Stolt-Nielsen Ltd

OSE:SNI

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Stolt-Nielsen Limited Third 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 morning, good afternoon. Thank you for joining us here in Oslo for our third quarter earnings presentation. Together with me is Jens Grüner-Hegge, Chief Financial Officer. I will be referring to a presentation which is on our website. The agenda is, as always, we will go through the highlights for the third quarter then I'll go through each of the businesses. Jens will take you through the financials, and then we will open up for question-and-answers afterwards. Going on to Page 5. The net profit for the quarter is $3 million. That is after a onetime loss of $12.9 million resulting from an accounting reclassification related to the investment in Avance Gas compared with $9.5 million in the previous quarter, which included a onetime impairment loss of $11.8 million, which was the bitumen ships. So we're going from an associated investment in Avance Gas to an equity investment. Now associated investment, we take our percentage share in the company through the net profit through our bottom line on this new equity investment. It won't go through our bottom line, but it will go through -- the movement in the share price will go through our OCI. Stolt Tankers reported an operating profit of $21.4 million, that's down from $26.5 million last quarter mainly due to the reduced gains on the bunker hedges and an increase in bunker costs net of surcharge. I will go in more detail during the Tanker section. Stolthaven Terminal reported an operating profit of $18.6 million, and that is flat compared to the previous quarter, when excluding the one-off benefit of $1.6 million that we had in the second quarter related to a contract termination fee that we received. Stolt Tank Containers reported an operating profit of $17.7 million, that's down from $18.8 million. Nothing really market related; it's more a seasonality of the summer slowdown. Stolt Sea Farm operating profit before fair value adjustment of inventories was $2.1 million compared to $2.4 million in the previous quarter, reflecting reduced margin, not in the turbot but in the caviar. Corporate and Other reported an operating loss of $3.3 million compared to a loss of $20.9 million in the prior quarter, which again includes the $11.8 million impairment of 2 bitumen ships that we took in the second quarter. In addition to that, we have a lower profit sharing allocation because of the reduced profits, primarily in Tankers and lower loss of AGHL or Avance Gas, so better performance from Avance Gas. So that resulted in an operating profit for the quarter of $54.8 million versus $48.5 million. But again, I remind you, in the second quarter, we had the $11.8 million impairment of the bitumen ships. So there's a clear reduction in operating profit and that is primarily driven by Stolt Tankers. Moving on to Page 6, which is the net profit variance between the second and third quarter. So $9.5 million profit in the second quarter. We took the impairment on the Stolt ships of $11.8 million, lower operating profits from Tankers of $5.2 million, lower operating profit from Terminals of $1.6 million, lower STC operating profit of $1.1 million and then with $3.5 million lower operating profit after the fair value adjustment and higher Corporate and Other results of $5.8 million and then you have the fair value adjustment of $12.9 million for the Avance Gas shares, bringing the quarter down to immediate profit of $3 million. Moving then on to Stolt Tankers on Page 7. The total volume that we transported increased by 1.6% and that was primarily driven by an increase in operating days and also higher COA volume. Deep-sea revenue for the quarter increased by 1.4%, reflecting an increase in bunker surcharges. So when the bunker prices go up, actually our revenue goes up because we get the surcharges. The regional fleet was -- the revenue from the regional fleet was flat. The deep-sea contracts off affreightment rates were down 1.6% for the quarter and spot rates were up 1.8%. The average was basically unchanged. So we had higher COA volume at slightly lower freights and the lower spot space available, as a result of that, we were able to get slightly higher stock rates on average during the quarter. The contract of affreightment freight rates renewal in the quarter were down on average 3.9% compared to a COA rate renewal decrease of 3.8% in the previous quarter. So you can say that we are not seeing any improvements in the COA or in the tanker market. We're kind of bouncing along at the bottom, I believe. Moving then to the operating profit variance between the second and the third. Lower trading results of $0.6 million, bunker cost increases net of bunker surcharges of $2.1 million and then we have had a lower bunker hedge gain of $7.9 million on our paper hedges and then we have a significant improvement of ship management costs. Some are one-off, but also some are driven by our efforts in lowering the cost of running our ships, so sustainable savings. We had a slightly lower joint venture equity income and Other at $1.8 million, bringing us to $21.4 million. Moving to Page 9. The bunker costs. The average price of IFO consumed increased from $437 per tonne in the third quarter from $383 per tonne in the second quarter. That's what we consumed. And this is really what is driving the reduction in the performance of Tankers. The COA bunker surcharge clauses cover on average 64% of the total volume that we ship. I remind you, 70% of our business is under contract of affreightment. The 64% is only what we covered through our bunker clauses in our contracts. The current market-to-market price of bunker hedges is, on average, $412 per tonne on the paper hedge that we have remaining. And you see here that of the -- on the third quarter '18, we realized a gain of 4.4 on what we consumed or what we used. And we have, on our books, the unrealized -- we took a loss of 3.1 because of the future prices were actually lower. We also have a sensitivity analysis here. And this is a net impact of P&M (sic) [ P&L ], excluding the paper hedges, but includes the bunker costs that we have. So going up 5%, 10% and 15%, you can see the net profit impact, again, without the paper hedges. Moving to Page 10. What is really a big issue in the industry is, of course, the low-sulfur fuel changes. On the 1st of January 2020, all ships will have to consume low-sulfur fuel with a sulfur content of 0.5%, down from 3.5% today. The options that we have is the MGO, which is marine gas oil or diesel or new fuels of 0.5%, which is now being developed by the oil companies. Ships can fit in scrubbers but realistically, as it stands today, around 5% of the global fleet have announced or have installed scrubbers. So a very small part of it. For us, if you take the current spread between MGO, and IFO, based on the consumption that we have of fuel, if we have an additional $300 per tonne cost, our total cost per year is $150 million. So it is clear that unless we are able to pass that cost onto our customers, we will be going out of business very quickly. The industry will be going out of business very quickly. So that is clear and it's the instructions, that all of this cost needs to be passed onto the customer. If you look at the industry today, most shipping industry, unfortunately, are losing money. And to expect the shipowners to even take part of this cost is unrealistic. So this cost will have to be passed onto the customers. Container lines already started to state their policy, and they will start it already in the 1st of January 2019. And you can see here the effects of what has been going on. This is a slide at the bottom, which shows you the spot rate development since 2014, when we had expensive fuel costs. And then you can see here the blue -- the spot rates is the yellow line; and the IFO, the dark lines, are the fuel price. And really the reason we made money in '15 and '16 and in '17 was not driven by higher volume or higher freight rates. It was driven by the lower bunker cost. And what has happened now is, of course, the -- because of all the supply of ships, the spot rates have been coming down since the end of '16. At the same time, the bunker prices have been going up, and that is clearly why you see a loss in the industry. And in the event the bunker price is going to increase by $300 per tonne, you can figure it out yourself, we will be going out of business very quickly unless we pass on that additional cost to our customers. Moving to Page 11, which is the index that we provide, you can see there was a slight downtick. And we have also done a sensitivity here showing you the net impact per quarter based on the movement in this index. Moving to Page 12, the order book. It's '18, still significant part -- the blue is what remain to be delivered in '18 and then you see it's coming down in '19 and '20. This is really what is rather -- what we believe is the turnaround in this market. We were hoping that it was going to happen earlier, but we don't see it yet. But unless there's any new orders -- and I don't think there's really an appetite right now to order new chemical package. So unless there's no new orders or -- if there are no new orders, we do expect that the market should turn around hopefully in '19. But I'll remind you that you can see that the average COA rates that we are renewing now, we're at 3.9% reduction and that really means those contracts are usually 12-month period. And the customers are, of course, taking advantage of the market, so they're asking for multiyear contracts. And in some instances, we are forced to take on multiyear contracts because it will hurt us more not to take it on. So these contracts will go well into '19, some even into '20, but primarily into '19. So even though we expect the market to turn around because of the slowdown in supply, the markets hopefully will return in '19. But we don't expect any significant increase in earnings in '19 because of the contracts that we're locking in today. If you look on of the bottom slide here, we have illustrated the same thing as above but we've done it quarter-by-quarter. The blue bars are the number of ships per quarter and the yellow is a percentage of existing fleet. And you can see in the fourth quarter of '18, there's significant of 16 new chemical tankers coming into this challenging market. And then it will drop off significantly around 1 -- a little over 1% per quarter in '19, and that's it. On Page 13, market development. Most markets remain subdued as tonnage deliveries continue to outstrip demand. There's strong competition on COAs, with unpredictable spot market volume leading to an extended waiting times to find cargoes. And this is really the first time we've seen in a long time where ships -- not ours, fortunately, but we have seen ships ballasting and lying around this summer, waiting for weeks for business. So the outlook remains stable for the fundamental petrochemical shipping demand. We don't see any change in demand, but it's -- again, it's a supply issue. There's a growing risk of adverse impact from the new tariffs on the chemical products and we're starting to see some of it. The products will be moved, but it will be a different trading pattern. So instead of sourcing products from the U.S. Gulf or from China, products will be sourced maybe from the Middle East or from Europe. So the volumes will be moved but unfortunately, the impact might be less tonne-mile as a result. So let's hope that the progress in coming to an agreement between Canada and Mexico and Europe is progressing nicely. But there is still some disagreements in regards to trade disputes between China and the United States, so we'll have to watch that closely. The MR market remains weak and -- which then impact negatively on the chemical market. Higher fuel prices in excess of newbuilding tonnes will limit the gains in the years ahead. Although we believe that the market has bottomed out, we do not expect a meaningful recovery to start until later in 2019. So let's hope I'm right in that belief. Fortunately, Stolt-Nielsen have far more legs to stand on and we are seeing steady improvements in Terminals. This is on Page 14. Their revenue decreased by $1.3 million from last quarter, driven primarily by a decline in the utility revenue. So that's more seasonality. Utilization for wholly owned terminals increased to 91.7% from 90.2%, due to primarily to the increase in leased spot business that we're able to win in Singapore. Utilization in our joint venture decreased slightly to 90.2% from 92.2% last quarter, and that was due to the lower utilization at Oiltanking Stolthaven Antwerp, which is more petroleum products than chemicals. Operating profit decreased by $1.6 million, I already said it, from last quarter, driven primarily by the penalty equity -- sorry, the penalty that one of our customer had to pay last quarter. Going to Page 15, the operating profit variance, very quickly. $20.2 million in the previous quarter. The $1.6 million impact from the fee we talked about; slightly lower in Houston, but we had insurance, one-off of $0.4 million; higher equity income from the joint venture, excluding one-off of $0.2 million; lower operating revenue of $1.3 million; lower operating expenses of $1.8 million and others, bringing us to $18.6 million. Overall, the market is strong in the segment that we operate in, and I expect to continue to see improved performance, steadily improving going forward. On Page 16, Houston performing well, with increased revenue driven through high utilization rates and excess throughput and railcar activities. Exports remain strong, but again concerns growing over the U.S.-China trade disputes. The Singapore market remains challenging, but we achieved a strong improvement in utilization during the quarter having secured short-term spot business. Even though that business was at a slightly lower rate, our utilization came nicely up. South Korean and Malaysian markets showing stable demand. Europe remains stable for chemicals and -- but weak for CPP, and that's the result that you saw in our joint venture in Antwerp. But potential impact on the U.S. trade war is that some Chinese products may be moved to Europe, as evidenced by some recent inquiries in the market. So that could be positive for our terminal activity there. We continue to pursue the development of long-term contract with potential pipeline-connected industrial customers. Major capital projects, including the Jetty that we're building in Houston, which is expected to be completed by the first quarter, and the expansion of Santos capacity remains on schedule. Moving then on to another profitable leg that we are standing on, Stolt Tank Containers. Revenue decreased by 0.9% and that was driven mainly by lower transportation revenue as a result of 4.2% lower -- fewer shipments, which is seasonality related. We continue to develop the global network to support our business, along with also developing further on our systems. Utilization down to 71.6% from 74.6%, reflecting the seasonality (sic) [ seasonally ] weaker summer markets. The margins remain stable. Going quickly to the variance analysis on the operating profit on Page 18. $18.8 million in the previous quarter. Lower transportation revenue of $1.3 million, higher operating expenses of $0.3 million, lower A&G by $0.5 million and Other of $0.1 million, takes us to $17.7 million. On Page 19, reduced seasonal demand in the quarter, driving down shipments by 4.2% and utilization by 3%. I'm not going through this point. The fundamentals in this segment is strong, and we expect to continue to grow our fleet by acquiring new tank and leasing new tank -- and leasing new tanks. The market is active even though there was a seasonal slowdown, and we will continue to see growth both in the number of shipping and also the earnings from this segment. Sea Farm, very quickly. Turbot volumes increased with a strong momentum in prices, driving turbot revenue up by 5.5%. Volume of sole sold remained flat, prices increased 4.4%. Caviar volume increased by 9%, but prices decreased 20.4%. So there's quite a bit of a challenge on the caviar side. The fair value adjustment of inventory had a negative impact of $1.7 million, down from the positive impact of 1.5% -- $1.5 million in the previous quarter. Then moving to Page 21, which is the investment in Avenir. As you might have seen on Monday, we announced the formation of Avenir LNG, where we have gotten 2 industrial partners with us, Golar taking 25% and Höegh taking 25%. We have committed, the 3 of us, of $182 million plus $10 million that is going to be raised by strategic investors, followed by a OTC listing on the OTC here in Oslo. We have commitments or we will soon have commitments of a total investment of $350 million, so we have raised half of it basically -- or have a commitment for half of it in the market. Our strategy and our vision is to become a leading provider of small-scale LNG for the power, remote, stranded demand for the power business, the bunkering, the trucking and industrial markets through supplying LNG using Avenir's ships, storage and containers for distribution. Connect small-scale LNG with underutilized large-scale LNG infrastructure. So the importance here with Golar and with Höegh is with their fleet of FSRU globally, we hope to be able to develop distribution, using that also helps in distributing small-scale LNG to the stranded customers in small parcels. Most of these FSRUs are underutilized, so we hope that we'll be able to use that excess capacity to further distribute downstream. We have currently 2 ships on order, and we have exercised additional 2 of the 7,500 cubic meter in Keppel Singmarine are being built in Nantong, China. The first vessel to be delivered -- the first 2 vessels in the third and fourth quarter of next year. We also -- and then the second 2 in the third and fourth quarter of 2020. We're also in the process of ordering 2-plus-2 20,000 cubic meters and also we have taken an investment -- final investment decision on building the terminal in Sardinia. Very excited about this. We are seeing huge inquiries, more business opportunities than actually we're able to pursue right now in the small-scale segment. And instead of Stolt, as I have said earlier, this is actually a huge opportunity where we can use our logistical experience with the FSRU and the LNG experience of Golar and Höegh; I think we are very well positioned to capture some business in this market. And that completes my part of the presentation. I'll give the word to Jens to take you through the financials.

[Jens F. Grüner-Hegge]

Thank you, Niels. Good morning -- or good afternoon to all of you here, and good morning to those of you on the call from the United States. I will, as normal, provide some further details about the results that were released today for the third quarter of 2018, and then also give you some further guidance on some of the P&L items for the next quarter. I want to remind you that we have today filed our interim financial statements for the third quarter with the Oslo Stock Exchange. And you will also find the press release that was issued this morning, the interim financials as well as this investor presentation posted on our website at www.stolt-nielsen.com in the Investors section under the heading Reports & Presentations. So talking about the net profit. Operating profit before one-offs for the third quarter was, as Niels mentioned, $54.6 million, down from $61 million in 2Q '18. Tankers performance declined from the prior quarter, driven really by the reduction in the bunker hedge gain, and that was a reduction of $7.9 million compared to the prior quarter. Before onetime adjustments, Terminals operating results were flat. STC had another strong quarter, though decreasing slightly due to reduction in shipments tied to the quieter summer months. Whilst Stolt Sea Farm's performance continued to benefit from the rising turbot prices. Including the one-offs, reported operating profit increased by 6.3% compared to the quieter prior quarter of $54.8 million, were up from $48.5 million. And that is because of the impairment that we took of $11.8 million in the prior quarter. Moving further down, you will see net interest expense of $33 million, slightly down from the prior quarter. That's been offset by the FX loss due to the stronger U.S. dollar seen during the quarter. And other nonoperating income was impacted by the negative $12.9 million that Niels mentioned earlier, related to Avance Gas. And therefore, net profit came in at $2.3 million for the quarter, with EBITDA adjusted for one-offs. And the fair value impact came in at $122.3 million. Moving over to the balance sheet. I'm happy to report that debt decreased by $61 million from the prior quarter, so we're now under $2.5 billion at $2.446 billion. And the debt-to-tangible-net-worth ratio decreased to 1.51 from the 1.55 that we reported in the prior quarter. Also worth noting, another component is the EBITDA to interest expense. That was 3.65. Now that's slightly down from what we reported in the prior quarter of 3.77, mostly due to the weaker EBITDA that we had in this quarter. The net debt-to-EBITDA ratio, which drives the pricing of our revolving credit line, remained below 5:1 actually at 4.76. And if you take the gross debt to EBITDA, that came in at 4.93, which was also a reduction, as we have [ pride ] in previous quarters been above 5:1. So that reflects an improvement on the balance sheet as we continue to focus on repaying debt. Net -- sorry, the average interest rates was 4.98%. That's pretty much flat from the prior quarter. And therefore, the net interest expense, we expect that to remain relatively steady also for the next quarter, the fourth quarter of 2018. I wanted to talk a little bit about the effects of the recent establishment of the Avenir joint venture with Golar LNG and Höegh LNG as announced on Monday, and as Niels explained earlier. Our part of the investment included equity-in-kind of $32.5 million, and that represents really our newbuilding contracts as well as the investment that we had in our terminal in Sardinia. And in addition to that, we also put in $17 million in cash. So, so far, a total of $49.5 million, and you'll also see that we have committed up to 50% of the $182 million, so then that would indicate $41.5 million on top of that. It could be reduced then once we go to the OTC. But the projected CapEx that you will see on the CapEx slide includes $66 million in 2019, and that will now become the responsibility of this new joint venture. So that will all fall away from our capital expenditure schedule. I'll remind you when we get to the CapEx slide. So overall, if you look at the total, our share of the $182 million, the overall projected investment earmarked for LNG from our side will be approximately the same as it is today. But also worth noting is that all the debt that we will raise in Avenir will be nonrecoursed through SNL. Moving over to cash flow, the next slide. You'll see cash flow from operations was a positive $100 million, and that was up from $91 million in the prior quarter. This was predominantly due to timing on interest payments, which tend to come sort of in 6-month lumps versus the expense being recorded on a regular quarterly basis, and that's driven predominantly by the bonds. And tax payments that were also -- and also some higher probably noncash items in prior periods. During the quarter, cash spent reflected terminal expenditures of $23.6 million. I'm referring here to the capital expenditures of $42 million that we had in the quarter. So $23.6 million was made up of terminal investments, $8.5 million was tied to drydockings of ships, $2.1 million on Tankers capital expenditures and then a little bit on Stolt Sea Farm as well. On the financing section of the cash flow, the net proceeds from debt is really due to an increase in the small loan at Stolt Sea Farm. But during the quarter, we also repaid about $20 million under our revolving credit line. And the cash balance, therefore, at the end of the quarter was $85 million, which was just marginally up from $80 million in the second quarter. And as I mentioned, our focus still remains on reducing debt. We're having a very critical eye on every CapEx item and we're also focusing on maintaining control over our operating expenses. Moving over to EBITDA. And just to remind you that SNL's EBITDA figure is, as presented here, excludes any impact of the IFRS fair value adjustment to Stolt Sea Farm's inventory. It also excludes gain or losses on sale of assets and other noncash onetime events, and that includes the $12.9 million related to Avance Gas. And if you look at, Tankers EBITDA decreased, really mainly due to the lower bunker, as Niels discussed earlier. The lower bunker hedge gain, I should say. Terminals also decreased due to the second quarter one-off in Antwerp and some slightly lower utility revenue that we had at our Stolthaven-Houston terminal. STC's EBITDA decreased really following a strong second quarter, more than any weakness indicated in the third quarter. And as a result, SNL's EBITDA for the quarter decreased from $128 million to $122 million. Then going over to some of the expense categories, the A&G expenses for the quarter decreased to $52.2 million. That's down from $57.5 million in the second quarter and also below the guidance that we gave for the quarter of $57 million. In the third quarter, we had a lower profit sharing, which -- it's tied to the overall profitability of the group, and other SNL corporate costs. And we had the closure of the Bergen office, which was really part of the final stage of the integration of Jo Tankers. And that helped to reduce the overall expenses as well as some minor reductions in cost and cost of businesses. Now our guidance for the fourth quarter is for a slight increase in the current quarter, where we estimate just shy of $55 million. Moving onto the next slide, depreciation and amortization. Depreciation and amortization for the third quarter was $68.6 million, and that was compared with $68.2 million from the second quarter. And we gave a guidance of $68.8 million, which is actually consistent with our guidance for the next quarter. The increase in Tankers depreciation was really the main driving force behind the increase, sorry -- behind the increase as a result of additional days that we had in the quarter. So more days should depreciate the assets over and some higher drydocking amortization. And as you will see below there, we have the impairments of $11.8 million that we took in the second quarter related to the 2 bitumen ships. So for the next quarter, we are expecting $68.8 million in depreciation and amortization. Moving over to share of profit of JVs and tax. Our share of profits in our joint ventures was $6.9 million for the third quarter, and that's slightly down from $7.1 million in the prior quarter. Our regional tanker JVs in Asia had a large decrease, really due to a generally weak market situation; and that was partly offset by some improved results in our deep-sea tanker joint ventures. At Stolthaven, in the current quarter, we reported a $5.8 million gain. That's down from $7.3 million in the prior quarter, and that reflects the $1.6 million one-off that was related to the penalty fee we earned in the prior quarter at our Antwerp joint venture. Our guidance for the next quarter is $7 million, right in the middle between the second and the third quarter. Looking at taxes, tax expense for the quarter were $4 million and that was a slight reduction from $4.9 million in the prior quarter and the reduction is predominantly related to our Stolthaven Terminals division. And then we move on to the next slide. Okay, we have the capital expenditures program. Capital expenditures spent in the third quarter alone was $41 million. So out of the $102 million spent year-to-date, $41 million was spent in the third quarter, primarily driven by terminal expansions, including the Jetty buildout at Houston. That's expected to become operational in about January 2019 as well as tank expansions at our terminal in Santos, Brazil, expected to get -- come online mid-2019. The total committed capital expenditures at the end of the third quarter was $406 million, the number you see down at the bottom right of that slide. This includes the $66 million that I mentioned earlier for Stolt-Nielsen Gas. So if you take that out and if you assume that we are committed up to our share of the $182 million, so that would mean a remaining $41.5 million, you add that, our committed CapEx going forward is just shy of $400 million, at about $399 million. Tankers' CapEx going forward, that includes about $44 million for ballast water treatment systems. And for terminals, we have $21 million remaining for the Houston Jetty, $27 million for capital improvements at the Houston terminal. Some $9 million related to the expansion at the Brazil terminal in Santos. And most of the remaining earmarked for really ongoing maintenance CapEx for Stolthaven Terminals. Just to remind you also at Stolt Sea Farm, we're constructing 2 new farms, one in Cervo and one in Tocha; Cervo in Spain, Tocha in Portugal, for the production of sole. And that will be completed mid- to late -- mid- and late-2019. And then the last slide before I hand it back to Niels. The debt maturity profile. It shows our expected debt repayments through 2022. It includes our regular principal payments that you see down there at the bottom in dark blue. The orange sections are our balloon payments and the light blue are the bond maturities. The $156 million payment in 2018 is -- the orange part is actually the facility we raised in conjunction with acquiring Jo Tankers back in 2016. We are in the process of refinancing that and expect to have that concluded before our fiscal year-end, so by mid-November. And that's going to be done in the form of a Japanese operating lease, which will be secured by 9 of the 13 ships that currently secure that facility. The 2019 bond payment that you see that's $148 million, that doesn't mature until September of 2019. So we have plenty of time to watch the market. And if the bond market is not there, then we will make sure to have ample liquidity on -- available so that we can pay that off without alternative means. We believe we have a well-balanced debt maturity profile, so we're comfortable with this going forward. And with this, I would like to hand it back to Niels.

[Niels G. Stolt-Nielsen]

Thank you, Jens. Some key takeaways just to summarize what we just said. We have established a joint venture with some industrial players in Avenir, with $182 million of committed equity from the 3 partners. We had a net profit of $15.3 million for the quarter if you take away the one-off from Avance Gas. Tanker market remains challenging, with excess tonnage and rising bunker prices, but I would say, with the growing -- regular growing GDP, global GDP and global trade, this excess will be absorbed in due course. And we expect that the market should be more balanced in '19. I'll remind you that even though '19 is a turnaround point where probably we will see stronger spot prices, it will take some time to get those increases through into the contracts and subsequently the earnings. Solid fundamentals in Stolthaven Terminals with increased utilization across the networks. We are getting our operating costs down and I think we are able also to capture a better-paying business. Stable demand at Stolt Tank Containers, and we think that, that will continue. We expect continued increases in the turbot prices. And hopefully we'll get the sole volume up and running, so we'll get earnings from the sole too. Strong earnings base, so we have more legs to stand on, ensures positive free cash flow. And the target, as Jens pointed out, is to reduce our debt which yes, we have started to do. So we have, over many years now, expanded significantly with acquisitions, with acquiring assets, building new assets. We have now the assets that we need for the time being, and we can provide ample growth with those assets without taking on additional debt. So our debt level will be going down, and I believe the earnings -- the revenue will be going up because of the assets that we have acquired and that we have built. Of course, if the tanker market returns eventually, we will have -- we're well positioned with the -- with an expanded fleet. And Jens also said that we have access to competitive funding and good liquidity. To also just add on in regard to the bond market: if the bond market shouldn't be there in 2019 or it shouldn't be as attractive, we have alternative ways of financing that. We have uncollateralized assets; we have several terminals, which we have no debt on, so we will easily be able to raise additional funds should the bond market not be there. That concludes the presentation. We will now open up for questions here in Oslo and then we will take some questions from the phone, if there are any. Any questions here in Oslo? Yes.

[Unknown Analyst]

About Avenir. If I remember correct, it was at some point talking about GasLog [ entering ].

[Niels G. Stolt-Nielsen]

We never said GasLog. But rumors were that they were one of -- that we considered. And...

[Unknown Analyst]

Yes, the question is more about you're now teaming up with Höegh and Golar. Could you sort of explain to us how the [ strength now ] that team was put together and how you think about developing business going forward?

[Niels G. Stolt-Nielsen]

Yes. Well, it is -- knowing that, of course, the FSRUs that they're sitting on that's floating in storage. Most of those assets are underutilized. To be able to have access to that capacity and access to LNG through those FSRUs, they give us good points to distribute -- further distribute. We are looking at projects in -- all over the world. But in South America, there's no doubt that Golar has Nanook, where we have access to that additional capacity for further distribution, which is something that we are currently working on. So I think GasLog is a good shipping company but Höegh and Golar, I would say, is a better strategic fit because of, well, both the upstream for Golar with the production of LNG on -- to get access to LNG. But also through the FSRUs and also their knowledge in the shipping markets. So I thought that, that's a very good strategic fit. Our vision is not really to be a shipping company. If it is not the time charter market that we are out to pursue, might be opportunity short term because of good timing on the ships that we have ordered, but our wish is to become a supplier of small-scale LNG. In other words, source the LNG, ship it, store it and distribute it and sell that LNG. And I think there are great opportunities for that. With their expertise -- we don't have that deep expertise, we have logistical expertise. But with those partners, we have gotten access to some very knowledgeable people.

[Unknown Analyst]

Just a quick follow-up, then. You were talking about closing it -- or to bring it to the OTC this year. And at that point, sell $10 million of shares. So that was from your own stake, was it?

[Niels G. Stolt-Nielsen]

No. So -- well, no. So what we're doing now is we're raising $110 million total, $11 million coming from the OTC. So the shareholders have committed to $182 million, but in case nobody invests, the shareholder committed to $182 million for a total investment of $350 million. But of course, that might change depending on what we do. So we are now looking at selling to some strategic investors, $11 million, or 10% of the $110 million. But the shareholders, because we have taken a $350 million commitment, have committed themselves to a total of $182 million. Us, 50%; the others, 25% each. So out of the $110 million, $11 million will come from potential investors. And then we'll do a listing quite quickly.

[Unknown Analyst]

And just one final. In terms of, you already disclosed that you were going backwards [indiscernible]. In the press there, I can see... of the bunkers...

[Niels G. Stolt-Nielsen]

But at $150 million of additional cost, we have to pass that through. The industry has to.

[Unknown Analyst]

The question you -- I suppose you already have a sense of some projected costs, in place that -- are you done formulating that towards the new type of fuel or how do you, in practice, price to pass on?

[Niels G. Stolt-Nielsen]

Well, the contracts that we are renewing now, basically what we have said is that we have a walkaway clause -- a walkaway right. So if we don't come to an agreement, on the revised bunker clause, either party can walk away. So we have stated quite clear that the reference price needs to be on the MGO, on the cost of that additional cost. So -- or the MGO needs to be -- the additional cost of the MGO needs to be compensated, which is not currently included in the bunker cost. So the only thing that we have done so far and we have not fixed any contracts yet where there's a clause that the customer will automatically take over the -- all the costs. But what we have said and what we're doing is that there is an exit clause if we don't come to an agreement. The customers, they will, of course, say hey, it's the market or demand that will determine how much of that cost can be passed on. My message here, my message to our investors, to our customers, they forgot the cost. And then you can see the shape of the industry; we have to pass that on.

[Unknown Analyst]

One question in terms of Terminals in 2020. One would think that the market is keeping still, that this will also be positively affecting the tankage demand. So [ other rigs ] in fact announced some new projects, supposed to have some sort of, in fact, some storage facility on that as well. Are you trying to do something in terms of new business on the tanking side or terminal side?

[Niels G. Stolt-Nielsen]

Not related to 2020, but we are clearly seeing inquiries coming up. We are focusing on chemicals. That's our main business. But as a result of potential demand coming from what you're talking about, we are -- yes, of course, we're still optimistic that we can see improvements in the terminal market. But we are not taking any position towards that segment. Yes?

[Unknown Analyst]

What's your view on installing scrubbers [ at this point ]?

[Niels G. Stolt-Nielsen]

Yes, the -- I think scrubbers is -- we have some scrubbers and we are considering additional scrubbers. I think scrubbers are -- is a short-term solution. I think the spread between the marine gas oil and heavy fuel oil -- or low-sulfur fuel will be coming rapidly down. So maybe 2, 3 years, so -- but the potential savings using scrubbers is so big, so its payback period can be very quick. So scrubbers is absolutely an option which we are considering. But it's not a long-term solution. The long-term solution is low-sulfur fuel that is being -- going to be developed.

[Unknown Analyst]

And would you -- what type of ships would use [indiscernible], [ bunker ], terminal [ holder ], or?

[Niels G. Stolt-Nielsen]

The large ships. Not clear on the ones right now because they [ are ] scheduled for dry dock, and they are more fuel efficient. So it's still the large, less fuel efficient ships. Scrubbers is not at all an alternative for small ships because they don't have the space. So it's the large, the less fuel-efficient ships. Yes?

[Unknown Analyst]

You mentioned you had the seen limited in demand over the past quarter. And just in light of the raised tax -- tariffs between China and U.S., have you not seen any shift in demand from certain products, say, soybeans from U.S. to China, for example? Have you not seen any shifts in demand here?

[Niels G. Stolt-Nielsen]

Soybeans? Soybean oil? Do we ship soybean oil? To be -- I don't -- we have seen -- we have one contract with a large Chinese customer of MDI being moved from China to the United States, which is -- now the MDI is on the list, which will affect our business. But the customer will most likely source that MDI from Europe and ship it. So we will still move it but at a shorter distance. So as we stand right now, we don't see -- we haven't seen the impact. But we believe we're starting to see concrete examples of what might happen. Soybean oil is the -- it's not really -- we do carry oils, so vegetable oils, but it's not our main business out of U.S. Gulf. Out of U.S. Gulf, our primary products are sophisticated, small parcels and chemicals. Yes?

[Unknown Analyst]

Regarding the MSC Flaminia case, could you provide some color on the next steps here? And if this fine stands as it is, would you be covered by some of the insurance?

[Niels G. Stolt-Nielsen]

Yes, so the -- thank you for asking because this is important. So we have MSC Flaminia, which -- there was an explosion and unfortunately, lives were lost and the ship had caught fire. And there's been a trial in the United States between the parties, Conti, being the owner of the ship; MSC, being the operator of the ship; Deltech, which is the owner of the product; and Stolt Tank Containers, we're the tank container; also the freight forwarder; and the port that handled the product -- the terminal that handled the -- all parties were involved. During the finding of facts, it was determined that all parties have a fault, where the container was stalled, what temperature the product was loaded, where the tank containers were sitting during the summer period and heated up. So it's a long story. During finding of facts, it was determined that all parties had fault. So when the ruling came a couple of weeks ago, it was a bit of a surprise to all parties that Stolt and Deltech got the full blame. Now the ruling was that we, the 2 companies, we're at blame. There was no fine. The judge didn't say how much the cost. What has been done is that the cargo on the ship and the cargo claim has been settled. So that's gone. What is now being disputed is that Conti is suing for $162 million for the ship, which is a -- so we, when I say we, this is all covered by insurance, right? So there will be no impact, cash or any wise, nothing on Stolthaven's numbers. So it's all covered by our underwriters. But together with our underwriters, we are surprised of that ruling, and that ruling, most likely, will be appealed of who was at fault. But the lawsuit, which they are doing in the United States of claiming for $162 million for the ship is against really the U.S. law states that you cannot sue and claim for money beyond the value of the ship before it exploded. And from the numbers I received is that the value of that ship before it exploded was $45 million or $40 million to $45 million. And now that they have spent money -- instead of taking it as a total loss, they have spent money on fixing it and spent $162 million. According to U.S. law, you can't go after -- you decide to go and build it and redo it, that's not the most economical way of recovering. So this is not over. So most likely it will be appealed in regard to who is at fault. And then when -- who is at fault, how is that going to be divided amongst the parties and what the total amount can be, the total amount, is it $162 million or is it the $42 million? So it's a long way to go. But I repeat, this is -- this insurance coverage, so it will not have an impact for Stolt. Any other question here in Oslo before I open up for the phone? Operator, there's no further questions here in Oslo. Is there any questions on the phone?

[Operator]

[Operator Instructions] We will now take our first question from Mr. Lukas Daul from ABG.

[Lukas Daul, Analyst]

Just on the issue of -- or on the topic of scrubbers, can you repeat how many scrubbers have you already sort of decided to install? And what would be the number of vessels that you could realistically equip with scrubbers by 2020?

[Niels G. Stolt-Nielsen]

So currently, we have 4 scrubbers installed and we are considering or in the process -- we are most likely going to install an additional -- 14? 14 scrubbers, and that's the -- realistically, the scrubbers that we will install on our fleet.

[Lukas Daul, Analyst]

Okay. Good. So it's 18 in total. And then back to the discussion regarding passing through the bunker costs. I guess, it's already a topic for you and your clients, but can you sort of describe a little bit what direction it is taking and what would be sort of the optimal way to solve this issue?

[Niels G. Stolt-Nielsen]

The optimal way to solve the issue is that the price increase between heavy fuel oil and marine gas oil will be passed on. If that's realistic, the only thing I can say is that how long can an industry last when we're currently losing money to be able to not pass it on. The customers, they don't disappoint. They're, of course, trying to say, yes, we'll take part of it. But they are driven by what is out there. So our position is that we will pass all of it to our customers. If some of our competitors will do otherwise, well, we'll have to see. We have not yet been able to get a blank kind of agreement from our customers that, that additional cost will be passed on to the customers. But it's -- for us to be able to recover it, we need, what is it, a 15%, 16% increase in our freight rates. [indiscernible].

[Lukas Daul, Analyst]

Okay. But I think this year, you have seen a very fierce competition on your competitors taking or fighting for revenue while COAs rise, so I guess it remains to be seen how they will respond to this issue 2 years from now. Don't you agree?

[Niels G. Stolt-Nielsen]

Absolutely. I mean -- it is how fast you will burn out your balance sheet if you don't do it, so -- and how long you can survive. But it's clear that we cannot take on such an additional cost. It needs to be shared.Is there any other questions or phone calls, operator?

[Operator]

There are no further questions at this time.

[Niels G. Stolt-Nielsen]

All right. Thank you very much for participating. That completes our third quarter earnings release. Thank you.

[Operator]

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