TORM - Q3 2023

Transcript

Operator (participant)

Thank you for standing by. My name is Danica, and I'll be your conference operator today. At this time, I would like to welcome everyone to the TORM plc Nine Months and Third Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll 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 call over to Andreas Abildgaard-Hein. Please go ahead.

Andreas Abildgaard-Hein (VP and Head of Investor Relations)

Welcome to TORM's Conference Call. We are pleased to have you with us. Today, we will present the results for the Third Quarter and First Nine Months of 2023. We will refer to the page numbers during the presentation. During the call, you can ask questions via the webcast, which we will address at the end of the conference. If you are joining via phone conference, you can ask live questions at the end. After this conference call, you will be able to listen to a recording, and as usual, you can find our presentation and other relevant data on our website. Please turn to slide two. Before we start presenting the results, I would like to draw your attention to our safe harbor statement. Please turn to slide three. Today's presenters are, as usual, Executive Director and CEO, Jacob Meldgaard, and CFO, Kim Balle.

Please turn to slide four. I will now hand over to Jacob.

Jacob Meldgaard (CEO)

Well, thank you, Andreas, and good afternoon, good morning to all. Thank you for connecting with us for our third quarter 2023 result presentation, and we are pleased to present yet another quarter with healthy financial performance. Our results in the first nine months of 2023 were historically strong, despite temporary softness in the third quarter, which was related to a decline in freight rates over the summer. We realized a TCE of $244 million in the third quarter and an EBITDA of $178 million. The decline in earnings in the third quarter is, as I mentioned, a result of a temporary drop in freight rates over the summer across all vessel types.

And while the product stocks in the third quarter of last year were being replenished before the sanctioning of Russian oil, this year, we still see that stocks are being drawn down to very low levels. If we look at our own fleet and capacity, available earning days increased 9% to 7,658, as we have grown the fleet by net eight vessels to 86 vessels in total over the past 12 months. TORM's of Directors has approved a dividend of $1.46 per share, based on our strong balance sheet, corresponding to a payout ratio of 99%. The distribution is in line with our distribution policy. The product tanker market has, in general, remained strong but volatile here in the third quarter, and freight rates were negatively impacted by seasonal refinery maintenance and stock draws.

As I'll explain later, we expect a strong ending to the year end and a market recovery, and we have already now covered 64% of Q4 this year at $38,822 per day. In the third quarter, we sold and delivered one MR vessel, which reduced the fleet to 86 vessels at the end of September. Here, after the third quarter, we've been active with respect to optimizing the fleet. I'll therefore spend a few minutes on our recent trades, and here, please turn to slide five. As mentioned, we've been active in here in the first nine months of the year. We acquired 10 vessels and divested four vessels in total. Now, since the end of September, we have acquired four fuel-efficient MR vessels built in 2015 and 2016.

This deal will be financed by a 50% cash consideration of $75 million and 50% by issuance of 2.68 million new shares, based on a share price of $28. Since the end of September, we have also acquired eight LR2 vessels built in 2010-2012. This deal will be financed by a 60% cash consideration of $239 million and 40% by issuance of 5.5 million new shares, based on a share price of $30.72, adjusted for the Q3 dividend of $1.46. Together with the seven LR1 vessels we acquired earlier this year, we in total have added 15 LR vessels to our fleet, adding approximately 7% to our average deadweight ton.

This is in line with our belief that the expected changes to the refinery landscape will support the LR market. Once again, we managed to use our shares to add vessels to the fleet. Since the end of September, we have also divested two older MR vessels and one older LR2 vessel, and now on a fully delivered basis, TORM will have a fleet of 93 vessels.... Please turn to slide six. The purpose of our One TORM platform is to ensure that the fleet has the highest possible tradability. We believe that we do this best with our own integrated commercial and technical management, where people, vessels, and systems work together in search for all possible synergies. In our view, optimal performance is obtained by setting such high quality standards for vessels, newer or older, that any customer would charter them at any time and in any geography.

It's extremely important to us that customers will not deselect a TORM vessel because of quality or safety-related reasons. When this high quality is obtained, optimal vessel positioning is key. The One TORM platform is set up for predicting in which basins the market are optimal for the coming period. By maximizing and optimizing availability for our customers, we can obtain superior earnings. In addition, the One TORM platform also works on minimizing resource leakage. By across the fleet, monitoring and information sharing, we constantly look for reducing the resources we spend, both for the benefit of the environment and for lowering costs. If a vessel does not run optimally, we want to know sooner rather than later.

In short, we all have a common goal with no conflicts of interest and no income sharing, and the One TORM platform will continue to optimize and improve while striving for best-in-class return on invested capital for the benefit of our shareholders. Please turn to slide seven. Taking a look at the development in the product tanker market, here, Russia-Ukraine war and the introduction of sanctions against Russia, we've seen a steep change in the product tanker freight rates towards a higher average level, as sanctions have led to a recalibration of trade flows towards longer distances. This has also brought along a higher volatility level as the product tanker fleet has moved closer to the point of full utilization, where even small changes in the underlying demand and supply are creating high volatility in freight rates.

In recent weeks, another devastating geopolitical conflict in the Middle East has shaken the world. So far, the impact on the product tanker market has been marginal and more indirect via the oil price volatility, but a potential escalation of the Israel-Hamas conflict to a broader region could have a more significant impact. On top of the geopolitical factors, there are, of course, also other drivers that have affected the market, such as refinery maintenance and temporary export ban in Russia, just to mention a few. The impact of these has nevertheless been smaller and of temporary nature, although some other factors that have supported the market, such as delays and restrictions on the number of transits at the Panama Canal, will stay in place for at least another three to four months, continuing to reshape the trade flows. Please turn to slide eight.

Let us take a closer look at the sanctions against Russia, which have been the main market driver for more than one and a half year now. Since the EU introduced sanctions against Russian oil products, the ton mile associated with EU imports has increased by 41%, as the EU now predominantly imports from longer haul regions. This is in spite of the fact that EU imports have been 10% lower, driven by weaker macroeconomic situation and recently, also on relatively mild temperatures. Similarly, Russia has been successful in redirecting its clean products to markets in North and West Africa, Turkey, Brazil, Middle East, and Asia, and thereby utilizing a larger part of the global product tanker fleet and thus impacting ton mile demand. Please turn to the next slide. Please turn to slide nine.

I already mentioned that EU imports, after the introduction of sanctions, have been lower than usual, and partly it has also been a result of the stock building ahead of the sanctions, which meant that a portion of demand was supplied by stockpiles instead of imports. After months of stock drawing, Northwest Europe is entering the first winter season without Russian supplies, with diesel stockpiles close to 14-year lows. The need to replenish stocks, not least for energy security purposes, will likely give tailwind to the product tanker market demand over the coming months. On the other hand, the product exports from the Middle East and India have been recently limited by maintenance at some of the key exporting refineries, which is expected to have peaked in October. The current rate level, even without these refineries, illustrates the fundamental strength of the product tanker market.

What is also important to mention here is that we have seen a number of new refineries coming online in the Middle East this year. However, because of several startup issues, the incremental production from these new refineries has been limited. This means that the full impact of the new refining capacity on the product tanker market will first be seen in the coming months when these refiners reach their full utilization and full export potential. Kindly turn to slide 10. The new refining capacity coming online in the Middle East has been one part of the refinery dislocation story. The other part is refinery closures that we have seen in the recent years, mostly taking place in net importing regions.

As an example of the impact of refinery closures, we have seen a good example here is Australia and New Zealand, where recent refinery closures have led to a 60% increase in the region's clean oil product imports. What makes it more important is that imports to Australia and New Zealand are traveling 20% longer distances than what is global average, and vessels are returning to exporting regions empty. That means there is no triangulation possibilities. Hence, the region's increased need for imports is an important contributor to higher ton mile demand for product tankers. Please turn to slide 11. Here, when we look, we will look at the supply side drivers, and after years of subdued newbuilding activity, the product tanker ordering at shipyards has picked up this year, and currently, the order book stands at 11% of the fleet.

This is almost double the order book to fleet ratio from end of last year. However, what is important to mention here is that the current order book is spread across three and a half years, translating into a 3% growth rate on an annualized basis. In fact, for the coming calendar year, 2024, we expect fleet growth at below 1%, which compares with an average growth of 4% per year for the past 10 years. Furthermore, if we compare the order book for product tankers with the share of fleet at above 20 years old, we see that the fleet growth will be relatively balanced, and the aging product tanker fleet means that the net fleet growth could even turn negative in the second half of this decade.

Another aspect important to mention is that the recent pickup in the new building activity has largely concentrating around the LR2 segment. But 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 7%, which compares with 12% of the combined fleet being candidates for recycling. Slide 12, please. To conclude my remarks here on the product tanker market, we expect the main demand and supply drivers on the product tanker market to continue to be supportive.

The trade recalibration effect that has led to a step change towards higher freight rates has, according to our calculations, added 7 percentage points to the ton mile since end 2021, even with weaker EU imports and without the new refining capacity in the Middle East having reached full utilization. Trade recalibration has been accompanied by other drivers, such as demand growth and refinery dislocation, which has added 3-4 percentage points to the ton mile over the past seven quarters. At the same time, net fleet growth has been limited to 2% per year, leading to the very positive demand-supply growth balance we have experienced. With sanctions against Russia expected to remain in place, coupled with low net fleet growth, we do expect the market balance next year to stay positive. Now, I'll hand it over to my colleague, Kim.

Kim Balle (CFO)

Thank you, Jacob. Please turn to slide 13. Our earnings development during the third quarter of 2023 once again showed a strong performance, and for the first nine months of 2023 was the strongest in TORM's history. TCE was $244 million in the third quarter, impacted by temporarily lower freight rates over the summer. While the third quarter last year was exceptionally strong due to the stock building prior to the implementation of Russian sanctions, this year we have had strong, a strong quarter despite stock draws. Our EBITDA for the third quarter was $178 million and included unrealized losses on FFA agreements of -$8.4 million. After adjusting for this, our Adjusted EBITDA was $187 million.

Over the past four quarters, we have achieved a total EBITDA of $881 million. During the fourth quarter, TORM has declared dividends of a total of $583 million, including the dividend announced earlier today, while also reducing our leverage and increasing the fleet from 78-86 vessels, as Jacob alluded to. Please turn to slide 14. If we dive into the details of our TCE rates, the average rate for MR in the third quarter was $32,632 per day, for LR1s, $32,641 per day, and for LR2s, $35,054 per day. The average across the fleet rate was $33,010 per day.

Based on our rates and coverage as of 6 November 2023, we had fixed a total of 64% of our earning days at $38,822 per day in the fourth quarter across the fleet. With a high coverage for Q4 and the average rate significantly higher than the Q3 average across vessel classes, we expect an increase in rates in the fourth quarter compared to the third quarter. Part of the mentioned coverage has been made with FFA contracts, and during the third quarter, TORM entered into two TC contracts of 24 months each, with rates of $43,000 per day.

In the third quarter, we had 7,658 earning days, and we expect to have 7,494 earning days in the fourth quarter, based on a full effect of the vessels sold during the third quarter, and taking into account that TORM Ismini, TORM Estrid, TORM Kansas, and TORM Tyr, and TORM Marina were sold and are expected to be delivered to their new owners in the fourth quarter. And that our four MR vessels and eight LR2 vessels were acquired and are expected to be delivered in the fourth quarter this year and the first quarter of next year. Please turn to slide 15. As Jacob mentioned, we continue to evaluate our opportunities for fleet expansion and renewal.

Thus, we have acquired and taken delivery of a total of 10 secondhand vessels in the first nine months of this year, just as we have sold two vessels, excluding the recent published transactions. This means that as of 30th September 2023, the value of the 86 vessels that we have in our fleet, or we had in our fleet, reached $3.055 billion, which is an increase of $421 million since the same time in 2022. The vessel value increase resulted in a Net Asset Value of $2.5 billion at the end of June, at the end of the quarter, which is $444 million higher than the same time last year.

Over the past 12 months, we have used the strong markets to strengthen our financial position, while at the same time paying out a total of $583 million, equivalent to 84% of the net profit generated in the same period. Please turn to slide 16. A couple of years back, we set our targets for important sustainability KPIs with respect to safety, diversity, and climate. Taking a view of the status, TORM reached a level of 0.26 accidents per 1 million working hours, and while we always strive for zero accidents, the level is below our 2030 target. With respect to women in leadership positions onshore, TORM has been on a stable level for a number of years.

Despite that TORM has large diversity within nationality, et cetera, TORM will focus even further on gender diversity and leadership to meet the 2030 target of 35% of women in leadership in 2030. In 2022, we also set our target to meet IMO's 2030 target already in 2025. In our most recent update, we have almost reached the target with a reduction of 39%. The One TORM platform will continue its efforts to be ahead of the curve. Please turn to slide 17. Summing up, our results in the first nine months of 2023 were historically strong, with a Q3 that was also strong, despite drawings on product stockpiles. The results reflected a continued strong product tanker market, our good performance, and with the just published largest fleet in TORM's history of 93 vessels on a fully delivered basis.

Market fundamentals and dynamics are pointing towards a stronger fourth quarter, which is also evidenced by our coverage for the fourth quarter of 63% at 30 up, $38,822 per day. We are pleased that strong earnings and balance sheet have allowed for another high quarterly dividend payout this quarter of $1.46 per share, and $7.01 per share over the past four quarters. All in all, our delivered results confirm that TORM's operating model consistently performs strongly, also compared to peers, resulting in a superior return on invested capital and a high dividend payout. We attribute this to our One TORM platform and our dedicated TORM employees. With that, we will let the operator open for questions.

Operator (participant)

Great, thank you. 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. Your first question comes from the line of Jon Chappell with Evercore. Please go ahead.

Jon Chappell (Senior Managing Director)

Thank you. Good afternoon. Jacob, I want to start with slide nine, because I think it's probably the most important part for the next few months, at least. You know, we've been noticing the same from an inventory drawdown perspective, and, you know, I think maybe some people forget the Russian sanctions didn't kick in until February 5th of this year, which means that Europe had exposure to Russian diesel all through last winter and took advantage of that, as you noted. When do you think you start to see maybe a little bit more sense of urgency as it relates to preparing for the winter? Warm winter last year, maybe that can't be repeated this year. Inventories at 14-year lows.

Have you started to already see a pickup as the refineries have come back, or do you think in a couple more weeks, with maybe one cold blast of weather, there's a bit more of an urgency and even a greater pickup in the momentum of rates?

Jacob Meldgaard (CEO)

Yeah. Thanks, Jon. Jacob here. So, no, I actually don't think that we have started to see anything noticeable about creating a, or having this sense of urgency. I think we, as a company, believe that it is that it would be right, seeing from sort of energy security and, and just the fact that you really, I think as a society, don't want too many bottlenecks. So in that sense, I'm a little surprised that we're not seeing any sort of general trend in that that people are starting to stock up. Because, of course, the lead time-

... of any further draws, the lead time to fill up is different this year than what you could expect last year, just simply-

Jon Chappell (Senior Managing Director)

Mm-hmm.

Jacob Meldgaard (CEO)

From a realistic point of view. But I don't think we've seen it yet. It's going to be very, very interesting to follow over the next couple of weeks and months. Middle East refiners are coming back from maintenance as we speak, so I would expect it to actually translate into further volumes of, especially diesel coming from Middle East into Europe over the coming weeks and months. But we haven't seen it yet.

Jon Chappell (Senior Managing Director)

Okay. Yeah, that's good to understand. And also the reaching out proactively and the time to get it there also means that once it starts, it sounds like the momentum would be pretty strong. Just from a corporate perspective, you know, seeing these vessel sales of the 20-year-old-ish ships makes complete sense. Even the MR purchase makes sense. But as far as the LR2s, you know, 2010-2012 ships, those are be 13, 14 years next year. Can you just help us understand the thought process behind maybe buying still some older tonnage? And, you know, as you mentioned in your One TORM strategy, the willingness of charters to continue to use ships that are at 15 years or older.

Jacob Meldgaard (CEO)

Yeah, so what we are experiencing is that, especially for the larger vessels, that that asset class in general have a longer, productive, life, because you can switch between clean and crude as the, as the vessels will, will age. So we are very comfortable with that. The assets that we have acquired will actually be meaningful, contributing to, the platform for a considerable number of years, and, and do not see for this particular asset, a 15-year as a, as a particular interesting point, for, for, for these assets.

Jon Chappell (Senior Managing Director)

Okay. All right. Thank you for your time, Jacob.

Jacob Meldgaard (CEO)

You're welcome.

Operator (participant)

Our next question comes from Bendik Nyttingnes from Clarksons Securities. Please go ahead.

Bendik Nyttingnes (VP)

Thank you. I just wanted to touch on contract coverage. You entered into a couple of two year time charters for your LR2s. How are you thinking around the balance between spot exposure and time charters going forward? And is there sort of a structure you would like on those time charters to be confident in entering them?

Jacob Meldgaard (CEO)

Yeah, Bendik, Jacob here. Well, I think that it's going to be really up to how we see the market when we stroke the deal for a couple of charters out. These are assets that where we think that the rates we obtained are meaningful for that period when we compare to our thinking about what we would get in the spot. So it felt like the right thing to do for the, in this particular, on these particular assets at the time. We don't have a particular wish for a balance between spot and the period. We believe in the market.

But of course, when and if there are opportunities like the one that you mentioned here, then we will be constructive to look at that. One of the vessels that we have acquired have a similar term contract attached. So we'll have, at least then we'll have three which are very, very much in line and similar. So I think it will depend on how the market evolves. When and if term rates are sufficiently high, we can look at locking it in, but at the same time, we don't see any constraints on keeping our vessels spot.

Bendik Nyttingnes (VP)

Okay, perfect. And if I could just have one more question. With regards to fleet renewal and expansion, do you have any targets you're working towards with regards to average fleet age or total fleet size?

Jacob Meldgaard (CEO)

No, we don't. I mean, we don't want to be taking any particular view on size. I think as we mentioned also on previous quarterly results, our thinking is that the current size gives us the flexibility to both opt out of certain assets, as we have also done. We've sold seven vessels this year, and then we have the flexibility to also look at incremental acquisitions, where our preference is for the cash share-based transactions as we've just done. So I think it would be rather opportunistic that you will see us offloading assets as they sort of on our platform is coming to the end of their useful life.

At the same time, we are happy to engage in dialogue on vessels transactions that are in the sort of sweet spot that we think, which is the structure itself being between a considerable cash component versus a considerable stock component when we look at acquisitions. But there is not a clear cut with the size we have. I think we have a lot of flexibility to go down or go up, as the case may be, with our integrated platform.

Bendik Nyttingnes (VP)

... Perfect. That's, that's good color. Thank you. Thank you. Thank you.

Operator (participant)

Okay, thank you. I'm going to hand it back to Andreas. Please proceed.

Andreas Abildgaard-Hein (VP and Head of Investor Relations)

Thank you. We have a couple of questions from the webcast. One for you, Jacob. Oaktree attempted to bring down their share in TORM in March this year. Can you comment on their wish to reduce their stake in TORM, and if they are somehow required to?

Jacob Meldgaard (CEO)

Yeah. So, I think it's probably a good question. I have, in the company, we have no knowledge of the intents or the strategies of our shareholders. So I think I will, unfortunately, apart from that, you need to direct it to the shareholders.

Andreas Abildgaard-Hein (VP and Head of Investor Relations)

Thank you. Then we have a question for you, Kim. Can you comment on how you will finance the MR and LR2 acquisitions made recently?

Kim Balle (CFO)

Yeah, I will do that. Thank you for the question on the four MR vessels. We are financing them via one of our long-term relationship banks on very strong and competitive terms, so super happy about that. And regarding the eight LR2s, it will be we have full commercial support from our core banks to the deal. And we know that at least three of them will be financed through banks, through a bank, and the others, we are considering bank financing or alternatives, but that is to be decided.

Andreas Abildgaard-Hein (VP and Head of Investor Relations)

Thank you. And we have one more question on the webcast here. Can you give some color around how earmarked proceeds will develop in Q4-Q1 with respect to the divestments and acquisitions you've made?

Kim Balle (CFO)

Yeah, thank you very much. That's also a very good question, and, we have written it in our Q3 report, so there's full transparency on page five. By the end of the third quarter, we under distribution, you can see we have $74.5 million in earmarked proceeds. And in note 10, we have described, and when we take all these transactions into account, we will have $184 million in earmarked proceeds. I hope that answers your question in regards to the earmarked proceeds.

Andreas Abildgaard-Hein (VP and Head of Investor Relations)

Thank you. And then, we just got one more question, with regards to financial policy. How are you balancing dividends and leverage going forward?

Kim Balle (CFO)

Yeah, I can, I can take a stab at that. So, so our distribution policy is, is very clear, and you've seen the results of that over the, over the last quarters. There is currently no ambition to change that. So that means that dividends would then be deriving from the operating cash flow, and that once you have a certain threshold of cash on account, then we will be dividending or distributing the balance out. And on leverage, we're comfortable with the current levels. We think we can even increase leverage a little in the, in the current environment, but basically, you should expect more of the same.

Andreas Abildgaard-Hein (VP and Head of Investor Relations)

Thank you. We have no further questions, so this concludes the earnings conference call regarding the results for the third quarter and first nine months of 2023. Thank you for participating.

Operator (participant)

Thank you, everyone, for joining. You may now disconnect.