Stolt-Nielsen Ltd

OSE:SNI

Earnings Call Transcript 2018-Q4

[Operator]

Welcome to the Stolt-Nielsen Fourth Quarter 2018 Results Presentation. Today's presentation is recorded. Please let me hand the presentation over to Mr. Niels Stolt-Nielsen, Chief Executive Officer.

[Niels G. Stolt-Nielsen]

Good afternoon. Good morning. Thank you for joining us here in Oslo for our Fourth Quarter 2018 Results Presentation. Together with me is Jens Grüner-Hegge, Chief Financial Officer. The agenda, as always, we will go through the highlights for the fourth quarter then I'll take you through each of the divisions and Jens will take you through the financials and we will open up for questions and answers at the end. The highlights for the fourth quarter. As you saw from the release this morning, Stolt Tankers reporting an operating profit of $7.7 million and that's down from $21.4 million in the previous quarter. That is mainly reflecting a lower or more competitive challenging freight market for tankers, but also higher fuel costs. And the loss of $4.1 million on the bunker hedges and that is compared to a gain that we had on that -- those paper hedges in the previous quarter. Stolthaven Terminals reported an operating profit of $11.7 million and that's down from $18.6 million, that is including a $6.1 million impairment, which I will go into later. And then a $1.7 million decrease in equity income from our joint-venture partners. Stolt Tank Containers reported an operating profit of $18.1 million, up from $17.7 million in the previous quarter. The operating profit rose despite lower revenues and that is mainly because of actions to manage costs as markets soften. Stolt Sea Farm's operating profit before the fair-value adjustment of inventories was $0.9 million versus $2.1 million in the previous quarter, mainly reflecting lower turbot volumes. Avenir LNG, we've successfully established the joint venture with our strategic partners, and listed the company on the OTC, here in Oslo, under the name, Avenir.Corporate and Others reported an operating loss of $11.9 million, compared to a loss of $3.4 million in the previous quarter, mainly reflecting a write-off -- the final write-offs in the bitumen business. That brings us in at $3.6 million profit for the quarter and a total profit of just under $55 million for the year. Then looking at the variance analysis on the net-profit basis between the third quarter and fourth quarter. So $3 million for the quarter, we had a one-off charge of $12.9 million when we changed the accounting of -- I’ll discuss when [ Jan ] and myself went off the board, which we didn't have in this quarter. We had an impairment of the terminals; I will go into that later, impairment of the bitumen. Lower tanker trading results, operating profit of $13.6 million, $0.9 million on the lower terminal operating profit slightly higher in tank containers, $2.9 million higher in Stolt Sea Farm and then the gain on the deal of that we did with Avenir of $11.2 million, and lower Corporate and Others of $2.6 million and some lower FX losses versus the third quarter of $2.2 million bringing us off to $3.6 million for the fourth quarter. Looking at Stolt Tankers, our biggest division. So the deep-sea fleets, so excluding the regional fleets, the volumes for the fourth quarter was approximately the same as the previous quarter, but revenue decreased 2.4%. And that's a reflection of lower rates overall, but also more spots volume being moved versus contract, compared to the previous quarter, so the contract nominations for the fourth quarter last year were down. Overall rates were down 3.1% versus prior quarter. That's a combination of, again, lower market rates, but also a mixture of what you carry. So even the COA nominations, if we have a quarter where we could carry more large parcels of assets that also influences the overall rates. CA rates -- COA rate renewals in the quarter were down, on average, 2.5%. So the rate -- the COAs that we renewed during the quarter were down 2.5% compared to the rate renewal decrease of just under 4% in the previous quarter. So if you want to look at it positively, there's a slowdown in the decrease in our negotiations when we renew our contracts. Moving on to the Slide -- Page 8. The operating profit variance between the third quarter and the fourth quarter, again, $10.8 million lower trading results for the quarter. Bunker cost increased net of bunkers surcharged. In other words, the bunker clauses that we have on our COAs of $0.8 million. Lower bunker hedge results, as I mentioned earlier, of $5.3 million and then we had a positive variance of lower depreciation and then that's mainly due to the life extension that we did in the fourth quarter. Higher admin of $1 million and lower equity income from the joint venture of $0.6 million brings us to a total of $7.7 million profit -- operating profit for the quarter. Bunker costs, the average price and here's one of the big challenges, the average price of consumed heavy fuel or IFO increased to $465 per tonne in the fourth quarter versus $437 per tonne in the third quarter. The COA bunker surcharge clauses, the bunker clauses covers us for 62% of our total volume, if you include the paper hedges that we have in place, we are approximately 75% hedged on our bunker exposure. Again, the fourth quarter loss on the bunker hedges resulted from a drop in the bunker prices towards the end of the quarter, caused by the large drop in the global crude prices. If you look at the overall paper hedges gain and loss that we have in 2018, you can see overall, we have a gain and it's been profitable of a total of $6.2 million for the year. If you look at the hedges that we have in place in -- for 2019, 80,000 tonnes and average fair value -- market value of $316, $317. I think that the market price, today, is at around $350 for heavy fuel oil.We all know about the laws of a fuel regulation that comes into effect in 2020, 1st of January, where we have to go over to a new fuel of less than 5.5% sulfur. And as I've stated earlier, regardless of how many scrubbers you have, the majority of the global fleet needs -- does not have scrubbers and the majority of our fleets doesn't have scrubbers or will not have scrubbers. So we are dependent upon being able to pass on that additional cost from switching from heavy fuel oil to what the only alternative that is in the market right now is the marine gas oil, to be able -- you have to pass that on to our customers. If we were not able to pass that on to our customer, our bill -- additional bill will be close to $130 million. And looking at our results, you know that that's not possible. So we will have to pass it on to our customers. And in the negotiations that we are doing now for COAs that goes into 2020, we are successfully able to pass it on, in not all contracts, but we are not accepting anything beyond passing it on. So if we're not able to come to an agreement, we have an exit clause saying that we will negotiate that towards October of this year, and if we don't come to an agreement, both parties can walk away from the deal. I think we are in a fortunate position because we expect the market to recover. If it's end of 2019, '20 but if you look at the supply and demand side on our -- in the chemical tanker segment, I do expect the market to, eventually, recover. So we are very happy that we're -- I think we can be glad that we will be in a strengthening market when we need to negotiate these bunker clauses that we need to put in place. You can see at the bottom here the reason why we have a challenging market. I've said earlier, the only reason we made money in '15 and '16, and part of -- or '17, it's because the bunker -- it's not because the volume went up, the total volume carried or the freight rates went up, it was because the bunker prices went down. And now that the bunker prices have come up again, the spot rates have not moved. And we haven't been able to add past that additional cost on back to the spot market because of the supply situation. And you can see, then, that the -- even though the bunker prices have been going up, the rates have not. You can see here on the blue, this is our average quarterly cost, purchase cost, which is $465 on the fourth quarter, while today's rate is closer to $350. So once we have burned off the expensive fuel, I think we will see improved earnings from the -- from us going in first quarter and the second quarter based on the cheaper bunker fuel that we will be burning. Stolt Tankers Joint Service Sailed in time-chart index, this we started in 1996, 1996 was at 1. And today, as you can see, we are an all-time low. You have to read the fine print at the bottom, the index is based on the sailed-in revenue, STJS ships plus net results of outside time-charter ships plus an adjustment for inflation on the sailed-in, which, of course, makes it looks worse. And, I think, that our operating cost has not gone up in line, it's been below inflation. So it's -- we are a bit tough on ourselves on this chart, but it gives a reflection of the market situation. The positive side on Page 12, the chemical tanker fleet and our order book. We don't have any more ships to be delivered of chemical tankers. And the blue line, here, in '19, and '20 is what is to be delivered in '19, and '20, of course. And the order book now is just under 10% of what we are categorizing as our competitors. I think it's 31 operators. There has been a slippage, so there were supposed to be more ships delivered in '18 and less in '19, but there's been a delay, so we do see -- still see a number of ships being delivered in '19. But we're not seeing any new buildings being ordered. Market development, we see the demand growth of 4% and that's what we have in our model based on GDP and it's, of course, a big uncertainty here of what is going to happen and the slowdown that we're reading about and seeing. But based on the feedback that we have, we estimate, as a multiple of GDP, that our growth -- the demand growth will be 4%. The core fleet, deep-sea growth will slow, 6% in -- has been 6% in '17 to '19, and 2% '20 and beyond. And if the new building remain moderate, the oversupply should be absorbed by the growth in the market. So we are cautiously optimistic that we will see a strengthening of the market, end of '19 into '20. Now we also see that the CPP market has also strengthened and there has been a correlation between the 2 -- those 2 markets. So we are cautiously optimistic that things should start to improve.Stolthaven Terminals, I will say, steady. Revenue and the expenses were relatively flat between the 2 quarters. The operating income including or -- excluding impairment charges of $6.1 million was marginally down by $0.9 million from third quarter, reflecting slightly lower the joint-venture equity income, nothing to read from that; it's just timing. The impairment was on our terminal in China, in Lingam where we had the explosion in 2015. We didn't have an explosion, but there was a big challenge -- it was a bigger explosion, and it's taking a longer time to fill up the utilization. You can fight with the auditors about the externals, or just about impairment, but this is what we came to. I think that the earning potential of this terminal is still there, it just takes time to fill it up. Utilization for our wholly owned terminals was 91.4% compared to previous quarters. So we -- an overall utilization above 90%. Quickly, the variance -- operating profit variance between the 2 quarters, Page 15. Operating profit of $18.6 million in previous quarters, the impairment that we just talked about of $6.1 million, slightly lower equity income of $1.6 million (sic) [ $1.7 million ] and others of positive $0.9 million, $11.7 million The market update, strong fundamentals in the U.S. and we're well positioned for that strong market, both in Houston, New Orleans with plenty of room for expansion. Singapore market remains challenging. where -- we're getting utilization up, but it's a bit of a competition. However, we are working on several very interesting, long-term industrial customers, which can bring the utilization up to -- close to 100%. South Korea, Brazil and the Malaysian market look stable. The European market remains stable for chemicals, but CPP, there are -- been an increase in inquiries, especially, in bunker fuel's short storage, which is related to the IMO 2020 regulation. Major capital projects includes the Jetty #11, which is almost finished in Houston. Ulsan expansion of 163,000 cubic expected to be operational in the first quarter and the capacity expansion in New Orleans, in New Zealand and in Santos, Brazil remain on schedule. New Zealand and Australia are stable for chemicals, working on opportunities to increase utilization and potential expansion. I would say the terminal business is steady and will continue to see steady improvements in earnings from that division. Tank Container, the market did soften towards the end of the year, revenue decreased 5.8% driven mainly by lower transportation revenue, a result of the 6.5% fewer shipments in the quarter. And if there is a good indicator of what's happening in the world, it is really to see the movements and utilization in shipments and an inventory buildup in the depots of tank containers. And what we saw towards the end of the quarter, or in December, where you traditionally see a significant drop in shipments and that's seasonality, this year we saw a significant drop, we've never seen that kind of drop before. It picked up again in January, which is normal, but it never came back to the normal level or to what we usually see as a recovery. It has improved as the weeks have gone by, but there was a big drop, which was a bit of a surprise. The other thing that we saw in -- towards the end of the year there was a significant pickup of demurrage. So when the customer ships our tank containers, and lease our tank container, we deliver it to their -- at their factory, they have x amount of days they can use it, which is included in the freight they've paid, but if they go beyond that, they have to pay demurrage. And the demurrage income went significantly up. That's usually an indication that the customer receives the tank container, and are not using the product that they need for manufacturing as fast as they had expected, another worrying sign about what is happening. Operating expenses was reduced by 9.1% in the quarter, reflecting the lower shipment volumes. But we're -- but we had, actually, an overall improvement because of the operational efficiencies. Utilization down to 68.2% from 71.6%, reflecting global slowdown due to economic uncertainty in the year, and [ enter ] reduction by the customers, as we just talked about. So if you look at Page 18, third quarter to fourth quarter operating profit variance, $17.7 million in the third quarter, lower transportation revenue, but lower operating expenses of $9.4 million, higher A&G expense, slightly higher A&G expenses, $0.7 million of other, brings us to a operating profit of $18.1 million. Stolt Sea Farm, turbot volumes decreased compared to prior quarter, which was partly offset by the increase in average price, price of turbot for this quarter was the highest since third quarter of 2011. So we're getting close to EUR 9.50 per kilo. Remember, our year ends at the end of November, so the low volume isn't related to the buildup for the Christmas sale in December. But we got record high prices and that's why you see on the next slide, you see that the fair value adjustment was at $4.1 million up, bringing the operating profit for the quarter of $3.3 million.Stolt-Nielsen Gas. Well, the big thing and very exciting thing is the creation of Avenir, together with Golar and Höegh LNG. We put it together and we -- the 3 of us combined committed $182 million to invest in the company. We raised $99 million right away, and we have a further $72 million, $73 million that we're committed to inject and then, we also raised $11 million through a private placement and then we registered it under the OTC. With that, we have the money to finance and pay for the 6 ships, the 4 7,500 cubic meter and the 2 20,000 cubic meter. And to pay and build the terminal, which is underway in Sardinia. I think that we will be the company -- so Stolt will have the 45% interest and the 2 other partners have 22.5%, each. The business is really not to become a shipping company but to be a supplier of small-scale LNG. Our long-term vision, here, is to source the LNG, ship it, store it and distribute it, not only making money on the logistics side but also making money at sourcing it and supplying at 2 remote locations. And I think with the partners of this, I think the 16 FSRUs globally, having access to competitively priced LNG, puts us in a unique position not only with the assets but also with the expertise that our 2 partners come with and also combined with our logistical experience. So very exciting and we see huge growth opportunities in the segment. That brings us to the financials. And over to Jens. Thank you.

[Jens F. Grüner-Hegge]

Good afternoon to everyone here in Europe. And good morning to those in the U.S. As normal, I will provide some further details on the financial results that were released earlier today for the fourth quarter of 2018, also touch a little bit on the full year results and I will give you per normal some further guidance on some of the P&L items. Also, I want to remind you all that we have, today, posted with the Oslo Stock Exchange, the earnings release and the interims. This have been filed for the year ended November 30, 2018, and also on our website, you will find the press release, the interims, this presentation, and also for those that are calling in on the phone, we have posted a video on our homepage, which summarizes the year in figures, which I hope you all find interesting.Moving on to the net profit, the operating profit, the top line that we're showing on this graph for the fourth quarter of 2018 was $41.7 million. This is down from $54.6 million for various reasons as Niels has touched on, but of notable points are the one-offs. You will see $12 million mentioned as an impairment of the Stolthaven and bitumen assets, this is $6.1 million relating to the Stolthaven Australasia and our investment in Lingang and about $5.9 million of bitumen assets. And this will -- have brought our bitumen assets down to 0 with the exception for the ships that we have. And as you will recall, we wrote down about $11.8 million on the ships back in the second quarter of 2018, so we feel that we're now taking what needs to be taken there. For the full year and you'll see the operating profit after one-offs was $28.9 million, that's down from $54.8 million. Moving further down, the net interest expense was in line with the prior quarter at $33.7 million, and one thing I want to point out is that on the other, we had a gain of $11.8 million versus a loss that was shown in the prior quarter of $12.6 million, Niels touched on this, the $11.8 million relates to our, the formation of Avenir as a joint venture and a gain that we took on that, and the $12.6 million includes the Avance Gas loss that we took when we changed the accounting method for Avance Gas back in the third quarter in July. So that brings us down to a net profit of $3.2 million for the quarter, slightly up from the $2.3 million in the prior quarter, and an EBITDA of $102 million, which is considerably down from the EBITDA that we have in the third quarter. And to an extent, really driven down by the results in tankers that we saw drop. For the year-to-date, I will just highlight a few points. The operating profit after one-offs was just marginally down from last year at $187.1 million and net profit is slightly up at $54 million versus $50.1 million. I would like to remind you, if you look at the tax line, for 2018 year-to-date, we are showing a positive number of $7.7 million, and that reflects the credit-related gain that we took of $24.9 million at the beginning of 2018 and that related to the reduction in the U.S. income tax rate from 35% down to 21%. Moving over to the balance sheet. Quite happy to point out that the debt has reduced further. It was down $54 million in the quarter, so we're now down below $2.4 billion. And I just want to point out, also, on the current maturities of debt, we're showing a rather significant amount of $473 million at the end of 2018. This includes the bond that is maturing in September, and that is about $150 million, $148 million. It also includes the Jo Tanker facility that we took on when we bought Jo Tankers back in 2016. Current outstanding is about $150 million and we are very close to drawing down on a replacement facility for that, where we will draw some $240 million under a new facility. And then, the last part there really is the Australasia financing, where we're in discussions on extending then -- extending that facility for another year. So don't get worried about those, those are well underway. Other things I would like to point out is, our fixed-to-variable interest rate sort of remains relatively stable at 72%, fluctuates a little bit depending on how much we draw on the revolving credit line, which is a floating-rate facility. And our average interest rate is just 5%, slightly up over the --during the course of 2018, reflecting the underlying interest rate environment. Looking forward, at the first quarter of 2019, we expect the interest expense to be marginally up at about $34 million. Two covenants I wanted to point out, one is that debt-to-tangible net worth that was at 1.51 last time and that -- with the reduction in debt has continued to drop to, now,1.48. On a net basis, it's 1.44, so we have seen an improvement there and we expect to continue to see an improvement as we go into '19. And the EBITDA-to-interest expense reflects the lower EBITDA for the quarter and that was down from 3.60 approximately to 3.34. And at the last one is net-debt-to-EBITDA, which actually drives the pricing on some of our loan facilities, it's important for us to keep that below 5:1 and that was at a 4.89 for the quarter. We are left with about $240 million in available liquidity on our revolving credit lines and in addition, we had cash of $65 million, so $300 million in total available liquidity at the end of 2018. Going over to the cash flow, you will see that the net cash flow generated in the quarter was $82 million. You will see changes that we had were really related to timing of interest expense. It was down from $100 million and we tend to have quite a bit of payments at the end of the quarter, the fourth quarter. We had used about $60 million in investments and that was split between $46 million in capital expenditures on Terminals, Tankers, Stolt Sea Farm, predominantly. And we also had the $18 million that we put into the joint venture, the Avenir joint venture that was established, also, in the fourth quarter. During the fourth quarter, going back to financing, we did close on one facility, a $93.8 million facility with the Danish Ship Finance and part of those facilities were actually used to pay off other facilities, but also to reduce the growing amount on the revolving credit line. Looking, then, down at the bottom, we have the net cash flow for the quarter was a negative $20 million after that debt repayment. And we ended up with $65 million in cash at the end of the quarter. Now when you look at the EBITDA figures here, I just want to remind you that these include the impact of the IFRS fair value that we applied to the Stolt Sea Farm inventory. it also excludes gains and losses on sale of assets and also excludes other noncash, one-time events, which would mean that the $11.2 million related to Avenir is not included here. Tankers' EBITDA decreased in line with the market, and because of the bunker hedge losses that we took. Also, terminals saw a bit of a decrease and part of the reason for that is because in the 2 prior quarters, we had one-off income, which was not repeated in this quarter. It was truly one-off income related to some termination fees that we charged our customers. And STC's EBITDA continues to be strong, tied to really the improvements in operational efficiency that they have experienced. So as a result we see that the overall SNL EBITDA was $103 million down from $122 million in the prior quarter. Moving over to capital expenditures, you'll see the total expenditures for 2018 came in at $167 million and for those of you that've been following us for a while will see that as a good reduction from prior years. So I'd like to say that we've sort of done what we said we were going to do and control the amount of money that we do spend, all in an effort to improve the free cash flow. In 2019, we expect $255 million in capital expenditures, this is an increase. It is tied to ballast water treatment systems that we're installing on our ships. It's tied to some $35 million of further investments in our Houston terminal, some jetty expansions that we have going in Houston and as well as expansions that we have at our Santos terminals in Brazil, and also at Dagenham, in the U.K., a lot of these are projects that have been carrying on, so it's not new projects that we have committed to, but that we are getting into this more final phases of them.For Sea Farm, we also have 2 new farms that are under construction, one is in Cervo, in Spain, and the other one is in Tocha, in Portugal. And these should be, both, completed in 2019.This slide now, this is the debt-maturity profile, could be a bit daunting, but I want to address the 2019 maturities that we have. If you look at the top light-blue portion, that is the bond that is maturing in September, and you will see in 2020, we have a further bond maturing in March. So between the 2 of them, it's about $300 million. The orange that are -- those are balloon payments that we have under our debt facilities and the dark blue are regular amortizations of debt facilities. If you look at -- starting with the orange one, that is predominantly the $150 million that are referred to the Jo Tankers facility, which we will pay back second half of February, with the new facility and also it includes the Australasia portion, which we will extend for another year to buy us time for the refinancing exercise. And that is at $75 million.So the bond, we are also pretty close to have finalized the refinancing of that without going back to the market. And considering where the bond market is today, which is higher than what we have appetite for on the cost basis, we're also working on being able to refi -- repay the March 2020 bond without having to go back and do a full bond issue at that time. For some of you, that might not be good news, but we feel that at current levels it's better to look for some cheaper alternatives using collateral assets that we have available. The next slide. This is a new slide that we have put up and it's really to give you flavor of the key metrics that we are focusing on a high level. And starting with the top-left slide, this shows the debt-to-tangible net worth, a key metric in our -- a key covenant in our financings. You will see the red line is the covenant limit at 2:1. The blue dotted line is the board's self-imposed limit of 1.5:1. With the Jo Tankers acquisition, the red solid line you see that's jumped up to 1.5:1, where the dotted blue the line is and it increased a little bit following that. But we have since, in the last number of quarters now been able to, sort of, steadily establish a downward trending momentum. The yellow bars, just -- I have mentioned what that is, that's the debt. The blue bars, that's the tangible net worth. The top right bar is EBITDA-to-interest expense. The EBITDA is the yellow columns and the net interest are the blue columns. Here the covenant is that we should have a minimum ratio of 2:1, so EBITDA twice as high as interest expense. That has been trending down a little bit because of the deterioration, predominantly, that we've seen in the tanker market, but we are expecting that to soon turn around and then start creeping up again to a higher ground. Bottom left, we have net debt-to-EBITDA. Again, this is a pricing covenant more than a real bank covenant. We'd like to keep that below the 5:1. It went up a little bit this quarter, again driven by the lower EBITDA that we have, but we expect that to continue on a downward trend. One thing in the middle there is the free cash flow, and one thing we talked a lot about is how we want to improve the free cash flow to make further cash available for debt repayment. You will see this goes back to about 2009 and we have, finally, managed to get some positive traction there. And that is very much driven by the reduced capital expenditures, which used to be sort of in the $300 million region plus-plus per year, which we have brought down. And also, an improved cash-generating capability, more focused on getting cash in from our joint ventures, et cetera. So we're pleased to see that this is now up at close to $300 million for 2018. And the last is just for those interested, it's the dividend per year.Moving over to -- I missed the -- A&G expenses. For the quarter, we had total A&G of $56.3 million, this was up from $52.2 million but -- and also slightly above our guidance that we gave at last-quarter presentation. The bulk of that is really due to the profit-sharing LTIP, where we had under accrued as you will see in the third quarter. Going forward, for the next quarter, we are expecting something in betweens of around $55.5 million, $56 million as a guidance for the next quarter. Depreciation and amortization, you will see that tankers depreciation was down from $45 million last quarter to $40.5 million in the fourth quarter, and this was predominantly driven by life extensions that we did of some of our ship series built in the mid-1990s. The ships are in excellent condition, they have a longer trading life than the standard 25 years, where they're -- committed to life extensions and with that, we've also then reduced the annual depreciation and that's coming through in the lower tanker depreciation. Total depreciation for the quarter was $63.2 million, and that was down from the $68.6 million, as mentioned. I'd like to point out the impairments that you will now have seen a few times, tied to the terminals in Corporate and Other, and we are expecting, really, for the next quarter our depreciation and amortization to come in at about $64.5 million, as a guidance. Share of profit of JVs and tax. The JVs contributed profits of $4.4 million in the quarter, down from $6.9 million. For tankers there's a slight reduction that's really in line with what we saw as a drop in the overall tankers results. A slight reduction, also, in Stolthaven and that relates to some early termination fees that we got from one of the joint-venture terminals in the prior quarter, more than really a deterioration of the results this quarter. As you will see at the fourth quarter is more in line with the fourth quarter of '17. So the third quarter was rather the unusual one. Our guidance for the next quarter is $6.6 million, where we expect the terminals to come up somewhat. And that tax expense, to touch brief on that was $3.2 million for the quarter and that was slightly down from $4 million in the prior quarter. And year-to-date because of the U.S. gain that we took of $24.9 million, it's coming in at a tax gain actually of $7.7 million versus more normalized $12.2 million in 2017. We just ought to give you a brief update on our position with IFRS 16. This -- the highlight is really that this will not apply to us until December -- for the quarter starting December 1, 2019. So -- and that's because our fiscal year ends November 30, or our fiscal year started really before this became effective. We will come back to you at a later stage with what's -- it actually means in terms of an EBITDA and debt implications. But more importantly, this has no practical implications for us. One, it's, of course, noncash other than the potential -- the tax impact if there's any, but the other thing is also, in all our facilities, bank facilities, our -- all our loan facilities, we are covered for a change in this accounting methodology and, therefore, there will be no bank covenant impact.And with that, I would like to hand it back to you, Niels.

[Niels G. Stolt-Nielsen]

Thank you, Jens. Takeaways, net profit of $55 million for the year compared to $50.3 million in '17. The chemical tanker market remains challenging, but we are cautiously optimistic that it will eventually turn around and we're hoping that towards the second half of '19 and beginning of '20, we should start to see improvement. Solid performance at Stolthaven Terminals. I think that will continue and then we will see the new capacity coming online and the operational efficiencies that our team are working on will also have an impact. So I think we will see a continued improvement in the performance of terminals. The market has softened in Stolt Tankers (sic) [ Stolt Tank Containers ] but the earnings are still at healthy levels. And I think, also, the operational efficiencies that we are able to achieve through the investments that we have done of our systems will also have a positive impact on our results. Very exciting with the new joint venture that we have established in Avenir. Exciting things that I hope to share going forward with you. So we have a strong earnings base from our businesses through the investments that we have done over the last, I would say, 10 years, but we will then -- so we have enough assets, we've positioned ourselves well for growth going forward. And as Jens just pointed out, our focus, now, will remain on -- ensure that we have free cash flow and that we will continue to reduce our debt levels. So you won't see any major capital expenditures coming our way. Of course, there are things that you have to do running the business, but nothing major until we have gotten our debt level down. And as Jens has also pointed out, we are in a situation where we are not dependent on going to the bond market to refinance our bonds for '19 and '20, we have collateral, unencumbered collateral that we can use to raise enough to repay those 2 bond issues that were -- that are coming due. That completes our presentation. And we will now -- then open up for questions. And we'll start here in Oslo and then, after which, we will take calls. Anyone in Oslo have a question?

[Lukas Daul, Analyst]

Lukas Daul from ABG. I was wondering about the container business, you increased the number of containers, utilization came up a bit in Q4. And you had a step increase in EBITDA during 2018, up from '17 in the container business and now you have more containers, do you think you will, sort of, lift the EBITDA from that business again in '19? Or have we sort of reached a steady state -- level?

[Niels G. Stolt-Nielsen]

Well, so we have increased our fleet and, I think, that you will see that the fleet will go above 40,000 containers. And, of course, utilization went from below -- just below, around 74%, down to 68%. And that's a reflection of 2 things: slowdown; but also, more competition. Now more competition we can handle so we can compete more aggressively and adjust our rates and go after it and get utilization up. And, historically, it's proven or what we're focusing on it is being able to react more quickly to the market so that we keep our utilization up. So I think that the combination of the operational efficiencies, the systems that we've developed, that even in a deteriorating or higher competitive market, we should be able to see continued growth in the EBITDA in Stolt Tankers for '19.

[Lukas Daul, Analyst]

Okay, thank you. And then on -- Jens, when you talk about using more collateralized financing going forward, do you have a ballpark number? What's the value of your unencumbered assets?

[Jens F. Grüner-Hegge]

We have -- we're currently working on a sale leaseback transaction, where we're using 4 older ships and here you're looking at collateral values in $110 million, $120 million range. We have our New Orleans terminal, which is in the books for about $140 million, but probably with a borrowing value that is higher than that because of the performance of it. And we have some other, we have the Dagenham terminal, and the Moerdijk terminal also as un-collateralized. In total, I think we're looking at about book-value-wise some $300 million.

[Lukas Daul, Analyst]

And then, finally, when you showed the free cash flow chart on Page 29, how does that reconcile with your cash flow statement, where your free cash flow is roughly $160 million?

[Jens F. Grüner-Hegge]

I'm sorry, I can't take that off the top of my head but I will come back to you on it.

[Anders Redigh Karlsen, Analyst]

Anders Karlsen, Danske Bank. Can you shed a little bit of light on how many containers you have at the end of '19? And what is the expansion that you will see on the terminal sides in the same timeframe?

[Niels G. Stolt-Nielsen]

We have at the end of the year -- I think, we had around 39,000 tank containers. But we have orders that are being delivered in China that brings it up to -- close to 41,000. It's an additional 2,000 tank containers coming in. The total cubic meter of terminal capacity under construction, Jens, did we put that on the slide?

[Jens F. Grüner-Hegge]

[indiscernible]

[Niels G. Stolt-Nielsen]

So it's -- I know by the top of my head, it's around 65,000 cubic meters in Santos and in Ulsan expansion is 163,000 cubic meters.

[Anders Redigh Karlsen, Analyst]

And that's [indiscernible]

[Niels G. Stolt-Nielsen]

The -- by the end of '19? No, no, earlier than that. I think that the expansions that we will see in Ulsan is first quarter of '19. And the same thing with Santos, it's almost finished. We also have expansion in New Orleans, I think it's 20,000 -- no, 2 18,000, 8,000 -- so 16,000, 20,000 -- 20,000 cubic meters in New Orleans.

[Jens F. Grüner-Hegge]

I just want to come back on the cash flow comment that you had. If you look at the cash flow slide that we had where we had all numbers, the top part that showed the operating cash flow that actually is net of interest expense whereas the graph that we showed in the back that is before interest expense. So when we talk about free cash flow, it is really cash available to service the debts, repay the debts and pay dividends, okay?

[Petter Haugen, Equity Research Analyst]

Petter Haugen, Kepler Cheuvreux. Could you say something about the $130 million you mentioned in the start here? $130 million in terms of that would be your cost increase if you didn't get the IMO 2020 other bill reimbursed?

[Niels G. Stolt-Nielsen]

That's just the difference between what we pay for HFO and what we will pay for MGO.

[Petter Haugen, Equity Research Analyst]

That was my question, actually. So the second question would be, then, as you say, you have some trials now going, what do you pay for compliant 0.5% sulfur?

[Niels G. Stolt-Nielsen]

MGO?

[Petter Haugen, Equity Research Analyst]

No.

[Niels G. Stolt-Nielsen]

No, that's the fuel that we're paying -- buying now.

[Petter Haugen, Equity Research Analyst]

Okay. So you are not currently using 0.5%?

[Niels G. Stolt-Nielsen]

No. So a low sulfur fuel? No. We're really using MGO. We're using HFO and MGO. Sorry, there is restricted areas already which we comply with and when we go there we switch and burn MGO.

[Petter Haugen, Equity Research Analyst]

A follow-up then, when would you think you have actually available 0.5% sulfur fuel oil?

[Niels G. Stolt-Nielsen]

That's the -- tell me, you know probably better than me. So that's very -- but I think that the payback time for -- the way we looked at it for the scrubber investments that we've done will be a year, and -- but within a year from -- so if the low sulfur fuel will be available after a year, the payback on the scrubbers has already been done.

[Petter Haugen, Equity Research Analyst]

Understood. But my question was related to your comments about this being priced as an MGO minus and often EFO plus or HFO plus, so I'm just -- as everyone is curious about, what will be the relative pricing of the new 0.5% sulfur?

[Niels G. Stolt-Nielsen]

I don't know.

[Petter Haugen, Equity Research Analyst]

Me neither.

[Niels G. Stolt-Nielsen]

First, we need to see the fuel and test it and also to see how it works. Yes. Yes, we are.

[Unknown Analyst]

When you talked about some of the COAs negotiations for 2020 and onwards, you say that if you don't agree on passing on the cost, you sort of delay the discussion until October, and out of the agreements or out of the negotiations that you have had so far, how many percent, would you say, you have sort of closed on? And how many did you postpone until October?

[Niels G. Stolt-Nielsen]

Well, it can be a little deceiving because we have had a lot of discussions with our customers, we're -- and we -- before 2020, just as a principal, the -- and we are continuously renewing contracts throughout the year, evenly split throughout the year. The percent, I'm not going to go tell you exactly, but I would say the majority are still to be negotiated for a full passthrough. So it's going to be a challenge. It's not only a passthrough or changing the reference from IFO to MGO, but there's also be going to a discussion of how many cents of freight rate you will get for each dollar of fuel increase that you will get in compensation, that also is a quite a complex calculation because you need to figure out, also, the distance of the voyage and the fuel efficiency of the ship.

[Unknown Analyst]

But do you think that if you choose to walk away that there are others in the line willing to step in and take maybe something that is not fully compensating them?

[Niels G. Stolt-Nielsen]

In -- I mean, you can see our results, and if we don't pass it on, we will go out of business. And I think our competitors will go even faster out of business. So our positions right now, our policy right now, you are not allowed to take any of that cost, you have to pass it on. If you are not able to do it now, if the customer is not willing to commit now, we will have a discussion in the fall and our position won't change. And then, we need to be prepared to walk away. We cannot take on the additional costs. But I'm not saying it's going to easy, but it has to happen. But what is positive is that we're seeing some of the major customers, the major customers are -- they are agreeing to the bunker clause that we proposed, which is customers that we have many contracts with so when we expect that we renew with oil majors and the large chemical companies, they have -- they understand the situation and we've been able to agree on the bunker clause.

[Unknown Analyst]

About small -- your small gas distribution here. Could you say something about the timeline, your thinking about when expanding? Because, I suppose, it's just a matter of timing when that's going to be expanded. Is there any leads now, there's been a few quarters now with little -- well, not that much happening?

[Niels G. Stolt-Nielsen]

Sorry. I mean, we -- it's easy to order ships, it's easy to, I hate to say it, but easy to raise equity and debt, it's easy to build tanks, it's not difficult to get permits, it's a process to builder. So that is the easy part. The challenge of the whole concept is, of course, the timing to get commitments offtake for the small scale. And it's a lot of work. But we're getting there, we're getting some interesting -- I'd rather like to announce it when we have achieved it, rather than talk about what we are about to achieve. But I think that -- the Sardinia project looks very interesting. We're in the process of building the terminal. We're in the process of building up offtake and the economics looks very good, but it takes time. And I'm certain we will announce it when we have achieved what we were set out for. There are opportunities, of course. So our thinking is, there are so many opportunities out there and this small organization, we need to kind of focus -- we can't chase everything, we need to focus on the ones that are the most realistic to be able to close. It is important to achieve the first one to get the proof of concept and see the numbers ourselves. So I don't want to run out and buy -- order more ships on speculation. I think that we have now proven to the potential customers that we're willing now to commit and put money and build the ships. But now, I think, we have enough assets for the time being, on the shipping side. On the terminal side, there are opportunities and we're looking at building the hub in remote communities so that we can service the industry, power industry, manufacturing industry, and, of course, bunkering. But I want to be careful in giving numbers at this stage. So we are now focusing on getting offtake. Is there a phone, yes, go ahead. There's somebody on the phone.

[Operator]

[Operator Instructions] Right now we have one question and that question comes from the line of [ Claire Bennington ].

[Unknown Analyst]

Yes, I just had a question about -- going back, again, to the 2020 IMO of low sulfur coming up. Obviously, you're looking at marine [ debue ] at the moment, I just wondering if you have any, kind of, game plan in terms of looking at using low sulfur fuel oil in 2020? Or whether you'll, sort of, assess that in the first 6 months and then take a decision on that? I just wondered if you had sort of a timeline of what, kind of plans you have for your fuel bunker balance in terms of what fuel you'll use?

[Niels G. Stolt-Nielsen]

Yes, we would be -- we have not fitted scrubbers on the whole fleet so by -- far from it. So we would be very interested in burning low sulfur fuel when it's available. We have yet to see the performance of the low sulfur fuel and the availability and the price of the low sulfur fuel. That's definitely the alternative that we will have. I think that's the long-term solution. So the scrubbers is just a short-term transition solution, which with the spread as it is today, will have a payback period, which we estimate is 1 year or 1.5 year.

[Unknown Analyst]

Yes, okay, and do you have...

[Niels G. Stolt-Nielsen]

I can't say anything more about the low sulfur fuel because the information is not readily available.

[Unknown Analyst]

Sure. Okay. And the other thing that my understanding is, is that the new low sulphur fuel oil could, essentially, achieve that how sort of blends from, sort of, lighter distillate or middle distillates, et cetera, and that kind of equivalence will lower the sulfur in the fuel, what I was just kind of interested in as well, is just I wondered if you'd looked at any of the costs that might be associated with carrying a type of fuel and then not being able to mix it when you have got a different spec, because you might have a risk of solids forming in the fuels with the different chemical combination and stuff, It's just that can't be exactly the same even if they're 2 different types of -- I just wondering if you [indiscernible] it is kind of expenses or had any worries around the sort of logistics of the different -- the availability of the difference spec? Low sulfur fuel oils at different ports.

[Niels G. Stolt-Nielsen]

I think it's best if you actually contact Jens offline, outside of this meeting and we can put you in contact with our department that is working on it. But what I'm saying is, right now, we are preparing ourselves for scrubbers and burn HFO and passing the additional cost of the MGO through our bunker clauses. And of course, when the low sulfur fuel becomes available, that is absolutely a -- that's the long-term solution. The price is difficult to determine at this time. The availability is also uncertain at this time, but it will definitely come. When it comes to the characteristics and the operational and technical challenges for it, I can't give you a proper answer. It's better that you contact the company and I will put you in contact with the people that have deep understanding or following it in more detail.All right, thank you very much for taking the time to come and see us. And we'll see you at -- for the second quarter -- oh, sorry, the first quarter.

[Operator]

Okay, that concludes our conference for today. Thank you for participating. You may all disconnect.