Stolt-Nielsen Ltd

OSE:SNI

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Stolt-Nielsen Limited Second Quarter 2018 Results Presentation and Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Niels Stolt-Nielsen. Please go ahead, sir.

[Niels G. Stolt-Nielsen]

Thank you. Good afternoon, good morning. Thank you for joining us for our second quarter 2018 result presentation here in Oslo. I will be going through the normal presentation. Together with me here in Oslo is Jens Grüner-Hegge, Chief Financial Officer. I would be referring to a presentation, which is on our website.On Page 4, we have the agenda. We will go through the second quarter highlights for the group. Then I'll take you through all the businesses. I will go through -- Jens will take you through the financials, and at the end, we will open up for questions and answers.Then on Page 5, we reported this morning a net profit of $9.5 million, and that is after impairment of $11.8 million, which we took on our 2 bitumen ships. This compares to $38.7 million in previous quarter. But as you might remember, we had an -- a tax-related gain of $33.1 million in the first quarter, which we unfortunately don't have in this quarter. Stolt Tankers reported an operating profit of $26.5 million, and that is up from $10.9 million in previous quarter. $9.2 million of that is because of the paper hedge we have on bunkers, but there is also an underlying slight improvement in operations. Stolthaven Terminals reported an operating profit of $20.2 million. That is down from $25.9 million. But also there in the first quarter, we had an $8.2 million gain on an adjustment to the deferred taxes that we had in our joint venture in Antwerp. So also here taking away the one-offs, we see an improvement in the operating performance. Stolt Tank Containers reported an operating profit of $18.8 million, and that is up from $16.2 million as shipments grew by $7.6 million -- sorry, 7.6% which is a reflection of a solid and healthy tank container market. Stolt Sea Farm's operating profit before the fair value adjustment of inventories was up $2.4 million compared to -- with $2.2 million in the first quarter, reflecting improved margins.Corporate and Others reported an operating loss of $20.9 million, but again the $11.8 million is included here compared to the loss of $3.6 million in the previous quarter, bringing the second quarter at $9.5 million, year-to-date at $48.3 million for the year. You can also see here that the weighted average number of shares outstanding is slightly down from 61.9 million to 61.6 million, and that's because of our share buyback program that we have had our -- have executed up on -- in the quarter. Moving then on to Page 6. The net profit variance between the first quarter and the second quarter, we reported a $38.7 million net profit in the first quarter. We don't have the reduction in deferred U.S. tax liability in the prior quarter of $24.9 million. We saw a stronger Tanker operating profit by $15.7 million, slightly down of $5.7 million in Terminals because of the deferred tax liability there too. Higher STC operating profit by $2.6 million, lower STC from operating profit after the fair value adjustment of $1.6 million and impairment of the 2 bitumen ships, bringing them down to the current market price for those types of ships. $11.8 million and lower Corporate and Others of $5.6 million and then others of $2.1 million, bringing us up for the quarter of $9.5 million.If we then move on to Page 7. Out of the $4.5 billion assets that we have, $2.5 billion -- or $2.4 billion are in ships, by far the biggest segment in our group. The total volume increased by 3.5% that we transported during the quarter. This increase was mainly driven by higher operating days and also higher volumes under our contracts of affreightment. The deep-sea revenue for the quarter increased 4.3% as a result of the additional operating days. The regional fleet revenue also increased by 6%, and this is partially due to an increase in demurrage that we incurred during the quarter because of quite a bit of congestion, both in Europe and in the Caribbean for the regional fleet. The COA rate decreased due to a product mix, while the spot rates were up. Now the COA rate decrease is just of the product mix that being nominal. During the quarter, we had quite a bit of sulfuric acid -- phosphoric acid that we transported, which is larger volumes and lower freight rates. But the positive note, spot rates that we booked during the quarter were up. COA freight rates renewals in the quarter were down on an average of 3.8%, which compares to 4.1% in the previous quarter. So there's still a decrease in the contract of affreightment that we are renewing. There's still competition. But as I wrote in my comment, I think that maybe we are now starting kind of seeing it leveling off, hopefully.Moving to Page 8. Here we analyze the operating variance -- operating profit variance between first and second quarter in Stolt Tankers. Previous quarter, $10.9 million. We had the higher trading results by $6 million. We had bunker hedge variance of $9.5 million as to paper hedges. Bunker cost variance of net $0.3 million -- $300,000. Increased income from the joint venture of $0.7 million, gain and loss on sales on assets that we sold off, a loss of $800,000. And others of $0.5 million, bringing us up to $26.5 million operating profit for the quarter.Page 9, the bunker costs. Bunker cost net of bunker surcharge but excluding bunker hedges increased $300,000. But as a result of the bunker clauses that we have in our COAs, even though the average price of purchase IFO during the quarter are $398 for the quarter versus $379, we only saw an increase in our cost of, say, $300,000 because of the bunker clause. And of course, on top of that we also have the hedges that are reflected on the right-hand side. We realized $3 million in the quarter. We have unrealized gain of $6.3 million, which gives us a total gain of $9.3 million. We still have these hedges in place, the paper hedges, in addition to our bunker clause. So for the remaining volume under those contracts are 56,000 tonnes for the remainder of '18 at an average weighted price of $263 and in 2019, 48,000 tonnes at an average price of $260. So if you kind of look at the percentage, 60% is hedged under the COAs. And then I said, half of that, the remaining that is unhedged, the remaining 40%, 20% are covered under these paper hedges for '18 and other 20% is covered in the first half of 2019.This is just for your reference. We have done some sensitivity analysis, on Page 10, of how it impacts our line. So if you look at -- let's say if we see a 5% increase in the bunker price at -- so bringing up to $401 per tonne will give us a cost of $60.9 million for the quarter. That's an increase of $2.9 million. We expect out of the $2.9 million increase to recover $1.3 million through the bunker clause. And then -- but we also have then the paper hedge, we'll -- which will give us a $2.1 million gain. So for your reference, just see what impact it will have if you look at the COA bunker clauses and also the paper hedges that we have in place.Moving to Page 11, spot rates versus bunker and time charter index sensitivity. The top part, here you see clearly what happened in -- we had a challenging market in 2009, '10, '11, '12, '13 and '14. But in '15, the oil prices started to fall, but you saw that the spot rates didn't fall. So the reason that we weren't making money in '15 and '16 wasn't because the freight rates really went up or the volumes went up, but it was because the bunker prices went down. And then you see towards the end of '16 or beginning of '17 that the spot rates started falling, reflecting the -- of course more supply of ships but also the lower bunker prices. But then we see then that the bunker -- the challenge that we're faced with now is that the bunker -- spot prices -- spot rates have come down, the bunker prices are -- have gone up. On the bottom left, you see the Sailed-in Time-Charter Index, what the sensitivity is. So if you see a 5% movement in the index, we'll have a $5.9 million bottom line impact per quarter. You can see then on the STJS Sailed-in Time-Charter Index that we have reported for quite a while, you see a little uptick at the bottom, which is a positive sign. Let's hope it continues.Moving to Page 12. This is the order book as we see it. This -- these are a summary of what we call our main competitors and what is in order. And according to our -- these are ships that are 16,000 tonnes and above, what we categorize as our competitors. And the order book currently stands at 11.2%. And you can see that 2018, there is still ships to be delivered. There's still some ships to be delivered in '19 but a dramatic drop off. And we're not seeing any orders coming in and hoping that it will remain so for a while for the market to be able to absorb the tonnage that has been ordered. But the reason that we have a bit of optimism is that in '18 -- once '18 has passed, we see the supply of new ships coming into market will hopefully be absorbed by the relatively healthy growth in demand that we're seeing.So moving to Page 13. Market development. Most markets remained subdued as tonnage delivery continue to outstrip the demand of growth. Again, we hope that that's going to be more balanced in '19 and beyond. Now I'd just like to remind you that we are today renewing COAs at, as you saw, at the reduction. And those COAs are carried usually at 12 months but at sometimes also 24 months, 2 years. And the charters are, of course, taking advantage of today's competitive environment. So they said, like -- we would like to lock in these rates for 1 year or 2 year. They're trying to go long on duration because they also see the same picture. So even though we might -- we believe that there's going to be recovery in the market in 2019, a lot of the business that we're locking in today will have to be serviced in 2019. So even if the market is recovering on spot rates in 2019, there will be a time before that we'll be showing in our earnings. Strong COA competition continues, driven by owners seeking to secure cargo in advance of newbuildings being delivered in '18 and '19. Outlook remains stable for fundamental petrochemical shipping demand. So I would say the demand is relatively healthy. Growing risk of adverse impact from new tariffs on chemical products, we haven't seen anything specific yet, but of course, that's always the risk in the escalating trade war that is growing between China and the United States. The MR market remains weak, negatively impacting the chemical markets. Once you see VLGC market, the correlation between the VLGC, the MR and the chemical, it will be that more of the MRs will operate in the crude, and that will free up -- or that will mean less MRs going into our segment. So historically, there's quite a correlation between the 3 segments.Higher fuel prices and excess newbuilding tonnage will limit gains in the year ahead. Although, we believe that market has bottomed out, we do not expect to see a meaningful recovery until the start of 2019. Let's hope it's in 2019. So I think that we will see the recovery in '19. But again, the impact on our results will take a little longer because we are being forced to lock in today's rate for next year.Stolthaven Terminals. Steady continuously. Steady improvement every quarter. Revenue increased by $1.4 million from last quarter. Utilization in our wholly own terminals was at 90.2%, and that's up from 88.5%, and that's because we've been able to lease out more of our Houston, New Orleans and Singapore tanks. Utilization in the joint venture terminal decreased to 92.2%, and that's from 93.4%, primarily driven by the CPP -- the weak CPP market in Europe in our joint venture with Oiltanking in Antwerp. The operating profit increased by $2.5 million from last year after excluding the first quarter one-offs related to the reduction in the deferred tax liability in the joint venture terminal in Antwerp. So the underlying performance, Terminals continue to improve.Page 15, $25.9 million operating profit in the first quarter. We didn't have the tax -- deferred tax liability, positive impact in the second quarter that -- which we had in the first quarter. But higher equity income from the joint venture of $1.1 million, higher operating revenue of $1.4 million, now wholly owned, higher operating profit (sic) [ expenses ] of $900,000 and others of $900,000 plus brings us to $20.2 million. So a steady nice improvement in the Terminal division.Houston is performing well with increased revenue driven by higher utilization, access throughput and railcar activities. The exports remain strong. But again, a bit uncertainty in regards to the U.S./China tariff dispute. So what we're really working on is getting utilization up but also getting rid of the lower-paying, lower-margin business, replacing it with a higher-margin business, taking advantage of the strong demand that is out there in Houston.Singapore market remains challenging, but we have had some good luck, some good success in getting additional business. So we have seen improved utilization at Singapore Terminal. The South Korean market, where we have our biggest terminal and the joint venture, is stable with an increased lease -- increase in lease capacity. Europe remains stable for chemicals, but as I said earlier, there is a weak CPP market. We continue to pursue the development of long-term contract with potential pipeline connected industrial customers. Major capital projects in the Terminal [ division agreement ] includes the Jetty #11 in Houston, which we expect to be finished this year -- I'm sorry, in the first quarter of '19. And also we have a nice expansion project in the strong market of Santos, Brazil.Stolt Tank Containers continues to be the star performer in our group. Revenue growth of 8%, reflecting both growth in shipments and higher demurrage revenue resulting from customer holding the tanks longer for inventory storage. We continue to develop the global depot network to support the business, which has served us well having these depots strategically around the world. Utilization was slightly up to 74.6%, up from 73.9%, and margins remain stable. Healthy demand in this segment. Quickly through the, on Page 18, the first quarter versus second quarter operating profit variance. $16.2 million in the first quarter. Higher transportation, demurrage and other revenues of $10.6 million. With that additional activity also have a higher operating expense and depreciation of $9.1 million, a slightly lower A&G and others bringing it to $18.8 million, thinking we will continue to see an improvement in quarters to come from the Tank Containers division.Stolt Tank Container market and key initiatives. Stronger demand driving increased shipments in most regions, focus on improving both utilization and turns per tank, fleet grown by 3.9% in the first quarter -- or in the second quarter. Operating revenue up 8% from prior quarter. And as always, we focus on system development and implementation of global platform to increase efficiency and scale and improve margins. The key to the success in this business, as I've said before, is to have the systems and the tools available so that you can price your service so that you ship your tank containers to regions where you're not long tank containers. The key to the game is to make certain that you minimize the number of empty repositionings. That's easier to ship a tank from Houston to Singapore, but if you have to bring it empty back, you will lose money. So if you have the right tools, the pricing tools in place, you minimize the number of empty repositioning, which is the key to the success in this business.We continue to develop our depots, which serves us very well. We have one large depot under construction in Saudi Arabia. It will be finished by the end of this year.Fish, Page 20. Small part of our business, but we see that the turbot sales went down slightly in the second quarter. That's because the first quarter in our fiscal year includes the Christmas sales, but the price increase is 2.4%. The volume of sole remains flat, but prices increased by 4.6%.I'm not going to go through the variance analysis. This is relatively small, but the outlook for both the turbot and the sole looks very promising.Stolt-Nielsen Gas Strategy. We continue to focus on the markets to deliver gas to stranded demand. People that are not connected to the grid that need -- would like to replace gas or LNG, replace diesel, heavy fuel oil with LNG or gas. We see a huge opportunity -- many opportunities not only in bunkering but in power, in transportation in the form of trucks. We see an explosion in the use of LNG as a mode of transportation of our fuel for trucks both in the United States and China. It's phenomenal. Enormous growth. And then our strategy here is to be able to build, have the assets and build supply of small-scale LNG to serve these, what we call, stranded demand. We have an order, 2 7.5 that we had ordered. We would like to order more to exercise the option. And we also like to order some larger ships that we see there's going to be demand for in 2020 and beyond. But we are, as you know, under restrictions on our investment capacity. So we will need to find other ways of achieving that same goal. Well, this is an area which we have strong belief in and something that we will pursue.That brings us to Slide 23, Financials. Jens will take you through the financials.

[Jens F. Grüner-Hegge]

Thank you, Niels. Good afternoon, and good morning, to those in the United States. I will provide the details about the financial results released today for the second quarter of 2018, and I will also give some further guidance on certain of the P&L items for the next quarter. I also want to remind you that we have today filed our interim financials for the second quarter with the Oslo Stock Exchange. And you will also find the press release issued this morning together with the imprints as well as this investor presentation posted on our website, which is www.stolt-nielsen.com, under the Investors section.Going over to the net profit. Operating profit before the one-offs for the second quarter of 2018 was $61 million, and that's up from $46.7 million that we have posted in the first quarter. As mentioned by Niels, the Tankers' performance improved from the prior quarter, and we also benefited from the bunker hedge gain of $9.2 million compared to the bunker hedge loss that we had in the first quarter of $300,000. Before onetime adjustments, Terminals' operating results were slightly up. STC had another solid quarter, with solid underlying demand, driving an increase in shipments. And Stolt Sea Farm's performance continues to benefit from rising turbot prices, although the caviar volumes and prices still remain below our expectations. The major one-offs for this quarter was really the $11.8 million impairment on the 2 bitumen ships. And that contributed to the reduction in the operating profit for the quarter. It went down by $6.4 million to $48.5 million compared to the prior quarter, where we were at $54.9 million. Net interest expense, that was in line with the prior quarter and the tax, as mentioned, in the first quarter reflected the reduction of the lowering of the U.S. income tax rate from 35% down to 21%, resulted in a $24.9 million gain that we recognized in the first quarter. And after all this, the net profit in the second quarter came in at 9.6% (sic) [ $9.6 million ] for the quarter. At the same time, we saw quite a substantial increase in the EBITDA, which increased by over $18 million to $127.7 million.Over to the balance sheet. Debt decreased by $11 million from the prior quarter to just over $2.5 billion. The -- and the debt-to-tangible net worth ratio, which is one of our key covenants, remained flat at 1.55. This is a marginal reduction but not showing up here. The EBITDA-to-interest expense ratio for the quarter, which is another key covenant, that improved quite a bit from 3.49 in the first quarter versus 3.77 in the second quarter. The debt-to-EBITDA ratio, which is important in that it drives the pricing of our revolving credit line, that is now below 5:1. And that puts us in that area where we'll see a reduction in the interest rate or in the margin on that facility, and hence, we should see a lower interest rate expense going forward -- or interest expense.Now at the quarter end, the availability that we had under the revolving credit line was $197 million. That's quite a reduction from the last quarter, but I'll come back to that as you will -- probably seen we did we repay a bond in the second quarter. We also had cash of $80 million, and in addition to those too, we had uncommitted credit lines of $76 million that we could draw in. So in total, available liquidity just in excess of $350 million. The average interest rate for the quarter was 4.98%, marginally up from 4.92% in the first quarter, and we are expecting this to -- the interest expense for the third quarter should be in line with what we have seen so far so around $34 million.Over to next slide, Cash Flow. The cash flow from operations was a positive $91 million, and that was up from $57 million in the first quarter. This was primarily due to a $39 million swing in working capital. And that came as a result of increase in trade receivables that we saw during the first quarter and subsequently, an increase in trade payables in the second quarter. So those 2 combined caused the $39 million swing. In March, we drew down $155 million on the revolving credit line, and that was to repay the bond that matured on March 19 with an amount of $148 million. This, if you recall, part of this repayment of the bond was originally funded by the bond we issued back in September 2017. That was USD 175 million bond with a fix rate of 6.375%. And that bond, the September bond, has now been listed on the Oslo Stock Exchange, and the ticker symbol is SNI07 for those interested.Also, during the quarter, we paid a dividend of $13.7 million. We also bought back shares, and you will have followed that buyback program, during the quarter itself, we bought back 621,000 shares and spent just about $8.7 million doing so. And now following the blackout period, we currently have $14.6 million remaining under the buyback program. So with all that, the net cash flow for the quarter was $10 million, putting us at $8 million at quarter end. And I'd like to remind you that our priorities cash flow-wise still remains to reduce debt, carefully review our capital expenditures and continue to reduce our operating expenses.Next slide is EBITDA. And just as a reminder, if you look at the Stolt-Nielsen Limited EBITDA in the bottom-right quadrant of the slide, the figures here are percentage excluding any impact of the IFRS fair value adjustments to Stolt Sea Farm's inventory, gain or loss on sale of assets and other noncash line onetime items. In the top-right (sic) [ top-left ] quadrant, you have the Tankers' EBITDA, which increased mainly due to the improved trading and favorable bunker hedge variance that we have discussed. Terminals increased due to the improved EBITDA at Houston and the JVs, while STCs increased as trading results continue to improve. And as the result, we now have an EBITDA of $128 million, which was up from the $109 million in the prior quarter.Next slide is the Administrative & General Expense. The A&G for the quarter increased to $57.5 million. That's up from $57 million in the first quarter of 2018 but very close to the guidance that we gave at the end of the first quarter, which was $57.4 million. In the second quarter, we have higher Corporate and Other expenses. These were pretty much offset by lower business A&G. And our guidance for the third quarter of 2018 is a marginal reduction down to $57 million, so in line with what we had in the first quarter.Next slide, the Depreciation and Amortization. The depreciation, amortization for the second quarter was $68.2 million compared with $67.2 million in the first quarter and a guidance that we gave at the end of the first quarter of $69.2 million. The increase in Tankers depreciation was the main driving force really behind quarterly movement as a result of additional days in the quarter and slightly higher drydocking amortization. And as we noted earlier, as you see below there, there was an $11.8 million impairment of the bitumen ships taken in the quarter to bring the value of those ships down to what have been indicated in the market -- being indicated in the market about the ships of that configuration. So the guidance for the next quarter then is $68.8 million, which puts us slightly above the second quarter.Over to the next slide, Share of Profit in JVs and Tax. Our share was $7.1 million in the first quarter, and that compared with $14 million in the previous quarter. But I need to remind you that in the previous quarter, we took an $8.2 million gain at the terminal JV in Antwerp. So removing that, there's a slight increase this quarter. Our Tanker JVs saw an increase due to more operating days and a reduction in the operating expenses. And also worth mentioning that in our Terminals division -- in our Terminal JV in Antwerp, we also took a $1.6 billion (sic) [ $1.6 million ] gain related to a cancellation fee that we collected from a customer. And our guidance for the next quarter is $7 million. So pretty much flat with what we had in the first quarter.Tax expense for the quarter was $4.9 million. The prior quarter included that gain related to U.S. tax, and excluding this gain, the taxes for the Terminal division increased from first quarter to second quarter by about $800,000. And that was due to an increase in taxes that we saw in New Zealand and a reduction in our cash -- tax loss carryforwards.Moving over to the capital expenditures program. We spent $31 million during the second quarter and have, year-to-date 2018, spent $61 million. The quarter expenditure was primarily driven by terminal expansions, including capital expenditures for improvements, the Jetty expansion in Houston and the Jetty expansion in Newcastle, Australia. With the completion of our tanker newbuilding program at Hudong-Zhonghua shipbuilding in China, our capital expenditures for Tankers have declined substantially as you'll see. What you have left there is predominantly related to ballast water treatment systems. And if you look at the overall capital expenditures, that has now declined to $401 million from what we have sawed in last quarter, $435 million. For Terminals, just to give you some detail on the -- what we spent in the second quarter, you'll see that Terminals is now the biggest portion of our capital expenditure. It was $24 million for the Houston Jetty. We have spent $27 million for capital improvements at Houston terminal. We had $12 million coming for the expansion in Santos, and most of the remaining capital expenditures for terminals is really earmarked for maintenance and CapEx. And at Stolt Sea Farm, we are constructing 2 new farms in Cervo and in Tocha for the production of sole, and that's what that capital expenditure predominantly relates to.Stolt-Nielsen Gas' capital expenditure relates to 2 -- the 2 7,500 cubic meter LNG newbuildings. The debt maturity. [indiscernible], next slide. Debt repayments for the next 5 years includes our regular, scheduled principal payments. And you see those in the dark blue, the bottom part of the columns. The orange section or yellow, depending on how it shows up on your screen, those are regular debt-to-secured debt balloon payments. And the light blue on top, that's the bond maturities that we have coming over the next 4 years. The $156 million balloon payment that you see in 2018, that is the remaining debt that we took on when we bought JO Tankers and refinanced their debt. That matures at the end of the fiscal year, and we are in the process of dealing with that. The 2019 bond repayments of $148 million is in the next big maturity that we have and that is in September 2019. You will also see that we have added a big orange block in 2022, and that's the new bond that has been issued in September 2017. And we feel that with these changes that we now have to the debt maturity profile, we have a well-balanced and evenly spread profile on our debt.With this, I hand it back to you, Niels.

[Niels G. Stolt-Nielsen]

Thank you. The key takeaways to the second quarter: $21.5 million, if you take away or exclude the one-offs; slight improvement in Stolt Tankers but still a challenging environment, hoping for an improvement or a turnaround in '19; continued strong demand for Stolt Tank Containers and strong fundamentals for the Terminal division; Sea Farm turbot and sole prices should continue to increase, which we are achieving by expanding the market for these products; strong earning base from the businesses ensure positive free cash flow, which will reduce our debt, which is very much in our focus. I'd just like to remind you that we have been growing our businesses aggressively in the last 10 years. Since 2007, 2008, we have spent over $3 billion investing in our businesses, and we have grown them. We are now very much focusing on getting a return on those investments. But I think we have positioned ourselves quite well. In Tankers, we have expanded our fleet by over 20%. We have acquired newbuildings. We have consolidated by buying JO. And I think the earnings potential there, just with realistic earnings scenario, if you take the second quarter of 2016, it was really the last peak we have, unfortunately, again driven by the bunkers. But if you take the Sailed-in from that period and apply it to today's fleet, I don't think that's unrealistic assumption. I think you should be able to see an EBITDA of closer to $400 million just from our Tanker division alone. From the Terminal division, by the improvements, just by the capital expenditures that we have done that we have committed to and that we are in the process of delivering, with the normal utilization and margins where they have historically been, I think we should get an EBITDA close to $150 million from that division.Tank Containers will continue to grow, even though it's a lower-cap asset base. It's healthy. I think we should be able to achieve an EBITDA of $100 million not too far in the future. So we are very well positioned in each of our businesses. We don't need to do any further capital expenditure to be able to achieve significant improved earnings in our business. And our focus will still continue to be to reduce our debt level. But there are still huge opportunities that we would like to pursue in the Terminal division. There's growth potentials, just by organic growth that we would like to continue or to develop but again, not before the debt level has come down.With that, that completes the presentation. And we will start off by asking questions here in Oslo before we open up for people on the phone. Any questions in Oslo?

[Axel Styrman]

Couple of questions. I'm Axel Styrman, Nordea. The first is Tank Containers. You previously mentioned there's been competition, in particular, from the Chinese, and that seems to have leveled off. Up today -- today's market, is improvement driven by the reduction in the price pressure from the Chinese? Or is it driven by underlying source and demand?

[Niels G. Stolt-Nielsen]

So the question is, what is the underlying driver for improvement in Tank Containers. I would say that the -- it is -- if you looked at -- we went from $65 million -- $62 million at a top, and we went down the year before last year to $32 million. And you could see that, that was very much utilization falling from 75%. We were even up at utilization at 80%. And that fell down to 65%. Now we are back at 75% again. The margins are lower. So the biggest driver is of course stronger competition, but we have been able to aggressively compete and winning and getting the utilization up and turns per tank up. So there's strong competition, but there's healthy growth in demand. So we're doing more shipments at the lower margin. And I think this is -- it was -- as I have said before, it's unrealistic to believe that you can be in such a fantastic business for such a long time alone, return on capital employed at 25%. So that has come down. But what -- and I think we have now reached, as I also before, I think we've reached a level where not everyone is making money or has healthy returns at these levels. So if you have the systems in place so that you can achieve that utilization and that -- the number of turns per tank, you can make money. And we can see -- we see growth today driven by more ships -- more products being produced and more locations being shipped to new locations. So there's a growth not only by taking businesses away from drums or taking businesses away from chemical tankers but there's more products being produced and more locations being shipped to more destinations. But again, there's a lot of new operators that compete. But we are able to make money, lower margin but making more shipments, more -- higher utilization. And I think that, that will continue.

[Axel Styrman]

Second question is about the freight tensions. You recently mentioned about the [indiscernible] have you seen any changes in margins coming from the U.S. to China so far?

[Niels G. Stolt-Nielsen]

Nothing. Nothing. I checked before because I knew you were going to ask it. So we haven't seen anything yet.

[Axel Styrman]

And the third question, IMO '20 situation and we discussed that a couple of months ago. And what are you doing? What have you done in the last couple of months? And can you please update us on your plans?

[Niels G. Stolt-Nielsen]

For scrubbers?

[Axel Styrman]

For scrubbers or do you think there would be a [ sample ] so much and you lend the fuel [indiscernible] there and may just not want to be any bigger challenge or...

[Niels G. Stolt-Nielsen]

Yes. That's -- the biggest challenge that we have is that what are the alternative fuels, the low sulphur fuels. So today, with the difference between heavy fuel and the premium that you have to pay for the marine gas oil, the scrubbers makes huge sense. But if there's an alternative fuel that will be developed, where the difference is not as big, it is more difficult decision to make. We have a case internally now to look at installing 27 scrubbers. We haven't made the decision, but these are primarily focused on the large ships and the younger ships. We haven't made the decision yet. But it's -- as it looks now, it's a strong case to go towards. We only have 5 scrubbers but to do further -- to do any further. One thing is clear is that if the owners -- there's still a very small percentage that have announced that they're going to do scrubbers. It's growing, but it's -- if you look at the global fleet, it's very small. So I think if we are not able to pass this cost on to our customers, we will go very quickly out of business. Everyone well. So it -- I think a lot of companies are -- believe that they will be able to pass that on. And the question is, of course, well, how will all your customers react when you put a scrubber on? Will you be able to achieve the freight rate based on MGO prices versus heavy fuel oil prices? So it's a tough decision. It's not a no-brainer. But we are now leaning towards scrubbers.Next question?

[Unknown Analyst]

You said, we are under restrictions in terms of whether investment [indiscernible] just [indiscernible] but that's self-impulse. And how -- in terms of ranking your priorities, will you be starting dividends versus further injections into the [indiscernible] LNG ship option for example. How are you thinking there?

[Niels G. Stolt-Nielsen]

I'm thinking if -- as you have seen, the smartest investment we can do now is buying back shares, which we are doing. We are under this -- we reimpulse on ourself this safe harbor rule, so there's limited amount of shares that we can buy per day. So that's what we do. And it is also a priority to, once the earnings in the company comes back, to continue with the $1 dividend. So we have a self-imposed capital expenditure. There are things -- we're looking at several contracts for the Terminal division, where you have to spend a couple $2 million or $3 million to upgrade a tank or build a new pipeline. That will continue. We have to run the business. But our major investments, you will not see until we have gotten our debt level down.

[Unknown Analyst]

Corporate listing of your Avenir venture is -- that's going to be a self-funded [indiscernible], not something you plan on injecting [indiscernible].

[Niels G. Stolt-Nielsen]

We have said that we would like to develop this business. And because of our own capital constraints, we -- the -- it is the intention for us not to commit further beyond the 2 ships that we have committed to. But see if we can bring in partners so that we can continue to pursue it.

[Unknown Analyst]

So you know you might go on?

[Niels G. Stolt-Nielsen]

Something like that, yes.Yes?

[Unknown Analyst]

In terms of the Containers, you have $16 million less in CapEx this year. [indiscernible] depots or...

[Niels G. Stolt-Nielsen]

That's primarily depots. There are also some tank container acquisitions, so buying new ones. But it's primary depots. There are leasing quite -- the leasing rates for tank containers are quite attractive. And the leasing commitments that we are making, even though it comes up [indiscernible] it's not included in the CapEx list.

[Unknown Analyst]

How many Containers per [indiscernible]?

[Niels G. Stolt-Nielsen]

That we are...

[Unknown Analyst]

Adding on?

[Niels G. Stolt-Nielsen]

Adding on, I think we are committed to add on another 3,600 -- around 3,000 over the next -- this year and the next year.

[Unknown Analyst]

The order book is heavier in the second half [indiscernible][Audio Gap]

[Niels G. Stolt-Nielsen]

Difficult to say but I think that the uptick that you saw in the second quarter is just -- it's too early to say if that's the beginning of a recovery. It's too early to say. But we will not see anything fundamental until we see a reduction of supply of new ships. And that is, as you can see from the chart, going to happen in '19 and '20 and beyond. So '19, in your analyst report, I don't think you should expect that they can take off of the market or at least in our earnings. That, unfortunately, I don't think is going to happen until 2020 and beyond.

[Unknown Analyst]

When you said you [indiscernible][Audio Gap]

[Niels G. Stolt-Nielsen]

It will hurt us more for not having that volume in 2018 and 2019 and rely on the spot business. Remember, the most of the business that we carry of specialty chemicals are carried on the COAs. So if we don't take those contracts, I mean, if we don't compete, 10%, 15% down or 3% or 5% down, we will not able to replace with better-paying spot rates. So we know from experience that unfortunately -- we are trying to hold back, and all the time, there are -- we are only referring to the contracts that we did renew. There are some contracts that we didn't renew because they ask for too much. And then we say, "Okay, listen, we believe the alternative of going to the spot market is better." But in most cases, the COAs are better alternative to compete with than losing the business.Yes?

[Unknown Analyst]

On the target [indiscernible] of COAs, do you think you're going to maintain such a high COA coverage in your fleet? It should be freight rates [indiscernible] next year.

[Niels G. Stolt-Nielsen]

Yes, why wouldn't -- M&A. We have to compete. Yes, I think we -- actually, right now, we used to be more at 70%, 75%. So we are now at about 65% to 63% contracts.

[Jens F. Grüner-Hegge]

Yes, that is right I guess.

[Niels G. Stolt-Nielsen]

65% to 70% contracts. So yes, I think, we will continue to have that.

[Unknown Analyst]

But in terms of covenants, looking into 2020, why don't you give them the same price than for the scrubber-fitted vessels in 2020? I mean, you can take back what you lose on the 2019 lower price.

[Niels G. Stolt-Nielsen]

So we don't fix any contracts. We just having a clause stating that we are able to negotiate, either leave the contract or negotiate a compensation for the higher fuel price. So nobody is willing to give you the benefit. Yes, but they are -- they -- for having scrubbers, but they are willing to letting us sit down and talk to them, where we are free to drop the contracts if we don't come to an agreement.

[Unknown Analyst]

In terms of the scrubbers and competition, how important is it for you to sort of [indiscernible] to whatever competition would do in this context?

[Niels G. Stolt-Nielsen]

Our decisions are driven by what we think is the right decision. Of course, we are not blind so we listen to what the market trends are. But our decision process is driven by what we think is right. So looking at what [indiscernible] or any of the other competitions are doing, I think, yes.[Audio Gap]It's really -- it's our own decision. And we -- it's driven by what we think is the right thing to do.

[Unknown Analyst]

[indiscernible] bunkers. And just in terms on that table that you have shown on Page 10. Does this show you're a lone bunkers now?

[Niels G. Stolt-Nielsen]

What do you mean lone bunkers? That we are over...

[Unknown Analyst]

[indiscernible] if your hedging result is more than offsetting in your [indiscernible] after the bunker escalation. So the 1.3 versus -- no I'm sorry, the 1.6 versus the 2.1.

[Niels G. Stolt-Nielsen]

Yes, so you can say that we are actually under that scenario, making the cost of the paper hedge in addition to the bunker clause, yes.

[Unknown Analyst]

A good trend.

[Niels G. Stolt-Nielsen]

Yes. When you get it right, yes. But it's really not our business. So that's why we try to cover as much as possible with the bunker clauses in our COAs.Any other questions? Operator, are there anyone on the phone call that would like to ask any questions?

[Operator]

[Operator Instructions]

[Niels G. Stolt-Nielsen]

If there are no questions, that completes the second quarter earnings presentation. Thank you very much, and please enjoy your summer. Thank you.

[Operator]

This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.