TORM plc (TRMDA) Earnings Call Transcript & Summary

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the TORM plc First Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background in way. After the speaker's remarks, there will be a question-and-answer session.[Operator Instructions] I would now like to turn the conference over to Andreas Abildgaard-Hein, Head of Investor Relations. Please go ahead...

Thank you, and welcome to TORM's conference call. We are pleased to have you with us, and we have been looking forward to presenting to you the results for the first quarter of 2023. We -- we will refer to the page numbers that we present during our presentation. And at the end, you can ask questions if you are on the phone conference. If you are joining via webcast, you have access to ask questions during the presentation as well. After this conference, you'll be able to listen to a recording and as usual, you can find our presentation and other resident data on our website. Please turn to Slide 2. Before we start presenting the results, I would like to draw your attention to the safe harbor statement. Please turn to Slide 3. Today's presenters are as usual, Executive Director and CEO, Jacob Meldgaard; and CFO, Kim Balle. Please turn to Slide 4. I will now hand over to Jacob.

Thank you, Andreas, and good afternoon, good morning to all. Thanks for connecting with us today for our first quarter 2023 results presentation. During here, the first quarter of 2023, the product tanker market has remained strong with continued high volatility. We have achieved an EBITDA of USD 199 million and a profit before tax of USD 155 million, both of which are reduced by USD 15 million due to unrealized losses on FFA contracts that we have incurred to secure strong earnings on part of our earning days here in 2023 and into early 2024. We Return on invested capital ended at 29.2% for the quarter. And our balance sheet remains strong at net LTV of 26% and available liquidity of USD 575 million. This morning, Torm's Board of Directors approved a dividend of USD 1.46 per share based on the first quarter, and we expect that we'll distribute around USD 121 million here in early June. As of today, we have taken delivery of all of the 7 LR1 vessels that we acquired a little earlier this year back in January. We expect that the 3 MR vessels that we announced to be acquired here in March will be delivered to us by the end of this month. As of the 5th of May, we have covered 64% of the second quarter tonnage days at USD 4,086 per day. And here, please turn to Slide 5. Since the start of the Russian invasion of Ukraine now back in February 2022, we've seen strong improvements in product tanker rates, increased trade growth, longer trade distances, mainly due to the EU sanctions on Russia, but partly also due to more fundamental factors such as the oil demand recovery, recent refinery closures and consequently, increased import needs. This has moved the product tanker fleet closer to the point of full utilization, which again has led to higher freight rates. And this is where even small changes in the underlying demand and supply are creating high volatility in freight rates. And this is what we have experienced in the past year. Please turn to Slide 6. This rate volatility can be demonstrated by movements in the average freight rates. But in the past months, we have also seen increased rate volatility across the different regions, which has, in turn, led to even more MR vessels ballasting over longer distances to optimize vessel earnings. -- these more inefficient saving patterns have tightened the availability of vessels on the market and further support freight rates. Now in this environment where we see increased volatility, being able to then position our fleet towards the premium trades and the regions is even more important. And this means that having access to the right customers, the right cargo combinations is really essential. We can see that we -- with the One Torm integrated platform continue to have really strong support from our customers, and we remain confident that we will have access to the cargoes and the trades that will enable us to position our fleet towards the premium regions. Now please turn to Slide 7. -- when we look more closely at the main market drivers, the geopolitical conflict in Europe and the resulting EU ban on Russian oil products has been the most important demand driver for more than a year now. As a result, the composition of EU imports has undergone a significant change from being mainly short-haul to being now predominantly long haul. This has translated into a 48% increase in EU import ton mile during the post sanction period compared to the same period a year ago. And this is in spite of the fact that EU imports are almost 20% lower year-on-year, which itself has been a result of higher imports and product stockpiling ahead of the sanctions as well as the fact that EU oil demand has seen some weakness so far this year. Similarly, Russia has so far been successful in redirecting its clean products to markets in North and West Africa, Turkey, sun to Brazil, the Middle East and also Asia, again, increasing ton miles, although recently, we have seen some slowdown in Russian volumes presumably due to refinery maintenance. And here, I kindly ask you to go to Slide 8, please. Looking at some of the more fundamental drivers, so not related to [indiscernible], Changes in the refinery landscape are also an important driver on the market. Since 2020, around 3 million barrels per day of refining capacity has been closed down permanently. Most of the affected capacity is located in regions which are already large importers of refined oil products such as Australia, New Zealand, South Africa, just to mention some of the examples. These regions import needs have increased in conjunction with the refinery closures and are expected to increase further as oil demand is still picking up with especially jet fuel demand still recovering. On the other hand, these refinery closures coincide with new capacity coming online, mainly in the Middle East and also in China, regions that already today are large exporters of all products. Much of this capacity, especially the Jazan and Al Zour refineries in the Middle East are currently ramping up to reach their full capacity. These refiners are, to a large extent, concentrated around middle distillates, which we believe will further facilitate the trade recalibration triggered by the EU ban on Russian oil. Refinery capacity increases in China this year are likely to cater more for the increasing oil demand domestically. -- after the country listed all of the COVID lockdowns. So in the short term, we do not model any significant increase in exports from China. But should China increase its export quotas in the coming months. This would be another leg up on the market. Please turn to Slide 9. The positive outlook for the demand for product tankers in the next 2, 3 years coincides with the supply side, which remains supportive. Despite we've seen reasonable increase in newbuilding ordering. Indeed, the recent orders, especially in the LR2 segment have resulted in the order book to feed ratio increasing to 8% from 6% just 2 months ago. But our fleet growth assumptions for the coming 2 to 3 years have not changed as these new orders are mostly for the second half of 2025 or 2026, and we expect some of the late 2025 deliveries to be pushed into 2026. Please turn to Slide 10. When we look at the fleet supply over a longer time horizon, it is possible that there will be more availability for product tanker orders at shipyards. And subsequently, we could see higher deliveries of new builds, not least due to the need to renew the aging fleet. However, this will coincide with a significant increase in the scrapping potential as the fleet built in the 2000s is reaching their natural scrapping age. Consequently, the net fleet growth could even to negative here in the second half of this decade. Please turn to Slide 11. Another aspect that one needs to take into account in connection with the recent pickup in the LR2 ordering is that given the versatility of the LR2 fleet, they can both trade clean and dirty products, the LR2 order book should be seen in connection with the Aframax order book, which, of course, relates to dirty products. The combined order book is currently at 9%, still relatively low in historical terms, and this compares with 5% of the combined fleet reaching 25 years of age during the same period. And we consider that this segment has normally a lower average scrapping age which has historically been 21 years, still regularly even all the way up to 24% of the fleet could be removed from the primary market in the next 3.5 years. Now here kindly turn to Slide 12. On the concluding remarks here on the product singer market, it's clear that we see the main demand and supply drivers on the product an market continue to be very supportive. The trade recalibration changes in the refinery landscape, which already started last year, we continue to support the market also this year with the new large refineries ramping up in the Middle East being an important driver in this development. Around a year ago, we estimated that the full recalibration of the EU Russia trade would add 7% to the ton mile demand for product tankers. And according to our calculations, 6% of this has already happened despite the fact that EU imports have been down so far this year. With an expected pickup in European imports later this year, the Ton-miles could increase by a further 2% to 3% and in fact, exceed our original estimates. Of course, we should not disregard the fact that the current environment with high inflationary pressure on the global economy could slow down the growth pace of the global oil demand. Nevertheless, we believe that even those effects will be overweighted by the effects of the redistribution of the energy supply chain and that a potential effect caused by -- so demand growth will not from the redistribution. Furthermore, the positive demand side is complemented, as I mentioned by the support of supply type situation, securing low fee growth for at least the next 2 to 3 years. I'll pause, and I now hand it over to my colleague, Kim.

Thank you, Jacob. Please turn to Slide 13. Despite the strong TCE rates achieved on average in 2022, we have achieved even higher TCE rates in the first quarter of 2023. We increased our rate from $34,154 per day in 2022 to above $41,700 per day over a total of 6,732 earning days in the first quarter across the fleet. For MRs, the average rates for the first quarter ended at $36,461 per day, LR1s at $4,047 per day and for LR2s at $65,551 per day. Once again, the one on platform demonstrated a very strong performance also when comparing to our peers. Based on our rates and coverage for as of 5th May 2023, we had effected a total of 64% of our days at $4,086 per day in the second quarter across the fleet. For MR, 68% were fixed at $350,804 per day for MRs. 62% was fixed at $450,578 per day for LR1s and 51% were fixed at $59,197 per day for Alts. Part of the coverage has been made with SFA contracts. And as for 5th May 2023, the cover for the second quarter of 2023 was 744 days fixed at $42,026 per day -- for the third quarter, 1,116 days were fixed at $42,199 per day. And for first quarter, 1,116 days were fixed at INR 42,402 -- sorry, $42,405 per day and as per first quarter of 2024, 443 days were fixed at $41,849 per day. These contracts are accounted for in CCE and FX on net results. In the first quarter of 2023, they gave an unrealized loss of $15.2 million, and we expect unrealized gains and losses on these contracts impacting our P&L, while they are outstanding. As of 11th May 2023, the market value of our FFAs and related bunker hedges was a plus of $25 million. Similarly, the results are fixed at strong levels for the second quarter, where we are expecting 7,546 earning days and in Q3 when all additional secondhand vessels will have been delivered, we expect 7,761 earning days. Torm had 299 drive-in days in Q1 2023, which is 29% of the expected write-down in days for the full year. Please turn to Slide 14. The continued strong markets have provided us with an EBITDA of $199 million from our operations in the first quarter of 2023. And over the past 4 quarters, we have achieved an EBITDA of USD 881 million. During the same period, Torm has paid dividends of total $51 million to our shareholders, together with the dividend announced earlier today. At the same time, while acquiring 10 secondhand vessels to the fleet, we have reduced our net loan-to-value to 26% before dividends by the end of Q1 2022. Our CapEx commitments increased during the first quarter of 2023, and the increase is driven mainly by purchased but not yet delivered vessels and scrubber investments. Please turn to Slide 15. Torm continues to evaluate our opportunities for fee expansion and renewal. As mentioned, we acquired a total of 10 secondhand vessels in the first quarter this year. This means that as of 31st March 2023, the value of the 3 vessels that we have on a fully delivered basis in our fleet at that time, reached $2.9 billion, an increase of USD 936 million since the same time in 2022. Existing measures increased by 3% since the end of 2022, and we added 5 vessels to the fleet amounting to $172 million. Since the end of the quarter, further 2 vessels have been delivered and further 3 vessels will be delivered before the end of May, corresponding to SEK 166.9 million. Our net asset value reached $2.6 billion as of 31st March 2023, also impacted by significant cash generation. By the end of the second quarter 2023, we expect to have 8 vessels in our fleet. Furthermore, we have seen that the secondhand vessels for especially in one 50-year-old MRs have increased further since the end of Q1 2023. Please turn to Slide 16. We -- as mentioned, we will distribute around $121 million or $1.46 per share based on our end of first quarter cash balance. Consistent with our distribution policy or distribution is derived from our cash position of $411 million and our available funding sources of $115 million, we deduct restricted cash primarily related to FFAs of $30 million and cash in Marine and estate technologies of around $5 million. And finally, [indiscernible] proceeds, which were partly used for the 50 vessels of $23 million. Our minimum cash reserve for $83 vessel was $149 million at the end of the first quarter. Our payout ratio remained high at a level of 78% of the profit before tax of $155 million. Please turn to Slide 17. During the past months, Torm has utilized the strong market to strengthen our financial position. Comparing to our first quarter performance last year, our net loan-to-value has reduced significantly from 51% to 26%. In addition, we have obtained refinancing and acquisition commitment of $556 million, while extending debt maturity from 2026 to 2028 with a further possibility to extend to 2029. The commitment further secures an interest rate margin reduction of $433 million of Torm's existing debt. Margin reduction is an all-in 65 basis points. This includes the loan margin reduction and the new loan priced SOFR as an interest rate, which is lower than the U.S. LIBOR. The refinancing underlines the strong position we have with European shipping banks in addition to the strong relationship that we have with Asian lending houses. All in all, a conservative funding structure coming from well diversed in funding sources. We have had 90% and 84.4% of our interest rate exposure for the next 3 and 5 years, respectively. Our 5-year interest rate exposure was hedged at 1.47% plus margin, either by interest rate swaps or by fixed rate agreements. On the cash side, we have also seen significant improvements during the past year. Available liquidity increased from USD 139.6 million in the first quarter of 2022 to USD 574.6 million in the first quarter of 2023, including funding commitments related to acquisition of the marine 2 LR1s segment business. Our distribution policy where we hold back $1.8 million per vessel provide a strong liquidity buffer. Further, with the coverage already obtained, we have fixed 31% of our earning days at USD 40,721 per day for the rest of the year. With that, I will let the operator open up for questions.

At this time, if you'd like to ask a question, simply press star followed by the #1 on your telephone keypad. You may also ask a question on the webcast. Our first question will come from the line of Jon Chappell with Evercore.

Jacob, I want to start with the market one. Just a little bit of clarification, but also a little bit of recency. I thought it was interesting that you said the 7% of ton-mile benefit that you foresaw let's call it, 12 to 15 months ago from what's going on in Europe. You had 6% of that already. But then you'd also laid out another 3% from kind of refinery dislocation, et cetera. So when we put it all together, the 10%, I guess, aggregate ton-mile benefit, you think you're already 60% of the way there. Is that an accurate assessment if we add it all together? And then the second part of that is, given some of the recent volatility, maybe to the downside, can you explain some of maybe the seasonality or some of the other issues that you think have caused a little bit of downward volatility of late.

Yes, absolutely. So the way we think about this, clearly, the sanctions are working the way that they intended to. So oil is flowing as crude out of Russia. And you're seeing that Europe is replenishing on the refined product side with products from further away. What we have not seen so far is that the volumes that we are experiencing are lower than what they were on average last year at this stage because there's been some stockpiling taking place towards the end of last year. So the differentiator here is that actually the sort of the trade recalibration, we say it's 6% so far, but there's more to come. And that more to come stems from a normalization in the import levels. So that is what it hinges is a volume game that is a little different. So actually, the fact that we called 7%, that was based on those volumes. We are not seeing exactly 7% yet, only 6% because of volumes being down, but transportation distances being slightly higher. So we think it's [indiscernible], but it's, of course, hinting on that you would see that imports into EU would grow from where they are now. So that's number one. Number two, to some of the recent weakness, which is primarily seen from our perspective, actually a European MR or Atlantic MR game. Much of that has to do with what we don't have so much insight into, which is the Russian refinery sector being closed down for maintenance. I think that is the one key component into, I would say, understanding the seasonality of the rate environment for MRs in the Atlantic that currently, some of the vessels that would be engaged in export out of Russian refiners. They are now reentering so to say, the market that we've been operating in and many of our peers all along, which is non-Russian trades. Our opinion is that Russia will not necessarily come back to exactly where they were on their exports but close to. And at that point, that will take tonnage up and the efficiency in our market will in that sense, go down, leading to a higher freight rate environment. I'm not seeing big signs of change currently in the 8 years. It is, of course, on a day-to-day, it's quite sensitive, but I don't think that's a good indicator of what is taking place. We saw that MR rates, for instance, in were, let's say, in the low to mid-20s yesterday and today, they're in the low to mid-30s. But is that a sign of that there's any dramatic change in the underlying freight, not really. It's just that there's a little more cargoes coming in the market and then immediately freight rates react. And I think we will see a lot of that that intraday almost ends today or is intraweek, rates will be quite volatile.