Koninklijke Vopak NV

AEX:VPK

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and welcome to Vopak's 3Q '22 Results. Today's call is being recorded. I will now hand the call over to Fatjona. Please go ahead.

[Fatjona Topciu, executive]

Good morning, everyone, and welcome to our third quarter 2022 results. My name is Fatjona Topciu, Head of IR. Our CEO, Dick; and CFO, Michiel will guide you through our latest results. We will refer to Q3 2022 analyst presentation, which you can follow on screen and download from our website. After the presentation, we will have the opportunity for the Q&A. A replay of this call will be made available on our website.

Before we start, I would like to refer you 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 involve certain risks and uncertainties. Accordingly this is applicable to the entire call, including the answers provided during the Q&A part.

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

[D.J.M. Richelle, executive]

Thank you very much, Fatjona, and a very good morning to all of you joining us in the call. Let's move to the first slide with the key highlights because during these uncertain times, Vopak has once again proven to be robust. The need for our services was healthy. And across the world, we continue to serve our customers well. We improved our financial performance and made solid progress on our 3 strategic priorities in the third quarter of 2022.

Let's first take a look at the improve side. We improved our EBITDA, which was underpinned by good results across most divisions and positive currency translation effects, notwithstanding the cost pressure due to surging energy prices and personnel expenses. We actively managed our portfolio and agreed to divest our agencies company and transforming our chemicals portfolio in Antwerp. We will improve the operating cash return, which Michiel will talk about more.

Our improved financial performance and solid strategy execution allows us to update our outlook for the full year 2022 by increasing our expectation for EBITDA and proportional operating cash return. We are growing our base in industrial terminals through a brownfield expansion of 110,000 cubes in Caojing, which will further strengthen our industrial footprint in China. The heightened demand for LNG infrastructure in Europe has led Gate terminal to increase its send-out capacity.

An important part of our strategy is to accelerate towards new energies and sustainable feedstocks. This can be done by building new sites or repurposing existing sites. In our Los Angeles terminal, we will do the latter by repurposing 22 oil storage tanks of around 148,000 cubic meters to sustainable aviation fuel and renewable diesel. This quarter we invested in Elestor, an electricity storage company. Elestor has developed a flow battery that will be able to store electricity on a large scale and in the safe conditions. We are observing a growing interest for the storage of green ammonia in several of our key hub locations. Given ammonia is a proven technology and has the potential to decarbonize several sectors.

Now moving on to the next slide in a well-diversified infrastructure portfolio. I'd like to give you some details on how the markets developed in which we operate and how that impacts the demand for our services. Let's start with gas. The LNG infrastructure is in high demand due to a lack of Russian pipeline gas and the gas market tightness is expected to continue into 2023. While on Vopak, our Gate terminal in Rotterdam is currently fulfilling a very important role in the energy security of Northwest Europe by expanding its send-out capacity.

If we take a look at new energies and sustainable feedstocks, in line with increasing market interest in hydrogen and sustainable fuels, we are making good progress in the acceleration towards new energies and sustainable feedstocks. We witnessed a growing market interest for the storage of green ammonia in the key hubs. For example, Vopak Singapore has just completed its conceptual design and risk assessment of a planned ammonia expansion to serve low carbon power generation and the local bunker markets. We have good momentum in sustainable feedstocks as we are currently building storage capacity for biodiesel and jet fuel [indiscernible]. And we will repurpose the oil tanks in Los Angeles to sustainable fuels.

Now moving on to energy markets that we serve through oil products. Following the international sanctions regime, global oil flows continue to rebalance. The oil market was initially geared for maximum efficiency. But as a consequence of sanctions, we see more long-haul product trade flows from alternative origins. And hence, the demand for our services in hubs is improving as a result of change product flows and security of supply. Our fuel distribution terminals continue to perform well.

Move on to the manufacturing markets we serve through our industrial terminals and chemical terminals. The chemical market is under pressure due to macroeconomic headwinds. Surging utility prices have led to lower European production increasing, the need for imports. Demand for our infra services was stable as downward pressure for macroeconomic headwinds were compensated by increased need for imports into Europe. Furthermore chemicals throughput increased due to new industrial terminal capacity.

Our third quarter performance reflects that our well-diversified infrastructure portfolio uniquely positions Vopak to serve our customers amidst highly uncertain times. We have a global network with deep product and commercial expertise, are present in the major industrial clusters where we serve manufacturing markets. We store a wide variety of products from chemicals to gases and already safely handle and store ammonia in 6 locations around the globe.

Finally, our teams have been able to create the foundation to generate long-term and stable returns. About 1/3 of our revenue comes from contracts longer than 10 years and 72% of our revenue contains an indexation clause. All of these have created a robust foundation that led to the improved results year-to-date. In our last call, we highlighted the various levers that have impacted our performance.

Now let me take you through each element of our business performance in more detail. The starting point is last year's EBITDA of EUR 614 million. We divested our Canadian terminals and experienced positive currency translation effects. Oil markets remained volatile year-to-date on the back of high prices and limited availability of products. However, we see an improvement in oil market conditions in the third quarter of 2022.

The chemicals market continued further improved as demand for chemicals remained robust. Chemical supply chains continue to fill up with product, and we observe an increase in both storage demand as well as chemical throughputs across the different geographies. The gas market is strong, especially at our Gate terminal. At the same time, surging energy and utility prices combined with higher personnel costs, led to the increase in our cost base. Finally, we have delivered on our growth projects, which have contributed EUR 20 million.

Now let's take a look at our industrial terminals. Our global network gives us a leading position, and we expanded again in China with a new industrial -- with new industrial terminal capacity. The construction for the new capacity will start in early 2023 and is expected to be commissioned by the start Q1 of 2025 based on a long-term industrial contract. This investment will support Vopak's cash flow generation with above company average operating cash return. There's no direct impact on Vopak cash or debt level as the financing will be supported by local funding means.

Now let's take a look at LNG. On the LNG side, our Gate terminal has taken 3 initiatives to strengthen its position; increase its truck loading capabilities, increase its send-out to and initiate an open season for an additional 4 BCM sent-out capacity, the 4th tank. Subject to smooth cooperation of all stakeholders, such capacity could become gradually available. During 2022, Gate LNG terminal has substantially expanded its send-out capacity. And currently the Gate LNG terminal capacity is equivalent to 50% of the Netherland's needs for gas, highlighting the critical role that our infrastructure solutions provide in energy security.

The momentum is building around the infrastructure required for energy products of the future. We will invest EUR 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, LOHC and in the future, liquid hydrogen offer opportunities for Vopak. We already have the experience operating ammonia in 6 locations around the globe. And recently we announced that we are preparing for the import of green ammonia in our flushing terminal using 2 existing refrigerated LPG storage tanks, each with a capacity of 55,000 cubic meters.

In addition, Vopak Singapore is exploring the expansion of its ammonia infrastructure for low-carbon power generation and bunker fuels. On low carbon feedstocks, we have already a strong footprint of around 25 existing biofuel locations around the globe. We believe that for any CO2 infrastructure, the right terminal infrastructure is needed to be in place with the adequate scale and competence. Increasing renewable energy production and consumption will require intermittent storage of this energy, an area which we are also active in. Our efforts here will be accelerated through our investment in Elestor, an electricity storage company.

Accelerating towards new energies is taking pace as we will repurpose oil storage tanks to sustainable aviation fuel and renewable diesel in our Los Angeles terminal. The total investment is approximately EUR 30 million and is related to repurposing of the current infrastructure with above company average operating cash return. Transition to sustainable fuels and the long-term commitment from the customer is anchoring our business in Los Angeles for the long term.

To summarize, we look back at a quarter with strong results and good progress on our strategy. During these uncertain times, Vopak has once again proven to be robust. The need for our services was healthy, and across the world, we continue to serve our customers well. To achieve this, we benefited from Vopak's very well diversified infrastructure portfolio, serving both manufacturing markets as well as the energy markets around the globe. With our global scale, geographic diversity and various products and infrastructure solutions, we are well positioned to capitalize on the strength of our portfolio as storage demand indicators continue to be favorable in the near term.

Now I will hand it over to our CFO, Michiel.

[Michiel Gilsing, executive]

Thank you, Dick, and good morning to everyone on the call from my side. As Dick said, from a financial point of view, this has been a strong quarter. Most of the divisions have contributed to the improved financial performance. And we have also been able to improve our cash flow as a company leading to a more healthy cash return on our capital. In line with our ambition to improve the performance of the portfolio, we reported strong financial results. We increased our EBITDA to EUR 659 million, a 7% increase compared to the same period last year, which was underpinned by better business conditions and currency tailwinds, partially offset by the cost increase.

Cash flow focus remains strong. We were able to generate EUR 514 million on a proportional basis, which is a 17% increase in the first 9 months of the year, driven by better operational performance and lower operating CapEx. Strong cash flow generation led to an operating cash return of 11.3%, slightly ahead of last year's 11.1%. This strong financial performance was underpinned by a solid balance sheet, well within the target of 2.5x to 3x net debt to EBITDA.

Financial performance was as well as a strong commercial structure that provides the necessary protection against the current inflationary environment, where 72% of our revenues come from contracts with an indexation clause. A strong financial performance, a solid balance sheet and a rigid commercial position are the foundation for our improved outlook for 2022. As a result, we are increasing our expectations for EBITDA as well as operating cash return for this year, for which I will give more details later.

Now moving to the key messages of the third quarter 2022. We recorded a record high EBITDA of EUR 227 million, a 3% increase from the second quarter 2022, driven by improved market conditions and the positive currency translation effect. The proportional occupancy also increased to 89%, a 2% point improvement compared to last year. The improvement was driven by a better performance in Asia and Middle East, followed by LNG and the Americas.

On the other hand, the surging energy prices, higher personnel expenses and currency effects led to an increase in cost of 5% to EUR 183 million for the quarter. Notwithstanding this increase in cost, our cash generation was strong with a cash return of 11.3% in the quarter.

We improved EBITDA in the third quarter primarily due to better performance in LNG and New Energy with Gate terminal running at 100% occupancy. Americas' performance improved due to the higher sales in Brazil, Mexico and the U.S. while Europe and Africa performance was impacted by an increase in costs during the third quarter related to energy prices and personnel expenses. And lastly, the China one-off is related to a correction related to cost allocation. But overall, the China results were very robust.

Some more details on the divisional performance trends. First of all, the Americas division benefited from the growth projects and an improvement in autonomous performance. The uptick in occupancy is the outcome of a strong economic activity mainly in countries such as the U.S. and Brazil. The Asia Middle East division, the occupancy rate reflects an improved performance in Singapore and Fujairah in the Middle East as we were able to capture market opportunities. The China North Asia division performance remains solid this quarter as well, and as mentioned before, was impacted by a one-off correction.

Performance of Europe and Africa reflects the improved market conditions in Europe, combined with the high utility prices and higher personnel expenses in the third quarter. At New Energy and LNG, the performance of the New Energy and LNG division was higher, mainly related to the Gate terminal running at 100% occupancy and a higher standard. As we have mentioned before, we are committed to actively manage our portfolio as one of the ways to improve our cash return. And we do this by a few different lines.

First of all, rationalizing. During the quarter, we agreed to sell Vopak agencies, and the transaction is expected to close by the end of the year. Secondly, the repurposing, accelerating towards new energy is taking pace as we will repurpose oil storage tanks to sustainable aviation fuel and renewable diesel in our Los Angeles terminal. And Dick already gave some colors on that, but I'm also confident that this investment will provide above-average cash returns. And then the third line is about Transform. In Belgium, we are refurbishing our Eurotank terminal by rebuilding 41,000 cubic meters. With these investments, we solidify our position as leading chemical terminal infrastructure provider in the port of Antwerp by strengthening our service offering and facilitating the continuous chemical imports for our customers. The total investment is around EUR 70 million, and it will contribute positively to the cash return of the terminal.

Then moving on to the cash flow generation. Our cash flow generation was also strong during this quarter. In the first 9 months of 2022, we generated significantly higher cash flow from operations, driven by higher dividends from joint ventures, emphasizing the cash flow generation ability across the portfolio. Sustaining service and IT CapEx, also known as operating CapEx, was EUR 194 million compared to EUR 270 million last year. As a result, we generated in the first 9 months, EUR 233 million cash available for dividends and growth while maintaining a healthy balance sheet.

And I would like to highlight that the dividend distributed to Vopak shareholders refers to the full year amount, while the cash flow refers to the last 9 months. The divestment of our Canadian assets and Kandla in India also resulted in divestment proceeds in the first 9 months of 2022, which is expected to increase by the proceeds of agencies later this year. So that is on the cash flow.

If we then move on to the proportional operating cash flow. The proportional operating cash flow is the basis for our operating cash return metric and is fundamental to the performance of our business as the value creator indicator for all our activities. It reflects the proportional earnings of our entire portfolio that is including joint ventures and subtracts proportional operating CapEx, which, as I said, is sustaining service and IT CapEx that is required to keep the business running at the highest operational standards. And also we correct for the IFRS 16 lessee.

In the first 9 months of 2022, we generated higher proportional EBITDA and our proportional operating CapEx was lower, resulting in an overall higher proportional operating cash flow. Proportional operating cash flow increased by 17% compared to last year. And as we have mentioned in the past, joint ventures are becoming more important to our business. The key value drivers that we see in the joint ventures are, first of all, a healthy cash return on the capital, which drives performance. Secondly, a healthy leverage to drive the return on equity in these joint ventures. And thirdly, very important to maximize the dividend distributions to drive the cash position of Vopak overall.

The strong cash flow generation in the first 9 months and the positive market environment encourages us to increase the guidance for cash return to a minimum of 10.5% instead of around 9.5% as previously communicated. Asset revaluation that we performed in the first half of this year had a positive impact of around 0.5% in cash return year-to-date. During the Capital Markets Day in June 22, we committed to have an operating cash return of at least 10% by 2025. And now we aim to review our ambition on operating cash return with a publication during the full year 2022 results in February.

Then the disciplined capital allocation priorities, we're going to -- we're going to stay focused on this disciplined capital allocation approach that will support and enable the strategic priorities. First of all, we remain focused on a very solid balance sheet, maintain our healthy leverage ratio because that provides us with the license to invest for growth opportunities. We will return value to the shareholders by our 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 returns, and I would like to spend also a few minutes on the robustness of our balance sheet going forward.

First of all, on the balance sheet. We have a solid balance sheet that is supporting our growth ambitions. Our management philosophy, as communicated, is to keep our net debt-to-EBITDA ratio between 2.5x and 3x. Our covenant maximum level is 3.75x. Currently we are at 2.82x, which is an improvement compared to last year's leverage of 2.93x, driven by the better cash flow generation of our business.

In the current uncertain environment, our debt structure is well positioned and creates enough headroom for growth. We have currently an interest cover ratio of 8.6%, well above the minimum required of 3.5% and broadly unchanged from last year's average 8.4%. Around 70% of our interest-bearing loans have a fixed interest rate and the average time to maturity of our debt portfolio is 5 years.

Then as Dick already mentioned, how do we protect our EBITDA margin in these inflationary times. Apart from the strong balance sheet, our commercial expertise is also supporting our strong results. Around 70% of our proportional revenues come from contracts that have an indexation clause. Indexation clauses are mostly applied in January, looking at the average CPI from previous year. Our contract structure has been a significant protection of our EBITDA margin, as you can see in the graph, notwithstanding the macroeconomic environment through the years. During 2022, we are actively managing the exposure by applying energy surcharges to the customers and having also more frequent contact reviews.

Then moving on to show the portfolio transformation to industrial gas terminals, which also improved the earnings quality. As an infrastructure solution provider, Vopak is characterized by long-term contracts. Portfolio transition towards more stable and higher returns towards gas and industrial terminals has also supported the contract portfolio towards contracts with a longer duration. Around 31% of the revenue comes from contracts longer than 10 years currently, which was, as you can see in the graph, 23% in 2015. And we have more than halved our exposure to contracts less than a year from 2015, which has improved our earnings quality and reduced the volatility of our earnings.

Now let's move to the, looking ahead. Based on the strong financial performance and positive storage demand indicators in the near term, we are encouraged to raise our 2022 outlook. We expect to deliver an EBITDA excluding exceptional items, around EUR 890 million for the full year 2022, which is an increase versus the range of EUR 830 million to EUR 850 million as previously announced. On cost, we had a prior target of EUR 690 million, which was subject to utility prices and currency exchange.

Factoring the last update on both energy prices, personnel expenses and currency movements, we expect to manage the 2022 cost base, including additional cost for new growth projects to around EUR 710 million. As we are having a better visibility on growth CapEx and operating CapEx, we have updated our estimates there as well.

To conclude, we expect to report a cash return of a minimum 10.5% for 2022, an increase of 1 percent point from what we expected earlier this year.

And this concludes my remarks in the presentation on the financial performance of the company. And I would like to hand it back to Dick for the Q&A.

[D.J.M. Richelle, executive]

Thanks, Michiel. And operator, you may open the line for questions, please.

[Operator]

[Operator Instructions] And we will take first question from Rachel Fletcher from Morgan Stanley.

[Rachel Fletcher, analyst]

Congratulations on the strong results. I have 2, please. The first is on the cash return, which is now expected to be 10.5% for this year. And at the Capital Markets Day, you set a 2025 target I think it was for cash returns above 10% by 2025. So you're at your target 3 years earlier than expected. You said that you'll review the cash return ambition in February, but I wanted to understand what really changed in the past 5 months. You mentioned 0.5% was from, I think you said asset revaluation. But have there been any other unforeseen factors which have driven this return up?

And then my second question is on the macro environment and the markets you're exposed to. It seems you're benefiting from the routing of flows at the moment across the range of markets. How long do you expect this to continue? And on the oil market specifically, what are your expectations for your oil hubs following the EU embargoes in December and February.

[Michiel Gilsing, executive]

Rachel, let me take the first question and then I hand it over to Dick for the second question. On the cash return, indeed, we are ahead of the 2025 target, which was set at minimum 10%. At that time, we were not aware of, let's say, the significant impairment. So the 0.5% improvement obviously comes from impairment. But if you look at the major improvement versus also the last outlook we have given, you see that effectively, the cash coming from the business has significantly improved to where we thought it would go. So some of the markets, especially if you look at the chemicals market, LNG performing strong.

And also in the last quarter, which we expect to continue at least till the year-end, is that the oil market has been quite strong. So the business generates quite a bit more cash. You're also seeing that on the operating CapEx, you see that the spending is less than last year. So there's also quite a lot of focus on making sure that we keep it under control and well disciplined. So that has helped quite a bit in terms of generating more cash from the business.

And culturally, I think by introducing the cash return and also having a lot of focus internally on free cash flow generation. We see also quite a bit of a shift culturally to really focus on cash more than ever before. So I think that's the -- yes, that's a bit of the answer to your first question.

[D.J.M. Richelle, executive]

And Rachel, maybe to your second question. On the macroeconomic outlook and related to what we see happening in the different markets. I think a few words on that from a general perspective and then zooming in on oil specifically. But I think the central theme here is redundancy in supply chains and security of supply. I think that's what we see, by and large, in the demand for our services in the hub locations. So you see that through the extraordinary events that are happening around us that in general, supply chains are becoming longer. And as a result, also redundancy built up in supply chains is more acceptable where, I would say, in the past, we were used to somehow drive for optimal supply chain management.

You see that there's more and more acceptance for building in that redundancy and focusing on security of supply. That's a generic statement that refers both to energy and manufacturing. If you now zoom in specifically to oil demand, flows indeed are rebalancing. We saw that already happening in Q2. At that time, we were at least not sure how fundamental those changes are and were. What we now see happening is that some of those rebalancing flows are there to stay that has a positive impact, at least in this quarter on the demand for storage in Singapore and continued strong demand for storage in hub location like the Middle East.

You also see that as a result of security of supply and redundancy in that supply chain that strategic storage is improving and increasing demand for storage in Rotterdam as well. So to your last question, which was like with the upcoming embargo in December and then in January, sorry, in February for the products and for crude from Russian public, you see that the market is adapting to that and is accepting it and already the flows have been adjusted towards that. So also, therefore, we say the outlook that we presented is based on the fact that at least in the near term, we do not foresee any significant reasons to change the current flows as we see them unfolding. I hope that helps answering your question.

[Operator]

And the next question comes from David Kerstens from Jefferies.

[David Kerstens, analyst]

I've got 3 at least. First of all, in terms of the momentum regarding the improvement in market conditions, is it fair to conclude that, that was mainly back-end loaded in the quarter, mainly in September, as I think a month ago, you sounded still much more cautious on the outlook.

And the second question then relates to your guidance. Does that explain the increase in the step-up in the EBITDA guidance for the fourth quarter to EUR 241 million and what is the [ breadth ] of the EUR 50 million finance upgrade, exactly what driving that? And maybe related to that, the EUR 241 million, can we annualize that going into 2023? Does it imply that you're approaching EUR 1 billion next year?

Then secondly, following up on the question on the embargo and the impact on Rotterdam. I think in the Q1 call, you indicated that the occupancy rate in oil storage in Rotterdam was below 70%. Can you give an indication on how that has developed since?

And then finally, you talked about the expansions in Gate LNG. Are there any other opportunities elsewhere in the Netherlands or outside of the Netherlands to further investments in LNG, given the importance of that project going forward?

[D.J.M. Richelle, executive]

Thanks, David, and good to have your questions. We could not quite follow the second question, but let me first start to give you an update on the first, the third and the fourth. And then maybe at the end, you can help us to explain what your second question was. We couldn't quite follow it. But maybe on the first one, whether it's back-end loaded or not in the quarter. I think what we've done when we last spoke with you is to give you -- to kind of like stick to the message that we've given to the market in Q2 and the help that we provided at that time to the market, the improvement in results.

At that time, in Q2, we said we see it, but we're not sure whether it will stay at the current level. Now that has certainly throughout the quarter has further improved. And I wouldn't say I'd go as specific as you say, it was just in September that it started to move up. So I think it was gradually during the quarter to reconfirm the outlook that we had. I think that's to your first question.

Then your third question on Rotterdam and occupancy rates. In Rotterdam indeed was under pressure in the first quarter of the year. I think that has a lot to do with the uncertainty in the market, what's going to happen with the flows that are coming from Russia, and it will take some time for flows to rebalance. If you look currently at the occupancy rate in oil in Rotterdam, they're at a healthier level at probably around somewhere between the 80% and the 90% occupancy rate. That's where we sit now. And again, that's on the back of security of supply, so strategic storage, but also the fact that longer supply lines are needed now and people are taking up positions with more capacity simply to serve their end markets over here.

Then last, on your question towards LNG Gate, we've indicated how the development is going in Gate. There's continuous dialogue with our partner, Gasunie, on further potential infrastructure development in the Netherlands to additional -- to look for additional LNG opportunities. We are discussing with them, how we work together in Eemshaven and at the same time, as I said, also other opportunities, which is the 4th Tanking Gate and potentially what the Netherlands as a country and as a gateway to Europe for the LNG imports could further develop and are working very closely with Gasunie on that. Too early to be very specific on it unfortunately. And then maybe to your second question...

[Michiel Gilsing, executive]

Yes, I mean, the second question, as far as I understood, David, that you are looking for, let's say, the difference between this outlook and the previous outlook if I got your question correctly.

[David Kerstens, analyst]

Yes. And the step-up in the Q4 EBITDA to EUR 240 million, right, to get to the EUR 890 million, what's driving that increase for Q3?

[Michiel Gilsing, executive]

Yes. I think the step-up versus, let's say, the last guidance was effectively a better oil market, as Dick already explained. I think also stronger-than-expected chemicals market still, especially also in Europe, you saw that chemicals were performing quite well in the ARA region, but also Singapore continued nicely in Houston, industrial terminals, a bit better. And also on the gas side, we had better results than what we effectively expected. So this has been the basis. So if you look at these trends, we expect these trends to continue in the fourth quarter. Our -- if you take our guidance and where we are today, then the fourth quarter would be around EUR 230 million, so not EUR 240 million, but EUR 230 million. Yes. So looking at these trends yes, we are confident that we should be able to end up around this EUR 890 million.

[David Kerstens, analyst]

And is that a clean run rate going into 2023, the EUR 230 million mark?

[Michiel Gilsing, executive]

Well, we will come forward with a new guidance during the full year results of '22. So we're going through the budget process. That's too early to tell. Obviously, if you look at the business today, the performance is good. I still see 2 major concerns. Well, obviously, one is the currency exchange. So -- but that's very hard to predict. It's now giving us a tailwind, but it could also end up in a headwind. That's very hard to predict. In my mind, what is also very hard to predict is, let's say, where is the global economy going. I think there's still quite a bit of uncertainty and potential volatility going forward. Are we really going towards an economical recession or not? So I think we're going through the process, David, too early to tell. I understand your question, but we will give the guidance, as we indicated, in -- during the full year '22.

[Operator]

And we will now I'll take the next question from Thijs Berkelder with ABN AMRO.

[Thijs Berkelder, analyst]

Congratulations with good results. First, some questions in terms of derisking the investment case. Can you explain why the proportional EBITDA in Netherlands in Q3 was so much lower than in Q2, while in rest of Europe, Africa, it was so much stronger than Q2?

Second question is on LNG. Had the step from, let's say, EUR 8 million to EUR 10 million we're now EUR 15 million per quarter. Is that more or less fully related to throughput benefits meaning that as soon as we would see the flow of LNG tankers slowing down again that we, again, would lose that quarterly contribution.

And third question is maybe more corporate strategy related. I think about a year ago, OpEx was looking to potentially divest the Australian term loans. Can you update this on the performance of Australia and whether the asset is in principle still for sale?

[D.J.M. Richelle, executive]

Thanks, Thijs. I'll take the second and the third, and then Michiel can comment on the first one on the Netherlands, but specifically on your second question, LNG, the way to position that is indeed it's -- it is variable spot revenue or shorter term, I would say, shorter-term revenues. So it's not like a month or 2 months, it's like a year revenue that you see now the uptick. That is definitely the reflection of the results in Q3.

And then your question to kind of like, well, what happens in the flow of LNG starts to diminish or be spread over different type of infrastructure. What we've seen so far, and that's why we are confident that we will move ahead on the 4th Tank in Gate is that the interest in the market to commit longer term for additional LNG volumes at this moment is quite healthy. And obviously, to build a 4th Tank that's having investments, so we need long-term commitment. So yes, in principle, if the flow would dry up, we will see a drop in, let's say, when we go through the extension of the current temporary shorter-term contracts, but the expectation and the interest shown by the market in the 4th Tank is encouraging to say. That's on LNG.

And then specifically on your question on Australia, the process, we went through the strategic process and decided not to pursue any transaction over there. We're happy with the healthy performance of our Australian asset. We were at the moment, also quite happy with the healthy performance, and we just feel that the whole case for us to remain the owner of the asset is an attractive hold case for us. And as any terminal in the network, if somebody comes up with a very attractive offer, we would look at it. But for now, there's no indication on Australia. So that's a bit the update on the portfolio. And I hope Michiel on the Netherlands.

[Michiel Gilsing, executive]

On the Netherlands, thanks for the question, Thijs. On the sales side, we have actually improved in the Netherlands, as you can see so. We see actually the performance of chemicals and better performance on oil has helped us there. We also expect that to continue in the fourth quarter. But on the cost side, we have seen significant additional costs. Some of it has to do with labor cost, but most of it has to do with energy and utilities.

But obviously, what we're now working on is to really predict for next year what it means because we have indexation clauses in the contract as explained. So -- and the January moment is the time to correct most of these contracts, especially on the chemical side. So that's where we're presently working on to make that more clear for next year. But indeed, due to the costs, you have seen a decrease in the proportional EBITDA of the -- of the Netherlands.

[Thijs Berkelder, analyst]

Yes. And the uptick in rest of Europe is primarily chemical Antwerp related?

[Michiel Gilsing, executive]

Yes. That's chemicals Antwerp related. Yes, we also have activity in Spain, but it's a joint venture relatively small compared to Antwerp.

[Thijs Berkelder, analyst]

Yes. Okay. Then maybe one. You indicated that 72% of your contracts have indexation losses. What part of these index contracts come up for renewal next year? Something like 20%, 25%?

[Michiel Gilsing, executive]

I think that's a tough question Thijs, to be honest. On the renewals, you would expect -- on average, I think we have on the chemical side, 3-year agreements. So approximately 1/3 of that on the oil side. Today, you have less indexation clauses. So we're now much more work on the oil side with energy surcharges because they don't have the normal indexation clauses like we see on the chemical side. So there, the renewals are more once per 2 years. So half of the portfolio renews from -- other than, let's say, the contract we have for the industrial part of Europoort.

So Overall, I think if you mix it all, approximately 1/3 will come up for renewal. Half of that has indexation because that's chemicals related and the other half is more oil related. That's a bit overall. I realize that, but I'll try to give you some guidance on the spot here.

[Thijs Berkelder, analyst]

No, that's clear. And finally, maybe an update on maybe less performing regions, Pakistan and the flooding situation and update on Malaysia?

[D.J.M. Richelle, executive]

On Pakistan, the situation in Pakistan is not impacting the activities that we have directly in the terminal, both on the LNG and on the liquid side, there is the situation in the country is obviously a very tragic situation as large parts of the country, but north of Karachi are completely flooded. But the activity levels in -- on our side are still relatively stable. Also if you look at it from an LNG perspective.

So Pakistan has been able to secure LNG imports for a long period of time. So they still run the LNG imports to the max on the long-term contracts that they have for supply of LNG. And then maybe towards Malaysia, maybe you can be specific what you're referring to on the situation in Malaysia.

[Thijs Berkelder, analyst]

Well, we had the downtime because of the, let's say, the explosion in the -- I think, in the PETRONAS complex and different factors there. What is the progress in getting up and running again?

[Michiel Gilsing, executive]

The refinery complex, which is a joint venture within Petronas and Aramco is -- has been going through a process of ramping up again, getting to maximum capacity. The petrochemical connection to the cracker, which is also co-owned by Aramco and PETRONAS has gone through the same process and then the further downstream petrochemical connections from the complex, which are owned by PETRONAS with other joint venture partners are in the process now of starting up.

And the -- unfortunately, only there was an incident that has been in one of those downstream activities 2 weeks ago, which has caused a setback of a few weeks, first indication for the activities to bring everything back to normal. So that's the -- that's where we are sitting now. So another few weeks, a few months, I should say, of further delay in -- but that's the downstream petrochemical activities from PETRONAS.

[Operator]

We will now take the next question from Lampros Smailis from Kempen.

[Lampros Smailis;Van Lanschot Kempen;?Equity Research Analyst, analyst]

Congrats on the quarter. I have a couple of follow-ups and then 2 questions of my own. So the first follow-up from Rachel's question. On the operating cash return, can you please quantify what is the effect of occupancy? And if there is an effect of higher pricing for a better performance?

And then on my question, so one is, can you give us some color on financing for the China expansion? And what is exactly meant by the local funding means? Because I understand there is no cash outflow. So a bit of color on how the side would work. Then on CapEx looking forward, since we see that there is an increased cost of raw materials, how much wiggle room is there if needed to postpone certain projects? And what do you expect in terms of growth contribution both for this year and the next?

Then the next question, I remember on the last quarter, you said that you were expecting some contract leakage in the Asia. We see that, that is very limited, at least so far. Can you explain why that is or what has led to kind of that not materializing? And finally, on the LA repurposing, when can we expect that to be complete and having a contribution on the P&L?

[D.J.M. Richelle, executive]

Thanks, Lampros. I'll leave the OCR question for Michiel. Maybe on the project side and some of the postponement because of material cost increases, and we don't see that immediate effect now. When we commit for these large CapEx commitments, we have a pretty good overview at that time from the contractors, including the main pricing for equipment. And when we feel comfortable at the start, including a healthy level of contingency, we will move at. And if we don't feel comfortable moving ahead. So the risk during construction, I would say, is relatively well under control from that angle. I think the start-up of the L.A. expansion or repurposing is going to be at the end of 2023 or towards the end of 2023. And that's the preparation.

So you will see during 2023 that you see a small drop because we take that capacity out of service. But then at the end, it starts to contribute for more attractive returns than we -- attractive rates that we currently have. That is the effectiveness of the investment that we do. But I think for project contribution. And then your question was what is the contribution overall for growth?

In 2023, we basically -- and we will update you on our EBITDA guidance in the beginning of 2023, and we'll provide you with sufficient information in that update. If you recall, the growth contribution came from the time that we did not give you any EBITDA guidance, and we're now moving a little bit away from that more into guiding you on EBITDA and OCR going forward. And hence, that's what we will do in the first quarter, as mentioned.

[Michiel Gilsing, executive]

Yes, maybe to take it from here from Dick and the growth contribution for this year is going to be approximately EUR 45 million in terms of EBITDA that Dick already mentioned. We like to go -- to give an outlook going forward really on the overall EBITDA outlook because it's sometimes rather confusing if we segregate it. I think ultimately, it's all bulk down to the overall EBITDA, which we can generate as a company and the return we make on our capital.

That was also one of the questions on what does it mean in terms of improved occupancy and pricing on the operating cash return. Yes, that is not an easy question to answer straight away. But if you take 1% approximately and then there is quite a difference between the different lines of business, but approximately 1% of additional occupancy brings another EUR 20 million to EUR 30 million in terms of cash. So that would mean that if you look at the overall proportional EBITDA, it would increase with approximately 3% to 4%. So it did have an impact of 0.3% on the overall cash return. It's a bit of a quick calculation. I realize that, but that's approximately how it works.

And then on the financing in China, yes, that's -- so the project overall is EUR 100 million, approximately 80% will be funded by local debt, so that's nonrecourse debt. And the other EUR 20 million will just come out of the operating cash flow of the joint venture itself, but it will not impact the dividend upstreaming from the joint venture. So the dividend upstreaming is still going to be 100% of the profits. And that's -- yes, obviously, it doesn't show up in our growth investments on a consolidated level, but these are actually ideal investments to do because you can leverage it at a local level.

Still the leverage of the overall joint venture is relatively conservative. So that's what we monitor. We can use some of the existing cash in the joint venture, which is over and above, let's say, the returned earnings, and we can still distribute dividend. So that's going to help us quite a bit in terms of creating return, creating value, but also protecting our cash flow at a holding level. So yes, hopefully we are able to find more of these joint venture-like investments.

But if you look at the industrial terminal and gas projects, most of these projects are joint venture-related projects and especially if we can add it on to an existing location where already cash is being generated, that helps us quite a bit in improving the return and protecting our cash.

[D.J.M. Richelle, executive]

And maybe Lampros, you asked for specifically occupancy in Asia, Asia Middle East and whether there was any leakage or the reason for Nordic. That's mainly solid development in Singapore, where the occupancy actually stayed pretty healthy, especially on the oil side. And that's where the demand has been good. We -- as I said already before, the oil markets outlook in Q2 were still a little bit more difficult to predict given the highly uncertain and volatile situations. We've seen that now developing rather positive in Q3 or at least remain at a healthy level, which is not what we could foresee back in -- when we had Q2. So that's the reason.

[Operator]

And we will now take the next question from Quirijn Mulder with ING.

[Quirijn Mulder, analyst]

Congratulation with the results and also the better presentation than in the past. So I'm happy with it. So on the LNG. First of all, you're moving now to EUR 80 million contribution on the LNG effect. Is there anything you can say about the future? Is that EUR 80 million? Is that something like a yard stake for the coming quarters? Or is -- or are you -- because we have seen it for a very long time, EUR 12 million. So it's interesting to know whether we are at a higher level now and that's not going down.

Then the second question is about the expansion. We often understand that Altamira, something is happening. So maybe you can elaborate on that or maybe you are not evolved at all. So I'm very interested in it. Then on the CapEx and on the steps. At the Capital Markets Day, you discussed that Chemicals, in fact, has de-prioritized in my view. And now you are going to invest EUR 70 million into the Eurotank in Antwerp. Maybe you can tell me how that is, let me say, is comparable to the strategic steps you have indicated at the Capital Market Day.

And my last question at this moment is about the -- about the LPG business with Aegis? how is that developing? And what is the outlook at this moment?

[D.J.M. Richelle, executive]

Thanks a lot, Quirijn. On the LNG side, that's also a thesis question went to I think hard to make the number kind of like pinpoint at a much higher level. I think what you do see Gate is the main contributor. There's shorter-term contracts, let's say, a year out that has been made for Gate, there is incentives that we get also from certain board fees that are helping us in this quarter as a result of just a large increase of additional vessels that are coming through. A large part of that will -- we expect to continue to be in the numbers going forward.

Then again, you still have Pakistan, Mexico and Colombia and those results with the exception of, I would say, maybe Pakistan, but the other results are sometimes fluctuating. So I think that gives you the proper guidance. If you then go to your question on Altamira, I know Huizhou has been commenting on some of the liquefaction activities that are taking place. I would say that's an activity that generally is happening along the U.S. Coast, including Mexico. Everyone is looking for opportunities to liquefy natural gas and export it to other parts of the world. Since we have a facility in Altamira, we would be looking at it. But we're not involved directly in the same discussions as [indiscernible] is commenting on. And it's really far out still to make that anything concrete for our facility over there. I wouldn't really bet on it.

Then maybe on LPG ages. I think the volumes and demand for LPG continues to be relatively strong in the country as the government continues to support the ultimate demand and through that subsidy scheme is helping drive demand and hence, also imports of LPG. So that's still a healthy development. Also on the existing locations, but also potentially for new locations in the new joint venture, and we're comfortable and happy with the way that is developing so far. And maybe on Belgium, a few words from Michiel.

[Michiel Gilsing, executive]

Yes, maybe to add a bit still on ages as well, Quirijn because if you look at the acquisition, from a business point of view, it runs in line with our expectations. So on a proportional EBITDA, it's in line with our expectations, but we have purchased price allocation, which then if you roll it up into our consolidated figures, it actually has a negative impact because of the acquisition price, which then needs to be depreciated over time or amortized over time.

So cash flow-wise runs okay. Business runs okay. But once you roll it up into the consolidated figures, you may get a different picture. That's why it's very important to look at the proportional EBITDA also for this activity and the return we make there. On the chemical side, yes, I think you're right. If you look at the portfolio overall, chemicals was the lower part of the portfolio. So we're very critically looking at any investment. We still have a portfolio to manage of chemical terminals. So it's not that there are no opportunities in this portfolio, but we have a very disciplined approach towards any of these investments. And this site is in the midst of a transformation.

So for us, very important to see whether there are opportunities to improve the cash return of this site as well. We see this as an excellent opportunity because it has a good commercial contract base. It's indeed quite a sizable amount, but you may expect that we always will do some investments in our oil and chemical assets. It's not like we will do 0 because that's probably not realistic. But the main focus is still on industrial gas and new energies. But that's a bit of the background. We found this one attractive enough to pursue.

[Quirijn Mulder, analyst]

Yes. And then my final question, if aloud is about the Gate expansion, the 4th Tank. As I remember, there was an optional shell to support that 4th Tank. Is that still valid? Is there any interest from -- or is that option gone?

[D.J.M. Richelle, executive]

As often, you know quite a lot probably of the history. We're not -- I mean, we're going through the open season as we speak now, Quirijn. Interest is healthy, and we will go through the process. I'm not aware of any particular predetermined obligations or right for anyone to step in. So we will just follow the market, follow the interest in the market and at the proper time with the right support from our stakeholders in terms of permits and making a decision on whether we want to move ahead with that. But as I said earlier, the interest is healthy. So this seems a good moment to very seriously look into the opportunity.

[Quirijn Mulder, analyst]

But for an FID, you probably take, let me say it takes until 2024, probably. Is that correct?

[D.J.M. Richelle, executive]

Yes. We try to see if we can fast track it. Maybe towards the end of '23, which will then naturally maybe move into the beginning of '24. But for now, we're still targeting the end of '23, if we can make that work. I mean the need is really there.

[Operator]

[Operator Instructions] We will now take the next question from Andre Mulder from Kepler.

[Andre Mulder, analyst]

First question on this balance of 62% index close, 28% not. The 28%, I assume that that's really the sort of the short term. So there the indexation does not include that? Or how should I relate that because you made some statements that, for example, in oil, you have the surcharges. So I'm looking for how that is actually composed.

Next one on the saying it's a bit of balance between the fixed interest rates and the floating interest rates. What's your policy there? How has that changed? And how do you look at that going forward? Then a statement on these rerouting flows. You said that the gas impact will stretch into '23. Would you expect the same for oil? I assume that, that will be the case. Will it sets into '23 or '24?

And then last question is on this growth contribution. Michiel, you said that it's going to be something like EUR 45 million. I see a number of EUR 20 million for the first 9 months. So can you relate those 2 amounts, please?

[D.J.M. Richelle, executive]

I'll start with the third one and then leave the others to Michiel. But maybe on the flows, I think enough said on LNG, on the oil side, I also indicated that the rebalancing of the flows so this is not immediately reflected in demand for our servicing, but rebalancing of the flows is happening, and it's kind of like moving into a pretty permanent pattern, I would say, as we don't expect, obviously, given all the sanctions for Russian flows to all of a sudden come back to Europe, and they find an outlet in mainly China and India. And hence, as a result, we expect that to continue.

Now still on the basis of further macroeconomic developments, we have to see how that plays out in the course of '23 and beyond. But specifically to the flows, this is -- it's kind of like resettling at a rebalance level, as I mentioned before, with larger supply lines and improved and increased demand for security stock.

[Michiel Gilsing, executive]

Yes, maybe I take it from there. I think your first question was on the contract 72%, which contains indexation clause and 28% doesn't. So that is -- most of that is in the oil business. So that's oil-related, which doesn't come with indexation clauses. But there, indeed, we have -- although it's maybe not an indexation, we have indeed active engagement with our customers to charge on the additional increases in energy cost, and that's what you see, for example, in the AF division, one of the reasons why the performance is actually compared to Q2, quite stable and much better than Q1 has helped as a result of these energy surcharges.

But there are no automatic inflation protection mechanisms in these oil contracts. And that's not only for Rotterdam, but it's also what you see in the Middle East and what you see in Singapore. So there's a bit of light on that question. On the fixed floating, yes, it is well within our policy. The 70-30, we're happy with the 70-30. It may slightly increase once we do a refinancing next year on the USPP. And so we are in the process of preparing ourselves to refinance part of the USPPs and it may well be that we take a bit more out of the market to refinance part of our revolving credit facility, but happy with the 70-30 at the moment.

And you also have to factor in here that joint ventures are separately financed. Most of the joint ventures have a good hedge in place as well. So at least at the 70-30 level. But in the Middle East joint ventures, we have floating interest. So that's where we have minority stakes. We're not able to hedge the positions there, although the impact for Vopak overall is relatively limited. And I think on the growth contribution yes, sorry, I maybe have been a bit confusing, but the overall contributions of this growth has been EUR 45 million. But if you compare it to in the 2021, so that's not from the start because these projects are already contributing in 2021 as well, the increment is EUR 20 million. So I hope that clarifies the 45 million versus the 20, Andre, just let me know. This for me is also one of the reasons we like to highlight, let's say, what the contributions of the projects are, but by having it sort of separately reported on top of the normal numbers sometimes makes it also rather confusing. So we hope that with the overall EBITDA outlook, that's going to be more clear going forward than it was.

[Operator]

And there are no further questions. I will turn the call back to speakers for closing remarks.

[D.J.M. Richelle, executive]

Very good. Well, thank you very much. Thank you all for your interest and for participating. If there's any further questions, you know where to find the team of Fatjona on IR. Happy to take any and to guide you further. And for now, I wish you a great rest of your Friday. Thank you, and bye-bye.

[Michiel Gilsing, executive]

Thank you.

[Operator]

Thank you for joining today's call. You may now disconnect.