Koninklijke Vopak NV

AEX:VPK

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and welcome to the Vopak First Half 2022 Results Conference Call. My name is Ben, and I will be your coordinator for today's event. [Operator Instructions].

I will now hand you over to your host, Fatjona, to begin today's conference. Thank you.

[Fatjona Topciu, Head, IR]

Hello, and good morning everyone, and welcome to our Half Year 2022 results. My name is Fatjona Topciu, Head of IR. Today, our CEO, Dick Richelle and CFO, Michiel Gilsing, will guide you through our latest results. Our COO, Frits Eulderink is here as well, and he will be available for questions during the Q&A session.

We will refer to the first half 2022 analyst presentation, which you can follow on screen and download from our website. After the presentation, we will have the opportunity for Q&A. A replay of the call will be made available on our website.

Before we start, I would like to refer to the disclaimer content of the forward-looking statements, which you are familiar with. I would like to remind you that we may make forward-looking statements during the presentation, which involves certain risks and uncertainties. Accordingly, this is applicable to the entire call, including the answers provided to questions during the Q&A.

With that, I would like to turn the call over to Dick. Thank you.

[Dick Richelle, Chairman & CEO]

Thank you, Fatjona and a very good morning to all of you joining us in the call. Today, we published Vopak's results for the first half year of 2022. During this period, we set our strategic priorities and acted accordingly. Our 3 strategic priorities that we set out in our Capital Markets Day are, improve the performance of our portfolio; grow our base in industrial and gas terminals; and accelerate towards new energies and sustainable feedstocks.

We progressed on our strategic priorities during the first half of 2022. We improved our performance in a volatile energy market. Positive revenue developments were offset by higher costs, related to the surging energy and utility prices. At the same time, our growth projects contributed well. This paves the way for us to set an EBITDA expectation for 2022 in the range of €830 million to €850 million. On gas, our new joint venture, Aegis Vopak, positions us as the largest storage provider for LPG and chemicals in India with 11 terminals across the country. On LNG, our Gate terminal in Rotterdam is currently fulfilling a very important role on the energy security of Northwest Europe.

And looking at our industrial terminals, our global network gives us a leading position, and we expanded again in China. Our opportunities for developing hydrogen infrastructure are accelerating, like, for example, the liquid hydrogen study between Portugal and Rotterdam that we announced last week. We revised our assets value and booked an asset impairment for the charge of in total €468 million. This asset valuation has no impact on the execution of our strategy, as we are focused on executing and accelerating the energy transition by taking a proactive approach towards repurposing some of our existing assets. Michiel will guide you in more detail through individual assets.

Now let's move to the Russia, Ukraine Board, which is, as we all know, a major humanitarian drama and we sympathize with the people who are now suffering from the violence of this award. Vopak is monitoring the situation closely and continues to be fully committed to adhere to develop and sanction laws and regulations. As governments try to ensure energy security and affordability, we are following applicable government regulations with regard to energy imports from Russia.

The Russia-Ukraine war and the international sanction regimes make the market situation volatile and uncertain. Direct impact is assessed to be mainly in Vopak Europoort terminal and to be limited on Vopak's Group level. There is, however, an indirect exposure through factors such as utility prices, inflation, market conditions and exchange rates, and that was considered during the individual asset revaluation performed in the second quarter of '22.

Now let's take a step back on markets, products and our service offerings. In principle, we serve 2 end markets, namely energy and manufacturing, and we do so with a wide variety of products. The product mix has already shifted over the past decade and will shift further as the energy transition accelerates. To customers, we offer infrastructure to support in industrial or energy complex, provide pure distribution services or multipurpose facilities. The energy transition will not happen uniformly. Vopak will be a critical partner standing side-by-side with those companies as they go through change. They need a partner like Vopak to assist in the energy transition, because the world is changing.

Now let's move to how the market developed and how the impact it has for Vopak. Starting with gas, the Russia-Ukraine war has put security of supply at the heart of European energy policy. Pipeline imports were lower than in previous years, leading to a record high LNG volume to Europe. For Vopak, that means that our Gate Terminal in Rotterdam is currently fulfilling a very important role in the energy security of Northwest Europe, and we are supporting further expansion.

On the new energies and sustainable feedstocks, we are making good progress in accelerating towards that segment. New opportunities in liquid hydrogen between Portugal and the Netherlands, together with Shell, ENGIE and Anthony Veder are being studied. Furthermore, we are developing a green ammonia import facility through ACE terminal in the Netherlands.

Let's move to oil and look at the market, because following the international sanction regime, the global oil flows are rebalancing. Euro market was initially geared for maximum efficiency, but as a consequence of sanctions, we see more long-haul product trade flows. At the same time, China demand is a key factor going forward. Now for Vopak, that means that the demand in the hub locations continues to be relatively soft due to tight physical markets for especially diesel, although we've seen a slight improvement during the second quarter in Europoort. Our fuel distribution facilities are performing well.

On the chemicals market, that market has been performing well in the first half due to strong global demand for manufactured goods, with the U.S. being especially strong. China lockdowns are impacting manufacturing prospects in Asia -- in China and Southeast Asia. And in addition, European production is under pressure, which in itself drives import opportunities. For Vopak, that means that the performance in chemical terminals was solid as well. Chemical throughput increased due to new industrial terminals and a further recovery in volumes at the existing sites.

In our last calls, we highlighted the various levers that have impacted our performance. We increased EBITDA by €5 million, corrected for currency translation effects, to bring it to €433 million. Let me take you through each element of our business performance in more detail. Starting point is last year's first half EBITDA of €403 million. Global commodity markets remained volatile in the first half. The chemicals market further improved as demand for chemicals remained strong.

Chemical supply chains are filling up with products and we observed an increase in both, storage demand, as well as chemical throughputs across the different geographies. The all market as said, remained volatile on the back of high prices and limited availability of product. And increased energy and utility prices led to an increase in our cost base. At the same time, we have delivered on our growth projects, which have contributed €19 million.

On gas, our new joint venture, Aegis Vopak, positions us as the large storage provider for LPG and chemicals in India, with 11 terminals across the country. On LNG, as I said, our Gate terminal has taken 3 initiatives to strengthen its position and increased its truck loading capabilities, and increased its sent-out capacity to 16 bcm, and we initiated an open season for an additional fourth tank, which has a capacity of 4 bcm of send-out.

Now looking at the industrial terminals. Our global network gives us a leading position. We expanded again in China with new ammonia storage in an industrial setup. As mentioned in our Capital Markets Day, we aim to allocate €1 billion in growth CapEx to industrial and gas terminals by 2030. The momentum is building around the infrastructure required for energy products of the future.

We will invest €1 billion into new energies and sustainable feedstocks by 2030. And you will see us active in 4 main areas; hydrogen, low-carbon feedstocks, CO2 infrastructure, and long-duration energy storage. Ammonia, liquid organic hydrogen carriers and in the future, liquid hydrogen are significant opportunities for Vopak to win as we already have a strong footprint in 6 locations around the world.

Recently, we announced our agreement with Shell New Energies, ENGIE and Anthony Veder to study the feasibility of producing, liquefying and transporting green hydrogen from Portugal to the Netherlands, that would then be stored and distributed for sale. On low carbon feedstocks, we have already a strong footprint of around 25 existing biofuel locations across the globe. Terminals infrastructure for any CO2 needs to be in place and scale and competence is required to do so.

Increasing renewable energy production and consumption will require intermittent storage, an area which we are also active on. We aim to create value for all stakeholders, which means society at large. We aim to do so through our sustainability road map that contains 12 key themes. This can be broadly categorized into care for people, planet and profit.

Now let me give you a few examples to make it more specific. In the first half of 2022, we managed to reduce our Scope 1 and 2 greenhouse gas emissions by 11.5%. This reduction was achieved through energy efficiency measures and the purchase of renewable electricity at our locations in the Netherlands, Spain and Singapore.

On diversity, we further improved the percentage of women in senior management positions to 18% as per the first half of 2022. We support the United Nations sustainable development goals and through our activities we contribute specifically to 5 sustainable development goals. Our solid performance in ESG benchmarks reflects our ambitions, disclosure and plans as laid out in our ambitious sustainability road map.

So all-in-all, we are a leading global platform in terms of scale, locations, capabilities and customer base. Because of this leading global platform, we have unparalleled access to growth opportunities related to the changing energy mix. And while doing so, we improved the performance of our existing portfolio, are committed to ESG in what we do and how we do things and deliver attractive cash flows and returns for our shareholders. How do we do that? By improve, grow and accelerate. Improve the financial performance to a minimum cash return of 10%; grow our base with €1 billion by 2030; and accelerate towards new energies and deploy €1 billion growth capital by 2030.

Over to you Michiel.

[Michiel Gilsing, CFO]

Thank you Dick, and good morning to everyone on the call. I hope you're doing well. As Dick said, we have a unique, diverse portfolio and are proactively positioning ourselves for the future. Before we start with the first half year performance, I would like to repeat the key financial focus areas that I also communicated during the Capital Markets Day.

Our first priority is to improve the performance of the portfolio, which is one of the key pillars of our strategy. We have, as I said, a strong focus on free cash flow generation by focusing on costs and having a very disciplined CapEx allocation, and we will actively manage our portfolio of assets. This puts us in a position where we are able to finance a progressive dividend policy as we also announced. And what I want you to remember is that we will proactively create value by improving the operating cash return of the existing portfolio and new investments. We consider the operating cash return a proper indicator of value creation for us as a company.

Now moving to the key messages of the first half of 2022. Well, first of all, we recorded an exceptional item, an asset impairment charge of €468 million, on which I will give you some more further details in the next slide. We improved earnings, measured as EBITDA, excluding exceptionals in the current very dynamic business environment. Our operating cash return came in at 11.4%, which was mainly driven by lower operating CapEx during the first half. Naturally, we have a higher operating CapEx during the second half of the year.

The leverage ratio of 2.86% is within our leverage range of 2.5% to 3%. And during the second quarter, we successfully renewed our revolving credit facility of €1 billion, which is now also linked to several sustainability-related KPIs. Then to the drivers for the asset impairment charges. Well, Vopak has recorded an asset impairment charge of €468 million. And the asset valuation considers the following. First of all, the impact on long-term financial projections for revenue and current dynamics related to inflation pressure, utility prices, labor and material costs and among others, transition in the energy market associated with the Russia-Ukraine war.

Secondly, our proactive approach to repurpose some of our existing assets in line with the strategic priorities in which the growth of the company will be focused on its industrial and gas terminals and accelerate towards new energies and sustainable feedstocks.

Thirdly, the most recent energy transition scenarios in the OECD countries and the revised asset valuation methodology for our oil assets has also led to part of the impairment in this quarter. As a consequence of these both factors, we impair effectively 3 locations. First of all, the Europoort for €240 million, Botlek Terminal in Rotterdam, chemical terminal for €190 million and the LNG terminal in Colombia, a joint venture for €36 million. Impairments are reported as exceptional items and have no impact on the cash flow generation of the company.

Due to amongst others decreasing results in Europoort and Botlek, the outlook for taxable profits further deteriorated. As there is not sufficient future taxable profits available, we also had to release the deferred tax assets in our numbers. Part of it has gone via the equity and the other part has gone as a tax charge into our regular P&L. And as such, has not been reported as an exceptional item, but just as a normal item. That's why you see that the earnings per share in the second quarter was materially lower despite the better results in the second quarter versus the first quarter.

If I look at the EBITDA and this waterfall, the EBITDA improved in the first half compared to last year due to positive performance in the Americas and positive currency movements. China and North Asia performance reflects the benefits from growth projects in industrial terminals, which we recently commissioned in the south of China. And while the Europe and Africa performance is negatively impacted by the volatile oil markets, we see some recovery in the second quarter versus the first quarter.

We go to the slide where we compare the first quarter '22 with the second quarter of '22, you see that our EBITDA improved primarily due to the higher net sales in Europe and Africa and also because you still see the benefit of the foreign exchange translation results. The total proportional occupancy increased to 87% in the second quarter compared to 84% in the first quarter, and this was mainly related to the improved occupancy at the Europoort and the Botlek terminal.

Americas performance was negatively impacted, primarily because of higher cost and to a lesser extent by the divestment of our Canadian terminals. New energy and LNG performance was impacted by super tax imposed in Pakistan, the retrospective charge of which has landed in the second half versus the first half, and that was to do with the super tax in Pakistan. And in addition to this, we have some negative foreign exchange effects in Colombia.

On the divisional performance, some details. The Americas divisions benefited from growth projects and an improvement in autonomous performance. The quarter-on-quarter change in Americas is mainly driven to higher cost in the second quarter. And the uptick in occupancy is the outcome of the strong economic activity mainly in countries such as the United States and Brazil.

The Asia and Middle East occupancy rate reflects persisting soft business conditions in oil markets. The improvement compared to last quarter is mainly related to currency exchange movements. China and North Asia division performance remained solid this quarter as well. And the performance of Europe and Africa, as I said, reflects the sequential improved market conditions in Europe, combined with the high utility prices in the second quarter. And in Europe and Africa, we are mitigating short-term impacts of the increased utilities and energy costs by addressing cost efficiency, as well as passing inflationary and the increase in utility prices to our customers. This, of course, depends on contract structures and market circumstances.

On new energy and LNG, the performance of the new energy and LNG division was lower in the second quarter versus the previous quarter due to one-off super tax in Pakistan, as I just mentioned, and also due to the foreign exchange effects in Colombia. In general, our new energy and LNG business is solid due to long-term take or pay nature of this business.

On the revolving credit facility, we successfully renewed our €1 billion senior unsecured revolving credit facility with a syndicate of 12 international relationship banks. This RCF is linked to our performance on 3 key topics from Vopak sustainability road map. First of all, our safety performance; second, the gender diversity in senior management; and thirdly, the reduction of greenhouse gas emissions going forward. The incorporation of sustainability KPIs underlines our mutual commitment with banks towards a more sustainable world. This new revolving credit facility continues to provide the funding flexibility necessary to execute Vopak's business ambitions to grow in our base in industrial and gas terminals, and accelerate towards new energies and sustainable feedstocks.

Then moving on to actively managing our portfolio position. The attention to the portfolio is critical, and we have already embarked on this journey. We've taken important steps to increase the gas and industrial share by investing in major growth markets such as China and India. In addition, we have lowered the proportional capital employed by 25% in oil products since 2017. We aim to further increase the share of industrial, gas and new energies, which are usually underpinned by long-term stable commercial contracts. And in this way, we are positioning the portfolio towards higher and more stable returns.

Proportional operating cash flow is the basis for our operating cash return metric, and it is fundamental to the performance of our business and the value creation indicator of all our activities. It reflects the proportional earnings of our entire portfolio that is including joint ventures and subtracts proportional operating CapEx, which is sustaining service and IT CapEx that is required to keep the business running at the highest operational standards and it also deducts the IFRS 16 lessee.

In the first half of 2022, we generated higher proportional EBITDA, and our proportional operating CapEx was lower, resulted in a higher proportional operating cash flow, as you can see in the graph. In total, the proportional operating cash flow increased by 20% compared to last year's first half. If we then compare it with the consolidated cash flow generation, which is obviously the IFRS reporting, our consolidated cash flow generation was also strong during the first -- during this quarter and during the first half. Reported operating cash flow of €260 million compared to proportional operating cash flow of €347 million.

Now moving to free cash flow before financing increased to €48 million compared to €60 million negative last year, so an improvement of slightly over €100 million. In the first half of 2022, we generated significantly higher cash flow from operations and also driven by higher dividends from our joint ventures, which reflects the cash flow generation ability across the portfolio. The dividend generation of the joint venture was significantly higher than the net results of the joint ventures. Sustaining service and IT CapEx also known as said, as operating CapEx was lower versus last year. Growth investments were significantly higher as we closed our transaction with Aegis in India in the second quarter of 2022.

The divestment of our Canadian assets and comp plan into this joint venture also resulted in divestment proceeds in the first half of 2022. As we have mentioned in the past, joint ventures are becoming more important to our business. Also looking at industrial and gas investments going forward, you may expect that the more joint venture is coming. The key value drivers that we see in the joint ventures are threefold.

First of all, we want to make sure that the cash return on capital in these joint ventures and in any company we own, drive the performance of such an activity. But secondly, for a joint venture, it's very important to have a healthy leverage to drive the ultimate return on equity. And the third element is to make sure that we distribute dividends to the maximum to drive the cash position of Vopak. And these 3 priorities are proactively managed in the company.

As we mentioned during our Capital Markets Day, we will focus on cash generation for our portfolio. Operating cash return is defined as the operating cash flow divided by the average capital employed. The first half of the year is usually characterized by a lower operating CapEx in the second half year due to timing and phasing of operating CapEx.

For the first half year, we had a solid operating cash return of 11.4%. The current expectations for the full year is an operating cash return of around 9.5%, subject to market conditions and currency exchanges. Our long-term target of operating cash return of at least 10% by 2025 remains unchanged. However, we will look at the year-end to evaluate this target going forward, also taking into account the impairment charges we took during this quarter.

Now on the outlook. We expect to deliver an EBITDA in the range of €830 million to €850 million for the full year '22. This target reflects the continued volatility in the energy market, inflation and utility price pressures and subject, obviously, this outlook is to market conditions and currency exchanges.

On the costs, we had a prior target of €645 million, which was subject to utilities, price and currency exchanges. Factoring the latest update on both energy prices and currency movements, we expect to manage the '22 cost base, including additional costs for new growth projects to around €690 million. So that's an update compared to our prior guidance of €645 million.

To summarize, we're going to stay focused on a disciplined capital allocation approach that will support and enable the strategic priorities. First of all, we will remain very focused on a solid balance sheet, maintain our healthy leverage ratio because that provides us with a license to invest for growth opportunities. We will return value to the shareholder by a progressive dividend policy. And last but not least, any remaining capital will be spent on growth investments with attractive operating cash returns. And with these 3 priorities, we aim to generate an attractive total shareholder return.

This concludes my remarks of the presentation, and I would like to hand it back to Dick for the question and answers.

[Dick Richelle, Chairman & CEO]

Yes. Thank you very much, Michiel, and I hand it back to the operator to open up the question-and-answer part of this presentation. Thank you.

[Operator]

[Operator Instructions]. The first question comes from the line of David Kerstens calling from Jefferies.

[David Kerstens, Jefferies]

Three questions. I'll ask them one by one. Maybe first of all, on the occupancy rate in Europe and Africa, now more than a full recovery, back to 87%. With hindsight, what was the drop to 79% in the first quarter? And do you expect that you can now continue at a stable level going forwards, the high 80%s.

[Dick Richelle, Chairman & CEO]

Let's answer that. You first want to put your 3 questions in here or you're going to go one by one? If not I'll answer this one, David.

[David Kerstens, Jefferies]

No, I can ask them all at once, if you like. The second question was related to the super tax in Pakistan. Excluding that, I understand it's a one-off, do you see an improvement in the performance of the LNG division, given the strong momentum that you highlighted at Gate LNG? But I noticed occupancy rates are also at already very high levels and stable compared to previous quarters. So do you actually see an underlying improvement in result in LNG?

And then the third question is related to the impairment charges. What will be the net effect on the bottom line of these impairment charges, given that you also now talk about an increase in the effective tax rate. Is that a one-off in the second quarter? Or do you expect an higher tax rate as well for the full year, offsetting lower depreciation charges? I think, related to an impairment of around 9% of your total invested capital.

[Dick Richelle, Chairman & CEO]

I'll take the first one, and then Michiel will fill you in on the LNG side and on the tax effect of the impairment. But on the occupancy, Europe and Africa, indeed, we're happy with the performance in the second quarter. That is across the board, I should say. So our chemical activities performed better in both Belgium and Botlek. And also we saw an uptick in occupancy in the Europoort for the oil occupancy, which is welcomed.

I would say on your question whether we've turned the page, and this is now the new normal going forward. I think it's a little bit too early to state that, especially when it relates to the oil occupancy. We're happy with the quarter. As we indicated, uncertainty and volatility remains high in that market. You see people picking up storage in the second quarter, we expect that to kind of continue in the rest of the year, but it's still hard to see because it's -- there is a proportion of that, that is spot capacity that is being picked up. So that's on the oil side.

I think if you move to chemicals, we're happy with the movements, the activity, the occupancy and rate developments from a chemical perspective in the locations that I mentioned. And that's on the back of what I said, chemical production in Europe being under pressure because of high feedstock and utility pricing. And therefore, opening up a window of opportunity for imports coming from the U.S. and the Middle East. So that's, I think, in the balanced picture on where the occupancy sits and how we look at that.

Over to you, Michiel.

[Michiel Gilsing, CFO]

On the super tax in Pakistan, as far as we can see it now, it seems to be a one-off. So the government has taken a measure to increase taxes just to get more income. But however, you never know whether that is going to be continued going forward. So -- but for the moment, we consider it a one-off. If you look at the LNG portfolio on the performance, I think it's clear that in Pakistan, the underlying business is still very strong. So stable, but impacted by the super tax.

If you then look at the other locations, Mexico, also good performance, stable. If you look at Colombia, while we made an impairment on Colombia. So it's lower than the business case. But if you look at the results for the year, they are very stable, but it's lower than what we expected so far when we took the investments. And on Gate, you see that the results are improving. So quarter-by-quarter, and you also may expect that in the second half LNG performance as a result of Gates will further increase because we are expanding the capacity. There is another bcm rented out to -- for a customer. So that's going to have a positive impact in the second half versus the first half. That's on the second question.

And on the third question on the impairment charges. It's -- well, it's reported as an exceptional item. So including exceptional items is definitely going to have an impact on our net profit. On the deferred tax asset, that is not an exceptional item, but it's reported as a normal item. So it will also impact our profit, excluding exceptional items. And as a result, it will also impact our profit, including exceptional items. So that's going to be a negative for the earnings per share.

Indeed, with the impairment charges, like you mentioned, going forward, depreciation obviously will drop because we take certain of the capital employed of our balance sheet. We don't expect any further releases of deferred taxes assets. So we took the full deferred tax assets related to the Dutch fiscal unity of the balance sheet during the second quarter. So you may expect that, going forwards, the regular tax pressure will be there, but obviously, we have a lower depreciation charge.

[David Kerstens, Jefferies]

And what is the regular tax pressure going forward?

[Michiel Gilsing, CFO]

I think we mentioned. I think you could expect, let's say, going forward, that it will be in line with what we have shown in Q1. So -- and what we've shown last year. So, I don't have an exact percentage, but that's where it normally should end up with.

[David Kerstens, Jefferies]

Did you completely impair the assets that you mentioned, Europoort, Botlek and Colombia? Or is there still something showing there?

[Michiel Gilsing, CFO]

No, no, we did not. We will not disclose, let's say, what the percentage was, because people are also asking us what is the percentage and what's the remaining book value. But the -- no, we did not impair the assets to the full extent. On the Europoort terminal, we took €240 million, and that's a result because we have, I think, 2 main drivers there. First of all, we will take a large chunk of the capacity out of the business up to 2030. So we think around 1 million cubic meters, we will take out to provide for opportunities in the new energy space.

And obviously, in an impairment model, you have to take out the assets you are going to take out, but you're not allowed to include, let's say, any new activities going forward. And secondly, it's important to mention that we changed the methodology for oil assets in OECD countries.

So instead of working with a relatively high residual value, we work with a prolonged horizon with a lower residual value at the end. And the reason for that is that we see that the energy transition is accelerating, and we want to make sure that the energy transition acceleration, but also the lifetime of these assets are properly recorded in our books. So that's, I think, very important change also from an accounting point of view.

On the Botlek terminal with €190 million, it's very -- well, although the chemical market is strong and revenues are increasing, it is less than what we originally expected. On the revenue side, if you look at the cost, it's higher than what we expected. But here, the result is really because of energy cost and also because of labor costs. And on the sustaining CapEx, we do actually a bit better than what we originally expected. But overall, the case for the Botlek is less than what we thought. And as a result, we were triggered or effectively, this terminal was triggered in the review for impairment analysis, and we had to write-off €190 million.

And then the last case is really on the SPEC case in Colombia. Yes, that's effectively unexpected situation due to weather conditions. So the company -- the country has been subject to heavy rainfalls over the last 3 years. And as a result, there is a lots of hydrogen -- sorry, not hydrogen, hydropower available and less usage of our terminals. So the results have been lower than expected for the first 3 years. And from a prudent approach, we have also factored that in going forward for Colombia and lowered our expectations, although it's very hard to predict, of course, what the weather is going to do.

We still have quite a bit of upward in the case for Colombia because there was an opportunity to replace the FSRU with a cheaper FSRU, a more efficient FSRU. Going forward, the contract was almost concluded, but then the war started between Russia and Ukraine and the overhang in the market on FSRUs quite quickly disappeared. And as a result, we had to -- we were not able to conclude that contract. So that was an unfortunate and unexpected situation as well. So overall, we decided to take a fair share of the investment out of our books to be on the prudent side.

[Operator]

The next question comes from the line of Lampros Smailis calling from Kempen.

[Lampros Smailis, Kempen]

A couple of questions from my side, please. One, can you give us a bit more detail, just a follow-up for impairments, on Europoort, what can we expect that repurposing to sort of go live with a new energy transition products? That's number one. And for the Botlek and SPEC, would it be fair to assume that these assets could be up for sale as part of the divestment process?

[Dick Richelle, Chairman & CEO]

Maybe on the Europoort repurposing for energy transition, what we are looking at there, Lampros is, as Michiel already indicated, we are taking some of the capacity out of service. That is what we will do gradually between now and 2030. That's up to 1 million cubic meters. And we are looking for ways to repurpose the available land that we have there for some of the opportunities that you've heard us talk about in the new energy space. So that's the liquid organic hydrogen carrier as an opportunity, that is looking into biorefinery opportunities, that's looking into sustainable aviation fuels. It's, I would say, quite a number of opportunities that the team is very actively looking into.

For now, what you see is the indication of the capacity being taken out of service, new investments, we will announce at the moment that they will come about and indicate to you the relevant timings on it. And that's a part of the announcement that we have today. I hope that sheds a bit of a light on how we look at the Europoort, we're overall still very excited on the location and the connectivity that we have in the Europoort, at the same time, being realistic about the long-term outlook of that asset and hence, the reasoning also for the impairment, as Michiel indicated.

Maybe on the Botlek and SPEC, Michiel, do you want to say a few words on that?

[Michiel Gilsing, CFO]

No, I think not more than I think what we said during the Capital Markets Day, we will actively look at rationalizing our portfolio wherever we see opportunities to do so. So the impairment on Botlek and SPEC should not be an indicator for a potential divestment going forward. We have not made any announcements on the divestments. We are certainly looking at options in the portfolio, what can we do. But I would not link a divestment with the impairment at this moment in time. So once we have more clarity, we will certainly make the right announcement at the right moment in time on any of the divestments.

[Lampros Smailis, Kempen]

Okay. One more, if I may. So on LNG, you see, as you said, a very high demand in all regions. And I noticed that Port of Rotterdam reported earlier in the week, a 46% increase in throughput year-on-year. Besides the opening process for the fourth tank at Gate, is there any expectation or could we see any more activities to expand that capacity, given the strong demand we see?

[Dick Richelle, Chairman & CEO]

Yes. Maybe, Lampros, to answer on that. I think the increase in volume is visible compared to the same period last year. There is, I would say, a short, medium and long-term effect of what's going on. The short-term is to try and debottleneck as much as we can today and create therefore additional send-out capacity that's within the current capacity elements that are still available to debottleneck with short-term investments to enable that capacity to be freed up. That's what you see today, and it is ongoing as we are talking actually in the course of this year.

Then the second one, medium term is looking for the potential of building a fourth tank in Gate, which will take obviously longer to get that executed. If you look at the financial impact of the short-term view, that financial impact is there, as Michiel indicated, we expect it to improve in the second half of the year and further contribute and also into 2023.

But you have to realize that the bulk of the investment that was made a long time ago in Gate is covered by long-term so-called take-or-pay contracts, and those constitute the bulk of the results also coming in from Gate. So yes, there's a bit of variable upward that is reflected, but the capacity, send-out capacity increases are not proportional to the result increase as long as you don't build a new fourth tank. And hence, we are looking at the fourth thing. That's medium term.

Long term, this will drive further towards the acceleration toward different energy carriers going forward. And hence, the reason that we are focusing and being active a lot on the hydrogen side and all the hydrogen capabilities that we, as a company, are developing, together with Gasunie in the Netherlands, looking at ammonia import, looking at LOHC, looking at liquid hydrogen, as we announced last week in a consortium, those things clearly are expected to also be accelerated as a result of what's currently going on. So I hope that gives you a bit of an insight of the direct impact on LNG.

[Operator]

The next question comes from the line of Thijs Berkelder calling from ABN AMRO.

[Thijs Berkelder, ABN AMRO Bank]

Let's say, three questions. First, on the impairments. Companies typically tend to impair terminals when you're close to a broader restructuring. Can we expect the staff restructuring in Rotterdam as well? And on asset revaluation method, can you maybe explain what you have done on the so far non-impaired terminals, such as what kind of discount rates are you currently using?

Second question is on the gross project pipeline, which so far in terms of FID seems very small and limited. And that's why you need to transition to other energy sources, When can we expect a larger action there a slash? There's a big propane terminal in Canada in preparation, when can we expect FID there?

Then a final question is on Malaysia on the PT2SB terminal, it looks as if the refinery is starting again, but in your report, you mentioned the liquidity position, which may threaten the performance of the JV, In case this liquidity position goes, let's say, the wrong way? What is then the impact for Vopak?

[Dick Richelle, Chairman & CEO]

Thank you, Thijs, for the three questions. I'll take the growth one, and I'll quickly say something about your question on the reorganization or not as a result of the impairment. So let me be very clear on that one, that's not what we currently have in mind and have planned that there's any larger restructuring of organization taking place at the impaired assets. That's the first answer.

Maybe on the growth pipeline and your specific question towards the propane development for exports out of Western Canada, in addition to what we have there, together with AltaGas in RIPET, we are currently working to get to an FID moment. We have positive feedback -- received positive feedback from the province of British Columbia in their determination to allow us to set up the terminal. So the permit has been received. We are now waiting and in the final stages of receiving Federal approval for the project to move ahead and have decided to move into the next phase of the development of the project, which would lead to a potential FID, I would say, within 6 to 12 months, and we are positive and encouraged by the developments that we see over there, which is on the gas side, a significant expansion to the portfolio for this unique position that we have in Western Canada.

We're looking and continue to look at quite a number of also brownfield expansions. -- when it gets to our industrial footprint. There's quite a number of industrial sites that have started up years ago and I see now gradual additions. As you can see, for instance, also on what we put already into operation this quarter in China, existing facility, long-term contracts, customers are expanding, and we subsequently then invest in expansions that we took into operation, and we expect that to continue also in the period ahead. So I would say stay tuned on that side.

Maybe, Michiel, on...

[Michiel Gilsing, CFO]

Yes, Thijs. First of all, on the question on the impairments and the -- maybe more the methodology on how it works. So we readily don't disclose any discount rates. But the way the methodology maybe starts first with how it worked before. So what we did or what we do with most of our assets, but we changed it for oil assets is that we had a horizon of 15 years and then effectively at the end of 15 years, you take a residual value, which is a multiple of the EBITDA or a multiple of the free cash flow. Why did we change it for oil? Because of the energy transition, we think it's wiser to have a longer horizon for oil assets because to assume that there will be continuous free cash flow or EBITDA generation after 15 years, given that the energy transition is accelerating, it's probably not a prudent approach.

So we said, let's extend the horizon for oil terminals instead of cutting it off after 15 years, we take into account the scenarios of IAE and translated into Vopak scenarios for each and every asset. Then we extend the period for OECD assets to at least 2050. So you see effectively already an impact of the energy transition, especially in the later period up to 2050. And then we take a far more conservative residual value after 2050 for OECD countries because it's probably quite uncertain what is going to happen with oil assets after that period. So that's for OCD.

For non-OECD and that's especially related to our fuel distribution business, we think that the lifetime is a little bit longer than on OECD because you see that markets are still growing there. That's where we extend the horizon a bit longer, but also then after that extension, which is more or less 10 years longer than an OECD location. We also take the same conservative approach on the residual value. So then we looked at all the assets in our portfolio, used all oil assets in our portfolio and use the new methodology to look where would there be a trigger using this methodology and the only trigger which came out of the process at this moment in time is the Europoort location. So that's where the impairment partly comes from.

Second question or your third question is on PT2SB. Indeed, the refinery is starting up again. So it is quite a process to get it fully up and running. So the whole process takes till October. And if everything goes well, then the whole complex should be up and running. The terminal is performing very well at this moment in time because parts of the refinery are already operating. What we have seen in the time up to, let's say, this restart that there were some cash flow challenges at -- with the customer. And effectively, we have given some relaxation on the debtors. So more time to pay.

Effectively, the customer is paying at this moment in time in terms of revenues, but also in terms of certain of the outstanding debt. So we will progress in this way, improve our liquidity position, although the overall liquidity position of our joint venture is still very strong. We hope that this year, we will be able to technically complete also the terminal from a banking point of view, and that hopefully, that will allow us to pay dividend next year, but it's still a little bit too early to tell. So this is, I think, gives you a bit more color and detail on the dynamics around the PT2SB joint venture.

[Operator]

The next question comes from the line of Quirijn Mulder calling from ING.

[Quirijn Mulder, ING Groep]

A couple of questions. First of all, a more technical is, let me say, in Europe or this lowest half also included. But a more blunt question is, did you consider, let me say, something is considered to take a big buzz because you now take Europoort and Botlek and maybe, yes, I cannot imagine that, let me say that the chemical markets for -- hardware, for example, are so different from Botlek. So there's also reason sooner or later to take a charge there in my view. And there are also other assets, which in mine view sooner or later have the same problem like in Latin America or -- so did you consider that? And what is the impact on the return on cash flow? Because it should go up quite rapidly if you take out, let me say, a serious amount of money from the Europoort, for example, and to Botlek that has a positive impact on your cash flow returns.

[Dick Richelle, Chairman & CEO]

Yes, let me take this question. So indeed, Quirijn, first of all, indeed on the Europoort, Laurenshaven is included and also our share of the Maasvlakte oil terminal is included. So this is seen as one cash generating unit. It's also connected operationally and worked from a commercial point of view as one asset. So effectively, you look at the full cash generating unit of 3 separate locations, but they are interconnected, of course. So you could see it as one terminal.

Yes. On the big bath, yes, obviously, that's a good question. But this is also where you have to be very prudent as well. It's not like you can just write-off whatever you like to write-off because then indeed, that could lead to big bath accounting. We carefully looked at our chemical assets in Belgium, and there is no trigger. There is still sufficient buffer, given where we think that the markets are heading towards to at this moment in time.

We also looked at all the other assets, although maybe some of the assets are, indeed, like you said, borderline, we see that effectively the performance of those assets is improving. So that's creating more buffer than less buffer. Does it mean, well, there is no risk that anything will be impaired going forward. There is always a risk if market circumstances change. But at this moment in time, we think this is a very, well, a fair picture of where the asset values are and also a prudent approach also taking into account that you don't want to be accused from big bath accounting just for the purpose of writing off a lot of assets. I think that's the perspective from my side on the first question.

Second question, you're right. So indeed, the return on cash flow will be positively impacted by the impairment, not for the first half year because we take average capital employed. So every month, we look at the capital employed, and we did a write-off at the end of the first half. So it has a limited impact on the cash return as we have shown in the first half, but it will have an impact in the second half, but only half of it, because then we have 6 months where we work with the revised capital employed. So next year, it will be a more positive impact. And that's why we also said where we will look at the year-end and then take this factor as one of the factors into account and then update our target for the cash return going forward. So a little bit too early. Yes, it will have a positive impact. And yes, we know that we will come back to you with an update on this.

[Quirijn Mulder, ING Groep]

Yes. But in connection to that, you agree with me that, let me say, given over 11% in the first half year, that your target of, let me say, 2025 of 10% is, yes, let me say, not very ambitious.

[Michiel Gilsing, CFO]

Well, that's -- well, what we said during Capital Markets Day is, first of all, let's break the trend of the declining returns, and that's very important. So first half year indeed is more or less similar than first half year last year. Second half year, if you look at the outlook, but also look at the operating CapEx, it will normally be lower in terms of cash returns. So we think the outlook is now 9.5%, which is not yet a turning point in terms of cash return. If we would do better than that, obviously, then there could be an opportunity that we already ended the 10% and then the impairment impact is going to be positive going forward as well, but it's too early to tell. So, as said, we will update by the year-end, but this is a bit of the dynamics around the cash return from our side to clear.

[Operator]

Well, we currently have no questions coming through. [Operator Instructions]. There are no further questions, so I will now hand you back to your host to conclude today's conference. Thank you.

[Dick Richelle, Chairman & CEO]

Well, thank you all very much. Thank you for dialing in, participating, asking us the questions. If there's anything else that you'd like us to give an update on, you know where to find our colleagues from IR. Wishing you a wonderful day. Bye, bye.

[Operator]

Thank you for joining today's call. You may now disconnect. Host please stay connected on the line and await for the instruction. Thank you.