Koninklijke Vopak N.V. (VPK) Earnings Call Transcript & Summary

Hello, and welcome to the Vopak call. My name is Saskia, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to Fatjona Topciu to begin today's conference. Please go ahead.

Good morning, everyone, and welcome to our call. My name is Fatjona Topciu, Head of IR. Our CFO, Michiel Gilsing, will guide you through today's announcement that we reached a positive FID together with our partner, AltaGas, on Ridley Island Energy Export Facility. We will refer to the presentation, which you can follow on screen and download from our website. After the presentation, we will have the opportunity for the Q&A. A replay of the webcast will be made available on our website as well. Before we start, I would like to refer to the disclaimer content of the forward-looking statement, which you are familiar with. I would like to remind you that we may make forward-looking statements during the presentation, which involve certain risks and uncertainties. Accordingly, this is applicable to the entire call, including the answers provided to questions during the Q&A session. With that, I would like to turn the call over to Michiel.

Thank you, Fatjona, and a very good morning to all of you joining us in this call. Today, we would like to give you an update on the most recent and largest greenfield growth project that Vopak has ever committed to. We're proud that together with our partner, AltaGas, we have reached a positive final investment decision on Ridley Island Energy Export Facility, a total investment of CAD 1.35 billion. But first, I will give you an overview of Vopak's well-diversified gas portfolio that serves both energy security and energy transition. Growing in gas is one of Vopak's strategic priorities, and we have underpinned this ambition with our network capabilities and market opportunities. We have a strong reputation and a long-term proven track record in developing, building and commissioning gas terminals. Our network of 25 existing terminals with dedicated infrastructure supports both LNG and LPG movements with a strong commercial proposition of long-term contracts. With the experience that we have as a company, together with the current position that we have in the partnerships, we are able to capture growth opportunities in both LNG and LPG. We're focusing on the opportunities to grow this organically through our own origination because we think that this is where most of the value sits. The expectation of LNG demand is that it will continue to grow between now and 2050 with over 40% because of increased demand for energy and a continued shift from coal to gas as an electricity generation source. While on the LPG side, a similar story based on the same fundamentals of increased global demand for energy. In India, for example, there is a shift and a switch to cleaner cooking fuels but also increased demand as a feedstock for petrochemical production. Our current footprint, coupled with our capabilities and supported by market dynamics makes us focus to continue capturing growth opportunities in this sector. Moving to Slide 6. Our journey in gas storage began over 40 years ago in Flushing here in the Netherlands. However, the momentum really picked up in the last 20 years. We also store gas in industrial terminals, such as in Caojing Terminal in China, near Shanghai. Over the past 20 years, we have built a global gas terminal portfolio that supports our ambitions. Our total capacity is around 3 million cubic meters of storage. This portfolio plays a crucial role in ensuring both energy security and supply security, especially when LPG is used as feedstock. This strong portfolio of assets offers a scale and exposure to different markets, while at the same time, delivering improved returns. Over the last 12 months, we have committed more than EUR 717 million to gas projects. This compares to a total average proportion of capital employed of approximately EUR 1.3 billion for our gas terminals by the end of 2023. Once these projects are commissioned, we expect that proportional capital employed in gas terminals will reach around EUR 2 billion. We are allocating this capital towards a line of business that is underpinned by long-term contracts and has proven to generate positive and improved cash returns. As you can see from the graph, these returns are in line with our target of above 12% operating cash return. The recent growth projects announced will further support and enhance our operating cash flow returns. Now moving to Slide 8. The strategic location of our terminals in Western Canada offers the shortest shipping distances between North America and Asia, enabling the distribution of LPG to the global markets. With a proven track record and a solid reputation, we are extending our footprint in Western Canada with a second LPG terminal. REEF will strengthen Canada's position as a growing global energy exporter in addition to the existing Ridley Island Propane Export Terminal, RIPET. As we have mentioned in the past, our progress is driven by strategic partnerships, particularly our successful cooperation with AltaGas and strong community support that we had in this project. In summary, REEF's strategic location, robust capabilities and strong partnership make us proud to have a world-class export facility in Western Canada. Now I would like to give you some more details about the project. REEF will be developed on a 77 hectare site adjacent to AltaGas and Vopak's RIPET terminal. REEF has been granted the key federal and provincial permits to construct storage tanks, a new dedicated jetty, rail and other infrastructure required to operate a state-of-the-art facility. The project will have the capability to facilitate the export of LPGs, methanol and other bulk liquids under a long-term contract. The project will be developed and become operational in phases. This approach is the most capital efficient build-out and matches energy export supply with throughput capacity, as well as mitigating impacts on local communities and providing local construction and employment opportunities that will extend over longer time horizons. Phase 1 will include approximately 55,000 barrels a day of initial LPG export capacity, including propane and butane and 95,000 cubic meters of LPG storage in new dedicated multiproduct jetty and extensive rail and logistics infrastructure. As you can see from the graph on the right-hand side, after Phase 1, there is also room for further expansion on LPG capacity, but also other bulk liquids. Now moving to Slide 10. I would like to give some details on how our disciplined capital allocation policy is creating the headroom for the strategic investment. Our share of investments will be EUR 462 million, an amount that we will fully self-fund by our own balance sheet capabilities. The phasing of CapEx is expected to have a gradual impact on the leverage. In 2024, we expect that impact to be 0.1x and further increase up to 0.5x in 2026. The capacity of 95,000 cubic meters is expected to be commissioned near the 2026 year-end. This capacity is fully committed and underpinned by a long-term commercial agreement. The site offers opportunity for further expansion in LPG, but also in other bulk liquids. The expected EBITDA contribution from the joint venture once operational is in line with our investment guidance. The joint venture expects to generate an EBITDA of between CAD 185 million and CAD 215 million. In total, capital invested of CAD 1.35 billion, this leads to a multiple of between 6x to 7x EBITDA, which is in line with our ambition to allocate capital in attractive and accretive gas projects. Funding this investment by our current balance sheet capabilities allows for an efficient use of the capital structure that we have here at holding level, and this is expected to further support cash flow generation at group level. However, this is not the only gas project that we are working on. We have a well-filled pipeline to grow our base in gas terminals. In LNG, we are progressing well in expanding Gate Terminal with the fourth tank. In Australia, our proposed LNG terminal in Victoria is progressing well in its permitting process. While in South Africa, after the tender award, we are testing the market interest on LNG solutions together with our partner, Transnet. While in India, we are expanding through different projects, our LPG footprint, which supports the local energy transition ambitions. We remain focused and determined to capture further growth opportunities in gas. To summarize, today's announcement is another proof point on Vopak's strong position to capture growth opportunities, utilizing its strong financial position. This investment will deliver attractive operating cash return and will further strengthen our LPG proposition in Western Canada. We create connections through our well-diversified global portfolio by growing our base in LPG. Our well-diversified terminal portfolio is supporting energy security as well as the energy transition. We drive progress as we capture the opportunities of the energy transition. As a result of all of the above, we create and return value to our shareholders. And with that, I would like to hand it over to the operator for any questions.

[Operator Instructions] And we now have a question from Jeremy Kincaid from Van Lanschot Kempen.

Congratulations on the announcement. Just first question on Phase 2. I know it's -- I know you've just completed FID on Phase 1, but could you just provide a comment on Phase 2? Are you actively working on that now? And could you give us an indication of what the potential size of Phase 2 might be if that gets up and running?

We -- yes, thanks, Jeremy. Yes, Phase 2, obviously, we're actively working on it, but we have no sort of firm indication yet. But I think this announcement is going to help us really to also get more market interest on Phase 2 because people are always a bit like are you guys really going to develop this project. And once you announce it that you're really going to develop it, it most of the times triggers more serious interest in expansion. So nothing firm today, but this announcement today is certainly going to help, let's say, the potential for expansions. And there is product available, which needs to be exported. So there is certainly an opportunity, but very hard to tell you any size and any timing on it yet. But the good news is the jetty is already there. The land is available. So it will make it easier for any further expansion than it has been up till now.

Sure. And in terms of the customers that will be using this facility, is it just one or are there other multiple customers who might use this facility?

Well, for today, it's only one. So AltaGas rents the capacity. So there's effectively a -- well, full rent out to AltaGas. In the future, that could be other customers as well. So there is an open -- it's an open access terminal. But to be seen how that will develop on, first of all, on the LPG side, which is maybe a bit of a different game than if you compare it to methanol and potentially diesel to be exported from that location. So hopefully, it will develop into a multi-customer facility. That's the intention. But with the AltaGas contract and the first phase, we're already happy with the returns we see. So it would be additional -- well, it would be leading to additional returns for the project, but the start return of this facility is already attractive for us. So that's why we are quite happy with what we see in Phase 1 and -- but effectively, it's upward potential for us to develop the further phases.

Sure. And then one final one, just a simple one on the economics. So you're deploying EUR 462 million. I assume AltaGas is contributing equal amounts.

Yes.

And then the rest is bank debt to get you up to the CAD 1.35 billion capital cost. Is that right?

No. So the CAD 1.35 billion, if you work it back to euros, then it will be EUR 924 million. So we take EUR 462 million of it. AltaGas takes EUR 462 million of debt as well. So the project will be fully equity funded effectively. But then we will structure it in such a manner that we will effectively use our balance sheet for it. And so we will use debt capacity at the holding level. Well, there's 2 reasons why we do it. One is, well, first of all, to make the project work from an AltaGas point of view, they wanted to use their own balance sheet. So effectively, we looked at that opportunity as well. We -- first of all, we have the headroom to do it. But secondly, it's also tax beneficial for us to do it. So to structure it in such a manner, it will mean that we can land more of the profits effectively in the Netherlands than in Canada. And we have quite some tax losses in the Netherlands. So we have close to [ CAD 500 million ] tax losses, which we need to, but we also want to consume. And this project is going to help us to consume quite a bit of those tax losses. So that's also the reason for us that we were ultimately, let's say, also fine with the structure to structure it in such a manner because we need quite a bit of these projects to basically consume the tax losses in the Netherlands, which then would also create value, of course.

Sure. Okay. Those are my questions.

[Operator Instructions] And we take our next question now, which comes from Thijs Berkelder from ABN AMRO.

Congratulations on this deal. First question is on -- is it logical to assume that you will seek leverage in the terminal or in the JV at a certain point post-delivery? And are you normally expecting the first large cash back already ends 2027? Or is it more logical to assume that cash will stay in the JV to prepare for Phase 2, Phase 3, whatever?

On your first question, Thijs, so what we did is we did -- we looked at the bankability of the project. So there is no intention between the joint venture partners to refinance it post-delivery. So that is not the intention. But we -- what we could do is we could finance it ourselves, but that also means that you have to then reduce your stake a bit, which is not our preferred option. So it can be done. So if it needs to be done, the project would be bankable from our point of view, so we could push debt into a lower level, so effectively relaxing the holding. But that's not the intention. So for us, it's a backup scenario, if we need it, we can do it, but it would not be preferred option because we would like to stay a 50% owner of this facility, given also that there is some expansion opportunities. And on the second question, yes. So immediately, in 2027, upstreaming of cash will start. So it's a full distribution model, 100% upstreaming of dividends from year 1. So -- and that's the concept. So well, by the end of 2027, at least, well, the project will transfer dividends to the shareholders.

And up next, we have Andre Mulder from Kepler Cheuvreux.

Yes. A few questions. First, on the investment of the CAD 1.35 billion. It said CAD 200 million will be financed in '24. Can you give a path of how that will develop towards the CAD 1.35 billion over '25, '26? In terms of contracts, what's the length of the current contract with AltaGas? I came across this 60% tolling. I do not know what that means. Can you explain about that? And does it mean that you will start to record this EBITDA contribution of, let's say, CAD 185 million, CAD 215 million on a JV basis as of '27? Is that the case?

Yes. So on your first question, yes, so the phasing of CapEx, indeed, the first CAD 200 million goes out in 2024. And let me check, do we have the details for 2025? No, there's no details given for 2025. I wouldn't know by top of my head, but you can expect a bit of a gradual phasing of this. I don't have the numbers here, Andre. But it would be [ CAD 115 million ]. So it's probably going to be -- if I look at the leverage impact, it should be around [ CAD 500 million ] in the year thereafter and another [ CAD 600 million ] in 2026. That's what you may expect. But we can check it if you really need to have the details.

No, that's okay.

Yes. Yes. So the agreement, we can't disclose the commercial agreement, but I can assure you it's more than 10 years. Let's put it that way. So it's a long-term agreement. And indeed, let's say, the joint venture will record CAD 185 million to CAD 215 million, and that's depending on the throughput level. So there is a minimum throughput guarantee for this facility, which effectively leads to a minimum EBITDA. So that is to be recorded in 2027. So from day 1, it will just start. And then there is some throughput -- additional throughput income if the facility really runs at a higher throughput than the minimum throughput. So that provides the extra EBITDA over and above the CAD 185 million. So that's really throughput related. So the CAD 185 million should be the minimum one and the CAD 215 million is if the facility runs at a very good throughput. And this obviously is a throughput facility because it's facilitating exports from Canada to Asia. So it comes in by rail. It's almost -- yes, you can almost consider it pipeline maybe in a different way, bringing the gas from Canada via rail into Prince Rupert and then export it straight away to the Asian market. So there will be a continuous flow. On the tolling...

We'll get back to you.

We -- on the tolling, we will get back to you, Andre. Is that okay?

Yes. Yes. That's okay. And on the contract that you have with AltaGas, that already covers, let's say, 100% of this 95,000 or...

Yes. Yes. So it's fully rented out.