TORM plc

Hello, my name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the TORM third quarter 2024 results conference call. Today's conference 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 the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Jacob Meldgaard, Chief Executive Officer. Please go ahead.

Thank you, and a warm welcome to everyone joining us on the call today. This morning, we released our third quarter results, and I'm pleased to share that Tom has once again delivered a strong financial performance. Let me start by highlighting some of the key takeaways for the quarter. Our time charter equivalent earnings rose to US dollar 263 million, and EBITDA amounted to US dollar 191 million, although trade rates have been lower than expected in the last part of the quarter. We continue to see the market dynamics we've experienced in recent quarters, driven by ongoing geopolitical tensions from both the Ukraine-Russia conflict and escalating issues in the Middle East. These factors have resulted in vessel rerouting, longer voyages, and higher ton-mile demand, contributing to a tight supply-demand balance in the product and market. However, in the quarter, we've also seen that a significant part of the increased CPP volumes has been carried on uncoated VFCCs and sewage maxes, and this has shifted the balance and put a temporary cap on rates. Looking ahead, we believe the key fundamentals supporting a positive rate environment will remain in place, although we recognize that the market is very susceptible to changes in both the geopolitical scenario and potential cannibalization from crude carriers. As mentioned by us here back in August, we've acquired eight secondhand MR vessels for US dollar 340 million in a partly share-based transaction. These vessels built at Hyundai Meepo Dockyard between 2014 and 2015 are part of our ongoing program to replenish our fleet. And so far, we've taken delivery of six of the vessels and are expected to take over the remaining two before the end of the year. With this strategy, we believe TORM is set to continue to create significant value for our shareholders also in the years ahead. It's been a profitable quarter, and in line with our policy of distributing excess cash flow after debt repayment, TORM has declared a dividend of US dollar 120 per share for the quarter, adding to the strong dividend flow seen in recent periods. Now, please turn to slide four. Now, for almost three years, geopolitical tensions, first in Europe, and since then in the Middle East, have driven product tanker rates to a new higher average level. At the same time, we've also seen increased volatility in rates as seed utilization has moved closer to full utilization. However, in recent months, we've seen a decline in rates as short-term factors such as intensified crude tanker cannibalization have softened the positive impact from geopolitical factors. And here, kindly, Turn to the next slide. Turn to slide five. If we start with a bigger picture, the main impact of the geopolitical tension has been a reshaped product tanker trade towards longer distances. The 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 hangar market has been strongly affected by the Fuji attacks against commercial vessels at the Bab-el-Mandeh Strait. The share of global clean petroleum product trade transiting the Suez Canal has declined from 12% to only 4%, with most of the redirected trade going a longer route around the Cape of Good Hope. Please turn to slide six. If we look closer at seaborne trade with clean petroleum products, trade volumes have increased by 2% so far this year, supported by increasing global oil demand and recent changes in the refinery landscape. Together with longer trading distances, this has led to an overall 10% increase in total mild demand. Actual loaded volumes have, though, been trending down over recent months and fell below a year ago levels here in October. One of the regions affected has been the Middle East, where exports have fallen by 8% month on month in October. Given the region's market share of around 10% of the global CPP exports and the fact that the Middle East exports to the West is one of the trades most affected by the Red Sea disruption, this of course has had a strong impact on our market. Nevertheless, we've started to see improvements in refinery margins in some regions that should support high refinery runs and demand for transportation. A lot of talk on the oil market in recent months has been about China's disappointing growth in oil consumption. While the effect of the recent government stimulus package has yet to show in oil demand, It's also important to point out that for the product tanker market, China's market share is below 5%. However, China is important for us indirectly as China accounts for around 25% of global crude oil flows and hence has an impact on the crude tanker market. Please turn to slide seven. Unusually large spread between product and crude tanker earnings that we saw earlier this year led to a cleanup of a number of VLCCs and sewage maxes since the end of the second quarter. These accounted for 9 to 10 percent of the clean petroleum product ton mile here in the third quarter, offsetting a large part of the incremental ton miles. A seasonally improving crude tanker market is reducing incentives for crude cannibalization. This is already seen in both the volume of crude oil trade in the first month of the fourth quarter, but also in the stark decline in the volume of clean products being loaded on crude tankers. While CPP trade volumes are yet to increase after refinery maintenance season and run costs, the headwinds from the crude cannibalization have reduced so far in the fourth quarter. Please turn to slide eight. On the tonnage supply side, we've seen an increase in new building activity this year with the order book currently standing at 22% of the fleet. As we pointed out earlier, new building activity has largely concentrated around the LR2 segment. Given the versatility of the LR2 fleet, which can trade both clean and dirty products, the LR2 order book should be seen in connection with the dirty Aframax order book. The combined order book is currently at 18%, which is more or less equal to the share of combined fleet being candidates for scrapping. The same trend is seen in the entire product center fleet. In fact, the average age of the fleet has not been as high as it is today in two decades. With 14% of the fleet about 20 years old, this will potentially offset a large part of the fleet growth in the coming years. Should a strong freight market result in less than expected grabbing activity, as we've seen in the past two years, we still expect older vessels to leave the mainstream market and go into sanctioned or capitalist trades. Furthermore, We see that as vessels turn towards 20 years of age, their average utilization drops significantly compared to younger vessels. That would lead to a growing share of the fleet operating at a lower utilization. Now, please turn to the next slide. Please turn to slide nine. Looking further ahead in time, we expect the product tanker delivery from 2028 onwards to be much lower than what we're going to see for the next three years. This is predominantly due to Chinese shipyards opting to build container vessels, LNG carriers, and other vessel segments where China has strategic import interests. This coincides with a period where an increasing share of the fleet reaches a natural scrapping age. Please turn to slide 10. On this slide, lastly, I'll say that behind the geopolitical factors that have reshaped refined product 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 product tankers. Beyond the already announced closures, the refinery environment remains dynamic. The risk of falling refinery 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 refiners, 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. And just a final note on the market, we believe that Trump's presidency is likely to imply less restrictions on the US oil industry. And with potentially stricter sanctions against Iran, that would be a supportive factor for the crude sector market. It remains obviously to be seen, but we expect US oil imports to be shielded from potential tariffs in order to keep gasoline prices under control. On the geopolitical landscape, Trump is likely to push for a faster resolution of the Ukraine-Russia war. However, the prospects for success for Trump in negotiating a settlement remain uncertain. What matters most for the tanker market is the EU sanctions, and we do not foresee a quick abolishment of these or a full return to pre-war oil trade between the EU countries and Russia. However, with Trump's more aggressive approach to geopolitics and trade policy, uncertainty on the tanker market as well as in the global economy is likely to increase in the coming years. 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 11 for the financial highlights. In the third quarter, TCE amounted to US dollar 263 million. And based on this, we achieved US dollars 191 million in EBDA and US dollars 131 million in net profit, i.e. slightly up compared to same quarter last year. Fleet-wide, our average TCE rates were close to US$34,000 per day, while LR2s pulling in close to US$41,000, LR1s at over US$33,000, and MRs at more than US$31,000. While rates were strong early in the quarter, they softened significantly in September due to seasonal factors, as well as crude tankers taking some of the additional tonne mine demand. Overall, we had 8,253 earning days this quarter. up from 7,949 days last year, with LR2s making up a larger share of the total. We are proud of these results, which reflect a TCE rate per day increase of US$700 compared to Q3 2023. Moreover, our return on invested capital amounted to 20.3%, demonstrating a very healthy business environment in the third quarter. Once again, our business is developing substantially profit and cash flow, and we are committed to continuing our practice of returning a significant portion of these earnings to our shareholders. Now please turn to slide 12. The chart in the upper left corner shows how vessel values have steadily risen over recent quarters, bringing the total value of up to US$3.9 billion. The growth in net asset value mirrors broker valuations of our vessels as well as the expansion of our fleet. On the lower left, we've highlighted the trend in our net interest-bearing debt, which now stands at US dollar 825 million, i.e. flat relative to the same quarter last year, despite the fleet expansion that we've made. Right now, our net loan-to-value ratio is at 23.1, i.e. lower than the same quarter last year. And after subtracting the detailed dividend for Q3, it will move closer to 26%, maintaining a solid financial foundation as we move forward. And now please turn to slide 13. Based on the result in this quarter, the board of directors have declared a Q3 2024 dividend of $1.2 per share. And as usual, we derived to this dividend by subtracting repayments of debt from our free cash flow. And relative to basic EPS, this equals a payout ratio of a healthy of 89%. This slide gives you the full overview of the dividend distribution and the key days to observe. Ex-dividend date for the shares on NASDAQ Copenhagen will be on the 20th of November and for the shares on NASDAQ New York on the 21st of November as shares are now trading T plus 1 in New York for otherwise the same procedure as usual. And now please turn to slide 14 for the outlook. Based on the result we have published today and the coverage we have for the fourth quarter of 2024, we have close to full visibility for the year. The table shows that we, in the fourth quarter of 2024, expect to have 8,086 earning days, and as of 4th November 2024, we have fixed a total of 52% of those at a feed-wide rate of US dollars 29,044 per day. Compared to the current spot rates, this is relatively high, Thus, if you assume that storm will achieve rates in line with the current spot rates for the remaining part of the quarter, then the fleet-wide rate will be affected accordingly. Thus, for the full year, we are now at 87% coverage at a fleet-wide rate of $38,379 per day. This compares to 2023 fleet-wide rates of US$37,124 per day, i.e. underscoring what looks like to be an overall very satisfactory year with average rates for each segment close to last year's levels. As you may recall, three months ago, we narrowed our guidance range by increasing the low end of the guidance range. This time, we primarily bring down the high end of the range, thereby taking into account the current spot rate environment. Thus, we expect TCE earnings for 2024 of US dollars 1.11 billion to 1.16 billion and EBITDA of US dollars 810 million to 860 million. And now please turn to slide 15 for a short summary of our priorities and commitments. We continue to maintain a strong cash position, which provides us with significant financial flexibility and enable us to seize opportunities in the markets where they arise. Our debt maturity profile remains secure, creating long-term financial stability that is essential as it allows us to focus on executing our strategies without concerns of any major debt refinancing. It also provides comfort to our investors knowing that our financial obligations are well managed and spread out over a period of time. We have no major CAPEX commitments at the moment, and this enables us to be more agile and responsive to market conditions, focusing on investments that generate higher returns. We have successfully enhanced our rate of leverage, allowing us to capitalize on federal market dynamics in the previous course. Leveraging these dynamics allow us to optimize performance and stay competitive. We've continued to take a prudent approach to financial leverage by using share-based funding for our recent vessel acquisitions. This ensures that our net loan-to-value ratio remains unaffected, which is important for maintaining our strong financial health. By structuring these deals in this way, we have expanded our fleet without increasing our financial leverage, keeping our balance sheet strong. And finally, we remain firmly committed to delivering value to our shareholders. Consistent with our strategy, we are distributing 100% of free cash after debt repayments on a quarterly basis. This ensures that our shareholders continue to benefit from our financial performance, reinforcing trust and confidence in our long-term business model. With this, it concludes 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 begin the question and answer session. 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. If you would like to withdraw your question, simply press star 1 again. We'll take our first question from Emily Harkins at Jefferies.

Hi, this is Emily on for Omar. Thank you for taking our questions. I first like to ask, how are you thinking about the product market thus far into 4Q? The cannibalization by the VLC seeds and sewage maxes impacted product tanker demand in 3Q, but those ships are now going back to their normal trades. However, product rates have fallen. So what do you make of that?

Yeah, good morning, Emily. Thanks for bringing up that. So I think we tried to illustrate also in in the prepared remarks that we think that Q3 was affected by crude cannibalization, and that is more or less so far at least a Q3 story. So we are seeing that here in the fourth quarter, there is no over and above utilization of crude tankers in the CPP trade from what we would normally experience. So there's a normalization taking place. So why have rates not reacted well? At least, as I mentioned, one factor to look at is that the absolute volumes out of the largest market of exports of CPP globally is the Middle East. And that market, we can see that actual volumes here in October fell by about 8%. So I think it's quite logical that, yes, we've had a dent from cannibalization from the crude carriers, that is not so much longer the case. However, when you then prolong sort of the softness in the rate environment by the fact that we have lower volumes to transport. So one softening of rates could be seen as a factor of supply, whereas the current softness in rates, we would attribute more to the demand having been lower due Refinery outages and refinery maintenance.

Thank you so much. And as a follow up, you tended to be active with fleet renewal on an ongoing basis, including the AIDA Mars that you mentioned that you acquired this past summer. Do you have your eyes set on more transactions or do you prefer to take a wait and save approach given the softer market now?

It's clear that the buyers and sellers in a market where we're sort of re-establishing where we're headed, that we need to see new sort of clearance prices of assets before we can actually engage both on buying or selling of assets. So far, there's not much actual transactions taking place. So I think we're staying agile. We could do either or. We could be in dialogue potentially on acquiring a share-based transaction for the assets, but we could also potentially, of course, look at letting go and selling of assets. Currently, there's no specific plans around this, Emily.

Thank you so much. I'll turn it over. Thanks.

We'll go next to Van Dijk-Folden Nijmegen at Clarkson Securities AS.

Thank you. Just building on the previous question here, you've previously been successful at use in your shareless currency in less acquisition, which was great and a creative way to grow while keeping the LTV stable when you were priced at sort of a higher level. But with the recent... I would say with the product anchor space trading down recently, how are you thinking about this strategy going forward?

Thanks for that. And to be very clear, we don't see that as a very potent tool in the toolbox, given the current discrepancy between the public market pricing and our NAV. So to your point, if the snapshot that we see today of the price in the public market would persist, then it's not realistic for us to contemplate the type of deals that we, for instance, did earlier this year and also last year. I think something needs to give before that would be on the table again.

Okay, thank you. That's good to hear. I'll return to you. Thank you.

And we do have a follow up from Emily Harkins at Jefferies. And Miss Harkins, your line is open. Please go ahead.

I'm sorry I don't have a follow up.

OK, thank you. I'm no further questions that concludes our Q&A session. I want to turn the conference back over to Jacob for closing remarks.

Yes, thank you very much. Thanks for listening in here to the Q3 2024. Wish you all a great day. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.