TORM - Earnings Call - Q2 2025

Transcript

Speaker 2

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the TORM Second Quarter 2025 Conference Call. All lines have been placed on mute to prevent 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Jacob Meldgaard, CEO. You may begin.

Speaker 1

Yeah, thank you very much. A warm welcome here to everyone joining us on TORM's Q2 2025 Conference Call. Earlier this morning, we did release our interim results for the second quarter of 2025, and I'm pleased that again we can report market-leading performance. In the quarter, we witnessed a continuation of the more stable operating environment established in the first quarter, offering a clear contrast to the freight rate volatility seen in the latter part of last year. Our TCE came in at $208 million, broadly consistent with both the last quarter of 2024 and the first quarter of 2025. This translated into a net profit of $59 million, leading to another quarter with attractive dividend distribution of $0.40 per share. We also advanced our fleet optimization strategy by divesting one LR2 vessel and two MR vessels, all built in 2008.

This aligns with our ongoing approach of phasing out older tonnage to maintain a modern, high-quality, and commercially attractive fleet. These well-placed transactions underscore the strong condition and upkeep of our vessels and do reinforce our commitment to operating an efficient and competitive platform. Looking ahead, the macro environment continues to be fast-moving and marked by geopolitical uncertainty, but market sentiment remains broadly positive. We have entered the third quarter with strong momentum, supported by firming rates across our vessel segments and an encouraging degree of visibility into our upcoming fixtures. Despite the external challenges, both the underlying fundamentals and the forward curve for freight rates remain positive. Based on this and the rates we have already secured, we have raised our full-year guidance to reflect a stronger earnings outlook for the remainder of this year.

As always, we remain vigilant and agile, and with that, let us turn to the key drivers shaping the market and our positioning going forward. Please turn to slide number five. Let me just go into first. This is a snapshot of the market landscape, and product tanker rates have remained both stable and attractive across the board. Here, as illustrated in this graph, benchmark earnings for MR and LR2 vessels show resilience and with recent figures reflecting a healthy uptick. This stability is underpinned by increased trade flows and the limited net fleet growth in CPP trading fleet. Here, please turn to slide six, I'll elaborate on that. Trade volumes have surged recently. They reached a 16-month high at the start of Q3. This growth has been driven by increased east-to-west middle distance flows.

For the past two quarters, we've been pointing out that low trade volumes on this route have not been sustainable. With inventories in Northwest Europe falling into the lower end of the five-year range, we have recently seen a surge in east-to-west middle distance trades, further supported by strong exports from the United States. This has lifted ton miles again to levels well above what we saw before the Red Sea disruption. At the same time, crude cannibalization has normalized at more at the historical levels. Looking further ahead, the product tanker market is expected to continue to be driven by geopolitical factors and high uncertainty, but we expect market fundamentals to continue to support trade flows and vessel utilization. Please turn to slide seven. Since the start of this year, two refineries in Northwest Europe have closed, with two more expected to close by the end of the year.

These closures combined correspond to 6% of the region's refining capacity, leading to a lower local product supply and increased need for imported middle distance in an environment where product supply is already tight. According to our calculations, if all this supply were replaced by imported diesel and jet from the Middle East Gulf, this would translate into an additional demand of 15 to 24 LR2 equivalents per year, depending on whether vessels transit the Red Sea or sail around the Cape of Good Hope. To put it into perspective, this corresponds to 6% to 10% of the current CPP trading LR2 fleet. Refineries are not limited to Europe. In less than one year from now, two refineries with a combined 11% of the region's capacity will close on the US West Coast.

This we expect to lead to increased need for gasoline and jet imports, which according to our calculations will translate into an additional demand of more than 25 MR equivalents on a round-trip basis if they all come from Asia. Please turn to slide eight. Geopolitical developments remain a key driver in the market. In its latest sanctions package against Russia, the EU introduced a ban on third country petroleum products obtained from Russian crude oil from January next year, which mainly affects diesel imports from India and Turkey. We do not expect any significant effect on ton miles from this, with alternative sources available from the same distance, but there will be a slight positive impact if imports are replaced by supplies from further away.

While it is still unclear whether President Trump's threat of additional tariffs on India will force Indian refineries to shift away from Russian crude, potential reshopping of crude flows with China taking more Russian oil and India more Middle Eastern Western oil is likely to be positive for larger crude tankers while negative for the Afromax segment. Nevertheless, we expect the demand loss for Afromaxes to be offset by a substantial share of sanctioned Afromaxes not returning to the mainstream trades. Clearly, it is still highly uncertain what the U.S. administration's next move vis-a-vis Russia is, but we do not foresee any reversal of EU sanctions anytime soon. Please turn to slide nine. Let's take a look at the tonnage supply side.

As we pointed out earlier, the relatively high product tanker order book should be seen in combination with the fact that the average exits of the fleet is the highest in two decades. In addition, a large share of especially older fleet is sanctioned, which is expected to support exits from the market. This is especially the case for the combined LR2 Afromax fleet, where every fourth vessel in the global fleet is under either OFAC, EU, or UK sanctions. It is especially the OFAC sanctions that had a strong impact on fleet utilization, with our data showing that ton mile on vessels sanctioned since January has declined by 75%. Lower utilization on sanctioned Afromaxes has incentivized LR2s to move to dirty trades, as a result of which we have seen a 2% decline in the CPP trading fleet over the past 12 months.

This is while the nominal product tanker fleet has grown by 4%, driven by new deliveries. Please turn to slide 10. Looking ahead, several factors will continue to shape the product tanker market, including ongoing geopolitical uncertainty, additional EU sanctions against Russia, evolving U.S. trade policy, and continuing Red Sea disruption. In addition, returning crude output from OPEC is indirectly supporting our market. On the demand side, oil consumption remains robust, and changes in the refinery landscape are increasing ton miles. On the supply side, increased newbuild deliveries need to be seen in combination with the increasing number of scrapping candidates, alongside reduced trading on the sanctioned fleet. This will influence tonnage availability and market balance. I'm certain that TORM is well positioned to maneuver in this environment through our conservative capital structure, the operational leverage, and the integrated platform.

With that, I'll hand it over to you, Kim, who will walk us through the financials.

Speaker 0

Thank you, Jacob. Now please turn to slide 12 for an overview of the financials. In the second quarter, our TCE amounted to $208 million, and based on this, we achieved $127 million in EBITDA and $59 million in net profit. Fleet-wide, we averaged TCE rates of $26,772 per day, with LR2s above $35,000, LR1s slightly above $27,000, and MRs around $23,000. Lost freight rates during the quarter remain broadly in line with the previous two quarters, underpinned by solid market fundamentals. This stability provides a strong base as we progress through the year, with our earnings continuing to reflect performance well above market rates. Please move to slide 13. This slide illustrates our revenue progression quarter by quarter since Q2 2024. With this quarter's results, we now mark three consecutive quarters with stable freight rates and earnings, highlighting a period of sustained performance in consistent market conditions.

Despite continued geopolitical uncertainty, underlying ton mile demand remains solid, though we stay alert to how quickly market dynamics can evolve. Against this backdrop, we delivered a satisfying result, generating TCE of $208 million and EBITDA of $127 million, based on a fleet-wide range rate of $26,672 per day. Adjusting for gain on sold vessels, EBITDA amounted to $122 million, at par with the $126 million realized in the previous quarter. With our current operational leverage, we are well positioned to benefit from any future improvement in freight rates. For every $1,000 increase in daily rates, our quarterly EBITDA could rise by approximately $8 million, based on around 8,000 earning days, highlighting the meaningful earning upside should the market strengthen further. Slide 14, please. Here, we show the quarterly development in net profit and key share-related ratios, which closely follow the trend in EBITDA.

As a result, earnings per share for the second quarter amounted to $0.60. Our approach to shareholder return remains clear and consistent. We continue to distribute excess liquidity on a quarterly basis while maintaining a disciplined financial buffer to safeguard our balance sheet. For the second quarter, this approach has led to a declared dividend of $0.40 per share, representing a payout ratio of 67%. This aligns with our free cash flow after debt repayments and reflects both our solid earnings performance and our ongoing commitment to responsible capital allocation. Please turn to slide 15. As illustrated on this slide, following several quarters of steadily rising vessel values, local valuations for our fleet were at $2.9 billion at the end of the quarter, reflecting both lower vessel valuation as well as our described divestment of vessels.

Although vessel values were down around 7% across the fleet, it is worth noticing that this number is heavily influenced by older tonnage from 2010 to 2012, while newer tonnage has held up relatively well, showing only low single-digit declines. Turning to the center chart, our net interest-bearing debt now stands at $767 million, with a stable net loan-to-value of 27%, consistent with the levels prevailing for the last couple of quarters and underscoring the strength of our conservative capital structure. On the right side of the slide, you can see our debt maturity profile. Over the next 12 months, we only have $157 million in borrowing maturing, just around 14% of our total debt, and we face no significant maturities until 2029, giving us ample runway and financial stability.

To further strengthen our capital structure, TORM has secured commitments for up to $857 million on the most attractive refinancing terms in our history. This refinancing package covers two existing syndicated loan facilities and our lease agreements. The new structure will be divided between term loans and revolving credit facilities, enhancing our liquidity and giving us greater financial flexibility. The package also extends the maturity profile with the new financing running into 2030. Our loan facilities are expected to be refinanced in Q3 2025, while the lease agreements will be refinanced on a rolling basis as buyback options are exercised, with final completion expected before Q2 2026. Altogether, our solid financial foundation gives us flexibility to navigate current market conditions and to pursue value-creating opportunities as they arise. Please turn to slide 16 for the outlook.

A strong performance in the first half of the year sets a solid foundation for the remainder of the year. As of August 4, we have secured 56% of our earnings days in the third quarter at an average TCE of $30,617 per day across the fleet. For the full year 2025, we have fixed 66 of our earning days at an average TCE of $27,833 per day. These levels provide us with solid earnings visibility and reflect continued market strength across our vessel segments. While geopolitical volatility remains a factor, we are seeing improved sentiment in the market environment. On that basis, we are confident in both increasing our and narrowing our full-year guidance range. We now forecast TCE earnings of $800 to $950 million compared to our previous guidance of $700 to $900 million.

Similarly, we raise our expectations for EBITDA for the year to $475 to $625 million, up from $400 to $600 million previously. This revision reflects our secured coverage and the future market expectations, while acknowledging the potential for continued fluctuations. Overall, we remain well positioned to deliver strong results in 2025. I will conclude my remarks and hand over the mic to the operator.

Speaker 2

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jonathan Chappell with Evercore ISI. You may go ahead.

Thank you. Good afternoon. I'm Jacob. On page 13, the fleet-wide TCE EBITDA chart, the consistency over the last three quarters is really noticeable, especially for an industry that's notoriously volatile, and especially given all the geopolitics and macro uncertainty that you mentioned in your prepared remarks. What do you think has caused this consistency over the last nine months or so, and does that restrict you at all with the things that you could do with TORM, whether it's positioning vessels or S&P activity or charter in, charter out? Does it kind of restrict some of your flexibility?

Speaker 1

That's a good question. I think I agree with the fact that it is really a remarkable stability that we've seen, I would say, over the last three quarters predominantly, but it really doesn't restrict us of any. I always see these markets as that we need to establish, I want to say, a clear view on where is the market kind of headed and what range we are in. I think we've been range-bound for some time here. I think that, as also in my prepared remarks, I think that we illustrate that I think there is some option of that things could change here. The dynamic could change to the upside.

Obviously, of course, if we look at, for instance, the additional oil coming to market, the fact that trade routes will, everything has been equal, still remain stretched, and there is further closure of refineries in the parts of the world where we already have a need for import. I think that sort of the headwinds that we've seen, which have sort of put a cap on the market, could, in the coming quarters, change the dynamics so that we have more tailwind. I see it more from that perspective that this is really a solid, solid, I would say, foundation for creating more upside potential as the oil markets also will change their dynamic, I think, especially with the OPEC change in sort of turning on the taps.

Thank you. Just to follow up, Kim, I think it needs to be asked, like, I understand you have a calculation for your dividend policy. The payout ratio thus far this year has been lower than it was last year. Now that you've completed this tremendous financing, do you think that the calculation, if we kind of look beyond the leases, maybe fourth quarter or first quarter next year, becomes a bit more favorable in the magnitude of payout ratio?

Yes, I do. That is our expectation. Our expectation is that when we look into 2026, for several reasons, our cash flow per given will decrease notably. With that, you should expect, of course it depends on where we are in the markets, but you should expect the payout ratio to, or the dividends to be higher, and the payout ratio also to, in itself, be higher. Yeah, I would expect, we would expect that.

Do you have any sense on what the main, is it kind of 75 to 80 again, similar to what it was in 2024?

Good question, but probably yes. I would imagine that now I'm going out on a little limb here because I don't have it calculated for this meeting, John, but I would expect that 80 would be a 75, 80 would be a fine place to be.

Okay. Great. Thanks, Kim. Thanks, Jacob.

Yeah, thanks. Thanks, John.

Speaker 2

Your next question comes from the line of Omar Nota with Jefferies. You may go ahead.

Thank you. Hi, Jacob and Kim. Thanks for the update. Nice to hear kind of the thoughts of, you know, lower breakeven and a potential higher payout ratio as we look into next year. I wanted to maybe just ask about kind of what we're seeing here in the third quarter. Obviously, some pretty good guidance in terms of your bookings, especially on the MRs where you're showing $28,000, which is quite a bit above kind of peers, but also what you had been capturing the prior few quarters. This is interesting because the LR2s and LR1s are kind of flattish to slightly higher, but it's really the MRs that have gone up. Can you maybe just talk about what's driving that upside and what can we expect from here for the rest of the year to the extent you can say?

Speaker 1

Yeah, I think on a granular basis, what I've been thinking about, and I think it's the right question, is, okay, what has been driving this? Really, as we look at the data points, the fact that CPP on the water now has, going into the third quarter, gone up to the highest that we've seen for more than a year is significant. In combination with that, if we go back exactly 12 months, I think we were all sort of a bit puzzled by the fact that crude tankers, predominantly Suez, but also some we see, were really turning their attention to the CPP market, taking away demand for about 8% or so. Now we are back to 1% of the trading Suez and VL fleet being in our minds. I think the combination of that, really, you've seen a trading uptick in general.

You've seen the cannibalization, at least for now, having more or less evaporated from a very high, historically unusual high level. That really just trickles down more into the MRs because you only have that many LR2s trading. As I alluded to, it is a little fascinating that I think we have all been following the order book of LR2s, watching it and thinking, okay, that seems to be quite a hefty order book. The fact is actually that even, I think, let's say that there's 50 vessels that have been delivered over the last three quarters or so, the trading feed of LR2s is the same, sort of in broad strokes.

I think it's just this filtering down into that there's just more, there's been more trade at a granular basis in the MRs and that we've also then been assisted by the fact that in the larger segments, that CPP has simply not been moving on our sister vessels or the sister segment in crude to the extent that it was. It has been very, I think the fact that it is so widespread demand is extremely positive because I think it demonstrates a very solid market when you see that. It's not like almost a demo where we should count just, okay, how many cargoes are there of NAFTA out of the AT to Asia? I mean, that will not tell you the dynamic and the strength of the market. It's actually a lot of pockets of strength.

That's what in aggregate leads us to that we've got more CPP on the water now than at any point in time over the last 16 months. It's really that underlying strength that translates into the MR rates that you've seen.

Thanks, Jacob. That's very helpful. We get a good lay of the land there. I guess maybe just with that backdrop, you know, a lot more cargo on the water, less cannibalization. The fleet in general is even tighter. You talked in the presentation just about values having been softer. You're obviously very transaction-oriented with the acquisitions and the sales. What are you seeing right now in terms of the S&P market? Are values finding a floor? Is there any, you know, potential for them to rise just given this improvement in rates? Any color you're able to share on that front?

Yeah, I think it's a very, it's a very good question. Our thinking is that in these markets, the first thing to observe is obviously spot rates drop. They can, as we all understand, following the volatility and trend over the last three years, you know, spot rates are very volatile and they can change, you know, really fast. That's what they actually did over the last year is that they kind of also from the slide that was referenced before on the EBITDA, it seems as if actually rates have been stable over at least three quarters, whereas asset values have been like slowly coming down. I think this is a little like you would expect also in, let's say, a real estate market. It's rare that you like certainly get that all everybody puts the price down of their asset at the same time.

It takes a little time to sort of get the clearance prices. I think we've reached, in our opinion, we're sort of at that flexion point where rates have stabilized for a longer period. It has meant that asset values have also been creeping down, but right now, if we sort of take a snapshot, I would argue that they're probably stabilizing around the prices that we've seen also reflected in our Q2, end of Q2 numbers, and that now it remains to be seen what happens over the course of this quarter and the next quarter. I think that there is potential if freight rates, they start to climb up in a general sense that asset values could either stay or go up from where they are now. That would be the logic, though.

Okay. Very interesting. Thank you, Jacob, again for that. I'll turn it back.

Yeah, thanks.

Speaker 2

Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Srody Morato with Clarksons Securities. You may go ahead.

Speaker 1

Thank you. Hi, guys. This is Srody from Clarksons Securities. Just looking at the slide you provided on page five or six, I think, on the CPP ton miles, it sounded like it was trade volumes driving that up. The question is really, have you seen any change to the miles component? I feel like a lot of it has been more like a regionalized trade for a while, and we've basically been waiting for, let's say, the interbasing trade to pick up on the LR2s, right? Are you seeing any change there? Yeah. Yes, trade volumes, as a result, is trading, exactly as I say on slide number six, I believe it is, has gone up. The ton mile on this is reflected also in the fact that the incentive to bring middle distance from especially Middle East, Eastern Hemisphere into the West has also increased in this period.

It means that everything has been equal. We both have an effect on volume, but also on the distances sailed. It is a combination of both. Because of the restock, we could say, of middle distance into the inventories in Northwest Europe. If you followed our last couple of quarters, I think we had been a little puzzled that from a strategic point of view, the suppliers of middle distance were not, to a larger degree, still maintaining their inventories at higher levels. Towards the end of the second quarter, it was then clear that now you could no longer just eat out of inventory unless you needed to replenish. That was done predominantly from Middle East and also U.S. Gulf, but also Middle East driving up volumes and miles. Great. On the next slide, which was also great, the refinery closures, right?

Can you talk a bit more, maybe talk, you said it already, but what's the timeline here? When can we expect this positive effect to kick in? Yeah. We believe that in the end of 2025 already, so within this year, we will see the European refiners be closing down. They have been, I would say, moving along at a slow pace, but the decision has been made for them to finally close business and are no longer viable. That will already be from the end of this year, whereas in the U.S. West Coast, as I mentioned, that will be in about a year's time from now. Okay, this is one U.S. West Coast time. It's middle of next year, expected. Yeah, yeah, mid-next year.

It's obviously the greater picture around that, if I just may add a little comment, that from a political standpoint, it is the ambition to close the local refineries down in, for instance, Northwest Europe and also the US West Coast. It has just proven that those actions have sort of accelerated compared to how fast the transition on the demand for exactly the products that they're producing is. It may be that the consumption, let's say, on the US West Coast is slowly going down, but the pace of closures is much faster than that. That means we will be called upon in the broader product tanker market to carry more cargoes, actually. Yeah, indeed. I guess my final question is on the discussion of the price cap change. Specifically, I guess, I mean, there's a lot of LR2s that are trading into dirty trades, right?

Because it's been positive. When the EU lowers the price cap, you might see Afromaxes, right, that are trading legally Russian crude today, will lose that compliance. They have to move out of that trade and into the conventional market, which would put downward pressure on Afromax crude rates, probably. Do you see that as a threat to that switching for LR2s or not? Yeah, I think that it is clearly the jury's out on the real effect of this.

I think the fact that these vessels, especially if you look at the type of vessels that have been sanctioned, which in many cases also would be the vessels that you point to, whether they can easily, both from sort of a commercial point of view, be accepted back in the trade that we operate in as number one, and whether they are also actually maintained in that is what I would probably argue that on the margin, a lot of vessels will not easily come back. I think quite a lot of vessels are actually not maintained to a standard where it makes sense for them to sort of be retrofitted into the standard of our type of customers.

The jury's out, but it does seem to me as if when investments have been made by people into the gray fleet or the dark fleet and that they then subsequently get sanctioned, they are not looking for a long-term investment. They're looking for the short-term gains of being in a trade that few people want to touch. The operating earning is what they're looking at. It's not the maintenance of the vessel. That is the main focus. The jury's out. I think that it could be negative, as you point to, for mid-sized vessels and more positive for VLCCs as this trade goes on. Most likely, there is quite a part of this, let's say, crude trading LR2s or Aframaxes of older vintage already sanctioned that will have a hard time coming back either for commercial reasons or because after a period of time they are substandard. Okay.

Yeah, it's all right. Thank you, guys. Thanks. Thanks for the good questions.

Speaker 2

Your final question comes from the line of Clement Mullins with Value Investors Edge. You may go ahead.

Speaker 1

Hi, good afternoon, and thank you for taking my questions. I wanted to start by following up on John's question on the cash break-even. Could you talk a bit about the average margin on the sale and leasebacks you're buying back relative to the margin on the new financing facilities? I think it is, I think you can actually find it in our 20-F. I would recommend you take the recent 20-F where you can find both, you can find a full overview of our leasing arrangement. The reason why I'm saying that is it is a split on the specific arrangements. It is a fixed rate there. The comparison here is when you then look into the syndicate facilities we've made, that will also be published. We've not published it, but the rate is, it will also be visible in our upcoming 20-F for 2025.

It is notably lower than what you can see that we have in our current syndicated facilities that are around 1.85, 1.9. It is significantly lower than that. Makes sense. Thanks for the cover. You sold the 2008 build TORM Discoverer and the TORM Voyager. Could you disclose the selling price for modeling purposes? We have agreed not to disclose the prices for those vessels with the buyer of them. We will not do that. All right. Thank you for taking me away. That's fair. Of course. Any more questions?

Speaker 2

That concludes today's question and answer session. I would now like to turn the call back over to Jacob Meldgaard for closing remarks. You may go ahead.

Speaker 1

Thank you very much. I just want to say thanks to all of you for being interested in TORM and for listening in today. Have a great day. Thank you.

Speaker 2

This concludes today's conference call. You may disconnect.