Cmb.Tech NV Q1 FY2023 Earnings Call

Hello, and welcome to Euronav Q1 2023 Earnings Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to your host today, Brian Gallagher. Mr. Gallagher, please go ahead.

Thank you. Good morning and afternoon to everyone and thanks for joining Euronav's Q1 2023 earnings call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Thursday the 11th of May 2023, and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions and other statements which are not statements of historical facts. All forward-looking statements attributable to the company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the company's filings with the SEC, which are available free of charge on SEC's website at www.sec.gov and on our own company's website at www.euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. And the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our safe harbor statement on Page 2 of this slide presentation. I'll now pass it over to Chief Executive, Hugo De Stoop, to start with the content slide on Slide 3. Hugo, over to you.

Thank you, Brian, and good morning or afternoon to wherever you are and welcome to our call. I'll run through the Q1 highlights before passing on to Lieve Logghe, our CFO, to give you the key financial figures. Brian Gallagher, our Head of IR and Research, will then run you through 3 key factors within the current tanker market trends before I return to summarize the outlook. Moving on to the next slide. It was a very good quarter for Euronav and one where the freight market was especially strong. What was unusual is that the market got stronger as the quarter developed, which is a counter-seasonal trend compared to what we are used to seeing in the first quarter where typically the market starts to abate as spring approaches. Indeed, the month of March brought the highest Suezmax and second-highest rates for VLCCs since 1990. This combined to drive Suezmax rates higher than VLCC rates underpinned by strong demand from China and better tonne miles across the tanker spectrum. This situation has reserved somewhat in Q2 with rate softening now, and VLCC rates appear to be closer to those in Suezmax, but average rates in Q2 are highly elevated in both absolute terms and for the time of the year when we would have expected seasonality to pull rates downwards much earlier. With the new supervisory board now in place looking at both the strong company balance sheet and visibility on positive medium-term fundamentals, a higher return to shareholders plan has been proposed, which will see Euronav investors benefiting from the final dividend for the full year 2022 of $1.1 and a Q1 dividend of $0.70, both payable in Q2. This means that a total of $1.8 per share will be distributed to our shareholders in the coming weeks. I will now pass over to Lieve to run you through the financials. Lieve, over to you.

Thanks, Hugo. Taking Hugo's point further, Euronav's capital base is very strong with over $900 million in cash liquidity. Leverage falling again in Q1 to just below 43%, and robust cash generation coming from our fleet benefiting from the repositioning we have executed in the past 2 years. We have again taken advantage of higher values for all the tonnage and retain capacity for more should we decide to do so. With that, I will now pass it back to you, Brian, to give some thoughts on the current market cycle.

Thank you, Lieve. The order book has gained ample attention amongst investors in recent months. One of the key visible points of reference the tanker sector has is a very low level historically; the order book currently sits at below even a replacement level of 5%, assuming uniform build and a tanker life of 20 years. However, there have been some signs of life and some overdue contracting of new crew tankers, mainly in the smaller segments, but including Suezmax in recent months. This was to be expected given the strong fundamentals and the fact that practically no vessels have been ordered since Q3 2021. The right-hand chart on Slide 9 might look dramatic, but remember, we are looking at around 10 unconfirmed orders of Suezmax on a base of over 1,500 Suezmax and VLCC units globally. There was also further context that is required, and we give this in Slide 10 with 2 further points to make. On Slide 10, you can see that, firstly, Suezmax price inflation has not been as rapid as that we've seen in the VLCC sector. Hence, on a relative basis, there's still a detractor from a Suezmax's space. With regulatory changes coming in, but adoption of new fuels slower than expected, owners are likely looking at vessels that have a longer useful life. Secondly, let's also remember who is ordering these ships. There are no speculative orders in the order book; the mix is a sensible one of public owners like Euronav, respected longer-term private and scale owners largely in the Greek arena, and also the national owners who are investing on a strategic basis. It was unusual to see such a dearth of orders from Q3 2021. But even with this recent uptick, if it is fulfilled, these vessels will not hit the water until another 24 months to 36 months. So now turning to the demand side of the equation on Slide 11. On Slide 11, you can see that China has reopened, and Euronav has seen barrels purchased for economic recovery and for stockpiling over the last 6 months. It remains volatile with a record month for March followed by a more fallow April. However, the trajectory of recovery looks well established, and also some of this growth is being fed by Atlantic barrels. It is interesting to see the number of VLCC cargoes leaving the U.S. Gulf Coast has continued to grow even after the strategic petroleum reserve barrels were all moved earlier in 2022. With that, we retain our very positive medium-term view on the sector, and I'll now pass over to Chief Executive, Hugo De Stoop, to give some more medium-term thoughts on the cycle and the current traffic light outlook. Hugo, over to you.

Thanks, Brian. Very good topics. Summing up then, the fundamentals are supportive, but short term, some headwinds are emerging. New build costs and incoming regulations are capping supply despite recent contracting. The global fleet age gives some encouragement that either vessels will exit the mainstream fleet via recycling or exit via the shadow or dark fleet. After 5 consecutive quarters, upgrading the sector on our 5 key drivers, we today downgrade our supply on the back of the OPEC cuts announced recently. Whilst we do not believe that all of these cuts will be enacted or even delivered, it provides a headwind at a seasonal point of the year when we would expect refinery maintenance programs and moving into summer months to reduce demand in any case. That has happened and impacted freight rates in the very short term, but the fundamentals continue to remain supportive and freight rates remain profitable. Our business is in very solid shape, supported by strong finance, organic growth from our own order book of vessels due to be delivered, and a strong shareholder focus to return the cash generated from our platform as quickly as possible. With that, I will hand it back to the operator.

And the first question comes from Jon Chappell with Evercore ISI.

Hugo, if I could start with something that's not fundamental, just maybe a clarification, the AGM next week. I think there's some confusion from some of my conversations that there's still a question around the Board construct. Just to be clear, the Board is all set for the meeting in March, correct? And then the second part of that is the agenda for the AGM, which you laid out in the press release regarding the strategic direction. What do you anticipate to come from that regarding the strategic direction of the company outside of the capital allocation?

Hello, Jon, thank you very much for your question. Yes, it's a little bit confusing, maybe a little bit technical. So the meeting that we had in March was a special general meeting of shareholders. That's something that can be called for specific reasons, and we'll know where it came from. And you saw some change to the Board. The first change was that the 2 main shareholders appointed two non-independent directors. And the Board went from 5 to 7 because at the same time, 2 of the then-current independent directors were dismissed. Next week, we have our Annual General Meeting, which the date is set in our Article of Association. So every year, it's around the same date. And that is usually when directors are appointed, reappointed, newly appointed, et cetera. And there is no proposal to dismiss anyone, obviously. So when you look a little bit more in detail, there is a proposal to appoint 2 new additional independents against which two of the current independent are not asking to renew their mandate. So the Board composition will continue to be seven members, of which you have four representing the two non-independent, therefore, representing two core shareholders and 3 independent, which is the minimum that the company needs to have as per the Article of Association, but also as per Belgian corporate governance rules, et cetera. And after that, I think that there's going to be a lot of stability, but also clarity. I think we need to go through this meeting before being able to answer the second part of your question. But you can already see that the company is doing very well. I think the performance is very good. I think that the return to shareholders, which is very important for all the shareholders and the analysts that are on this call, is unquestionable in the sense that we will continue to be very generous when the cash generation is such as it was in the first quarter and likely to be in the second quarter. And as you know, we believe that it's going to be a multiyear upcycle. So from that point of view, I think everybody can be satisfied that, that part, which is a very important part, follows its course, and it's a continuation of what we have done in the past.

I appreciate that, Hugo. Just a quick follow-up, I think to Brian, probably. Hugo, you mentioned the downgrade and the traffic lights and the OPEC production, which makes complete sense. But in your press release, you noted that most of the growth is coming from Asia, and therefore, the substitution barrels from the Atlantic Basin, the tonne mile impact of that may offset. Any quantitative views on what the tonne mile impact from that substitution would have vis-a-vis the 1 million or so barrels of cut on total tonne mile demand?

Hello, Jon, it's Brian here. It's always challenging as we've been writing this, given the dynamic situation with the OPEC announcements. These have started to influence the figures we’re seeing this month. It's hard to pinpoint an exact number, but we estimate that the impact of the 1 million barrels will be around 50% because the tonne miles will balance it out. The challenge in providing precise guidance is that many of the Middle East barrels are still tricky to track regarding their origin and destination. We've found it surprising that the Middle East has not actively increased exports to Europe to replace Russian barrels. Meanwhile, Russian production and exports have not shown any cuts. So, to quantify the number you mentioned, about 50% will be influenced by tonne miles. However, it's a fluid situation, and we expect the next three to four months will bring more clarity.

And the next question comes from Chris Wetherbee with Citi Group.

Maybe I was hoping to see if, Hugo, you could elaborate a little bit on sort of the fleet plans. As we start to see some of the Board discussions sort of ease and we can maybe more focus strategically going forward. I guess any thoughts as you think about the fleet in terms of whether there's the opportunity for M&A, large-scale S&P activity or if it's just going to continue to be sort of your typical pattern through the cycle of buying strategically and selling when you need to?

It's a good question. I think that clarity will probably come a little bit later as I said, probably after the AGM once the Board is finally composed and is stable for the next couple of years. Having said that, if it was business as usual, I would say that we have done what we were supposed to do, i.e., waiting for the values to go up to sell the older part of the fleet. And remember, last year, we sold 9 vessels. In the first quarter, we're selling another one. In the second quarter, we are selling the VLCC that will replace the FSOs. So we are certainly not standing still. I think on the new building opportunities, we have been very active in the last 18 months. I guess that at this point in time, we feel that VLCC values, new building are too high. They have gone higher than the evolution has gone higher than on the Suezmax. On the Suezmax, we may still find some opportunities. It's obviously a category of vessel that is built in many more yards in the VLCC, and hence, you may find from time to time some opportunities. We certainly scrutinize the market and look at every single deal possible. It's also the part of the fleet that is a little bit older, and that's why we have been more active and we are probably likely to be more active for those 2 reasons, opportunities and also the fact that the average age is a little bit older than on VLCC side. But as you know, this is a cyclical market. The values are cyclical, and we are slowly but surely reaching values where we don't believe that it will be value creative. As far as M&A are concerned, I think it's fair to say that at the moment, we're not looking at any site specifically. I mean, we're obviously very busy last year, but unfortunately, we were not able to conclude. And going forward, I think that you need to be a little bit more patient. And I'm sure that we will be able to clarify sort of the longer-term strategy of the company in the coming weeks or months.

And then I guess if I could go to the red light, green light chart and just think about the demand for oil specifically as you think about sort of the macro dynamics playing out here. No change there, which I think is understandable. Just wanted to get your sense of what you think the potential incremental changes that you might see. Seems like China maybe is sort of emerging a little bit from what has been a weaker period, but we do see some potential consumer-led headwinds in a couple of the more developed end markets like the U.S. and Europe. Just kind of curious as you think about the demand dynamics that play out for 2023.

Hello, Chris, it's Brian again. I think you've answered the question better than I can. I think what you've said there is very fair. I think it's the crucial swing factor as a lot of the banks and, in particular, the agencies like the IEA and the EIA focused on, it is really all about China. I think we feel a little bit more comfortable and confident in the China story in that we believe that they started to buy, and we've seen them buying for a strategic reserve criteria. And if the oil price remains calm and low, as we've seen very actively in the last 4 or 5 years, the Chinese are the most aggressive and most assertive buyers on lower prices. So we feel that that's reasonably well underpinned that it's both strategic and consumer recovery reasons that will underpin the Chinese side of things. What is uncertain is that a lot of the economic data is indicating that the Western world, in particular, is slowing in consumption. Some of the recent data points in the U.S. regarding diesel and refinery production were also quite concerning. That's where the focus is. I think we feel China is more robust than I think a lot of the other parts of the market are. So it will depend on the developed world, I think rather than the developing.

And the next question comes from Omar Nokta with Jeffries.

Just wanted to ask about the market. You obviously referenced the near-term risks, and we've seen the VLCCs coming off here in the past couple of weeks fairly aggressively. Although Suezmaxes are moving in the opposite direction, getting stronger. I know it's short-term volatility. But just wanted to see from your perspective, what's been driving that divergence here recently? And also, do you think that divergence can continue like we've seen for the past year plus as opposed to what we've seen in prior cycles?

I believe your question has two parts. I agree that the aggressive trend we are observing in the VLCC market is indicative of market volatility. Historically, during an upcycle, which we refer to as a multiyear upcycle, such volatility is common. Based on our experience, there’s no reason for us to panic or call the market off. We are focused on the fundamentals and the overall trend. What we have observed so far this year reinforces our confidence in our projections for the next few years. It’s not unusual for there to be fluctuations caused by a surge of Chinese activity, which can drive prices up, or for them to suddenly withdraw. They are often quite strategic in their approach. Regarding the difference between Suezmax and VLCC, the Russia-Ukraine conflict has affected those trades and has had a notable impact on smaller vessel sizes like we've seldom seen before. There has been a shift; previously Suezmaxes were performing significantly better, and to some degree, LR2 or Aframax vessels were also outpacing their larger counterparts. There’s a rebalancing happening, although it's not a smooth transition. We’ve seen some volatility, but if you look at averages over a longer duration, we believe VLCCs will outperform Suezmaxes in terms of earnings. However, the gap between these two segments that we have witnessed in the past might be narrowing due to the ongoing situation related to the Russia-Ukraine conflict.

Okay. And I guess, presumably, does that play a part then in, as you mentioned earlier, the interest that you're seeing or that you're having in Suezmaxes? Or is it more purely just the age factor you were referencing?

No, it's more the age factor. I mean, you buy a vessel for 20 years, and we don't believe that the current situation will last 20; we certainly hope that it will not. So no, the major reason why we are more looking into the Suezmax is two-fold. First because we believe that the price we're seeing at the yard is still sort of affordable. I mean, it's getting very expensive, but it's not quite there yet. And secondly, as far as Euronav is concerned, our average age on the Suezmax fleet is a little bit older than the VLCC. So it makes sense to continue to renew that part of the fleet rather than the VLCC. And by the way, we continue to believe that these are the 2 segments where we want to be active.

And just one tiny follow-up because I wanted to ask about the Suezmax interest. And I was going to ask if that was more focused on modern second-hand ships or new building? It sounds like you're looking at new buildings. What kind of delivery window are we looking at if you were to place something today?

We identified one opportunity for delivery in 2025, but currently, most of what we see is scheduled for delivery in 2026. We chose to forgo the 2025 opportunity, not due to the delivery date, but rather because of the specifications of the ships and other considerations. The shipyards we are interested in have announced that they are fully booked until 2026. The only chance to find a slot in 2025 would be if an owner isn't exercising an option in another segment. While we see opportunities arise, companies like ours can move quickly. We can evaluate a deal and make a decision within 48 to 72 hours, unlike some smaller firms or those tied to government processes that may take longer to decide. We are committed to being agile, supported by our two strong shareholders, who are quick decision-makers. I'm confident we will continue to operate this way, which is crucial for seizing the opportunities that come our way.

And the next question comes from Frode Morkedal with Clarksons Securities.

I'd like to talk about the risk appetite. There's been some large swings in oil prices recently. I see tanker equities jump up and down in much the same fashion, I guess. So maybe you could give us an idea, from your perspective, of course, how people in the physical shipping market like the charters and the owners, how are they behaving right now in terms of sentiment? Are they feeling just as jumpy as equity investors currently do? Or how would you characterize the sentiment among the guys who actually buy charter ships?

That's a great question, but it's quite complex. I don't believe the mentality has shifted significantly because there are still people who need to purchase the capacity. They have their established programs and rely on major oil refineries, aware of what they can sell, which means they need to secure feedstock. This won't alter their mindset or their hunger for business. As I've mentioned, parts of this market are acting opportunistically, concentrating their transportation requirements to exploit the volatile market, which is a smart approach. The only segment that may be more influenced by sentiment or opportunism amid the current high volatility is the traders. They need to be opportunistic and identify arbitrage opportunities, which they are doing effectively. Some are also involved in longer-term ship trading. Our press release indicated that the market is more active now than before. From discussions, it seems most of these opportunities are indeed arising from trading houses that are recognizing chances for long-term time charters at significant discounts to the spot market—probably referring to yesterday's spot market, not today—because they perceive the same fundamental trends we've been seeing. To reiterate, we're in a multiyear cycle with a very thin order book, which serves as a guiding principle for us as ship owners. So if you're in it for the long haul and looking to profit but don't wish to own for 20 years like we do, it makes sense to seek something with two or three-year agreements, incorporating optional extensions, which is a wise way to navigate volatility by keeping your options open. That's essentially what we're observing.

Yes. I guess the owners look more on the supply side, the order book, and a lot of investors are maybe overly focused on the demand side, influenced by temporary factors perhaps.

It's interesting to see that investors are primarily focused on demand since supply can be quite variable. We have an adequate number of older ships, which can either be recycled or enter the dark fleet, although that fleet has limited capacity. If rates decline over an extended period, we could see ships heading to recycling yards or the dark fleet, a trend we've noticed develop over the last couple of years. This is why we're not overly concerned about demand; there is a cascading effect and potential flexibility. It's different from when we last experienced similar sentiments during the 2003-2004 period. By the end of that cycle in 2008, following the financial crisis, the order book was over 50% of the current fleet. Currently, we are at the beginning of a new cycle, and there are various reasons why shipowners are hesitant to place new orders right now; the process is time-consuming, expensive, and there's uncertainty regarding technology. While the order book's current state and growth potential, along with the outlook for oil demand, seem promising, shipping is inherently volatile, and there can always be unforeseen events. However, even if those happen, there are ways to address them.

And the next question comes from Ben Nolan with Stifel.

I wanted to revisit what you mentioned about Suezmax new buildings and your decision to forgo it. You were discussing the associated risks, which are numerous, but I’m interested in your thoughts on the residual value risk. Currently, a Suezmax costs about 50% more than it typically would, and delivery isn’t expected until 2026, combined with technological uncertainties and other factors. How do you feel confident in potentially placing an order at a price significantly above the usual level while managing the risk concerning the asset's residual value?

Thank you for your question. I don't fully agree that prices are 50% higher. A reasonably priced Suezmax is likely around $67 million to $70 million, while today's ordering price is closer to $81 million or $82 million. We are not far off, and the same applies to the VLCC market where we see prices around $130 million, whereas a good price would be $79 million or $80 million, which is the lowest we've seen in the last decade. There's certainly a discrepancy there. Regarding residual value, that's a great question. With a fleet as large as Euronav's, we diversify our risks. We're currently preparing for potential retrofitting, particularly with our recent new builds over the past 36 months. There are emerging trends such as LNG and dual fuel technologies, which are complex and costly to retrofit compared to building as dual fuel from the start. Other trends include ammonia, which is still a bit premature and unlikely to materialize before 2026 or even 2027. We are also considering methanol fuel, primarily promoted by Maersk, who have heavily invested in its production. It's crucial to balance technology and fuel supply, ensuring the fuel is green to meet future carbon emission reduction goals. At Euronav, we are cautious; rather than ordering a large number of ships at once, we're ordering them one or two at a time, focusing on making them as retrofit-ready as possible. Therefore, we are mindful of the potential residual value risk you mentioned.

So more of a just dipping your toe kind of approach. I understand that. Well, I have two hopefully quick questions. One, regarding expenses, there's been a lot happening over the last nine months. How should we view G&A going forward? Was it somewhat elevated due to recent events, and will it decrease? Or is this just the effect of inflation? Additionally, could you discuss the FSO in Yemen? I truly appreciate what you are doing as a global citizen. What needs to happen there? Could you outline that situation in a bit more detail?

So, in response to the first part of the question, yes, it has definitely been a very special year. When you're engaged in a significant and complex transaction, it leads to higher legal and investment banking fees, which are typical for this level of engagement but are also exceptional. This has resulted in some disappointment that we weren't able to finalize everything, causing some of our expenditures to feel wasted, despite the valuable lessons we've gained. We expect general and administrative expenses to return to previous levels, although salary inflation is impacting both on-floor and onboard personnel, which is reflected in operational expenses, not G&A. A figure around $16 million to $16.5 million per quarter should encompass any exceptional costs I've mentioned. For this year, we don’t anticipate significant additional expenses, and that’s the guidance I can provide today. Regarding the FSO situation, the UN has secured funding and aims to acquire a vessel that we can supply. We have also agreed to retrofit the vessel into an FSO instead of just a standard tanker, which we have completed after a dry dock period. We are selling the vessel at market value, including the retrofit costs, and we expect no loss for shareholders, especially since current values are quite appealing. Moreover, we are operating the vessel, leveraging our expertise in tankers and FSOs. Smith will assist with the delicate operations post-transfer of oil. We will continue to operate and train local personnel in the subsequent months after the transfer, after which the ship will be handed over to the local company by the UN. If I understand the plan correctly, the local company will take over operations, marking the completion of Euronav's involvement. Overall, this is a positive operation for both parties and financially sound. What surprised me was that we were the only operator willing to take this on. It requires not just experience and expertise but also the willingness to engage. Among various opportunities, we felt that this one was worth pursuing for Euronav, as it contributes positively to both the company and society. There has been immense enthusiasm from Euronav employees, with many volunteers eager to participate in the operation, and we are very pleased with that.

And the next question comes from Chris Tsung with Webber Research.

I just wanted to talk about your dividend for a second. I believe your policy is at 80% of net income. But just thinking about this, at least one of your competitors has committed to paying out a higher ratio of their net income. Is this something that you guys are thinking of or perhaps willing to entertain?

To be frank with you, we don't very often look at what the competition is doing. I think that at Euronav, we look at our own, and we are trying to do what is best, or what we believe is best for the company and its stakeholders in general. Shareholders, obviously, are our primary concern when we think about returning cash to the shareholders. I think that our policy is very well written; if you go to our website, 80% is a little bit the guidance. That’s what we've tried to apply all the time. The last short upside that we had in 2020, we split that between dividends and share buyback. Today, we are at the start of the cycle. We focus on dividends. Every quarter will have its own sort of decision process. I think we came out with a very strong outlook from 2022. That’s why we are adding a very generous layer of dividend, the $1.1 as the final dividend. I know that we are a little bit of a specific animal because, in fact, at Euronav, we have 5 opportunities to distribute dividends, whereas other companies have 4 opportunities. So they have a different dynamic. But quite frankly, it is what it is. I suppose that the shareholders are happy about that. And then, indeed, when you look at the first quarter result, it corresponds to 80%. It could be more, it could be less. It depends on what we have in the CapEx. It depends on where the leverage is. The leverage is in a very good position, so we have no problem paying those 2 dividends. It’s a couple of elements, and the 80% is only there to sort of guide people. We can deviate from it, and more often than not we have deviated on the upside rather than the downside. If you ask me whether we would go to a policy of paying out 100%, I don't think that's reasonable in the sense that you need to check the facts and circumstances at the time of deciding what it is. That's the role of the Supervisory Board and the management to see where you apply your capital, where you allocate your capital, and what creates, what we believe creates the most value for shareholders.

And maybe just a follow-up to the dividend, and perhaps a question for Lieve. Just trying to make sense of this. Coupon 32, I think it was a $1.10. In Coupon 34, it's $0.70. So I'm just curious what was Coupon 33?

So, indeed, to answer your question, a split has been made on the $1.10 to optimize the distribution to the shareholders. One part is a kind of closing dividend and then we have a part linked to what we call an out of issuance premium, which is a good tax-friendly system for our shareholders. This is the distribution split we can make based on our balance sheet. It enhances a bit these 2 different parts, which is mainly important for the Belgian shareholders.

The retail, in general, because in Belgium, the withholding tax is 30%. You pay it when you distribute a dividend, you don't pay it when it's a distribution out of your share premium, which is very much the same as a capital decrease. So that maybe you're more familiar with that technique. As far as the shareholders are concerned, they don't need to take any additional action. They receive the money on the one system; they receive gross for gross, and on the other system, i.e., the dividend, they receive gross for net. For the institutional shareholders, it doesn't change much because they don't have to pay withholding tax. They have different tax systems. So it's very much to take care of the retail, but the retail is not insignificant at Euronav. So whenever we can use those mechanisms, we will.

And perhaps, if I can squeeze one final one in. Just hate to do this, but got to ask about the arbitration, the pending one, I think, was lingering during your last call. Any notable dates on the horizon that we should be on the lookout for?

Yes. It's a slow process. I mean, personally, I was a bit disappointed that sort of the private justice doesn't go faster than the regular justice. But indeed, we're talking about 2024 and probably towards the end, I mean, Q3, Q4 2024. It's true that there are a number of steps that need to be taken, and it starts with the appointment of 2 arbitrators, one for each side, and then those 2 arbitrators will appoint what they call the President of the arbitration office or desk. After that, you have to submit a file, submit your claim, and you need to evaluate the damages or the amount of claims that you're claiming to the other side. So I don't think we're going to speak much about it until we have something tangible to share with the market. As you know, our philosophy is to really treat this arbitration as, okay, one side believes they had the right to do that, the other side believes they didn't; why don't we ask someone to arbitrate between the 2 sides; and it will be what it will be. I don't want to dismiss it, but I also don't want to be talking about it quarter after quarter. It is what it is. We will know, unfortunately, more than a year's time. We will let you know if there are any developments in between, but likely not, so be patient and make your own guess about it.

And the next question comes from Greg Lewis with BTIG.

Hugo, I think you were touching on it a little bit around the divergence between the Suezmaxes and the VLCCs. Any thoughts around how much of the vessels trading in the dark fleet are helping Suezmaxes outperform? I.e., I imagine it's a lot harder for a VLCC to trade in the dark fleet and maybe as Suezmax, but I'm just kind of curious if you have any thoughts around that.

I can start, and I'm sure Brian can add to my comments. Let's reflect for a moment. It's important to remember that the dark fleet's VLCC segment was significantly larger before the Ukraine-Russia conflict. This was primarily due to their activities in Iran and Venezuela, which we consider part of the illicit fleet because their sanctions differ greatly from those imposed on Russia. In terms of Russia, it's clear that many Aframax and Suezmax vessels were operating there, but VLCC involvement was limited due to shorter travel distances, mostly towards Europe and a bit towards the States. This makes sense. Now, with the need to transport oil to new buyers who are willing to purchase it from Russia, we can expect more VLCCs to be utilized. However, we need time for the market to fully adjust. Currently, Suezmax and Aframax vessels are entering what might be referred to as a darker fleet, although it's a different scenario compared to traditional crude oil trading. There is a price cap in place; if trade is below that cap, it's permissible. At Euronav, we've chosen not to participate in this trading for various reasons, including policy considerations. Honestly, given the current oil prices, I don't recall a time when the price cap was a significant factor. Russian crude consistently bears a discount, further exacerbated by higher freight costs. Many players are opting to engage in this trade and tend to remain in it due to aspects like insurance and finance, as well as a reluctance to move vessels from one sector of the market to another. Presently, we are observing an increase in Suezmax and Aframax participation in this segment, while the VLCCs that were previously involved are still operating, particularly with Iran and Venezuela. Moving forward, due to the distances involved, we might witness an increase in transshipments and more VLCCs joining that trade, although that has yet to materialize.

And the next question comes from Thijs Berkelder with ABN AMRO.

Good afternoon and good morning to the U.S. Congratulations on the results. Coming back on the dividend policy. I thought your dividend pre-deal policy was 80% of net profit but excluding one-offs. Now it's 80% including one-offs or 100% of ex-one-off profit. Is there a special reason for the 100% ex one-offs? And follow-up, there is more than 100% allowed in Belgium. Second question is on minimal on the total. But can you maybe give us a bit of explanation on Belgian inflation's impact on your Belgium cost base? And third question on the salvage operation in Yemen. Can we expect some kind of a book profit related to that project?

Thank you, Thijs, for your questions. In Belgium, we must refer to the statutory balance sheet rather than the consolidated balance sheet when considering dividends. We can pay dividends up to our reserve as long as we have sufficient reserve. Our model primarily includes most vessels on the statutory balance sheet, generating significant profits in favorable market conditions. For the few vessels that belong to subsidiaries, such as the FSO and Oceania, we need to transfer dividends from these subsidiaries to the statutory balance sheet. The limit on what we can pay is dynamic as it increases each quarter by the net profits accrued, which defines our remittance. Regarding our dividend policy, we typically exclude capital gains, and while that policy still stands, we can make exceptions. The current situation is an exception due to our substantial capital gains, around $100 million last year and ongoing, driven by values exceeding book values. Previously, we excluded these gains to reinvest in new building programs or occasionally in second-hand modern ship acquisitions. Currently, we believe the market values have risen excessively, particularly in new building contracts for VLCCs, with some potential opportunities in Suezmax, yet no immediate reason to pursue that. In the last few years, our new building program has seen significant activity, allowing for a potential return to shareholders. Furthermore, when considering our leverage based on book value versus market value, we find ourselves in a position to reward our shareholders generously. The Board evaluates all these factors before making decisions, and there was strong support for the decision made at this time.

I think in Belgium, core inflation was close to 10.5%, maybe even 11% in 2022. It's down to around 5% right now. So I think we have left the peak, and hopefully we're not going to have a second year like that. How does it affect overhead? Well, only a portion of the offices are in Belgium. As you know, we have offices in Greece, we have offices in London, we have an office in Singapore, et cetera, et cetera. The element that affects Belgium is indeed the inflation on salaries because in Belgium, it's an automatic indexation of salaries to the core inflation number that is produced by the government. Last year, people indeed had an increase of salary at the end of the year of around 10%. We can clearly see what the impact is there. I don't think that at the end of the day, it's much different in the rest of the world. I think that's all over the place. People have to increase salaries anywhere between 5% and 10%. So that's where we are. Let's also not forget that Belgium is not the most expensive place to operate a shipping company. I think the people living in London, New York or Singapore are starting off a base that is already much more elevated than Belgium. But we are not very worried about that.

In terms of the FSO Safer, can you elaborate a little bit on your question? What exactly do you want to know? You want to know the capital gain on that ship, if I'm not mistaken?

So Thijs, indeed, I understood you. You were interested to understand the capital gain. To be concluded finally, but seen from today and the price we had at the top of our mind, it should end again in the order of $19 million to $20 million.

Yes. And you remember that ship was not an owned ship. It was the ship that we had sold under a sale and leaseback program. So we already sold the ship one time. Thankfully, we had put an option. That option was in the money, so the capital gain generates the difference between the option that we had and the market price at which we are selling the vessel to this program of the UN.

And the next question comes from Quirijn Mulder with ING.

I have two questions. First, looking at the graph, the prices of VLCCs have significantly increased, while Suezmax prices remain at the same level, possibly due to the low number of orders. If someone is ordering a Suezmax, I believe the price must be considerably higher than it used to be. I'm trying to understand the logic behind the difference in price trends between new VLCC builds and Suezmax prices. Suezmax demand seems to be higher than it has been for many years. Could you clarify this? My second question is regarding the scrapping of vessels. We've talked about new builds, but what about the other end? I can imagine that people are hesitant to scrap their vessels, but at some point, they become too old and regulations come into play. Could you provide insight into the developments in that market?

I will address the first part first. The chart illustrates what Hugo discussed earlier, showing that VLCC prices have risen more quickly than those for Suezmax vessels. As we evaluate new build opportunities, which are quite limited, our focus is more on the Suezmax sector since the price increase has been more pronounced among VLCCs. The chart demonstrates this relationship clearly, indicating that VLCCs have seen a greater increase in value per unit compared to Suezmax vessels. Regarding the second part, it's evident that for Suezmax ships, particularly those over a certain age, trends are becoming clearer. We are starting to notice, as previously mentioned this year, that the unregulated dark fleet is expanding. Recently, there was an incident involving a Suezmax catching fire in the Far East, which had been exclusively part of the stock fleet. This indicates that the dark fleet is growing, primarily due to older vessels. Thus, we are seeing a two-tier market, as we operate within the legitimate sector where we are not experiencing supply pressure since older ships are exiting that particular segment.

Maybe just to add to what Brian is saying, most or the majority of the so-called dark fleet is unregulated. Even classification societies may not issue the certificate, but it doesn't matter. We certainly monitor that even before the Russian-Ukraine conflict in the trade with Iran and Venezuela. It is something that is also emerging in this case, even though you do have a number of legitimate owners who decide to carry Russian oil under the specific sanctions, i.e., under the price cap, and are able to demonstrate. You can see that it's less regulated, if I may put it this way. Some of it is not regulated, some of it is less regulated, attract less attention. Maybe the standards are different. Just to come back on the question because it's a fact that today Suezmax is not increasing in value as much as VLCC. I don't think we do have the answer because we're not a shipyard and we're not putting the tag price on it. So I suspect that it is, first and foremost, a question of what the yard wants to build. The yards are definitely in a luxurious position today because their order book is full and, obviously, it's full of many different types of ships, but particularly LNG carriers and containers. Those are ships that, from an added value perspective from a shipyard, is more interesting to build than a tanker. They are likely to make more money. Secondly, it's really a question of space. It takes less space and time to build the Suezmax. If you want to squeeze a Suezmax between 2 LNG carriers or 2 sorts of mid-sized 13,000 TEU, 14,000 TEU container ships, I'm not going to say it's easy, but it's definitely possible. If you want to squeeze the VLCC, you need to move many more things around. The fact is that the shipyards want to maintain their know-how on how to build ships and tankers. They really want to see at least a few tankers built every year so that the people who specialize in that continue to keep their knowledge and are busy. It’s a little bit more specific to a shipyard's desire. If they really want to have this type of ship built, they will make sure the price continues to be attractive. I think it's less the case for VLCC at the moment. That's why they have let it go to a level where they can make as much money as they would on another type of ship.

But my final question is then, how large is the dark fleet, in your view? Have you any idea?

Well, our ideas are simply the ones that we read in the market. There are a number of other analysts or even specific people specialized in monitoring that, and they are talking about 150 or...

Yes. I mean, there are a lot of numbers floating around here as always. But if we take someone like Vortexa who've done the numbers, they think there's been, in total number of tankers, all sizes, 740.

That's all sizes?

All sizes. As Hugo said, you're exactly right. You're looking in that roughly 100 sort of territory from our segments and our categories, which is sort of getting on as we've said consistently. I've done some presentation in the past, somewhere between 7% and 10% of both the Suezmax and VLCC fleets.

I'm sure if you want to send us an e-mail, we can send you some of the report that we have seen, and certainly the ones that we believe are more serious than others. Very happy to share that information offline with you.

And this concludes both the question-and-answer session as well as the call. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Thank you, everyone.