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Edited Transcript of MISC.KL earnings conference call or presentation 14-Aug-19 10:59am GMT

Q2 2019 Misc Bhd Earnings Call

Kuala Lumpur Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of MISC Bhd earnings conference call or presentation Wednesday, August 14, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mohammad Romzi

MISC Berhad - Senior General Manager of Finance

* Raja Azlan Shah Bin Raja Azwa

MISC Berhad - CFO

* Rozainah Binti Awang

MISC Berhad - General Manager of CPD

* Vincent Ng

MISC Berhad - General Manager of CPD

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Conference Call Participants

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* Adam Rahim Mohamed

MIDF Amanah Investment Bank Berhad, Research Division - Research Analyst

* Ho Meng Kong

UOB Kay Hian Research Pte Ltd - Senior Analyst

* Khir Peng Goh

AmBank Group Research - Research Analyst

* Yen Ling Lee

Maybank Kim Eng Holdings Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to MISC Second Quarter Financial Year 2019 Analyst Briefing Conference Call. Rozainah from MISC Investor Relations team will run through the agenda for today's briefing. Rozainah, over to you.

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [2]

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Thank you, Akadi. A very good evening, ladies and gentlemen. Thank you for participating in our Second Quarter Financial Year 2019 Analyst Briefing. We have with us today Encik Raja Azlan Shah Raja Azwa, VP, Finance; Encik Romzi Shafie, Senior General Manager, Finance; Encik Emran Othman, VP, Corporate Planning; Mr. Vincent Ng, General Manager, Corporate Planning; and Encik (inaudible) General Manager, Corporate Planning.

We will now start the session with financial highlights for the quarter's performance, which will be presented by Encik Romzi, followed by market outlook and business update by Mr. Vincent. At the end of the presentation, we will open the lines for a Q&A session. Our event manager will later provide instructions on the Q&A process.

Before we start, I would like to bring to your attention to the disclaimer slide. During the presentation, we may make some forward-looking statements in reference to our plans and expectations, and actual results could differ due to unknown risks, uncertainties and other factors that are, in many cases, beyond MISC's control.

With that, I pass the session to Encik Romzi for our first agenda, to update on MISC's second quarter financial year 2019 financial performance. Encik Romzi, over to you.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [3]

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Thank you, Rozainah. Thank you for all the participants for joining us this afternoon for the MISC analyst briefing.

Bringing your attention to the Page 3 of our AB pack, on the revenue, the revenue is lower than what we had recorded in Q1 financial year 2019. It's coming from the lower TCE from Petroleum segment. Lower TCE is, basically, as we have indicated in previous session, is the weakest season due to the plant turnaround in the U.S. And then the lower revenue has translated into lower profit before tax from the operations. And then in nonrecurring items, you can refer to our announcement for what we had disclosed.

On Page 4, operations quarter 2 FY 2019 versus Q2 FY 2018. In terms of revenue, we had recorded a lower revenue coming from the lower earnings base for the current quarter as a result of disposals of vessels in Q2 in FY 2018 and also redelivery of our in-charter vessels. And then in addition to that, in Q2 FY 2018, we had also I think revenue for FSO Benchamas, which we had delivered to the client at the end of Q2 FY 2018.

From -- resulting from that, despite of the lower revenue in Petroleum, however, the margin is higher. So from the higher margin, we have lesser losses. And then we are also gotten the FSO Sao Vang projects, which has been awarded to MMHE, and the Sao Vang project has contributed to higher contribution to the marine segment in MMHE and also the higher number of Marine Repair also contributed to the marine segment in MMHE.

On Page 5, comparison of the cash [less than] our profit. We have maintaining our cash flows from operations, and as compared, Q1 versus Q2, the number has been slightly lower because in Q1 FY 2019, we had a one-off receipt for one of job for offshore business unit for transportation and installations. Comparing to the Q2 FY 2018, we had higher cash flows from operations. It's coming up from the FSO Bergading, which had commencement in August 2018. And also, we had 2 LNG vessels that we had acquired end of December 2018 and one more vessels were delivered on January 2019.

The higher margins from AET also has contributed to the higher cash flows from operations. So from the -- performance-wise, the cash flows from operation is a bit more deeper, more stable numbers for assessment as compared to the profitability due to in profitability, there are one-off items that we distort the numbers.

On Page 8, cash and our debt balances. Our debt balances, if you look at the March 2019 and June 2019, has inched up slightly. This is mainly coming from the introduction of the lease accounting, whereby all the in-charter vessels now, we have to brought in our balance sheet. We had a corresponding asset, and then also the corresponding lease liabilities. This is disclosed as well in our announcements under the main standard that had an impact to our financial statements.

On Page 8, the revenue almost stable in all the 3 quarters. The operation and revenue mainly is coming from the dry docking days that had happened during those quarters. And then in comparison, Q2 FY 2019, the preceding quarters, Q1. Some in Q1 has incorporated the disclosure in quarter 1, had a gain on disposal and also gain on acquisition of businesses.

On Page 8, as I mentioned earlier, the performance on the Petroleum, if you compared Q2 FY 2019 versus Q1 2019, is coming up from the lower freight rates. But if you compare to the corresponding quarters, Q2 FY 2018 is lower earning days resulting from the disposal of vessels and the retrieval of in-charter vessels in FY 2018. However, there's a better improvement in the profit coming up from the higher margins from operating the vessels.

On Page 9. The comparison that I wish to bring the attention to is comparing the Q2 FY 2019 versus Q2 FY 2018. The revenue in Q2 FY 2018, we had the construction revenue from the FSO Benchamas, which are also incorporated into the profit before tax construction profit inside there.

On Page 10, the performance of Q2 FY '19 versus Q1 and Q2 FY '18, mainly is coming up from the improvement in the marine segment due to the FSO Sao Vang project and also higher number of repairs that we have contracted during the quarter.

Thank you. I will now pass the session to Vincent for the market outlook and business update LNG.

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Vincent Ng, MISC Berhad - General Manager of CPD [4]

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Thanks, Romzi. Good evening, everyone. As Romzi mentioned, I'll walk you through first the market environment for our business segments, starting as usual with LNG segment.

If you can see from the chart on Slide 12, the gray line that is fallen. As Romzi mentioned earlier and as you know, quarter 2 is traditionally the slower month in -- slower quarter in the year for demand. Nevertheless, towards the end of quarter 2, around June, the charter rates has strengthened a little bit, and this is due to -- partly to some new liquefaction projects that have started to commence such as Cameron LNG in the U.S. and Prelude FLNG in Australia. So this has taken up some of the tonnage availability. If we compare the charter rates for spot and move the 3-year rate 1 year ago, we can see that they are higher. The spot rate is higher by 8%, and the 3-year charter rates are higher by 14%. Overall sentiment remains steady with anticipation of shipping requirements slowly building up towards the autumn and winter seasons.

Moving on to the next slide, which shows the newbuilding. We can see that the newbuilding orders for 2019 and 2020, '21 remains strong. 40 vessels to be delivered in 2019 and 36 in 2020. Despite the influx of more vessels in the short and medium term, we feel that the longer-term prospect for the sector remains positive. And just to recap some of the drivers in the longer term, there's an increasing demand for cleaner sources of energy such as LNG, especially in East Asia and China. At the same time, there's also increasing supply of LNG to meet the demand. While there is currently an abundance of LNG, which led to low prices, the demand is expected to outstrip supply somewhere around 2022 to 2023. Hence, the number of LNG liquefaction projects are now being developed, for example, in the U.S., Qatar and Russia.

Finally, I think, as we see also that with new liquefaction projects, especially in North America, U.S., it also increases the ton mile shipping requirements due to the distances between the demand center, which is in East Asia, compared to the supply areas in North America.

Moving on to Petroleum. Same story in Petroleum as you see in LNG. Quarter 2 is traditionally the softer period. So we saw that for all the segments, VLCC, Suezmaxes and Aframaxes, the spot rates were lower compared to quarter 1. I think I listed there on the slide some of the factors across the demand and supply situation during this quarter. For example, the U.S. decision to end waivers on Iranian sanctions, reduce production and exports from Venezuela, and also the OPEC+ production cuts, which will continue during this period. In addition, as mentioned by Romzi earlier, there were longer-than-expected refinery shutdowns for maintenance upgrading ahead of IMO 2020 regulations, which contributed to less crude oil demand. And this was partly offset by increasing exports from the U.S. of crude oil and also the growth in long-haul shipments from U.S. and Brazil.

Again, as we saw in LNG, if we were to compare quarter-on-quarter, the risks were lower. But if we were to compare corresponding quarter a year ago, the risk for VLCC, Suezmax and Aframaxes were higher, just to make a point.

In terms of the next slide, on Slide 15, we showed the newbuilding deliveries as well as scrapping data. We can see that the newbuild deliveries for 2019 are expected to go up again after a lower number last year. And while scrapping has -- for year-to-date has been very low. So although tanker fleet growth is expected to be higher in 2019 compared to last year, it is expected to be partly absorbed by increasing U.S. oil exports and ton-mile demand growth. In addition, because of IMO 2020, we expect that there will be a reduction in the excess fleet due to downtime for scrubber retrofits. And also, we see an increasing demand for tankers as oil storage. So this will tick up some of the supply of vessels over the coming months.

In summary, we are hopeful for the tanker markets to continue the momentum into the second half of the year while we are remaining cautious on the uncertain economic growth globally.

Moving on to Offshore. Offshore is driven mainly by the crude oil prices. So far, for the year, crude oil prices have remained in the range that is supportive of continued investment in this segment into exploration and production. Restat Energy, one of the research houses, has forecast that offshore services sector is expected to grow by 7% annually over the next 4 years from 2019 to 2022.

In Slide '17, you can see that the main areas for floater opportunities is the same as what we showed last quarter, which is mainly in South America. So far in 2019, there have been 4 FPSO awards, 2 in Brazil, 1 in Nigeria and 1 in India. There is a potential for up to, based on reports, up to 16 new floater awards in 2019.

Okay, that's as much for the market environment, and I will go now to the business update.

For the LNG business segment, we are actively pursuing a number of opportunities in both the conventional and nonconventional LNG shipping solutions. In the meantime, our fleet of existing LNGCs will provide a long-term secure income that will support the income for the whole group.

For Petroleum, we can see that the current portfolio mix is at 65% term and 35% spot. This is slightly more defensive if you compare against the quarter ago when it was 62% term and 38% spot. During the quarter, we delivered 2 Aframaxes: Eagle Sibu and Al Habibah. So the fleet size is now 78 vessels. We expect to take a delivery of 1 LNG dual-fuel DPST for Equinor in quarter 4. This is -- if you recall, this -- we have 7 DPSTs on order, so this will be the first of the 7 to be delivered. And the remaining 6 will be delivered progressively over next year.

In terms of the Offshore business, we continue to pursue business for FPSOs, FSOs and MOPUs in the Asia Pacific and also the Atlantic Basin. And we're also exploring inorganic growth opportunities. We had 2 contract extensions during the quarter, which is for FPSO Ruby II and FPSO Bunga Kertas, and both has been extended until 2020. In the meantime, the -- same as for LNG, the Offshore business segment will be underpinned by the existing long-term charters for the assets that we own.

In terms of the arbitration and also legal case, there is not much uptick for the quarter. For the Gumusut Kakap arbitration, the decision is only expected to be delivered in 2020. In terms of the PCPP and MOMPL case, there is no update on the arbitration and adjudication in this quarter. In terms of proceedings in costs, MOMPL has filed an appeal to Court of Appeals in this quarter.

Finally, for Heavy Engineering segment. There were a number of significant milestones achieved during the quarter, which was the sail away of Gumusut Kakap Phase 2 extension subsea manifold. And MMHE was also awarded the EPCIC contract for Kasawari Gas Development Project by PETRONAS.

On the Onshore side, the unit also completed RAPID Package 3 Area 2 and RAPID Package 14. And so far, as to the Marine Repair segment, year-to-date for the half year, they completed repairs and maintenance of 38 vessels and secured 56 jobs. The order book backlog as of June is MYR 3 billion, and approximately MYR 3.2 billion worth of tenders are ongoing. The other areas that they continue to work on to develop new business, namely modular fabrication, in order to diversify away from the heavy engineering as well as the existing businesses. I think that concludes my section. I pass it back to Rozainah.

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [5]

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Thank you, Encik Romzi, Vincent, for the presentation on financial performance and business update. With the completion of the presentation. I would now like to hand over the call to the event manager who will guide and manage the Q&A session. Akadi, over to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question, we have Kong Ho Meng from UOB Kay Hian.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [2]

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I have several questions. My first question is on your JV income of MYR 101 million. Are there any one-off items within the JV income because it looks pretty high versus your normal quarterly average. My second question is on your Petroleum segment --

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [3]

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Ho Meng, Ho Meng, can you speak louder? Can't hear.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [4]

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Okay. My first question is on your JV and the proceed income? Yes. Can you hear me?

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [5]

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JV and?

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [6]

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Your JV and the proceed income in your -- it was recorded as [MYR 801.5 million] ringgit terms, the share of profit on your joint venture. So just want to know whether -- are there any one-off items inside that amount?

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Raja Azlan Shah Bin Raja Azwa, MISC Berhad - CFO [7]

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What's your name again?

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [8]

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Ho Meng.

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Raja Azlan Shah Bin Raja Azwa, MISC Berhad - CFO [9]

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Ho Meng. This is Azlan. The decrease in the JV income was because of a one-off gain pursuant to contract extension of FPSO Ruby in Vietnam. So that was about USD 10 million. So that accounts for the large growth in the JV income.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [10]

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Okay, noted on that. Ruby II, right?

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Raja Azlan Shah Bin Raja Azwa, MISC Berhad - CFO [11]

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That's right.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [12]

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Earlier, you also mentioned Bunga Kertas also extended. Were there any one-off gains from the Bunga Kertas?

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Raja Azlan Shah Bin Raja Azwa, MISC Berhad - CFO [13]

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No, there were none. There were none.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [14]

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Okay. So just Ruby II, okay. Noted on that. My second question is with regards to your Bursa package on Page 15. Under your -- yes, Page 15, where in your operating profit on Petroleum, you wrote there that you have a profit of [MYR 33 million] for Petroleum in ringgit terms. In the slide, you actually state that your Petroleum was a loss of USD 1.2 million. So -- on PBT level. So just can't reconcile. One is profit, the other is a loss. So, yes.

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Raja Azlan Shah Bin Raja Azwa, MISC Berhad - CFO [15]

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This is probably because of the funding cost. Funding cost attributable to the Petroleum division is isolated in the Bursa announcement, whereas in the slide, it has been allocated.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [16]

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Oh, I see. The slide shows activity level after finance cost and all, right?

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Raja Azlan Shah Bin Raja Azwa, MISC Berhad - CFO [17]

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That's right.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [18]

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Okay. Okay. Okay. I think, earlier, you mentioned something about the FSO Sao Vang. May I know what is the status now? What is the percentage completion of that conversion? And how much of that construction revenue there was in that line, if any?

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Unidentified Company Representative, [19]

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Percentage of completion is about 30%.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [20]

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Okay, noted. Do you recognize any financial impact on this 30% completion? Because usually, you recognize construction gains, right? Or do you recognize for this particular FSO?

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Unidentified Company Representative, [21]

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We had a small construction profit from this percentage.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [22]

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Okay. It is a financially income -- on the JV income level or on the revenue level? How do you see it?

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Unidentified Company Representative, [23]

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We had construction profit. We have a construction cost. And the difference is the -- we had construction revenue, then we minus the construction cost, then we come up with a construction profit. But at this stage, the construction profit is pretty small.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [24]

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I see. How small is small? Just trying to gauge. Is it significant? Or, yes.

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Raja Azlan Shah Bin Raja Azwa, MISC Berhad - CFO [25]

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Basically, you need to remember that this thing is quite complicated because on the one hand, we own 65% or 66% of MHB, where the construction gain is captured. Then on the other hand, we are 51% JV partner under the Offshore business. So once you take all of those into account, the net amount that is added on to the books is not much.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [26]

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Okay. So basically, you have 2 sources of income. One is on MMHE level, where MMHE recognize some Marine Repair revenue from converting the FSO. And on the MISC level, you have some construction gains, right? Is that correct? But operate others?

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Unidentified Company Representative, [27]

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That's correct.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [28]

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Okay. But if you operate others, so what is the negative attribute?

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Unidentified Company Representative, [29]

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Can you repeat again? Why is there...

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [30]

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Okay. Because for MMHE, they have a profit, right? There's a profit number to them. But on the MISC level, it offsets -- sorry, just double check -- because you say the net impact is small.

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Unidentified Company Representative, [31]

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From the -- if the construction is generated from MHB level, when it comes for the group consolidation, the figures will be eliminated.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [32]

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Oh, I see. All right. All right. Okay. Okay.

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Unidentified Company Representative, [33]

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Whatever the portion that belongs to our JV, that portion, we recognize. Increment the group profit.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [34]

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Okay. But just to double check, ignoring MMHE's revenue level -- on your level, on MISC level, on the finance income basis, do you recognize any financial impact from the 30% conversion by way of finance or?

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Unidentified Company Representative, [35]

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At this juncture, we have not yet.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [36]

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Not yet, sorry? Not in the second quarter yet. Okay, okay. My next question is just to double check. I think recently, at one point in time, the high-sulfur fuel prices have spiked up because of significant (inaudible) and so forth. So just to double check, do you guys see assessment bunker cost recently? And are you able to pass it down to your -- pass it onto your customers? Or do you have not so much a spike in your profit?

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Unidentified Company Representative, [37]

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On net aspect, if the vessels is on the term charter, all the bunker cost will be passed through to the charter. And then if you look at our composition now for Petroleum, 65:35. 65%, we stop here, then those portion of bunker will be passed through to the charter. The portion that adds up, only the spot portion.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [38]

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Okay. Within the 35% of the spot portion, how much are you able to protect yourself from any spike in the bunker cost? Are you able to pass on most of it, or? Yes.

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Unidentified Company Representative, [39]

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Ho Meng, are you referring to post January 2020 or right now?

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [40]

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Right now. Right now. Because I think I read somewhere that the cost -- bunker players are using their inventory for high-sulfur fuel. So that has caused a spike in prices.

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Unidentified Company Representative, [41]

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Not that we've noticed significantly. But in general, for bunker prices, I mean, it's reflected back in the spot rate in terms of the market. So the bulk of the market players will be in the charter rates.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [42]

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Okay. Just a last quick question for me. In your LNG slide, we see there were vessels drydocked in -- so how -- what was your utilization of the LNG in second quarter? Was it lower than first quarter, or very similar? Or how -- what was the dry docking volumes?

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Unidentified Company Representative, [43]

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As we have mentioned before, the drydocking is based on 2.5 years of schedule. So as of -- for Q2 2019, we had about 5 vessels that gone to drydocking. For Q1 2019, we had 4 vessels that gone to drydocking. And for Q1 2018, we had 2 vessels that gone to the drydocking. So then it follows the normal 2.5 years or 3 years schedule for drydocking.

To put it in the layman's terms, it's like the car repair that you have to go for certain maintenance we did sometimes to be road-worthy. So to be the -- to see the same maintenance we had to do for the ship. So it depends. Sometimes, you follow exactly the 2.5 years. There are times that at the charterer's request, we have to ship out more than 2.5 years. Sometimes it goes up to 2 years and 7 months or 8 months, depending on the situation when it -- also when it is nearer to the route that they are planning to do the drydocking.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [44]

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Okay. Noted. So some outlook for your third quarter and fourth quarter, moving forward, will we expect to see 4 to 5 drydocking? That kind of pace?

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Unidentified Company Representative, [45]

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So the outlook is expected to be positive, especially with the IMO requirement. In fact, the yard I expect to be full. We're also having trouble for our old vessel.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [46]

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I see. Okay. But you are intending to drydock more than 4 to 5 LNG vessels moving forward last quarter in -- on a quarterly basis.

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Unidentified Company Representative, [47]

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Yes, that's the plan.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [48]

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Okay. Okay. Any color is yet available -- any color how many that you plan to drydock in the third quarter? And how many you intend to drydock in the fourth quarter? And not just the LNG, but also for petroleum side you can guide?

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Unidentified Company Representative, [49]

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For the next 6 months, we are looking around about 5 or 6 vessels that are going to go for drydock.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [50]

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That's for LNG only, right?

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Unidentified Company Representative, [51]

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That's correct.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [52]

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Okay. Got it. How about for petroleum? Would there be any accelerated drydocking or...

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Unidentified Company Representative, [53]

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We need to wait for the drydock fleet to be ready because the drydock fleet is not ready yet.

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Operator [54]

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Our next question, we have Alex from Am Research.

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Khir Peng Goh, AmBank Group Research - Research Analyst [55]

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I have 4 questions. One is regarding your Page 7...

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [56]

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Alex, we can't hear you clearly.

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Vincent Ng, MISC Berhad - General Manager of CPD [57]

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Alex, can you speak slowly, please, because there's some distortions in your mic?

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Khir Peng Goh, AmBank Group Research - Research Analyst [58]

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Okay. Hang on. All right. Can you hear me now? Hello.

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Vincent Ng, MISC Berhad - General Manager of CPD [59]

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Not very well. But try to speak slowly, please.

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Khir Peng Goh, AmBank Group Research - Research Analyst [60]

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Okay. For your Page 7, under your LNG segment, I noticed in the second quarter compared to the first quarter, your revenue was slightly up, but your profit came down. Was it due to bunker cost? And if it is due to bunker cost, can you give us a bit of estimate on how much bunker cost went up for your LNG division?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [61]

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On Page 7, we are referring to Q1 2019 versus Q2 2019, there was some dip in the numbers of the performance or you're comparing Q2 versus Q2 2018?

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Khir Peng Goh, AmBank Group Research - Research Analyst [62]

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Second quarter 2019 versus first quarter 2019.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [63]

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Okay. As I mentioned earlier, there was a negative, if you will, of one-off gain in first quarter 2019 coming from the completion of the acquisition of one of our LNG vessels. And then we have also gained on disposal of one of our vessels in the first quarter 2019.

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Khir Peng Goh, AmBank Group Research - Research Analyst [64]

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But I understand those nonrecurring items were removed, am I right, from the $62.2 million in the second quarter and the $79.9 million?

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [65]

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Give us a moment, yes.

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Unidentified Company Representative, [66]

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It includes -- it included.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [67]

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Sorry, my mistake. There's a gain from the boiler retrofit that we have finalized with the clients in Q1 2019.

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Khir Peng Goh, AmBank Group Research - Research Analyst [68]

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And that amount was in the USD 79.9 million? It's not in the $10.1 million nonrecurring item?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [69]

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Yes.

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [70]

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Is there any other questions?

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Khir Peng Goh, AmBank Group Research - Research Analyst [71]

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Yes, I have. My second question is regarding your associate, which you mentioned that the, say, profit of 101.5 million, that jump in profit was due to a one-off gain for contract extension of the FPSO Ruby II. I'm just wondering how does the contract extension lead to a one-off gain. And why this goes to associate level, right?

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [72]

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Can you repeat the second question?

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Khir Peng Goh, AmBank Group Research - Research Analyst [73]

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For the associate contribution, which were up to 101 million, how is it that the one-off gains materialized for the contract extension for FPSO Ruby I -- Ruby II?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [74]

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This is primarily coming from the leases accounting treatment when the asset is under a finance lease, if there is an extension of the contract, then we have to do the discounting or comparing the fair value of the future cash flows, was this -- what is the value of the asset at a point of time, whatever the interest will be -- we recorded as a one-off gain into our income statement.

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Khir Peng Goh, AmBank Group Research - Research Analyst [75]

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But what was it on associate level? I thought FPSO Ruby II, you have 100% ownership.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [76]

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FPSO Ruby II is not owned by us 100%. It's 51 -- 60-40.

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Khir Peng Goh, AmBank Group Research - Research Analyst [77]

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60%...

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [78]

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It's not -- it's not a subsidiary. It's a jointly controlled entity.

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Khir Peng Goh, AmBank Group Research - Research Analyst [79]

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My third question is regarding your July '19 where I noticed your portfolio mix for petroleum charters for term to spot have gone up to 65%. I know -- I remember it used to be about 50% in the quarter the past few years. And I noticed that -- is this a conscious decision for management to move your petroleum tanker rates to term, and is this because you have an expectation that petroleum charter rates are going to come down over the longer term?

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Vincent Ng, MISC Berhad - General Manager of CPD [80]

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Okay. The decision to up in terms of the term is a conscious decision. It's not predicated on our expectation of the spot rate, whether it's going down or up. Rather, it's actually part of our overall strategy to go towards long-term secured income, so that we are less exposed to that cyclical spot market. So it's not based on a view that we have on the direction of spot rate.

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Khir Peng Goh, AmBank Group Research - Research Analyst [81]

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I see. Suppose spot prices were to go up later towards the end of the year during the wintering season, would we expect that portfolio mix of 65% to maintain? Or should we expect it to drop further towards the 50% level?

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Vincent Ng, MISC Berhad - General Manager of CPD [82]

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I think it's hard to predict because we have a large portfolio of vessels, all of which we have different charter terms, so it depends on when their charters expire, then we will look for new employment. So it's -- at that point in time, we will decide whether we should go for spot or another term charter. So it's not easy to say that I have to give the answer on that. So I think you have to depend on the circumstances that the times when the vessels are available for charter.

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Khir Peng Goh, AmBank Group Research - Research Analyst [83]

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Is there a comfort level or threshold where you would not want to pass or go below in terms of the percentage of spot charters that you have brought back to the segment?

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Vincent Ng, MISC Berhad - General Manager of CPD [84]

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I think, generally, we are looking towards around a 60-40 ratio as a comfortable ratio.

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Khir Peng Goh, AmBank Group Research - Research Analyst [85]

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So in this case, your 65-35 seems to be on the other extreme, so you'll most likely go back to 9% going forward?

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Vincent Ng, MISC Berhad - General Manager of CPD [86]

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No. Rather what we are saying is that we ---- 40% would be the kind of a mix for spot.

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Khir Peng Goh, AmBank Group Research - Research Analyst [87]

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Okay. I see. Okay. My final question is regarding your IMO 2020 readiness. Given where we are now and it's only next year, how ready are you in terms of able to meet the requirement of the IMO? And if, let's say, you are not ready, I mean what would be the impact to MRP in terms of the utilization of the assets?

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Vincent Ng, MISC Berhad - General Manager of CPD [88]

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Okay. To answer your question for the petroleum segment, we are already ready right now. And for the LNG segment, we will be ready by the end of the year.

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Operator [89]

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Next, we have Yen Ling from Maybank.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [90]

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Can I just refer to your slide, Page 7. I just want to clarify again the PBT for 2Q '19, $62.2 million, it includes [EI]. Is that correct?

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [91]

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[EI], what, sorry?

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [92]

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The nonrecurring item, is it included in the $62.2 million?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [93]

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Yes, it is. It is.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [94]

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It is included. Okay. Just now, I think Romzi mentioned for 1Q '19, the $79.9 million, it included one -- some gain -- gain on something like gain on boiler. What was it again?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [95]

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The $80 million versus the $62 million, we had one of these resulting from the finalization of the -- our projects that we have performed to the charter. So this is also similar situation like the one-off gain from the finance lease. We showed the numbers in Q1 FY 2019.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [96]

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Okay. How much was it?

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Raja Azlan Shah Bin Raja Azwa, MISC Berhad - CFO [97]

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What is the question?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [98]

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Something around, more or less a 10.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [99]

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Okay, okay. And secondly, the impairment costs, what was the reason? Was it because of the lower market value of the vessels?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [100]

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Yes, that is correct.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [101]

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Okay. And thirdly, the CapEx. I noticed your CapEx is already a lot lower this quarter. So before the shuttle tanker comes in, in the 2 -- taking delivery in 4Q so your CapEx should be -- remain low, right, similar to this quarter, in 2Q? And to 4Q maybe it will pick up and then next year will go up more?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [102]

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CapEx, are you referring to cash flow's comparison under Page 5 of our Bursa announcement?

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [103]

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Yes. Yes, the purchase of ships.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [104]

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It's slightly higher because in our Bursa, June 2019, it's about MYR 1.1 million. We said...

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [105]

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Correct. But if I just look at this quarter, second quarter, this second quarter achieved a lot lower compared to your 1Q? Is it a timing difference? Because 1Q, you had some delivery of one of the LNG vessel, something like that. So since 2Q, 3Q, there will be no new vessels? It should come down -- and then only 4Q pick up again?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [106]

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I can bring your attention to slide -- Page 14 out of the 22. If you look at our capital commitments, whatever we have budgeted today compared to Q2 2018, the numbers is also lower because a lot of our (inaudible) we have budgeted, we have paid out and also we have to get the delivery for some.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [107]

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Okay, okay. Lastly, could you share your thoughts why -- is there some divergence in the spot rates for the tankers? Because I noticed VLCC has gone up in August a lot, but Suezmax and Aframax are still very soft. Why is there a divergence here?

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [108]

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Sorry. Can you repeat?

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [109]

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For the petroleum spot rate, VLCC, the spot rate has gone up a lot in August, but Suezmax and Aframax are still very soft. Is this just a timing thing? Or some reason for the divergence?

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Vincent Ng, MISC Berhad - General Manager of CPD [110]

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Yes, we did observe, I think, in July, August, that had gone up in the VLCC. I think that partly is driven by certain expectations on the IMO 2020. So the long haul takes a -- continued exports from the U.S. for long-haul wages.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [111]

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Okay. So the long haul for -- VLCC for the long haul is doing better?

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Vincent Ng, MISC Berhad - General Manager of CPD [112]

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Yes. And also because, if you remember my statement earlier, some of the VLCCs are going for scrubber retrofits. So they will be taken out of the market for up to 40 days. So that will reduce the supply in the market. And also, there has been some usage of vessels as storage for oil -- oil products.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [113]

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Can I just clarify one last thing? Your spot exposure for the petroleum is mainly in Aframax, correct?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [114]

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Export in all the segments, we do have spot exposure. It varies from segment to segment.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [115]

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But in terms of, like, say, percentage capacity, which has the most -- I assume that's the one that has the most.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [116]

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In terms of percentage in spot usage -- yes, chemical had highest percentage in spot.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [117]

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I see. I see. I see. So lastly, petroleum tanker division in 3Q, maybe just slightly weaker Q-on-Q?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [118]

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Slightly -- sorry. Could you repeat that?

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [119]

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Just probably the earnings for petroleum side, 3Q '19, it could be just slightly weaker or flattish because like we've seen probably stronger VLCC offsetting the other 2 weaker segments.

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Unidentified Company Representative, [120]

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Right. The second half is expected to be as good as the first half.

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Yen Ling Lee, Maybank Kim Eng Holdings Limited, Research Division - Research Analyst [121]

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So as good as the first half?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [122]

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The fourth quarter tend to be high because of winter season, but third quarter tends to be relatively weaker so -- second and third quarter. So I think the third quarter, we expect it not to be strong in any case. And so fourth quarter will depend very much on the sentiment and demand for oil during that -- prior to that.

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Unidentified Company Representative, [123]

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And also how severe is the winter.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [124]

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Yes, the expectations of the severity of winter.

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Operator [125]

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Our next question is [K Lin] from CIMB.

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Unidentified Analyst, [126]

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Just a very quick one to follow up on Yen Ling's question. The nonrecurring item on Slide 7 for the LNG segment, which vessel is it in relation to?

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [127]

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Can you speak louder? Sorry. Does it include...

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Unidentified Analyst, [128]

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Which vessel is it in relation to the nonrecurring item on Slide 7, USD 5.4 million.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [129]

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It's really to -- few of our non-long-term charter vessels.

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Unidentified Analyst, [130]

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Non-long-term charter vessels, how many vessels are these?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [131]

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We have about 5 non-long-term charter vessels, and it relates to some of them.

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Unidentified Analyst, [132]

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Not all of them, just some of them.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [133]

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Some of them.

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [134]

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Yes. Correct.

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Unidentified Analyst, [135]

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Okay. And then on Slide 9, for the same question for the USD 7 million impairment.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [136]

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It relates to one of our assets that we have planned to scrap using the clean scrap yard.

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Unidentified Analyst, [137]

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What vessel is this?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [138]

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So one of our open assets under offshore business unit.

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Unidentified Analyst, [139]

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So there are 2 vessels involved here.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [140]

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One.

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [141]

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Only one.

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Unidentified Analyst, [142]

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Okay. So this particular asset is what you're planning to scrap?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [143]

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Yes, that's correct.

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Operator [144]

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Our follow-up question, Kong Ho Meng from UOB Kay Hian.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [145]

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Guys, did you mention that you are looking at -- in your offshore space, you're looking at opportunities in the Atlantic Basin. So just on the -- an update on how ready you are to secure FPSO or floater jobs today? And what is your strategy.

I think earlier -- I think in the past, you mentioned that FPSO in Brazil, and you may be looking for partnerships. So just to get a better view on whether are you still following the same strategy? How far you have gone? Yes.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [146]

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Yes. We basically have brought in the talent to enable us to execute this project. And so far as our strategy, we keep our options open, but we are ready to execute this, and we probably will have a better feel towards the end of the year.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [147]

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Okay. In terms of, say, CapEx-wise, what is the appetite of your CapEx would be for opportunity like this?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [148]

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As you are aware, these Atlantic Basin projects on the high side. They are more than 1 billion.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [149]

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So your EBITDA is supposed to be for $1 billion or could be more than $1 billion FPSO?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [150]

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Yes, we have got multiple projects. So we will need to allocate our capital very carefully across different jurisdictions. And given that this Atlantic Basin is on the high side, I think let's try to get the thing executed successfully first. I mean there's no point, say, they want to do many, but we don't do any. Let's just try to get this one off the ground first.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [151]

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Okay. So just earlier, you mentioned you brought in someone -- you have a partner already, is it? Sorry, just to double check.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [152]

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No, no. We have brought in 7. That means we have recruited people from the industry from various parts of the world to enable us to successfully execute this project.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [153]

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Okay. Okay. Are you still looking to...

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Unidentified Company Representative, [154]

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Yes, mainly people with experience in that area who have similar project experience.

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Ho Meng Kong, UOB Kay Hian Research Pte Ltd - Senior Analyst [155]

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Okay. Are you still looking to beat those projects on your own? Or you have to be with a partner -- or joint venture kind of thing?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [156]

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So we are keeping an open mind on that now. Of course, by doing a joint venture then it's lighter on the balance sheet. So we keep our options open.

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Operator [157]

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(Operator Instructions) Our next question, we have Adam from MIDF.

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Adam Rahim Mohamed, MIDF Amanah Investment Bank Berhad, Research Division - Research Analyst [158]

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Just 2 questions. The first question is regarding Page 7 of the slides. So regarding the LNG Shipping segment, right, could you maybe give us some color on the number of drydocking days in 2Q '19 versus 2Q '18?

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [159]

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You are asking the numbers of a drydocking days in Q2 '19 versus Q2 '18.

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Adam Rahim Mohamed, MIDF Amanah Investment Bank Berhad, Research Division - Research Analyst [160]

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Yes.

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Mohammad Romzi, MISC Berhad - Senior General Manager of Finance [161]

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Yes. I can see in Q2 '18, there are about 50. And in Q2 '19, there are more or less about 200 days.

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Adam Rahim Mohamed, MIDF Amanah Investment Bank Berhad, Research Division - Research Analyst [162]

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Sorry. So Q2 '18 is about 200. Q2 '19 is around, sorry, 50 or 15?

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [163]

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5-0.

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Adam Rahim Mohamed, MIDF Amanah Investment Bank Berhad, Research Division - Research Analyst [164]

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5-0. Okay. My next question is regarding the readiness for IMO 2020. I recall in the first quarter briefing, right, you guys mentioned that for the petroleum segment, if I'm not mistaken, that there are around, I think, 6 vessels that are going to -- that are retrofitted with scrubbers, and that the action to retrofit it -- retrofit the vessels with scrubbers is only -- is only done when the charterers request. Yes. So I just want to maybe get whether there are any updates on those developments?

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Vincent Ng, MISC Berhad - General Manager of CPD [165]

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I think that the statements will stand. So we are only installing scrubbers for small vessels we fix.

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Adam Rahim Mohamed, MIDF Amanah Investment Bank Berhad, Research Division - Research Analyst [166]

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That's for petroleum, right? Just to reconfirm.

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Vincent Ng, MISC Berhad - General Manager of CPD [167]

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Yes, for petroleum. So no more than that.

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Adam Rahim Mohamed, MIDF Amanah Investment Bank Berhad, Research Division - Research Analyst [168]

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Okay. So meanwhile, for like LNG vessels, you guys would probably use the low-sulfur fuel or LNG fuel.

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Vincent Ng, MISC Berhad - General Manager of CPD [169]

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Basically, they are steam vessels. So we actually usually like to borrow from the LNG as the main fuel, you could say that.

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Operator [170]

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We have come to the end of the Q&A session. I will now hand the session back to Rozainah for closing comments. Over to you.

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Rozainah Binti Awang, MISC Berhad - General Manager of CPD [171]

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Ladies and gentlemen, this concludes today's conference call. On behalf of MISC Berhad, we would like to thank you for your participation. To those who have not received our presentation slides, please do contact us, and we will gladly provide a PDF version.

To the sell-side analysts, we would appreciate that you forward a copy of your published research report to the MISC Investor Relations team for our reference. Thank you once again, and have a good evening.