Stolt-Nielsen Ltd

OSE:SNI

Earnings Call Transcript 2017-Q4

[Operator]

Good day, and welcome to the Stolt-Nielsen Limited Fourth Quarter 2017 and Full Year 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 G. Stolt-Nielsen. Please go ahead, sir.

[Niels G. Stolt-Nielsen]

Good afternoon, good morning. Thank you for joining us here in Oslo for the fourth quarter 2017 results presentation. I will be referring to a slide presentation, which you can find on our website. Together with me here in Oslo is Jan Engelhardtsen, Chief Financial Officer.If we go to the agenda on Page 4, the normal agenda, where I'll go through the highlights for the quarter, talk -- go through each of the businesses, and Jan will take you through the financials. And at the end, we will open up for question and answers.On the Page 5, the highlights. And I guess, the big surprise is, of course, the decline in the performance of Stolt Tankers. Stolt Tankers reported operating profit $20.4 million, down from $34.4 million, reflecting impact of lower COA volumes and COA freight rates and also the negative impact of Hurricane Harvey, and it was estimated to be $7 million, and I'll go into more details later.The Terminals operating profit $5.4 million, down from $16 million in the third quarter. We did impairment of assets in New Zealand of $8.4 million.Stolt Tank Containers, positive development. Operating profit was up. We reported $17 million, and that's up from $14.8 million. And that was driven by firming markets, increased demurrage revenue and improved margins on our shipments.Stolt Sea Farm operating profit before fair value adjustment of inventories was $0.1 million compared to $0.4 million. Then you had positive $4.8 million impairment -- positive evaluation impairment -- impact, sorry, versus a negative of $2.9 million in the prior quarter.Corporate and Others, there's an operating loss of $9.4 million compared to an operating loss of $6.7 million in the prior quarter, reflecting a $6.9 million impairment of assets of the bitumen business assets and a gain of $7.2 million related to the changes that we did in the U.S. retiree healthcare benefit plan.So that gives us a quarterly result of $1.1 million, just about breakeven, and a full year result of $50.3 million.So if we then go through the variance analysis of net third quarter 2017 to -- compared to fourth quarter 2017, we had a $18.5 million net profit in the previous quarter, $7 million lower operating profit from Tankers, $7 million impact from Harvey; $2.2 million lower from Terminals operating profit, very much also driven by the impact of Harvey; higher Tank Container of $2.2 million; higher Sea Farm operating profit after the fair value adjustment of $7.4 million; again the $4.5 million benefits from the retirement changes in the medical plan and the onetime impairment of our terminal in New Zealand and also a write-down of the assets in Stolt Bitumen, giving us $1.1 million.On Page 7, I just want to talk a little more about Harvey because we underestimated the impact from Harvey. And I just want to remind you that the Houston Ship Channel was closed down all activities on August 25 and didn't open again until -- on the 25th of August and didn't open again until the 1st of September. So the whole Ship channel in Houston was closed down.Stolthaven Houston was one of the first terminals to become 100% operational, on September 1. Other terminals resumed operations gradually, depending on the extent of the damage and flooding. And of course, many of our customers' terminals weren't operational, so they -- we weren't then able to call and had to wait.Stolt Tankers, at that time, we had 17 ships in the region when the hurricane hit and made landfall. As a consequence, the port closure ships -- the port -- the ships that were in port had to go out to sea. Following the reopening of the ship channel, the ships suffered severe delays due to congestion and unavailability of cargoes. So they didn't want the ships to be in port when the hurricane hit, so we had to sail out. And then, when we came back, of course, it took time before the terminals opened up. And a number of customers declared force majeure due to the flooding, and 54,000 tons that were booked were canceled or delayed, requiring replacements to be found in the spot market.So if we then move on to Stolt Tankers, the deep-sea revenue for the quarter decreased by $5.4 million -- sorry, 5.4%, reflecting a decrease in average COA rates. Regional fleets' revenue also declined by 6.7% during the quarter. Our 2 regional fleet [indiscernible] the market didn't decline, but we had less operating days because we sold the ship and [ ships ] into Caribbean service were impacted by Harvey.Total volume shipped in the quarter decreased 3.1%. COA cargo volume dropped 6.8%, while spot volume increased 5.7%. Again, this is very much driven by Harvey where the nominations that we received were canceled because of force majeure. And then we have to replace all that volume, and that's why the spot volume increased by 5.7%.The COA rate renewals for the quarter were on average down 1.1% compared with a decrease of 0.4% in the previous quarter. So the contracts that we renewed during the quarter, on average -- of the ones that we retained on average were renewed at 1.1% decline.So if we then go to Page 9, the Tankers third quarter to fourth quarter operating profit variance, there you see that we had an operating profit of $34.4 million in the third quarter. Lower trading results of $12 million, estimated impact of $7 million from Harvey. We had slightly higher bunker costs, but the bunker surcharge improvement was $2.5 million. So actually, the surcharge improvement means actually that we gave back less to our customers because of the higher bunker price. And the bunker hedge variance, because of the paper hedge that we have in place, an improvement of $3.6 million compared to the previous quarter, slightly higher shipowning expenses and slightly higher equity income from the joint venture, bringing us to $20.4 million.If you then go to Page 10, the bunker cost net of bunker surcharge, but excluding the paper hedges, decreased by $1.4 million. So actually, the bunker prices went up, but because we had to give back less to the customer under the bunker clause, actually, our bunker -- total bunker cost decreased by $1.4 million. The average price for IFO consumed increased to $327 per ton from $307 in the third quarter. The average price of bunkers purchased increased to $346 from $306 in the third quarter. And the COA bunker surcharge clause covered on average 69% of total volume in 2017. And here, you can see also then that we have still paper hedge on the bottom right. You can see that we still have paper hedges in place for 2018 and beyond.Moving to Page 11, the order book. It now stands at 15% of the fleet that we consider competitors -- operators. The order book now stands at 15%, all which is stainless steel. And here, you can see that there is a significant amount of tonnage coming in, in '18 and tapering off '19 and '20. But as we stated earlier, in previous quarters, we believe that 2018 will remain a challenge because of this delivery, the increase. At Stolt, we have now finally taken delivery of all of our ships, so our newbuilding delivery has now been completed.Market development. The Hurricane Harvey and resulting Houston Ship Channel closure severely disrupted U.S. cargo operations, we already talked about. The spot market actually at the end of December -- in December, which is, again, in the New Year started to improve, and it's carried on into the New Year. So that is, of course, a good sign. However, the COA competition continues quite significantly. Our main competitor, Odfjell, has taken on, as you probably have seen in their 100-ship strategy, have taken on quite a bit of new tonnage, which they don't have contract coverage on. So they are aggressively going after all or many of our COAs. And needless to say, we're not going to let that -- them go. So we do expect that there will be continued competition for these contracts, which unfortunately may affect, yes, the renewals going forward. And I question that. We've said, hopefully, by the second half of 2018 that there will be signs of recovering, but I'm afraid that '18 will be a challenging year. And I'm hoping that '19, the newbuildings have been -- most of the newbuildings have been delivered and the market had absorbed that -- all of the existing tonnage.On a positive side, 80% of the COAs' volume that we will carry in 2018 has been renewed. And if you look through the various presentations over the last previous quarters, we have shown you, basically, on average, how the COA contract renewal have been. So we have secured a lot of the COA business, but, however, there is continued -- continuously every quarter, there are contracts coming up. And yes, we expect significant competition in that renewal, but we will, of course, defend the contracts.The MR market was up at the year-end but has retreated, again, to below $10,000. And of course, that also has a slight negative impact in our segment.So higher fuel prices and excess ship newbuildings supply will limit gain for improvement -- improving spot markets. Again, when you see that even though the market -- the spot market improved towards the end of the year and beginning of this year, I believe there is going to be limited kind of improvement because of this supply of new ships coming in.Then moving on to Page 13, Terminals. Revenue remained unchanged from the last quarter. Global utilization went -- of our wholly owned terminals went from 85.6% in previous quarter up to 87.6%, so we improved our wholly owned utilization. If you look at the total utilization, including the joint venture terminal, remained basically unchanged at 91.4%. And again, we did an impairment of the asset in New Zealand of $8.4 million. I believe we are now taking the impairments that are necessary there.So if we then go to Page 14 and compare the operating profit between 2 quarters, $16 million last quarter, lower operating income from owned terminals, primarily driven by Harvey and less throughput as a result of ships not being able to call the terminal during the closure of the ship channel. We had also lower equity pickup from the joint venture, not reflecting the performance, but we had a one-off in the previous quarter, which we didn't have in this quarter from our joint venture in Antwerp. And again, the write-down of New Zealand, bringing it down to $5.4 million.So on Page 15, Stolthaven Terminal Market update and key initiatives. Harvey didn't -- which is very proud to say that the terminal didn't sustain any material damage. Our people were safe within, no contamination or no pollution as a result of this unbelievable amount of rainfall that came in such a short period of time. The Houston market remains, I would say, strong. U.S. Gulf market remains strong, both in Houston and New Orleans, we see optimism in the market. We see a lot of inquiries. So we are positive about the U.S. Gulf terminal market.Singapore markets remains challenging. I would say small signs of improvement or more inquiries coming our way, but we are not at the utilization we want to be. The Korean market is stable. Europe remains stable for chemicals but weak for CPP. We continue to pursue the development of long-term contracts with potential pipeline-connected industrial customers. We focus on ship-to-shore interface, these -- generating synergies between our ships and our terminals, including the construction of a new ship dock in Houston, which we announced earlier, which is expected to be completed in the first quarter of '19. And not only will that give us the opportunity to develop this property, but, of course, when we have more jetty capacity means less waiting time for our ships.Moving on to Stolt Tank Containers. Once again, a stellar performer. As you may remember, the market in '16 -- '15 and '16 declined; the margins, increased competition, but we have seen a significant nice pick up again. Lot of activity. There's still a lot of new operators, new competitors, but the amount of products being moved in tank containers is -- continues to grow. So we have seen that we have been able to get margins improvement, utilization improvement. And as a result, we have seen an improved earning from the Tank Container business. And I think we will continue to do so going forward.Page 17, on the operating profit variance. $14.8 million in the previous quarter, $3.3 million of additional demurrage revenue, higher A&G -- slightly higher A&G expenses and others, bringing it to $17 million.On Page 18, strong market demand in most regions, focus on increasing both utilization and turns per tank. So at the top of the market, we were -- utilization, we were approaching 80%. I don't think it's possible to get. I think 75% is kind of a realistic utilization of Tank Container. And we're at 73%, around 73% now. So we are seeing nice improvement in our utilization. And then, of course, it's not only the market, but it's also the way you operate the Tank Container, that you are -- you have the systems and you have the pricing mechanism to make certain that you send the Tank Containers in the right direction. You have depots in key locations, so you can turn them around quickly. And as a result, you're able to both utilize -- get the utilization up and also turns per tank up.Margins improved despite strong competition. Controlling operating expenses, of course. And we continue to focus on developing our systems and implementation of global platforms to increase efficiency of scale, while reducing overhead, so becoming more productive. Digitalization, they call that. So that's really what we are really focusing and have always focused on but now more than ever, knowing that the competition is there that you need to be able to do more with less.We opened 2 new depots in 2017, Laem Chabang in Thailand and in Vado in Italy. And we have 2 depots under construction, one in Saudi and one in the United Emirates, aimed at all improving turnaround times.Stolt Sea Farm. Volume of turbot sold increased 21%. And that is mainly reflecting the additional consignment sales that we're doing for one of the other big farmers. The prices increased during the quarter 6.7%. Volume of sole sold increased by 3%, while prices decreased just around 1%. Caviar volume stayed flat against the prior quarter and prices increased 4%.Quickly going through the -- on Page 20, the variance analysis, negative $2.5 million, slightly lower turbot prices, lower -- sorry, lower turbot gross profit and lower sole gross profit and lower caviar gross profit, is all offset by the fair value revaluation of the turbot and also of the caviar inventory, bringing up to $4.9 million for the quarter.That brings us to the financial presentation, and then we'll come back for questions. Thank you.

[Jan Chr. Engelhardtsen, Chief Financial Officer]

Thank you very much, Niels. Good afternoon, and good morning to those of you in the United States on the line. In this earnings release presentation, which is my #100 presentation that I've done, I will go through and provide you with some more background information to some of the figures we have presented today and also give you some guidance, which I also have done in the past to some of the P&L line items.Before we start, wanted to just say that we have today filed with the Oslo Stock Exchange our interim financial statements. Again, they cover the fourth quarter and also the full year 2017. And as before, the press release, the interim analyst presentation, you will find on our website.Now going to Page 22, if we look at the net profit, and this is before, what we call, the one-offs, you can see it's down from $55.2 million, down to $47 million in the fourth quarter. And again, while we have gotten a lot of benefits in both of these 2 quarters from the bunker hedges, and that's because the increase in the bunker cost, needless to say, as Niels has pointed out, the underlying Tanker market has continued to be very challenging. And of course, impacting in a significant way, and I think we all have underestimated the impact on Harvey in the quarter, which, as Niels mentioned, was $7 million for Tankers.If you also look at some of the other one-offs, we have the impairment on our Stolthaven New Zealand terminals of, this is before tax, $8.4 million. We had impairment of some bitumen accounts of $1.5 million. And also we had impairments on some other bitumen assets, one was a ship and also on our terminal in Vietnam. So we've written that basically down now, and that was $6.9 million. Of course, all of this is also mentioned, as we made a change in the U.S. medical insurance plan and tightened that up. And that is resulting in $7.2 million going through the P&L in the quarter. So you can see here, it's basically $17.7 million operating profit, as reported, that we are down for the fourth quarter.Net interest is up. That is reflecting the $175 million bond issue that we closed in September. That was done at interest 6.375%, and that has caused the interest rate to go up. So overall here, you can see, net profit was just under $1 million, reflecting these -- the impact of Harvey, the deterioration in Tankers as well as the impairments we have taken.Again, if you just look for the full year, you can see here that $113 million was the net profit in '16 compared to $50 million. So this is significant drop in the profitability. And if you want to look at the variance, it's really, half of that variance is coming from the declining earnings in the Tanker business, and the other half is coming from the increase in interest, which is a direct result of the acquisition of JO Tankers that we did at the end -- the very end, last few days in 2016. But again, the EBITDA for the quarter $111 million versus $122 million. So in terms of the cash, it's only $11 million impact. And we're just under -- at $468 million for the year. It's still up from the previous year. So there is a increase in the cash flow.Now if we go to Page 23, balance sheet. We try very hard to watch the balance sheet and, of course, our liquidity. The debt at the end of the quarter -- at the end of the year, $2,470,000,000, looks high, but it's still $50 million down from where it was at the end of the third quarter. The debt to tangible net worth, we have a 2:1 max there with a bank, it's at 1.55:1. But if you take out the cash and make it net debt to tangible net worth, it's at 1.51, which is just about the self-imposed limit that we have put on ourselves, and we have told you about that before.EBITDA to interest expense, 3.16, down 0.365, again ties with the reduction in the EBITDA. We have cash of $58 million, unused committed lines of $449 million, and we have uncommitted lines in place of $65 million. So we're right there at above $0.5 billion in liquidity.Good news, 77% of the debt is fixed going forward. Average interest rate is 4.85%. It did go up a little bit in connection with us doing the bond offering in September. And the -- for the first quarter of '18, we expect roughly $34 million to be the interest cost.Next, Page 24, the cash flow. You can see here, $62 million is the cash from operating activities, down from $104 million. You can see here that the biggest variance here is the change from one quarter to the other in the working capital. And that's really only an internal transaction. And it ties to what we have mentioned before is the closing down of our joint venture with Gulf Navigation and that closing down, that transaction where we, basically -- each partner purchased 2 ships each and took delivery of those, and we repaid all the debt in the JV, and that transaction spanned both quarters. So most of the variance from one quarter to the other quarter is, actually, directly linked to that transaction. So there's not really been any underlying -- there's no change in any of the cash trends here other than the weakening, if you will, that we have seen in the Tanker business.Capital expenditures, $80 million, is the last payment towards the last ship that we are taking ourselves from Hudong, from China, 38,000 deadweight. And it also is the second ship of the 2 that I just mentioned that we're buying from the -- where we closing out the joint venture with GST, that's Stolt Facto.If we go down, look at the financing activities. I mentioned already the bond issue. We raised $175 million. This was really -- and as the market -- the bond market was available for us in September, maybe a little bit too early, but anyway the market was there. We went in, did it and then we used the proceeds to pay down on the revolver, so that we now have capacity without really having to go to the market again to pay SNI03, which is due in March of this year. So altogether, that means the ending cash here is $58 million, and that's down from $86 million in the previous quarter. And cash flow priorities, just to say that again, reduce debt, review CapEx, and we are going through an exercise now where we are actually reviewing very hard the outstanding commitments that we have, and we also work on reducing the operating expenses.Then, this is Slide 25, the EBITDA. And here, of course, this is -- we take out all the noise that we get from the fair value adjustments in Sea Farm and also other noncash one-off items have been removed from this calculation. But you clearly see here the impact of Tankers, which is down $50 million from the previous quarter. Terminals, I would say, pretty much flat. Tank Containers, you can see here, the whole nice progression and the improvement that we've had all through the year. Niels was talking about it. Utilization has come up, and the margins have come up. So very nice sign. And I think, actually, the fourth quarter '17 has been one of the better quarters we've had in STC for a long time. So for Stolt-Nielsen, we are at $112 million for the quarter, and that is down $10 million from the previous quarter as we round off the figures.Going on to next slide, which is the A&G, admin and general expenses. It's $52 million -- $52.1 million, and that is down from $54.1 million in the previous quarter. I think we guided at $54.1 million or $54.2 million. The main difference why we are down is, of course, the impact of the changes that we did to the U.S. healthcare insurance plan, but by now you've seen lot of different figures. You heard upfront it was $7.2 million. But out of the $7.2 million, $3.9 million actually went through the A&G line and $3.3 million went through the operating line. So that's why the $3.9 million actually shows up here as a reduction, but the overall, the total amount, was $7.2 million.When we look at the quarterly guidance here of $57 million, which is -- of course, we're not going to have the same benefit on the healthcare gain of the same size. Of course, there will be a benefit going forward but not at this proportion. And we also expect to have an increase in the profit sharing and LTIP provisions that we do for the quarter. So $57 million is where we believe we're going to end up.Depreciation and amortization. You can see here that $68.6 million versus $66.8 million. The main -- this is pretty close, but we did make an adjustment to a group of tanks in STC. These were specifically bitumen tanks that we shortened a little bit the useful life on those, and that had the impact of around $1 million. Now you can see here the guidance is $69 million. But of course, we don't expect to do any more impairments, but you see that listed here at the bottom of the table.Share of profits of joint ventures, again pretty much in line with last quarter. Tankers, little bit better; Terminals, little bit worse; Tank Containers, basically the same. And we expect for next quarter $5 million as guidance.Taxes, also not really much to talk about here in terms of what we have recorded in the fourth quarter. Terminals, a little bit -- the Terminals, Tank Containers and Tankers, you can see here, little bit down for the quarter, but that ties in to the tax impact, if you will, the reduction in the tax. And that's tied to the impairment that we did on the New Zealand terminals.Then, Sea Farm tax up, of course, because we had a fairly large write-off from the fair value adjustment to the inventory. And -- so that basically left us at $3.4 million. And for the full year, $12.2 million versus $15.7 million the previous year.I think here, by far, the most important thing or takeaway is really the impact of the tax cuts that Donald Trump has introduced that will become effective in January of this year. And for us, that will lead to $25 million adjustment to our deferred tax liabilities and that will go straight to the bottom line and the P&L, that will be recorded and reported in our first quarter of '18. So in addition, of course, going forward, there will be a small impact in terms for our U.S. operations terminals and also our other operations in the U.S. because the tax rate is coming down.The other takeaway, which I'll say is very important, is the capital expenditure program that we have going forward. These are commitments that we have made, if you will, commitments by the board, by management and the board. It's not necessarily what we have committed to, if you will, to contractors and third parties, but this is the CapEx program that we are working on going forward.And you can -- in 2016, you may recall, we did the JOT acquisition in November, that was $575 million. And that was on top of another almost $300 million of CapEx. So very heavy in '16. '17 was just under $400 million. And now in '18, it's $269 million. And then you can see, it drops off very quickly to $155 million, et cetera, basically hardly any commitments. And that will, of course, enable us to reduce the debt very quickly also as we go forward.Just a couple of comments in the Stolt Tankers. This does not include, by the way, for Tankers, drydocking because that's separate. That's just an operating expense. But the $68 million, which is, if you will, primarily in '18 and '19, reflects the ballast water treatment installation that we need to do to comply. Terminals, which has a total of $253 million from '18 through '22. The most significant there, the jetty in Houston. This would be extremely important for us and for that terminal and also various maintenance capacity improvements in Houston. Also investments in Santos and, of course, another jetty in New Castle in Australia that we had mentioned before. The Stolt-Nielsen Gas, the $65 million there is, of course, the delivery tied to the delivery of the 2 small 7,500 deadweight LNG carriers. So again, important here to see the fact that the CapEx program is tapering off.Debt maturity profile, the blue part -- this is Slide 30. Blue part, as said before, it's just the bank debt, amortization of the bank debt. The green, balloon payments or facilities that will come to maturity. And that is primarily the $156 million facility we put in place in connection with the JOT acquisition, and that will be replaced and refinanced later on this year. Of course, the bond, the top part of the bond we talked about. That's the SNI03, which is due in March, but we have the money sitting in the overdraft facilities. And the 2022, that's just the repayment, if you will, of the bond issue that we just did.So back to you, Niels.

[Niels G. Stolt-Nielsen]

Key takeaways on Page 31. Net profit $50.3 million for the year. As you saw, we did a cleanup at the last quarter by doing some impairments at the end of the year. We expect continued soft market for Tankers as a result of the newbuildings and the existing tonnage. We see strong demand in Tank Containers. The fundamentals in Terminals are healthy. And we also expect that the Sea Farm, the turbot prices will hold up and as we see prices -- we expect prices to hold up or rise.We continue to focus on our debt reduction and cash flow improvement. So as Jan showed you that our debt, that will be coming quickly down, but until that has happened, we will be careful with any further significant investment.Again, $25 million gain on this new tax bill that has been passed in the U.S. We continue to have access to competitive funding. And as -- also as a result, we have sufficient liquidity already secured.That completes our presentation. So then, we will open up for questions. I will start with questions here in Oslo. And then, we will take questions from the phone afterwards.

[Niels G. Stolt-Nielsen]

Yes?

[Unknown Analyst]

What were you -- like previously, you mentioned like private equity money [indiscernible]. Where are they now? Are they sort of completely out? Or are they completely in? Or...

[Niels G. Stolt-Nielsen]

The question is, if the private -- what are the -- what is the private equity, the money, doing in our segment, they're coming in or -- we have not seen any new orders. So that's good. There's no newbuilding orders. So let's hope that, that continues for a while. I think it's going to take a while for the current order book to be absorbed. So it's not only that the order book comes down on being delivered, but the floating -- the amount of floating tons job there is too much. So the market needs to absorb it, and that will take time. I think that the money that's coming by nontraditional operators, they are now -- they've deep pockets. So they're waiting. They're looking for consolidation opportunities, and hopefully try to exit through some sort of consolidations. So if anything, I think, they're on their way out. Yes?

[Unknown Analyst]

You say that you saw decrease in COA cargo volume by 6.8%. How much of this would you say is Harvey related? All or is it past the Harvey and normal operations?

[Niels G. Stolt-Nielsen]

No. I think that the majority of the reduction of the COA volumes that we saw is driven by Harvey. And also slightly less operating base for us. But -- so the volume side of the business, the demand side of the business, is healthy. And I think there's a bit of optimism because of all of the things that -- when the U.S. economy is doing well, the global economy is doing well. So there's a bit of optimism. So I think that volume wise, it's okay. It is the supply side, which is the concern. And of course, the main competitor that we have is Odfjell. And we do expect vicious competition on contract renewal. Any other -- yes, sorry.

[Unknown Analyst]

Could you talk a bit more about what you've done so far on the LNG [indiscernible] and how far down the road you see go for [indiscernible]

[Niels G. Stolt-Nielsen]

In that segment?

[Unknown Analyst]

Yes.

[Niels G. Stolt-Nielsen]

Well, LNG is kind of a new leg that we'd like to develop. And as I've mentioned -- so the question is what are we doing in LNG and when are we expecting to increase our investment in LNG? The answer I will say is that, okay, we've ordered 2 ships. We have committed to 2 ships. That's an $80 million investment. And those 2 ships will be delivered in the second half of 2019. Our strategy there is really to be an aggregator of demand, so that we -- our aim -- we are able to utilize these LNG ships better than a supplier can or a consumer can. So instead of a supplier or consumer of LNG takes on a ship on time charter and uses to grow up the business, only uses 30%, I think that what we're trying to do is to collect COAs or part-time charters, so that we can offer the people that are developing the LNG business in small scale, offer them a better cost -- logistical cost structure than they can do themselves. That's really -- and then that also includes making investments on land too, so terminals. We can even do containers, delivering all the way to the factories, if there's not a pipe there. So -- and we're seeing -- and the target, again, small scale, remote communities, stranded, something that's not having access to piped gas. And we're seeing lots and lots of inquiries. Lots of interest. I think that this is the first -- it's a proof-of-concept; it's a lot of work. It takes a long time. What we've learned from LNG, it takes a long time before people make and FID takes a decision. So we're not building up demand for the ships. That's not our main business. Now of course, we also look at the time charter markets. So if somebody comes to us and wants a time-charter ship, of course, yes, we will look at that. But that's not really the business that we're in. We might be lucky with having order at the right time and the ship is being delivered on time, so you can get a good time-charter return, but the long-term strategy for us is to actually build up these logistic -- aggregation of demand buildup and logistical change for the customer. Of course, everybody knows about the 2020, with the new sulphur regulations coming into effect. And that there's quite a bit of expected LNG demand as a fuel for the ships. Container ships have already announced -- some container owners have already announced conversion. We are seeing ferries. So the bunker market is also of interest. And this is part of it. So we could have taken a more aggressive approach had we had more investment capacity, but I think that's -- as it stands now, it's not because of we don't believe that this market is going to be hot, but it's relooking at Stolt. We want to be disciplined now and get our debt level down before we make any big jumps. Of course, there are different structures that we can pursue. So we also have to be a bit realistic. And if you look, historically, what happens is that the ships comes before the gas. Both in LPG and LNG, you see that owners and speculators have been very aggressive in ordering assets. And when the ship -- and then because everybody expects that the demand is going to be there because LNG is going to be produced, but it always happens that as too many ships being delivered too early and then you sit around and wait for the gas. So we have to be also a bit a little -- we're analyzing. What we will prefer is actually build up a portfolio of COAs. So when we have enough of this, then we can kind of order more tonnage. Yes?

[Unknown Analyst]

Just a follow-up from me. Like where do you think you're going to trade the ships? What portfolio is related to carrier? Or is it going to be quite regional scale or small scale volumes? Or is it going to be deep sea [indiscernible]

[Niels G. Stolt-Nielsen]

Yes. So the first one we're looking is in the Mediterranean. And it's a little -- nice little triangular trade there where there's ferries there, there are cruise ships there, there are power stations there. The Sardinia is there. So there's a nice little -- you can't trade those ships long haul. So it's a -- we're looking at business in Southeast Asia, small regional trade. So that's where we're looking.

[Unknown Analyst]

And then kind of have you included the [indiscernible] on kind of how...

[Niels G. Stolt-Nielsen]

We have built up firm offtake commitment with just some subjects because we don't want to lift those subjects until we -- but -- until we have -- we want to build up -- we're willing to take risk. If we build up COA volume for 50% of a ship, I think, okay, let's do. 60%, we'll do it. And we'll -- by 2019 as we're going to be build out, we'll have enough. So what we're doing now is that we're just gradually working on putting this aggregation together.

[Unknown Analyst]

So the thinking is now to start to create the [indiscernible]

[Niels G. Stolt-Nielsen]

Yes. So Sardinia, there is -- we have a piece of land with a jetty with the permit to build an LNG tank in place. The tank is not placed, but we have the permits on that. We've enough building up of customers. So we're getting close now to being able to take the final -- any investment decision to build the tank and commit one ship to this project and then take this up. But the challenge here is to get people. This is small scale. This is not large power companies that are 30-year account. These are, I would say, mom-and-pop shops or small industries that are making a commitment that says, okay, if you -- you need to make a 10, 15-year commitment. So that's even though on paper looks fantastic because of the clean air, prices, et cetera. It's -- you need to convince them to make that commitment. That takes time, but it's coming.

[Unknown Analyst]

And pricing structure, is that going to be very similar to how you work in the [indiscernible] markets? Or how do you price -- I mean, is it going to be kind of COA volumes where you to take or pay? Or is it going to be -- like how do you actually price for service [indiscernible]

[Niels G. Stolt-Nielsen]

Well, we take a time-charter equivalent, and then we split up the boat and then fit everything -- a company that is only willing to commit to like 5% of the -- he is going to take -- he is not going -- he is going to charge them with a full rate for the ship. So he is taking his portion. So we need to price accordingly. And that is, of course, why we're holding back with making the commitment until we have enough volume and enough confidence that we can do. And the pricing on parceling out their capacity, the number -- the numbers look very good. I don't want to talk too much about it because then -- it takes a long time. You need to be patient and it takes -- anybody -- we're learning about LNG, and people have been in the LNG business for a very long time. But one thing that I have learned is that these projects take time, long time. Yes?

[Unknown Analyst]

On the Terminal side, you improved utilization quarter-over-quarter despite what's happened in Houston, I understand, due to Harvey effect. Do you expect that to continue? And do you expect to continue doing pretty much [indiscernible]

[Niels G. Stolt-Nielsen]

Yes to both. Utilization in Singapore is a challenge where we're seeing 75%, highly profitable terminal, but the Singapore market has been a bit oversupplied. But the positive trend there is that we are seeing more inquiries coming. Antwerp, our Antwerp Terminal, which is the joint venture with Oiltanking, there we are seeing pressure or -- because of the CPP market. There's an oversupply. So there, we are expecting utilization actually to fall. When it comes to margins, yes, I think all the investments that we are now doing to upgrade, upgrade maintenance, but also modernize, automate, that will also give improved margins. But I think it's a very steady business. Of course, there will be quarters where we're low -- but I think that the trend will -- that we will get utilization up and margins also up because of -- these are investments that we're doing, work that we're doing, and it takes time. Yes?

[Unknown Analyst]

How much of your COAs is renewal in Q1?

[Niels G. Stolt-Nielsen]

Q1 is, this -- Q1 is quite busy. I mean, it's evenly spread throughout the year, each quarter. But I will say if we say that, I think, Q1 -- I think first half of the year is more busy than the second half of the year.

[Unknown Analyst]

And then given what you have executed so far in the quarter, I mean this month, what are reports from the renewals [indiscernible] from the competitive pressure [indiscernible]

[Niels G. Stolt-Nielsen]

I think that there will be further declines in the COA renewals.

[Unknown Analyst]

So your expectations towards '18 versus '17, [indiscernible] that's probably going to be [indiscernible] negative?

[Niels G. Stolt-Nielsen]

So I would say guidance wise, we still expect to make money in '18. If you look at right now at our market, we are slightly better than breakeven.

[Unknown Analyst]

And you reduced the interim dividend in November [indiscernible] process that you had in November?

[Niels G. Stolt-Nielsen]

Because I don't want to announce what we're going to do before the board has decided what we're going to do. So -- but it is clear, we have for x amount of executive -- consecutive quarters paid dividend. And it's been $1 per share per year. We have on one earlier occasion in the last 15 years, 2001 -- 2012, we did the same thing. But when the market recovered, we actually paid up. So it is our long-term plan, is actually to continue with steady $1 dividend. But when we took on JO, which was a strategic acquisition, we want to take on -- we want to do this once-in-a-lifetime deal. I think it was the right deal. It was a good deal. It was good for the industry. And I think that as a result of that deal, it also triggered other consolidations, right? So then other people have actually instead of ordering new ships, the -- other operators have actually started to consolidate. So I think it's a positive thing for the market. But of course, when you take on that debt and the market is weak, we want to be conservative and protect our balance sheet. You guys know that if we get to higher debt level, our -- when we refinance our existing, that's going to become more expensive. So we just want to -- we want to hold back on further investment. We want to cut the dividend by half for the last of the interim dividend. And hopefully, once the market recovers, once our balance sheet has strengthened, we will continue with the $1. And I think that will happen quite quickly. Because as soon as the debt level will be coming quickly down now, based on our budget, that we don't announce, of course, but based on that, we will see a significant reduction of debt this year. And then, we will be back to pay our normal dividend, I believe. And hopefully, in the future, growing the dividend, that's what we're here for. We have the liquidity to do it. We have the balance sheet to do it, but we just want to be conservative and careful in the way we manage it.Any other questions in Oslo? Operator, is there anybody on the phone that would like to ask any questions?

[Operator]

[Operator Instructions] There are no questions over the phone.

[Niels G. Stolt-Nielsen]

Okay, so unless there's any other questions here, then I would like to thank you for taking the time to come and listen to us in Oslo. I'll see you next quarter. Thank you very much. That completes this presentation.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.