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TORM plc
8/15/2024
Good day and thank you for standing by. Welcome to the TORM first six months and second quarter 2024 results call. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again. Thank you. I'll now turn the call over to Jacob Milgaard, CEO. Please go ahead, sir.
Thank you, and thank you, everybody, for joining us on this call today. This morning, we released our company announcement with the results for the second quarter of the year, and I'm pleased to report that, again, this quarter, Solum has achieved a strong financial performance. Our time-sharer equivalent earnings increased to US dollar 326 million, and EBITDA improved to US dollar 251 million, as freightways remained firm throughout most of the quarter. Again, we have witnessed a continuation of the market dynamics that we've seen in the previous quarters, i.e. geopolitical tension stemming from both the Ukrainian-Russian conflict and the escalating confrontations in the Middle East that leads to rerouting of vessels, longer voyages, and higher ton-mile demand. This, of course, adds to an already tight supply-demand balance in the product anchor market. We remain optimistic about the prospects for the coming years as we believe that the supported fundamentals for the positive rate environment is likely to stay intact. Thus, we expect longer ton-mile, higher utilization rates in the years to come, and at the same time, manageable new building deliveries. Consequently, and in line with what you have seen in previous quarters, in early July, we entered into an agreement to acquire additional secondhand vessels. This time, eight MR vessels to be delivered during the second half of this year for a total consideration of US dollar 340 million. The vessels have all been built at Hyundai Meepo Dockyard in 2014-2015, and six of the vessels have been fitted with scrubbers. And then, as you would expect us to do when our vessels reach a certain age, we have divested one 2006-built MR tanker for delivery in the third quarter of 2024 for a cash Thus, adding it all together, we are both expanding and replenishing our fleet. And as we've done for some time now, we are using our partner share-based structure to finance the transaction. By continuing this way forward, we believe that TORM will be in a strong position to further add to our value creation over the coming years. All in all, this has been a very satisfactory quarter and in line with our intention of distributing the cash flow net of debt repayment, TORM has declared a dividend for the quarter of US dollar 1.80 per share, thus adding to the positive dividend load seen over the recent quarters. And here, please turn to slide five. In the past two and a half years, EU political tensions, first in Europe, then in the Middle East, have led to the product tanker rate increasing to a new higher average level. At the same time, we're also seeing increased volatility in rates as the feed utilization has moved closer to full utilization. Please turn to slide eight. The main impact of these geopolitical tensions has been a reshaped product and a trade towards longer distances, all while overall trade volumes have risen, supported by increasing oil demand and changes in refinery landscape. The EU sanctions against Russia in 2023 led to a trade rerouting towards longer-haul trade, both for European imports, but also for Russian exports. This year, the product-hanger market has been strongly affected by the Houthi attacks against commercial vessels at the Bab and Maldives Strait. The share of global clean petroleum products trade transiting the Suez Canal has declined from 12% to only 4%, meaning 8% of the global trade has been redirected. The majority of this is going a longer route around the Cape of Good Hope. While the Middle East situation is very dynamic, the recent escalation of the conflict between Iran and Israel suggest that the timeline for disruption continues to be drawn out. Now, please turn to slide seven for a closer look at the market development here in the second quarter of the year. In the second quarter of the year, trade volumes with refined oil products increased by 2% compared to the same quarter last year, supported by higher oil demand and recent changes in the refinery landscape. Together with the longer trading distances, this has led to an overall increase in ton mile demand for product tankers. At the same time, earnings for larger crew tankers have been subdued both seasonally, but also given the fact that VOCCs have not directly benefited from geopolitical drivers. This has led to a cleanup of a number of VOCCs and Suez Maxis since the end of the second quarter. However, As we move towards the fourth quarter, TORM expects a seasonally improving crude tranquil market to significantly reduce incentives for crude cannibalization at the same time as both seasonality and volatility with continued market disruptions will keep clean trade distances longer. Please turn to slide eight. When we combine the tonnage demand and supply drivers, our calculations show that the product-tanker demand-supply balance has stayed on a much firmer footing than before the geopolitical tensions started. After an 8% increase in tonn-miles last year, the Red Sea disruption, together with organic growth and trade volumes, has so far this year added around 10% to tonn-miles. This has been front-loaded, but actually more than what we had forecasted. What is important to mention here is that ton mile has grown significantly also on trades not directly related to the Red Sea disruption. At the same time, net fleet growth has been much more limited. The cleanups of both LR2s as well as large crude carriers have increased the supply of tonnage. But even with this, the supply growth has been much more limited than the growth in ton miles. Please turn to slide nine. The product tanker ordering at shipyards has picked up after years of subdued new building activity. Currently, the order book stands at 19% of the feed. As we have pointed out earlier, new building activity has largely concentrated around the LR2 segment. Given the versatility of the LR2 feed, which can trade both clean and dirty products, the LR2 order book should be seen in connection with the dirty Afromax order book. The combined order book is currently at 17%, which is equal to the share of the combined fee being candidated to recycling. Furthermore, it's important to mention that the current order book is spread over four years, and with the increasing average delivery time, vessels ordered today will most likely not be delivered before 2028. And I'll kindly turn to the next slide, turn to slide 10. When we look further ahead in time, we now expect the potential additional ordering of the product tankers from 2028 onwards to be lower than our previous forecasts. This is predominantly due to Chinese shipyards opting to build container vessels, energy carriers, and other vessel segments where China has strategic import interests. coincides with a period where an increasing share of the feed reaches a natural scrapping age. Should a strong freight market result in less-than-expected scrapping activity, we still expect older vessels to leave the mainstream market and go into sanctioned or carbon-fired straits. Please turn to slide 11. Lastly, Behind the geopolitical factors that have reshaped refined products and trade, there is a refining industry influx. In recent years, new refining capacity has been added in net exporting regions such as the Middle East. On the other hand, a number of refineries have been closed in net importing regions, for instance, Europe and Australia. This has led to higher trade volumes and higher demand for products and goods. Beyond the already announced closures, the refinery environment remains dynamic. The risk of falling utilization rates in mature demand regions raises the likelihood of further capacity closures before the end of the decade. Here, especially Europe, stands out with older, relatively small and less complex refineries that are more open to international trade than in other regions. A new wave of refinery closures is likely to again increase trade with refined products. Now, with these comments, I conclude my part of the presentation. I'll hand it over to my colleague, Kim, who will walk us through the financials.
Thank you, Jacob. Now, please turn to slide 12 for the financial highlights. In the second quarter of the year, our time chart equivalent earnings increased to 326 million US dollars. And based on this, we achieved $251 million in EBITDA and $194 million in net profits. When we adjust for the unrealized gains on derivatives in Q2 2023, the operating result is around 30% year-on-year, up around 30% year-on-year driven by both the firm freight rate environment and the increased relative share of LR2s in our fleet. Total cheap fleet-wide TCE rates of more than 42,000 dollars per day, with LR2s close to $52,000 per day, LR1s at more than $42,000, and MRs at more than $38,000. It should be noted that spot rates were at a relatively high level in the first part of the quarter, followed by some retreating towards the end of the quarter as seasonal desofting started. Our fleet had a total of 7,749 earning days, i.e. a little higher than the 7,451 days we had in the same quarter last year. However, as previously mentioned, with LR2's accounting for a relatively higher part of the total compared to last year, we believe these are strong numbers, and altogether, they reflect a very satisfactory performance, enabling us to realize GCE rates per day that have increased by $5,700 compared to Q2 2023. Further, the results that we have produced translate into a return on invested capital of 29.5%, thus underscoring the positive environment in which we are operating. And as highlighted previously, you should expect us to maintain a stable and conservative financial leverage also in periods where we are increasing our operational leverage as we are using our shares as part of the consideration in connection with acquisitions of assets. Again, this quarter, our business is generating significant profit and cash flow, and again, we remain firmly committed to returning a significant part of our earnings to our shareholders. Slide 13, please. The chart in the upper left illustrates how vessel values have increased over the previous quarters, leading to a total value of 3.7 billion US dollars, and it has a value showing a similar progression, reflecting higher broker valuations, of the vessels, as well as an increased fleet. Also, on this slide, we show in the chart in the lower left corner, the development in our net interest-bearing debt, which now amounts to 737 million US dollars, thus 157 million US dollars lower than a year ago, as we have increased our cash position somewhat, and thereby more than offset an increase in our gross debt. Based on this, we currently stand at a net loan-to-value ratio of 20.4. However, when subtracting the declared dividend for Q2, then it would be around 25%, but continuing the quarter-by-quarter decline in financial leverage. Slide 14, please. On this slide, we have made an overview of per share development in recent quarters. The result we announced today translates into an EPS of $2.08, significantly higher than the same quarter last year. The share count has increased by 10 billion shares over the period since last year, driven by our partly share-based transactions, and is up from 84.9 to 94.9 over the same period. Based on our strong earnings, the Board of Directors has declared a Q2 2024 dividend eight dollars per share, thus offering the dividend by 30 cents per share compared to same quarter last year. And now please turn to slide 15. These slides give you the full overview of the dividend distribution and the key dates to observe. Ex-dividend date for the shares on Nasdaq Copenhagen will be on 28th August and for the shares on Nasdaq New York on 29th August, as shares are now trading T plus one in New York, but otherwise the same process as usual. And now turn to slide 16 for the outlook. Based on the satisfactory results we have published today and the coverage we have for the third quarter of 2024, we increased the low end of our guidance range with 50 million US dollars and thereby narrowing the guidance range reflecting the increased transparency on full year numbers. Thus, we expect TCE earnings for 2024 of 1.15 billion US dollars to 1.35 billion US dollars and EVDA of $850 million to $1.5 billion. The table shows that we, in the third quarter of 2024, expect to have 7,859 earning days, and as of 12 August 2024, we had faced a total of 64% of those at a fleet-wide rate of $38,340 per day. For the full year, we are now at 68% coverage at a feed-wide rate of 42,205 per day. And with this, I conclude my part of the presentation, and I will hand it back to the operator who will take care of the Q&A session. Thank you.
Thank you. We will now open the line for your questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. To withdraw your question, simply press star 1 again. If you have dialed in and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from John Chappell with Evercore. Please go ahead.
Thank you. Good afternoon. Jacob, I'd hate to start with a big macro one. Seasonality makes complete sense. We've seen it many years. I think your chart that explained the crude and product was very interesting. But there is a little bit more, I think, macro uncertainty today. We've seen some softer numbers out of China. I think there's more concern about the consumer in general, IEA estimates for growth coming down. Your third quarter bookings have been good so far, but do you think that some of the weakness in August could be more than just seasonality and a little bit more cyclical headwinds as we think about how we come out of the summer and into the stronger winter?
Yeah, thanks, John. Yes, certainly. That could be a scenario. If I look back, then it was exactly the same last year. We were experiencing, if you plot, you know, in your data points, if you plot July, August, September last year, you saw exactly the same erosion in rates. So, you know, yeah, it could be that it's not seasonality and it's something more fundamental. I don't think that there's something that really points to that at this stage, but, you know, clearly that would be a risk for our market, but that's not, you know, that's the risk that we are having all the time. When I look at it, sort of, if I take it a step, a notch up, and I think that the oil consumption globally and sort of what we thought would be a potential risk, let's say a couple of years or three or four years ago, which would be a transformation of the underlying economy to way, aggressively away from fossil fuels. I think that has, that's not what I'm looking at right now. So there will be seasonality and there will be bumps, but sort of in the broad view, I don't think this is a sign of this. And looking back, as I say, to 23, the numbers, it was exactly the same price mechanism.
Okay. And if we tie that together with now the fleet reaching 96 vessels, which is, I think, by anyone's estimation, certainly critical mass gives you some optionality and flexibility with the fleet. If I go back and look at 7% ton mile benefit from Russia, 6% from Red Sea, certainly seems like these issues have probably more duration than anyone would have anticipated when they first began. But given that great impact, given now 96 vessels, given maybe some of the macro concerns, Is there a desire or maybe are you looking at a little bit more balance in the fleet? Because it does feel like the contract market has been far more steady and substantially more elevated than the weakness in the spot market we've seen recently.
No, clearly the markets are not reflecting that there is this speed bump, you could say, currently. I think we are going to take it really opportunistically. Currently, we are of the expectation that this is a seasonality and that it will come back. I think that's the time to actually make those calls rather than in the current environment. Okay. Thank you, Jacob. Thanks. Thank you.
Our next question comes from the line of Omar Nocta with Jefferies. Please go ahead.
Thank you. Hi, Jacob and Kim. Good afternoon. I am obviously nice earnings as usual and wanted to maybe piggyback a little bit on John's first question. You know, obviously we're in a very strong market. Things have clearly cooled off a bit. They remain elevated, definitely from a historical perspective. I guess there's been some talk of refinery run cuts in Asia and just wanted to get a sense from you. Do you feel like the spot market or the charter markets as they are today are reflecting that already? And then do you see risk or are you seeing signs that refinery run cuts will be coming into the Western Hemisphere as well?
So when we look at it, Then actually, I think we're starting to see that activity with our clients in Asia is actually coming back from the lows that we saw maybe a couple of weeks ago. It is on the back of the China demand have been slow, as you pointed to, slower VLCC movements and also that the product, how do I say, flow internally in China has been relatively slow. Of course, leading to that you are not calling on more crude into your facility. But it may actually lead to being a beneficiary that the product and market will have is that China is still running at a rate that is higher than what their local consumption would be, and that you could see that there will be additional export quotas likely to be provided soon. Let's see. It's a political decision, but I think it's stacking up against that we will see more exports out of the region rather than less exports out of the region in the coming months.
Okay, so it sounds like effectively then the market has been reflecting this for some time. A couple questions just to follow up a bit more on TORM specifically. This is perhaps an easy one that I think you probably have answered in the past, but just wanted an update. You mentioned that the 68 scrubbers that are installed on your fleet of the 85 plan. I guess, is the plan still to move forward with those remaining installations? And would you do those, I guess, as part of your ordinary dry dock of those ships?
Yeah. So, our plan is currently intact. And it will be, as you say, also done in the ordinary course of the business. That's a mix of some of the acquisitions we've done. over the last couple of years where it makes still financial sense. Of course, we will do it case by case and sort of look at what we deem to be the net present value of making the investment. The time is actually not so relevant because we're doing it during the ordinary course. But of course, you know, installation itself is costly and we do plan is to go ahead.
Okay, great. And then just a final one just regarding the dividend. I think this one, it's 87% of earnings this last $1.80. I guess just in terms of the policy, how should we think about it in terms of it being formulaic? And I know you get this question a lot, but is the dividend quarterly, is it still formulaic in regards to basically paying out excess cash that's above a reserve, or has it become a bit more discretionary by the board?
Yeah, it's always been up to the board to place discretion at the end of the day. But the way we sort of think about it is, as you're saying, and I think we should all think about it, whatever we earn or we generate of liquidity from end of a quarter or start of a quarter to end of a quarter, that is basically what we sort of have the ability or anticipate to pay out as dividends or distribute out. So it's the same thinking, but of course, if the board deems together management that we should sort of have another calibration of the final dividend, we could do that. But in the outset, it's the same way we are thinking. We just take the net cash generation per quarter and then we That's the outset for us that we will distribute that. We have not changed it per se over the course, the last many course.
Okay. Well, very good. Thank you for that caller. I'll turn it over. Thank you.
Our next question comes from the line of Clement Mullins with Value Investors Edge. Please go ahead.
Good afternoon. Thank you for taking my questions. I wanted to follow up on Omar's question on Chinese demand. I mean, diesel demand has been fairly weak year to date as some trucks shift to LNG. And on the other hand, as EV adoption in the region increases, that could also weigh on gasoline demand. Could you provide some commentary on when do you expect gasoline and diesel demand in the region to plateau? And secondly,
you believe china's infrastructure is able to support continued lng and eb adoption okay thanks for those questions i think i'll start with chinese demand for products well um of course there is as you point to a number of factors that is impacting how is the Chinese infrastructure sort of developing, both on EVs, adaption of that, and also on consumption of diesel and gasoline on the other side of the equation. We see that Chinese demand is going down, but that is obviously not necessarily bad for product tanker flows. So we are more concerned, not so much about the internal distribution of energy sources, in the Chinese ecosystem, but rather, what is the impact on trade flows in or out of the refineries? And there, everything has been equal. We don't see that there is a threat from the EV adoption, nor from how the sort of infrastructure issues that may or may not be there to build that further, that that is having a negative impact on the product market as such.
That's very helpful. Thank you for taking my questions, and congratulations for the quarter. Thanks a lot. Thanks for dialing in and for the question.
Our next question comes from the line of Peter Hagen with ABG. Please go ahead.
Hello, and good morning, or good afternoon, I should say. Two questions from my side. The TC market these days, would you consider doing something longer on current levels? And current levels I'm reading is, well, just try of 30,000 for MRs for three years or a little bit more than 40,000 per day for LR2s. Are those levels attractive, you think, for three-year chartering activities now?
Yeah, I think you are right. We did do that, Peter, during the quarter. And Ella took for three years with one of our clients in the low mid 40,000. So, yeah, we would look at that. It depends on the trade and our clients. That is a market that we are constantly evaluating. and that we also did this call, yes.
Okay, understood. And in terms of the volumes done, would you sort of consider doing a larger share of your fleet to lock in those rates, or are you happy to spread spots still?
We're happy either way, you know, so obviously we are believers in the market will offer, you know, good rewards, good risk return. when you are stuck and also from part of it, we will also happily engage with our clients. So I don't think it is an either or also given the number of assets that we've got that I think we can play both sides, Peter, on that. But the current levels are, in our opinion, attractive enough to also engage in.
Yes. Okay, thank you. And a second question for myself in terms of your presentation in slide 8, you're here showing, well, approximately 8 million deadweight, if I read it correctly, of crude tankers or LR2s and crude tankers moving into the product tanker fleet. Is this to be understood as your expectation for the full year, or does this Does this imply that you'll have some sort of reduction from what we now here are? Well, even the OCCs are doing a clean trade.
Thank you. That's a good observation. Good question. So this is the here and now. This is what we see. The portion of crude tankers that have migrated and you can see in for us cannibalized on the product and the trade. So this is not our estimation of where we will end the year. We do expect that, you know, a significant ratio of these vessels will go back into those rates once you see a seasonal pickup also in the VLCC and in the Suezmax trades. So this is here now what we can identify as vessels that are carrying clean petroleum products as we speak.
And just as a quick follow-up on that, speaking for myself, I was pretty surprised when I heard about all those fields, in particular trading clean. And to some extent, it makes me somewhat worried about the product trade, of course, because the crude tanker fleet is larger, and if all of them are capable of coming out and cannibalizing your market, I would think about that as a threat. But To what extent have you been surprised to see the migrations coming into your part of the market over the past couple of months?
For us, it is not surprising if the VE market is offering, let's say, pick your number, $20,000, $25,000 a day for a VE, and that you can in a way take two LR2 stems and LR2s are trading at $50,000, and that you can then optimize your earning on the V to let's say 40. That makes sense if I'm a viewer. But if the market for an LR2 is 30 and I'm getting 25 on a V, you're not going to do two LR2 cents because it's simply not economically feasible. So there was a window where the Vs were where you could say the gap between what a V were making and what an LR2 were making made that incentive. I don't think it is incentive even today to do it because your alternative from going out of the V market is not attractive right now. So I think what it demonstrates is that crude and product is not two separate markets. And obviously, if you have no V market, Vs will try to cannibalize on CPPs if those rates are. So I think that's just a, I think it's more that there is a, you cannot have a differential, let's say, of three times LR2 to a V, because then it will be attracted to do two, LR2 stems on a V and you get a higher TCE. Does that make sense? So there's a, you could say there's a limit to how high an LR2 rate can go on its own over time. That doesn't make me nervous. Let's say that it was Vs trading at 50. Well, then that tool could, I'm saying a little tongue-in-cheek, but then they could be doubled up.
Yes.
Without making it incentivized for Vs to switch over.
Yes. Thank you. Fully understood and agreed to. I was more speaking to the technical complications of actually cleaning up those tankers. I thought it was closely impossible to see those. ever trading or be accepted by the cargo owners to actually trade. But fully agreed and understood in terms of economic incentives. Yes. Thank you.
Thank you. Good question. Thank you.
We have no further questions at this time. I will now turn the call back to Jacob Melgaard for closing remarks.
Okay, thank you very much for dialing in to the second quarter 2024. Have a great day.
This concludes today's conference call. Thank you all for your participation. You may now disconnect.