Odfjell SE

OSE:ODF

Earnings Call Transcript 2018-Q4

[Kristian Verner Mørch, Chief Executive Officer]

All right. Good morning. Can somebody please close the door down there? Okay. So good morning, and welcome to the presentation of Odfjell's fourth quarter results and also presentation of the preliminary results for 2018. We're presenting here in Oslo this morning, but we are also broadcasting the presentation live. So if I can kindly ask you to wait until the end with questions, we'll take a Q&A session towards the end.The very short version of what you're going to hear today is that 2018 turned out to be a very, very challenging year for Odfjell. We have experienced some of the worst market conditions that we have ever faced. And at the same time, we've had considerable impact of the ongoing restructuring in the terminals division. So we are presenting a bottom line result that is the worst in the history of the company, and that history goes back a long time. So this is not something -- a record that we are proud or satisfied with breaking. But as I said, it's actually not that easy. You have to look at this number in some context, and we will get back to that a little bit later.First of all, I'll take you through the highlights as usual. And then Terje, he will come on and talk about the financials, and then I will come back and take you through some operational reviews. And finally, we're going to speak about prospects and markets updates towards the end. And then there will be a Q&A session to end it off.So if I start with the highlights for the fourth quarter. First of all, I think after a very challenging 2018, it was nice to see that towards the end of the fourth quarter, we actually saw the markets begin to improve quite substantially, and this is something that is carrying on into the first quarter. I'll speak more about the market outlook a little bit later. We had an EBITDA in the quarter of $33 million, which is down -- which is up $2 million compared to the third quarter. And out of the $33 million, $27 million of that came from the tankers, which is more or less unchanged compared to the previous quarter. On terminals, it was a $5 million EBITDA, which was also in line with the third quarter. That all came down to a net result of minus $48 million for the quarter. But as you will see later, that $48 million includes around $18.5 million in impairments. So if you net that out, then the result in the fourth quarter was in line with what we saw in the third quarter. And then we have a couple of subsequent events that happened after the close of the quarter. First and foremost, we are very happy that Lindsay Goldberg have reached a deal to settle their shares in Odfjell Terminals in the U.S. to a Canadian-based infrastructure fund called Northleaf. Northleaf have other investments in the terminal industry. They are long term, and they are very good partners for Odfjell to continue to develop and improve the footprint in the U.S. So we are very happy with that, and that will give us visibility in terms of what's going to happen on those terminals.Secondly, we have the last 2 gas ships that have been assets held for sale for the past more than a year, and we are now close to having a deal for selling those 2 ships, which we expect will close within the first half of 2019. I will now take you through the figures on the right-hand side, but Terje is going to take you through in more details on that. But as you can see in the quote box, 2000 -- the fourth quarter concluded a very challenging year for the chemical tanker business. We are happy to see that the markets have changed, and we also think that, that change is not only driven by the bump up in the CPP, but it's a more fundamental shift that we have been predicting will happen around that time. So that's good to see. And so we do believe we are past the bottom in terms of earnings.If we then turn to the highlights for the full year 2018, it was a challenging year with the markets, as I mentioned. The EBITDA for the year came in at $135 million, which is around $30 million below where it was in 2017. It is worth noting that the operating cash flow was positive in all quarters and stood at $43 million for the year. That does not justify the loss, but it is still a fact that in the worst markets that we've ever experienced we continue to generate positive operating cash flows.The full year net profit was $211 million loss, heavily impacted by the impairments in Odfjell Terminals. If you look at all the impairments in Odfjell Terminals, that was about 2/3 of that number or around $140 million. I think it's -- I know the markets don't remember as well as sometimes they should, but I do want to mention that in 2016 and 2017, in total, we have taken $180 million profit gains from sale of those terminals. So the $140 million that happened in 2018 has to be seen in that context. That does not in any way justify the results. We are just pointing out -- pointing to that fact. And in fact, if you look at the closing of the Singapore sale that happened in the last week of December last year, had that closed 2 weeks later, that $211 million would have been $111 million instead in loss. So we are talking about really big impacts from the restructuring.On Odfjell Terminals, I am repeating myself almost, but the restructuring of that terminal and Lindsay Goldberg exit is progressing well. We have solved Europe. We have solved the U.S. We have solved the overall governance of the terminals. So what remains is to find a solution on the Asian terminals, which I'll also speak about a little bit later.And finally, something which is not visible because of the bad market. But during 2018, Odfjell has made the biggest changes to our fleet composition in the history of the company as well. So if you look at unit cost and efficiency and environmental footprint of the average -- of the Odfjell Tankers fleet, we have done quite a lot of progress in 2018, and that will be helping us as the markets improve.I think those were the highlights, and then I'm going to hand it over to Terje, and I'll come back a little bit later.

[Terje Iversen, Chief Financial Officer]

Thank you. I will start with the tanker figures in the fourth quarter. We saw an increase in the gross revenue from the third quarter. That mostly is related to more sailing days, more vessels and also less off-hire than we had in the third quarter. Voyage expenses also increased as -- based on the same reason that the number of days went up. So that increased from $89.9 million to $94.5 million. At the same time, we had a kind of positive one-off related to our South American business, where we reduced the voyage expenses of around USD 4 million due to a tax-related matter in the South American trade. So that is improving our voyage expense or decreasing that in this quarter with around $4 million. After pool distributions, we have enough time-charter revenues of $117.1 million compared to $112.6 million in the third quarter. After time-charter expenses and operating expenses, which were at the similar levels as the preceding quarters, we had a small increase in the G&A when -- if you compared to the third quarter, but at the same time, you should remember that in the third quarter, it was lower than the average for preceding quarters. So that kind of on a normal level in the fourth quarter. Then we are left with an EBITDA of $27 million, compared to $26.8 million in the third quarter. Depreciation, then we have an impairment in this quarter of 1 vessel that we are putting up for sale; that was also involved in the South American trade. That will be divested in the coming months. We took an impairment of USD 5 million there. And then after capital gain, we are left with an EBIT of negative $2.1 million compared to positive $1.9 million in the third quarter. Then after net interest, we also have other financial expenses. This quarter, we had a negative development in mark-to-market on some of our derivatives, which was positive in the preceding quarter, and negative $10.1 million in this quarter, so that increased the net finance. So then after taxes, we are left with a net result of $30.8 million negative compared to negative USD 12 million in the third quarter.Looking at terminals, we see the gross revenue declining. That is 100% related to the divestment of Rotterdam at 20th of September. So that is not included in the fourth quarter figures but were included in the third quarter figures. Operating expenses were substantially down, also based on the same reason that Rotterdam is now not included in the figures anymore. G&A also was decreased due to the same reason, but at the same time, it didn't decrease as much as you should expect because we are now including 100% of the G&A related to the terminal division in Odfjell while 50% of that is passed on to the joint venture partners. But here, we show 100% this quarter related to those G&A expenses.Then we are left an EBITDA of $4.8 million compared to $3.9 million in the third quarter. We did an impairment of the terminal in Tianjin this quarter of USD 10 million. That is a newly built terminal that is now fully operational. Most of the licenses are in place. However, the market is not kind of supporting the regional investments. But today, we have a good utilization of the terminals -- on the terminal, but kind of the cargo or the storage is not giving returns or the rates that we had expected based on kind of business environment not moving as fast as we expected when we went into that investment. After capital gain, we have an EBIT of negative $8.5 million compared to negative $16.1 million in the third quarter, also down, which was impacted by the impairment related to Rotterdam in the third quarter.After net finance, we then have net -- on taxes, we have net result of negative $12.1 million compared to $19.8 million negative in the third quarter.Looking at the total, you see that the gross revenue is increasing, mostly related to the increased days for the tanker business. The EBITDA went from $31.5 million to $32.7 million. And after impairments of $18.3 million, which also includes $3.3 million for our gas vessels, then we are left with an EBIT of negative $13 million compared to negative $13.5 million in the third quarter. And the gas vessel that we impaired has been classified as asset held for sale for more than 1 year now, so we haven't depreciated it. So it's more kind of an adjustment of the book value related to the expected sales price. And as Kristian mentioned, we are in the process to divest these vessels and expect to close that during the first half of this year.After other financial items and net interest expenses and taxes, we are then left with a net result of negative $47.6 million compared to $31.2 million negative in the third quarter.Looking at the balance sheet, there are some major changes there. Mostly, it's related to Rotterdam terminal, where we divested a terminal in the third quarter. The cash proceeds were then left within the terminal business in the third quarter but was transferred to the owners in the fourth quarter, reducing our shares in investments in associates and JVs substantially from $243 million to $170.9 million in the fourth quarter. At the same time, cash and cash equivalents went from $206.8 million to $167.8 million. There are some kind of big numbers behind that, around USD 77 million was repaid in the bond maturing in December. We also received noncash proceeds from the terminals division of USD 81 million, and we also paid USD 27 million for the increased share in the Antwerp terminal.Equity decreased based on the negative result in this quarter. We are around 33% equity share around the fourth quarter. We also see that the current portion of interest-bearing debt is coming down as a consequence of us redeeming that bond in December of 2018.Cash flow, as Kristian pointed out, we still have an operating cash flow that is positive, also in the fourth quarter and for the year as a whole. In this quarter, we had the influence from the divestment of the terminal of Rotterdam, the cash proceeds received from that divestment and the investment in Antwerp. And as we should -- looking at the financing activities, we repaid the bond and we also paid quite substantial installments on some other debt during the quarter. We had a net negative cash flow from financing activities of $95.8 million this quarter and the net cash flow of negative $39 million as a total in the fourth quarter.This is a rather busy slide. The reason we are highlighting this to show that, going forward, we have to take into account IFRS 16. So we have prepared the figures, the reported figures in 2018 as if IFRS 16 was implemented in the beginning of 2018. I will not go through each quarter, but if you look at the fourth quarter, we have then simulated what will be the fourth quarter results for chemical tankers look like in the fourth quarter compared to what we have reported. As you can see, the gross revenue is at the same level. At the same time, you can see that time-charter expenses decreases quite substantially because we are now considering all time charter and bareboats operational, longer than 1 year as kind of an -- value use as an asset that is capitalized on the balance sheet. So we don't book all charter hires as time-charter expenses anymore. That is decomposed to time-charter expenses for the shorter vessels, for the shorter terms, put them into OpEx, depreciation and interest for all charters more than 1 year that are considered as operational charters.So time-charter expenses decreased substantially. What you see left, $70.8 million (sic) [ $7.8 million ], is only related to estimated time-charter expenses for shorter than 1 year hire agreements. Then you see that the OpEx, we have then estimated -- calculate the OpEx based on the new accounting rules, and then we are left an EBITDA of $46.2 million compared to 72 -- $27.0 million as reported in this quarter. So quite a substantial increase in EBITDA because of the new changes in accounting rules. And then you see that we have included depreciation of operating lease this quarter. So the EBIT is then ending at $8.7 million compared to $3.0 million. And the net result after also including net finance from operating lease is then ending at $24.8 million compared to reported $27.8 million. This is then excluding impairments in the fourth quarter.Looking for the year in total, the reported EBITDA would have increased from $108.7 million to $202.2 million, EBIT from $13.4 million to $23.4 million. And a net result quite comparable to actually reported, but we see the changes in the EBITDA, especially in also the EBIT reported.So this is more to give a guidance, what you should expect if you roll forward the historical figures from the tanker business in Odfjell in 2018 into 2019 with the new accounting rules implemented.This is where we try to decompose what we pay in charter hires, both for the time charters and the bareboats, going forward, based on commitments we have for today. So in total, first quarter this year, we will pay around $33 million in charter hire for operating leases and time-charter leases that are not considered as financial leases of $33 million, that will be decomposed in the P&L. You will see $13 million of that will still be booked as time-charter expenses; $5 million will be OpEx, you see a small interest element; and then we see the $13 million included as depreciation. So it will be decomposed. You will only see then the remaining time-charter expenses related to the contracts shorter than 1 year going forward.The balance sheets. There will also be impacts on the balance sheets, and we have included new lines showing the effects on the balance sheet the 1st of January '19. You see then we will have to capitalize right of use of assets of $187.8 million on the asset side. And on the other side of the balance sheet, we have to increase -- include noncurrent debt, right of use of assets of $140 million. And current debt right of use assets, $47.8 million. So we are increasing our total assets with around kind of 178 -- USD 187.8 million without kind of changing the equity, so meaning that the equity percentage will be reduced based on the total balance sheet that is increasing.Also looking at the financial ratios, we will see consequences. Here we have estimated for the chemical tankers alone, not including terminals, because that is only disturbing the picture. It's mostly for the chemical tankers business we will have an effect. And as I said, IFRS 16 will then increase reported EBITDA based on 2018 figures for chemical tankers from $109 million to $202 million. EBIT will also decrease slightly, but the net result will be mostly very much the same, but slightly lower than what we have reported. Equity ratio will be reduced from 33% to 30%. While looking at the net interest-bearing debt divided by EBITDA and the value of our EBITDA, the reported figures or the financial ratio will improve as a consequence of us reporting according to IFRS 16 from the beginning of next year, or '19.Then back to the operating business. Bunker expenses, that is one of our most -- kind of largest cost components. We saw an increase in the bunker cost for the Odfjell vessels this quarter, increasing from $42.9 million in the third quarter to $46.7 million, very much kind of reflecting the increased bunker price throughout the second and third quarter, while the decrease we saw in the bunker price or the oil price towards the end of the year will not visible before the beginning of '19 in our figures because we used the first in, first out principle in kind of calculating the cost of bunker in our P&L. Going forward, we still have quite a good contract coverage. We're still then hedging a large part of the expected bunker cost for us, also in clearing what we have done off the financial hedges. We have secured around 65% of the bunker cost exposure going forward. But as mentioned, you should expect to see a decreased bunker cost in the coming quarters based on the reduced bunker price that we see in the market today compared to the third quarter and into the fourth quarter.Debt development, not very much new to report on. This year, we have the bond maturing in September. We also have a financial lease maturing in September. But beside of that, we have rather limited debt repayments before the third quarter 2020. And then we have a simulation of the -- how the growth that is expected to develop going forward based on repayments and based on new financing for the newbuildings. So we will see an increase in debt towards this year, but don't expect that debt will decrease in 2021 and 2022 based on the investment portfolio that we have today. With regard to the bond maturing in September, we are kind of following the market, and we'll consider to refinance that at some stage when we find the terms acceptable for Odfjell compared to what we have done in the market previously.CapEx. We have the newbuilds, of course, being delivered in '19 and 2020, 6 newbuilds from Hudong, all fully financed. We have limited equity installments, around USD 12 million, in '19. Besides that, everything is financed through mortgage financing and sale and leaseback structures. For terminal business, we have included our planned expansion CapEx for '19 of around USD 6 million. That is a modest amount. But at the same time, we think that going forward, bringing a new partner into the U.S. business, you should expect to see some increase in the CapEx going forward based on us wanting to develop that terminal based on the very favorable market conditions we see for the U.S. business. But first, we have to sit down with a new partner and agree on the business plan going forward before we can signalize what kind of planned expansions we are going to embark on.I'll leave the floor to you again.

[Kristian Verner Mørch, Chief Executive Officer]

Yes. Thank you, Terje. So some operational highlights before we get to the market comments, and I'll start with Odfjell Tankers. What you're looking at on the top left-hand corner is kind of the development in our fleet is increasing its market footprint. What was also visible from that slide is 2 other things. First of all, the dotted line, as you can see, is the Odfjell's own days that are market exposure in terms of the size of the fleet and that has been going down because we have replaced the time-charter ship with some pool ships, which means we do not have the downside to the market for those ships, but we do still have the upside because there's profit shares and so on for the ships that are in the pool. The other thing that's visible from that is that you have seen in the -- especially second and the third quarter in 2018, we had quite a lot of off-hire days. We had many dry dockings. We had recoating on some of our coated ships, and that is expected to return to normal during 2019. So we have been also hit in 2018 by a too high number of off-hire days.On the top right-hand corner, you're looking at the contract coverage that we're having. That is about 59% at the moment. You can actually see that going down just a little bit from the second quarter. I think if we believe as strongly as we do in the fundamentals for the chemical tanker market, there's no point in having over-coverage going into 2019. We have let some contracts go because we felt that the levels that our competitors offered were not sustainable, but that's a conscious decision. It's not because we don't have the access to the contracts, but we do think that the strong fundamentals will support that we take a somewhat tougher stand on rates.Bottom right-hand corner is maybe the one that stands out the most. What you are looking at here is the comparison of the ODFIX, which is an operational index. So that will include the repositioning for dry docking and so on, will impact that negatively. And we are comparing that to the Clarksons spot index, which is kind of taking the spot rates and compounding that into a TCE equivalent. So as you're seeing, our performance in the fourth quarter went down by 3%, while the Clarksons index went up by 10%. I'm not too worried about that. I think it's a natural thing that when the spot market spikes, there will be some delay before that filters through to our earnings. You have to finish your current voyages before that's starting to filter through to our earnings. But the positive thing about that slide is that the market actually came -- the spot market did come up 10% in the fourth quarter. And as I've mentioned earlier, that seems to continue into 2019.Probably the hottest topic in the shipping industry at the moment is IMO 2020, scrubbers or no scrubbers. As you know, Odfjell has taken quite a clear stand against the scrubbers. We don't think it's the right way to solve IMO 2020, and we don't think it's a sustainable approach to install scrubbers, but we also realize that by taking such a firm stand, we do expose ourselves to some of the uncertainties of our future fuel prices and availability of fuel. The graph you're looking at here is a historic comparison of the cost of heavy fuel oil compared to gas oil. And you can see '11 to '14, you've seen that spread being around $275 and then up until today, that spread seems to have narrowed a little bit as the bunker prices come down. Most people who install scrubbers, they are very focused on that spread, either they burn HFO or you will have to burn MGO as an alternative fuel. And I have actually never really understood that logic because the alternative to burning HFO is not burning diesel. The alternative is to burn low-sulfur fuel oil. And since the green bar you're looking at on this graph is, since 1st of January, Platts have been quoting the cost of low-sulfur fuel oil. So even though not-too-big volumes have been sold yet because you can still burn the HFO, then what this shows is that the delta between heavy fuel oil and low-sulfur fuel oil so far is only around $30. And so that makes the economics of a scrubber quite interesting. And whether this is a marker for how the market is going to function when -- as we get closer to 1st of January or not, I think it will be a mistake to be overconfident at this point. But at least, early signs are that the impact in terms of pricing of low-sulfur fuel oil may not be as bad as everybody had been fearing. And at least the spread between the alternative to heavy fuel oil might not be in the favor at the moment for the scrubber economics. But as I said, it would be a mistake to be too confident on that point, and it is something that we continue to monitor very closely.There's one important point that I want to make on IMO 2020, and that is in Odfjell we have not taken any COAs, any contracts beyond 1st of January 2020 without either having a bunker adjustment clause, where the customers will pick up that difference in fuel prices or that there's an exit provision in that contract. And we have taken that very firm stand. We are not going to take on the risk of a changing fuel environment. So that's an important point to make when you talk about IMO 2020.Terminals. You're seeing quite a big increase in occupation, utilization up to 96%. That is the effect of Rotterdam not being there any longer. But if you then, on the right-hand side, you look at Houston -- Houston, as Terje mentioned, it's a very strong market in Houston. The chemical producers are producing at full speed and expanding. So we have 98%, 99%. So that makes the terminal full. When you fill up a terminal, a lot of them being long-term contracts, it's difficult to increase the top line revenue at the same time. It'll take a little while, but then it becomes a matter of efficiencies and selling all the services. And actually, in the fourth quarter, Houston has managed to increase their revenues by around 3% because of that strong market. So it is a very favorable market in the U.S.I don't think I have anything more to add on that slide except for the natural fact that our global footprint has been reduced because of the sales we have had.This is the current footprint on terminals, and it's a very reduced footprint compared to what it was in the past, but there's been good reason for the changes that we have made. I think the way that we think about it is that we have solved Europe. We don't have the uncertainty and the weight of Rotterdam anymore. We have increased our shareholding in Antwerp, which is performing well. It looks like we have solved the U.S. with a stable long-term infrastructure partner in that terminal. I'll have to repeat that, that deal is still subject to customary closing and so on, but it looks like that is happening. So the U.S. is solved as well. That means that the remaining challenge for us is to solve Asia. Lindsay Goldberg is still looking to exit Asia, and that work is ongoing. In Asia, Ulsan and Dalian are performing well, Dalian a little bit better than Ulsan. The 2 challenges we have are the 2 other Chinese terminals that are not performing as they should. And we'll have to find a solution for that. But otherwise, the restructuring of the terminals business is progressing well.Prospects and market update. We have mentioned a few times that the market came up in the fourth quarter, and we see that continuing. And we thought it would be -- it might be of interest to give our perspective of why that happens. And we think there are essentially 3 main reasons why the market has come up. First of all, if you're looking at the CPP market and the 2 top graphs here, on the right-hand side, you're seeing that there was a significant spike in CPP markets towards the end of the year. That has trailed off a little bit, but it has stabilized at a much, much higher level. And that means that the swing tonnage or the IMO2 tonnage that has been doing chemicals there are now beginning to swing back into the markets they were designed for, which is the CPP market. The latest data point we have is December. And there, we see that the 0.7% of the coated tonnage is now back, going away from chemicals again. And that may not sound like a lot, but it's from a big data point compared to the chemical tankers. So it actually has a meaningful impact on the supply. And what we are seeing that, that continues in the first quarter. So swing tonnage is less of a challenge than it has been throughout 2018.The second thing is that the palm oil markets have taken off. Strong markets towards the end of the year. September-November exports were all-time high. Production is all-time high. There's some reduction of taxes in India and Indonesia that favors this trade. So they've kept -- the vegoil market is stocking up both chemical markets but also IMO2 tonnage, and that also helps the supply side in the chemicals space. And then finally on chemicals, we've been saying for quite a while that the export of methanol, especially from the U.S. and Middle East would happen. And you are seeing a lot of that capacity now coming onstream towards the end of last year. The United States is now a net exporter of methanol. That's a big thing, and these are big, long-haul volumes that stocks up chemical tankers. So that helps the supply-demand balance as well. So these are the 3 fundamental things. So when some people look at the chemical market and say, "Well, the markets are only up just because the CPP market jumped." That's partly true, but it's not a sentiment thing. It's actually a real impact in terms of demand that will impact the supply side positively in chemical tankers. The other question we get quite a lot is, "Okay. So what's the impact of the ongoing trade war?" The short version is that we don't see any negative impact on our market. Actually, on some products, we are seeing an increase in tonne mile because of the trade war. We have picked 3 different commodities here. What you're seeing on the first 2, which is styrene and EDC. You're seeing year-on-year a reduction in exports from U.S. to China, but you're seeing at the same time an increase in exports from U.S. to Middle East and into the Far East for EDC as well. So what's happening is that a lot of these products will either get transhipped or the markets will find different ways -- the products will find different ways to their markets in China, and that means an increase in tonne mile. So these are only 2 commodities, but the general picture is that we do not see the negative impact of the trade war.The last product that we mentioned here is MDI, which is an export from China to the U.S. And we're actually seeing that increase. And also China to Europe is increasing. But China to the U.S. is increasing, and that's kind of a paradox because you would think that this trade war would be working 2 ways. And we're scratching our heads, quite frankly, a little bit in terms of why that is happening. And I think one of the possible explanations can be, if you speak to the container lines, actually you're seeing a little bit of the same impact on container volumes. And some people in the container industry feels that the explanation could be that if the Chinese government tells the Chinese corporations not to buy U.S. products anymore, they will stop doing it. But if the U.S. economy asks Walmart, "Don't buy products in China," Walmart's going to say, "Well, we're going to continue buying it as long as it makes economic sense." So there's probably less control in terms of shutting off that import. Whether that's actually the case or not, it's really hard to find out. But the fact of the matter is that you are actually seeing increased trade from China to U.S. on some commodities. So the bottom line is for the trade war, at least as it is now, and it also seems to be trailing off a little bit, cooler heads are prevailing, but we do not see a major impact from the trade wars on the chemical tanker demand as it is today.On supply side, in the fourth quarter, there was no -- zero orders of new tonnage in the core chemical markets. What you're looking at on the left-hand side is the number of new orders, it's not deliveries. It's the number of new orders, and that's been 0 in the fourth quarter for core ships. So that means that the current order book stands at around 8% of the total chemical tanker fleet, and that's not a very scary order book. 8%, we have been trying on the green bars to put that a little bit into perspective. Because if you look at the age profile of the chemical tanker fleet, and you say all the ships built before year 2000 -- between 1995 and 2000, that actually represents 17% of the fleet. We're not saying that all of that is going to go in terms of scrapping, but as the year progress, they will at some time be dropping off out of the markets. And that 17% compared to the 8%, means that 8% is not too scary a number in terms of supply.Then we are seeing -- and the 6% you're looking at, that's in terms of real supply, of course. This is not about ships coming and going, but real supply into the chemical tanker market. If the number of swing tonnage reduces back to the historic average, then it'll have an impact of 6% on supply for chemical tankers. So that also puts the 8% in perspective. And then finally, we are saying that there might be an impact on slow steaming and other things relating to IMO 2020 that is hard to predict today. We picked 5% using a couple of assumptions here, but the reality is if fuel prices really spike, you will start to see slow steaming, and that will impact real supply as well. So the short message is we think that supply is under control within our markets.So the market outlook conclusions. The markets did turn in the late 2018. We believe that was the bottom, and it's continuing into 2019. It's real structural improvements. It's not just the sentiment coming up. The trade war has no material impact. And so far, the GDP growth does not seem to have -- or the slower growth does not seem to have an impact on demand, I do think that, that is probably the joker in the demand side. If there is a real correction, it will obviously have an impact on the demand for chemicals. But there are so many positive structural things happening to long-haul transportation of chemicals that we think that it is fairly robust. But it is, of course, something that we have to worry about, and it will impact us should that happen. So total demand picture, we continue to think that's going to be around 4% compounded over the next couple of years plus whatever you think in terms of tonne miles. And that's a fairly robust number, as I said. On the supply, order book is under control. No new orders. 8%, it stands at. There's the swing tonnage that I just spoke about. And then there's the joker on the supply side is a little bit of what happens on the -- is there going to be an impact from IMO 2020. If there's an impact, we believe that that's probably going to favor the markets more than disfavor the markets. But it is something to watch. And the compounded growth in supply is expected to be around 2% in the same period as we're measuring up to 2021.So in summary, we believe the markets have turned. It's real improvements. It's not just sentiment. The 2020 impact so far looks like the impact of 2020 is going to be less than what everybody has been fearing, but these are early days and it's something that we're watching. No matter what happens on IMO 2020, it's a fact that the energy efficiency of our fleet is increasing quite substantially and has been increasing in 2018, and that will help us no matter what happens in terms of IMO 2020. And we're very happy on the terminal side to have a long-term infrastructure partner in place in the U.S. that appreciates the strength of that market and the potential in our terminal, especially in Houston. So the prospects, we expect the first quarter is going to be improving and we expect also terminals results will be stable throughout 2019 as we put a new plan in place for the U.S.So I think those were the summary and the prospects. I also just want to send a little teaser that on the 4th of June, we are going to have Capital Markets Day here at Hotel Continental in Oslo, where we're going to talk more about Odfjell and how we engage in the markets. And I hope many of you will be joining us for that day.So that concludes the presentation, and now we'll -- we will be taking questions.

[Kristian Verner Mørch, Chief Executive Officer]

Are you hearing the question on the -- yes? Okay.

[Bendik Engebretsen, Research Analyst]

Yes, Bendik Engebretsen, Danske Bank Markets. Before the refinancing of your previously -- of your bond in 2018 and after the sale of Rotterdam, you mentioned that a dividend payment was amongst the uses of capital. Is that still an option in 2019? Or is it off the table?

[Kristian Verner Mørch, Chief Executive Officer]

No, it's still an option, but I think presenting a loss of the size that we are here with the uncertainties, it's not an easy decision. But we have not made a clear recommendation and the board has not dealt with it. I wouldn't say it's off the table, but it's not the opposite either. So I'm sorry we cannot add more certainty on that point.

[Frode Morkedal, Managing Director]

Frode Mørkedal, Clarksons. You mentioned Lindsay Goldberg is selling the U.S. terminals.

[Kristian Verner Mørch, Chief Executive Officer]

Yes.

[Frode Morkedal, Managing Director]

Can you give more insight to who is the new partner, what type of partner is it? And also any indication on the valuation in terms of EBITDA multiples?

[Kristian Verner Mørch, Chief Executive Officer]

The last part of your question is the easy one to answer because I don't think we're at liberty to say, and the deal hasn't closed yet. So I'm sorry I cannot add too much of an insight there. What I can say is that Northleaf is a Canadian-based fund. They are an infrastructure fund. They have terminal investments around the world. They like a situation with an operating partner, which means that Odfjell can kind of operate the terminals as an integrated part of the system. And we are very excited about having them onboard. I don't think they've ever sold an investment they have made, so they are not short-term people, so we don't have to be in process like we've been in the last year with Lindsay Goldberg anytime soon on the U.S. And that's what that terminal activity is [indiscernible] Northleaf partners in Canada, Toronto.

[Petter Haugen, Equity Research Analyst]

Petter Haugen, Kepler Cheuvreux. About the IMO 2020, interestingly to see a quote for the very low-sulfur fuel oil. To my knowledge, there is very little volume being done at those -- well, at that specification. Is there any volume done at that specification?

[Kristian Verner Mørch, Chief Executive Officer]

There is volume being traded, and not only in Rotterdam. But you're right, there's very, very little being traded. I mean, actually, the only thing that's being traded is people who are testing it out on engines and so on. So it is very, very early days. And so there's probably some opinion in -- rather than real market forces in determining that price. So we probably shouldn't trust it too much. That's right.

[Petter Haugen, Equity Research Analyst]

And you also mentioned your BAFs for 2020. You don't do any COAs going into 2020 without either an exit option or a BAF which is incorporating, I suppose, the new prices. Is that then on the basis of MGO prices or this very low-sulfur price? Or what is the BAF basis?

[Kristian Verner Mørch, Chief Executive Officer]

So the BAF is either based on MGO prices or compliant fuel, which means the low-sulfur fuel oil. And it's correct that we are not taking any contracts without either having that BAF that will cover us for it or that we have an exit clause.

[Petter Haugen, Equity Research Analyst]

At the current stage, what is your contract coverage for 2020?

[Kristian Verner Mørch, Chief Executive Officer]

12-month rolling forecast -- 12-month rolling, it's around 60%, even with the growth. And that's lower than some of our other competitors, but I think it's going to be interesting to see what happens in the third quarter when we get to contract renewal season because it's actually a challenge that both the customers and the carriers they share, so I'm sure there's going to be a solution to it. But yes, 60%.

[Petter Haugen, Equity Research Analyst]

And that's a level you are comfortable with keeping from here?

[Kristian Verner Mørch, Chief Executive Officer]

Yes, I think we -- the -- there are 2 things, first of all, I think the coverage for us is also a market thing. I mean, for us to load up on contracts at the lowest point in the market just doesn't -- it's not right. And we would be fixing 60% or more of -- or we are fixing 60%, but if we took that further, we'll be fixing our revenue line at historically low moment. So we've been very focused on only taking the contracts that we think we need to operate efficiently, and then we are exposed to the market more than some other people are. The other thing there is to note about contract coverage is that the higher you take your contract coverage, the less flexibility you have in terms of your fleet. And the slide that Terje showed that we have actually a lot of our time-charter fleet trailing off into 2019 means that we do have flexibility if the market should do something unexpected to reduce the fleet or to swap the fleet around and so on. If you are highly, highly contracted, you don't have that capability. So that's also an operational perspective on coverage, and we have said that on contract coverage, we -- our sweet spot is probably somewhere between 60% and 70%. We don't think that it should go above 70%.

[Petter Haugen, Equity Research Analyst]

And a question on the terminals in Asia. Is -- are you also looking -- in light of the impairments being done and business not going as planned, would you be willing to also let terminals go if someone came along and wanted everything and not just your partners here?

[Kristian Verner Mørch, Chief Executive Officer]

I think we might. We might be. I think what we have -- if you look at the history of the last 2 years for us in terms of what we have done with the terminals, we have shown that we are ready to do whatever is the economically best technique, the best economical decision for Odfjell. If there was a transaction to be done, we would absolutely consider it. We do think some of the terminals are strategic, especially the Korean terminal has a high degree of synergies with the tankers, and less so in China. And I'm not implying either would happen. I'm just saying that it would not only be a financial consideration, but I wouldn't rule it out. But it's not a decision we have taken.

[Unknown Analyst]

A follow-up on the contract question. How many of the contracts that you entered into of the 60% is for exit clause? And how much are for compensation?

[Kristian Verner Mørch, Chief Executive Officer]

I -- that's a really good question. I cannot answer that straight off the bat. I can find out. I think the -- I would -- and this is guesswork, so don't hold me -- I think 1/3 or close to maybe half would be bunker adjustment clauses. I think more than half would probably be with an exit clause. But an exit clause, in some instances, can sound like the parties would have to sit down in good faith and solve the challenge on fuel. So it's not kind of a hard exit, but it's a good faith commitment that both parties will sit down and figure out how to solve it. But that probably overweight of those clauses compared to the bunker adjustment clauses. We'll find out. It's a good question.

[Unknown Analyst]

Just one more question. Because we're hearing more and more about owners now planning for cleaning of tanks and things that needs to be done ahead of implementation. Is that real? Do you really have to clean those tanks in order to fill compliant fuel on them?

[Kristian Verner Mørch, Chief Executive Officer]

We have done tests on a couple of ships and we think that, that particular issue is less of a concern. I think the biggest concern for us is actually in the barges. It's not the availability of fuel. It's actually getting the fuel physically through the ships because a barge cannot take -- you cannot swap a barge in and out of compliant fuel and noncompliant fuel all the time. But on the ships' tanks themselves, of course, cleaning up bunker tank up to carry MGO is a bigger issue. But actually from high-sulfur fuel to low-sulfur fuel is not a real issue. You have to plan for it. But it's not like you have to completely scrub and open the tank. You can kind of flush it through.

[Bendik Engebretsen, Research Analyst]

Another question regarding your debt. You showed a graph displaying that debt will peak in 2020 on deliveries on the coming vessels. You also showed that leverage was roughly below 6x EBITDA this quarter. It's fair to guess that leverage will also increase towards 2020 then. Are you committed to taking all these deliveries in 2020, even if the leverage increases? Or are you able to postpone some of those deliveries to keep leverage at a certain adequate level?

[Terje Iversen, Chief Financial Officer]

I would say that our balance sheet are more than capable of taking these new deliveries. We are talking about 6 newbuildings from Hudong and also to bareboat vessels. And based on our models, we have the financial strength to take them on. And even though it will imply increase leverage, we also have a solid cash position that makes us able to also reduce debt, if that should be necessary. So I think we are well prepared to take care of the newbuildings.

[Kristian Verner Mørch, Chief Executive Officer]

Yes? No other questions? Last chance. All right. Then I want to thank you all for coming here. We are going to be available afterwards if there's any other follow-up comments. But thank you for joining us, and stay safe.