanks, Quirijn. And Anil is sitting next to me, together Laurens from Investor Relations. But Anil was smiling all over when you were thanking him for his good services. So thank you for recognizing that. He is indeed moving on to one of our assets here in The Netherlands to do a commercial job, so thanks for that, Quirijn. Just on your questions themselves. Why are we going into styrene and against the backdrop of a difficult -- well, different, sorry, comments in '17. The '17 comments were about the operations and the capability of our assets in the Botlek to handle styrene and a number of other chemical projects that sort of intercorrelate in terms of tankage and piping and handling and capacity of the organization to deal with that. It was not a comment about demand in the market for styrene storage and handling services. Botlek is a prime real estate piece of land in our portfolio. It also is a prime piece of frontline execution over a very long period of time, but we've not invested in that asset for a very long period of time. So against the backdrop of a growing demand and growing market in styrene, which we can see, so our commercial confidence is high for that investment although the commitments are yet to follow to solidify that. Our commercial view on that is that it is in a highly attractive market. We put up modern tanks, which is a stainless steel tank setup, which is particularly attractive and needed for a product like styrene to avoid it polymerizing. So it's exactly what the customers need. They need this commitment from Vopak to put the facilities in. And it's a bit of a chicken and egg, when do you get the demand is when you have the facility, and when do you put the facility, when you have the demand. And who blinks first on that, we feel good about the investment. The demand is good, and I think I've placed '17 comments into context, hopefully, Quirijn. The lower pension cost. You're right, that is in our numbers, operational numbers from the start of this year, and we'll continue to be there. The finalization of the arrangements, which deals with the liability that we carry in the balance sheet, which is an accounting consequence of having a defined benefit scheme. If we switched to the defined contribution scheme, which is what we're doing, then that falls free. The amount is shown on the balance sheet. We still need to finalize the agreements. That will trigger some settlement discussions that are going in good spirit, very constructive, so I have every confidence we will complete that. And then you will see a number come into the P&L. And you can see more of that in the annual reports in Note 8.12. Yes, Anil is nodding to me. The cost effect is a few million cost relief in the Dutch operations. Again, it sounds a bit odd when I say cost relief, that's really the consequence of an accounting measure, it is not because we are changing the fundamentals of the pension that we offer to our employees. That's all being arranged very constructively. The tax rate. All I can say about that is that we have incorporated the tax changes in the U.S. and in Belgium. The rest is an outcome of the business mix of the different jurisdictions. So depending on where you make more or less money, then you will see the tax rate fluctuate according to the regional footprint. There is nothing magical about the numbers in Q1 in terms of one-offs that distort that pattern. So from that point of view, it is business mix rather than anything else. The only change that has not been incorporated is the awaited changes, if there are going to be, in The Netherlands, which is, well, it will play out if it plays out. And then, you can assess that as well as I can. So it's a normal pattern in Q1. I don't see anything special about it, to be honest, Quirijn. So let's move on to the next question, and I want to try to start wrapping up because I'm running out of time shortly. Next question, please?

[Operator]

Our next question is from Thijs Berkelder from ABN AMRO.

[Thijs Berkelder, Equity Research Analyst]

It's Thijs here. Congratulations with the results, especially impressed I am with your chemical performance. Can you maybe give us a bit of glimpse to what you expect in terms of quarterly sequential development in '18 in chemicals? I think you just come out of a restructuring, let's say, in the Netherlands. Out of conversions here, Zhangjiagang, is now starting to improve, and the Southeast are clearly acting as well. So what is your expectation on chemical for the rest of the year? Then secondly, leverage. Your leverage has fallen below 2x EBITDA. Meanwhile, you're working on, I think, about EUR 1 billion of expansions, a bit higher than the EUR 40 million for fuel oil. When will we reach peak leverage roughly?

[Gerard B. Paulides, CFO & Member of the Executive Board]

Okay. You mean peak leverage or bottom leverage?

[Thijs Berkelder, Equity Research Analyst]

Well, with the expansions, of course, CapEx, in certain months, will come in. So when will we reach peak leverage and what will it be, roughly? Not a precise number, but...

[Gerard B. Paulides, CFO & Member of the Executive Board]

Okay. Thank you, Thijs. First, on the chemicals momentum. I think the fundamentals of chemicals are supportive, the long-term trend is positive. You can, I think, expect in the chemicals market a continued activity in petchem applications in the world. So the fundamentals are good. The desire from Vopak to expand in this segment is clear. Obviously, we like the chemicals industrial connections. But also on distributions, we can see good opportunity. You now see that reflected in a difficult oil market, where you see the strengths of the Vopak network of terminals and different footprints play out, where one can compensate or take over from the other if one part of the business is in a little bit of trouble, which is crude and fuel oil. So chemicals is doing what it should be doing and performing well. I don't see that has anything in Q1 that I would like to highlight as being off-trend or of an exceptional or nonrecurring nature in its own right, and you've already highlighted some regional dynamics there. But if I would point particularly at the U.S., it's predominantly chemicals. And China, you've already highlighted 1 or 2 of the assets. In terms of debt, yes, we are seeing the debt-to-EBITDA drop off a little bit. That, of course, cuts 2 ways. In all fairness, the debt has come off, but also the EBITDA has come off a bit. So from that point of view, it's a bit of an outcome of all the moving parts. I think the essence of, however, the debt position that we have is the tenor. The pricing is flexible. The capacity is flexible enough to execute our investment program quite well. I don't see any constraints there. If it were to go up, and it would go up to about 3 or so, I would be terribly worried about that. I can easily see that we can accommodate those flexibility and maybe even more if that's needed, but we will judge that as it emerges. I'm not pegging ourselves on a certain number from that point of view, but the message I have really is that I don't see us being constrained at that or in the foreseeable future. The new investments, of course, are investments because they should be showing off cash flow from ops. And that cash flow from ops should contribute to EBITDA, and that EBITDA will then translate again into the ratio. So once you are over the investment hub for that batch of assets, they should help positively to pull that ratio back into where it should be again. With that, I want to move on. If there's any other questions, but I understand there are still 2. Okay. Let's take those as well. Next question.

[Operator]

Absolutely. Our next question comes from the line of Thomas Van der Meij from Kempen.

[Thomas Van der Meij, Analyst]

I actually want to dive a bit deeper in your cost side. I mean, you already indicated that Q1 seems to be light on the cost side. However, if we focus on The Netherlands. I mean, we've seen EBITDA declining year-on-year from 92% -- or sorry, it's more Europe and Africa, we've seen occupancy declining from 92% to 86%, but in your EBITDA bridge, it's basically a 0 movement. Could you explain what happened there and what are the main drivers of the cost saving? Secondly, given the difference in performance between your oil products and your chemical products. Could you give us the occupancy instead of regionally on the different business lines? So occupancy for your oil products and occupancy for your chemical products.

[Gerard B. Paulides, CFO & Member of the Executive Board]

Okay. First, on your cost question, what's driving the cost performance in the EMEA region in particular. I think what you can absolutely highlight is, first of all, the lack of a foreign exchange effect there, right? So if there's a performance improvement in The Netherlands, it's not due to foreign exchange movements, it's due to cost management. The cost management is applied consistently across all the assets in the region. It's a high-potential area for the EMEA division, particularly because they have so much pressure on the oil side, they really feel that they need to defend their margin by managing the cost really well. Contributing into that are the way we go about our maintenance and operations. The pension cost restructuring does make a contribution. And when I say maintenance and repairs and operational activity, I mean, positive cost management. I don't mean not executing what needs to be executed. Safety, health, environment is core to what we do. It's core to the investment case. It's core to the customers. It's core to our own people who we want to have to go home safely at the end of the day, every day. So it's real positive view on optimizing cost across the assets. It's going well. I would only say there's good momentum. On occupancy between oil and chemicals, what you see go down in oil is almost entirely explaining the drop in occupancy. If I eliminate all the oil assets and crude oil, then I'm more or less stable on occupancy for the non-oil assets. I think that's all you asked. Did I cover all your questions? Or...

[Thomas Van der Meij, Analyst]

Yes, but it will be great if you could quantify it a bit further. So basically, could you split the cost reduction in your EMEA region between, like, pension, I think higher cost in Q1 last year and the operational performance? And also on the occupancy levels, I mean, I understand it's stable, but what's the level?

[Gerard B. Paulides, CFO & Member of the Executive Board]

On the cost, I will refer you to Anil and Laurens to follow that up and work the detailed numbers, if there's anything to be added there. As I said, the pensions may be a number you could get a sense for. But Anil and Laurens will follow up on that. On the occupancy, as I said before, the drop you're observing is entirely the fuel oil and crude. If I eliminate that, then the rest is stable, so you could -- I think you can do the calculations then. I don't have the number for chemicals at the top of my head, but if you just weigh it out, then I think you could get there. And Anil and Laurens will help you establish that number. It's entirely in the oil and fuel oil segment.

[Operator]

The last question comes from the line of David Kerstens from Jefferies.

[David Kerstens, Equity Analyst]

Just a quick follow-up, please, on the cost saving. Do you anticipate any start-up cost related to all the capacity that will be commissioned in 2019? You highlight the high commercial coverage, but do those new terminals, will they immediately contribute already in '19? Or do you expect some start-up cost already this year to be taken? And is that explaining the cost phasing that you're referring to earlier?

[Gerard B. Paulides, CFO & Member of the Executive Board]

No, that's nothing to do with the cost phasing comment I made earlier. That is just -- if I look at our total cost for '18 relative to what I see in Q1, it seems it turned low in Q1 just to what I would expect the operating cost to be. Our -- the good news is our cost management program is driving that cost to go down. But even if I take that into account, it feels lighter than what I expected it to be. And that will depend on our cost patterns in the remaining quarters of the year, and that creates, therefore, a word of caution for me on '18. That has nothing to do with start-up costs. The '19 capacity will be spread over the year. And you've seen in the previous presentation that, that is spread over the different quarters so you can build that in. And then, typically, I would say, be a bit cautious at the initial quarter of start-up. You have some running costs the quarter before to take care of the new ramp up, your capacity and your utilization. So it does contribute fairly immediately, but if you build in a little bit of leeway there, I would not be uncomfortable.Okay, we need to close the call because I'm being signaled to move elsewhere. I hope we covered all the questions. Thank you for participating, and we will talk to you with the next quarter or at an earlier opportunity. Thank you all. And, operator, if you could close the call.

[Operator]

Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.