TORM - Earnings Call - Q3 2025

Transcript

Operator (participant)

Thank you for standing by. My name is Rebecca and I will be your conference operator today. At this time I would like to welcome everyone to the TORM third quarter 2025 results conference call. 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 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 like to turn the call over to Jacob Melgaard, CEO. Please go ahead.

Jacob Meldgaard (CEO)

Yeah, thank you. Also, welcome to everyone joining us here today. From me, this morning we released our interim results for the third quarter of 2025, delivering another strong set of numbers that underscore TORM's ability to generate market leading performance in Q3. We continue to operate in a relatively stable market environment despite ongoing geopolitical tensions. Freight rates firmed compared to the first half of the year, driving a TCE of $236 million above the levels achieved in the previous quarters. This in turn resulted in a net profit of $78 million, enabling us to declare a dividend of $0.62 per share, clearly reflecting how stronger earnings translate into higher shareholder returns. Also, we advanced our fleet optimization strategy with the acquisition of five vessels for 2014 built MR and one 2010 built LR2 while divesting a 2007 built MR.

We also agreed a three-year time charter for the 2009-built MR vessel Tom Lily to a European refiner at a daily rate of $22,234, thus above the prevailing market rate for such vintage. These transactions support our ongoing focus on maintaining a modern, high-quality, and commercially attractive fleet. Looking ahead, while the macro environment remains dynamic and shaped by geopolitical uncertainty, market sentiment is broadly positive. We enter the final months of the year with solid momentum supported by firm rates across all vessel segments and good visibility on our upcoming fixtures. Based on this and the coverage we have already secured, we further increased the midpoint of our guidance and narrow the range to reflect a high level of transparency on earnings with relatively few uncovered days for the remainder of 2025. As always, we remain disciplined and agile in our execution. With that, let's turn to the key market drivers and how we are positioned for the quarters ahead. Here, please turn to Slide 5.

Here let's start with a snapshot of the market landscape. Product tanker rates have remained both stable and attractive across the board. While recent figures reflect the onset of refinery maintenance season in the Atlantic and the Middle East. Benchmark earnings for MR and LR2 vessels continue to show resilience. This overall rate stability is supported by consistent demand and limited growth in the CPP trading fleet. Let's turn to slide 6. As we've noticed for some time, the low levels of east to west trade volumes observed earlier this year were unsustainable. Indeed, in the third quarter, trade volumes increased significantly, driven by higher middle distillate flows from east to west, supported by transatlantic movements. This lifted ton-miles well above the level seen before the Red Sea disruption.

While crude cannibalization stabilized at historically normal levels at the start of the fourth quarter, trade flows have eased slightly as refineries in the West and the Middle East undergo seasonal maintenance. However, as maintenance concludes, trade flows are expected to resume, further supported by refinery closures in the West, which increase the need to source products from alternative locations. Please turn to slide 7 to elaborate on that. Since the start of this year, two refineries in Northwest Europe have closed, with two more scheduled to shut by end year. Together, these closures represent 6% of the region's refining capacity, reducing local product supply and increasing reliance on imported middle distillates in an already tight market.

If this supply were fully replaced by imports from the Middle East Gulf, an additional 15-24 LR2 equivalents per year would be required, depending on whether vessels transit the Red Sea or sail around the Cape of Good Hope. To put this in perspective, this represents 6-10% of the current TPP trading LR2 fleet. Beyond Europe, two refineries on the US West Coast, representing 11% of the region's capacity, are expected to close within the next six months. This will likely drive increased demand for gasoline and jet fuel imports, translating into a need for more than 25 MR equivalents on a round trip basis if sourced from Asia. Here I kindly ask you to turn to slide 8. Geopolitical developments continue to be a key market driver. Since our last quarterly call, several new measures have emerged.

While the duration of these measures remain uncertain, inefficiencies caused by the Red Sea disruption and sanctions on Russia continue to support the tanker market. Earlier this year, OPEC began unwinding production cuts, but the impact on crude tanker rates only became apparent at the end of the third quarter. We expect the positive effect of strong VLCC rates on product tankers to become more visible once the refinery maintenance season concludes. Sanctions against Russia have intensified in recent months. The EU import ban on third country petroleum products derived from Russian crude effective January next year is not expected to significantly affect product tanker ton-miles as alternative sources are available at similar distances or could slightly increase demand if imports are sourced from farther away. Meanwhile, intensified drone attacks on Russian refineries have reduced Russian clean petroleum product flows, boosting flows from the US Gulf.

Recent OFAC sanctions on Rosneft and Lukoil may further lower Russian crude export. While the direct loss of Russian barrels is limited to the sanction feed, replacement barrels from other regions would provide additional demand support for the conventional crude tanker fleet in an already strong rate environment, indirectly benefiting the product tanker market. Regarding U.S.-China reciprocal port fees, these are now off the table for another 12 months. While such measures could have added inefficiencies to the broader tanker market, TORM would have seen limited impact due to exemptions and the flexibility of our fleet. Finally, the IMO postponement of the Net Zero framework in October does not affect the market today, but signals that oil will continue to play a role in the maritime industry for the foreseeable future. Please turn to Slide 9. Let me turn to the tonnage supply side.

This year's higher nominal fee growth has been largely absorbed by significant shift of LR2s into dirty trades as OPEC sanctions continue to limit the productivity of sanctioned Aframaxes. Over the past year, nearly 50 newbuild LR2s have joined the fleet, yet the number of LR2s trading clean has declined by around 10 vessels. As a result, total theme product tanker capacity has fallen by roughly 1% despite a 5% increase in the nominal product tanker fleet. Looking ahead, the relatively high order book for the next two to three years should be viewed in the context of an aging fleet. The average age is now at a two decade high and the share of vessels approaching scrapping age is almost equivalent to the current order book. Furthermore, a significant portion of the order fleet remains under sanctions which is expected to accelerate exits from the market.

This is particularly evident in the combined LR2 Aframax segment where one in four vessels globally is under EU or U.K. sanctions. Kindly turn to slide 10. To summarize, the key factors shaping the market this year are expected to continue into next year, including ongoing geopolitical uncertainty, the Red Sea disruption, and sanctions on Russia. In addition, higher crude output from OPEC is indirectly supporting the product tanker market. On the demand side, oil consumption remains solid and structural changes in the global refinery landscape continue to support ton-mile growth. On the supply side, a wave of newbuild deliveries will be offset by an increasing number of scrapping candidates and reduced trading activity among sanctioned vessels, factors that will influence overall alternative availability and market balance. I'm confident that TORM is well positioned to navigate this environment of elevated uncertainty supported by our strong capital structure, operational leverage, and fully integrated platform. With that, I will now hand it over to Kim who will walk us through the financials.

Kim Balle (CFO)

Thank you Jacob and please turn to slide 12 for an overview of the financials. In the third quarter we generated TCE revenues of $236 million, resulting in an EBITDA of $152 million and a net profit of $78 million. On a fleet wide basis, we achieved TCE rates of $31,012 per day and bringing it down by vessel class. LR2s earned well above $38,000. LR1s around $29,500 and MRs exceeded $28,000 per day. Compared to previous quarters, freight rates have strengthened supported by solid market fundamentals. Once again, the rates we secured reflect our continued outperformance relative to the broader market. Now move to slide 13 please. This slide shows our quarterly revenue progression since Q3 2024. This quarter's results we see meaningful uptick adding to the stable freight rates and earnings of prior quarters. This further highlights the favorable market conditions we are operating in.

We delivered a satisfactory result with TCE of $236 million and an EBITDA of $152 million. $25 million higher than previous quarter. This improvement reflects a $4,340 per day increase in fleetwide TCE rates. Given our current operational leverage, we are well positioned to benefit from the already very attractive freight rates. Please turn to Slide 14. Here we present the quarterly development in net profit and key share related metrics which closely track the trend in EBITDA. For the third quarter, earnings per share came in at $0.79. Our approach to shareholder returns remains clear and consistent. We continue to distribute excess liquidity on a quarterly basis while maintaining a prudent financial buffer to protect our balance sheet. For Q3, this has resulted in a declared dividend of $0.62 per share representing a payout ratio of 78%.

This aligns with our free cash flow after debt repayments and reflects both our strong earnings and our ongoing commitments to responsible capital allocation. Please turn to Slide 15. As shown here, broker valuation for our fleet stood at $2.9 billion at quarter end. This reflects generally stable vessel values with a slightly positive sentiment among other factors resulting in a NAV increase of approximately $100 million to $2.4 billion. In the center chart you will see our net interest-bearing debt now stands at $690 million corresponding to around 24%, roughly the same level as at the same time last year. Underscoring the strength of our conservative capital structure, on the right, our debt maturity profile shows that only $122 million in borrowings will mature over the next 12 months and that we will have no significant maturities until 2029. This provides us with ample financial runway and stability.

As we mentioned in August, we have secured an attractive refinancing package to replace two syndicated loan facilities and our lease agreements. To date, TORM has repurchased 13 out of 22 leaseback vessels and two additional purchase options have been exercised with one vessel expected in Q4 2025 and the other in Q1 2026. The remaining vessels are scheduled for repurchase during 2026. Altogether, our strong financial position gives us the flexibility to navigate current market conditions and pursue value creating opportunities. Please turn to Slide 16 for the outlook. Our strong performance in the first three quarters provides a solid foundation for the remaining part of the year.

As of 31st October, we have secured 55% of our Q4 earnings days at an average TCE $30,156 per day. For the full year 2025, 89% of our earning days are fixed at an average TCE of $28,281 per day. These levels provide solid earnings visibility and reflect continued market strength across our business segments. While geopolitical volatility remains a factor, market sentiment is firm. On this basis, we are confident in increasing the midpoint of our TCE guidance by $25 million to $900 million while further narrowing our full year guidance. Thus, we now expect TCE earnings of between $875 million and $925 million compared to our previous range of $800 million-$950 million. Similarly, we increased the midpoint and narrowed our EBITDA guidance to $540 million-$590 million compared to the prior range of $475 million-$625 million.This revision reflects both our secured coverage and current market expectation while acknowledging the potential for continued fluctuations. With that, I will conclude my remarks and hand it back to the operator.

Operator (participant)

At this time, if you would like to ask a question, press Star one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from the line of Frodi Morkedal with Clarksons.

Frode Morkedal (Senior Equity Analyst)

Okay, thank you. Hi guys.

Jacob Meldgaard (CEO)

Hi there.

Frode Morkedal (Senior Equity Analyst)

Yes, just read Trade Wins where you talked about, you know, 2009 built MR charter after three years at $22,000 a day, which is like a fantastic rate given the age.

Jacob Meldgaard (CEO)

Right.

Frode Morkedal (Senior Equity Analyst)

Basically three and a half times evened it up as I see it. The question is really, you know.

Jacob Meldgaard (CEO)

How do you manage to pull.

Frode Morkedal (Senior Equity Analyst)

That off and how repeatable is it to chop out for such long duration for that type of.

Jacob Meldgaard (CEO)

Yeah, thank you for noticing. I did also mention it in the remarks here. I think there are two things. One is the enabler to be able to charter out ships that are in this case more than 15 years of age and then how many opportunities are there? We take the first point first and I think the point about having an integrated platform, really our customers, I would argue, are not really age focused in their dealings with us because we have a platform where all our assets are living up to the same standards. If you come to human behavior, safety, etc., it is exactly the same people on board a vessel that is, let's say, straight out of the yard or one that is built in 2009.

Also on efficiency, you know, all the things that we do to make it a TORM vessel when we own and control it is the same across the fleet. I think my point being I do not see this as really as unique because our customers will look at TORM delivering the same type of service for any of our vessels. To your question, how many other we are, I mean this is a European refinery. Will there be more? Someone tells we are in negotiations on several of our ships on longer duration. Clearly with the market that we are experiencing right now, it is so that we are in more frequent dialogue with customers around longer term deals than what we were six months ago. It is quite a game of that. We are only going to do this if it makes financial sense. We don't need to take the COVID because of obviously the financial strength on the balance sheet that Kim, I think, went through in detail.

Frode Morkedal (Senior Equity Analyst)

Interesting. I mean, yeah, for sure. I mean, you know, 30% cash return on such a deal certainly means ship value should increase. Right. Which brings me to the next question really is about you also announced before MR, so you're buying ships and one LR2. I guess you also sold all the ships, just like, you know, broadly speaking.

Jacob Meldgaard (CEO)

How's your thought process?

Frode Morkedal (Senior Equity Analyst)

When you made those decisions? You know, are you looking at some type of return hurdle, cash breakeven or maybe the time charter opportunities?

Jacob Meldgaard (CEO)

Yeah, yeah, good question. I think the answer is all of the above. We do not only look at one metric, but of course it needs to qualify for that. Our internal hurdle for what we deem to be a proper IRR and also return investor capital, given that we are in volatile markets and we are spot operation. Of course it needs to pass on that parameter when we look at asset acquisitions. I think again I will make the same point here, so probably I am a little repetitive, but I think we are also, we have the benefit of that when we make investment analysis. We are not biggie on vessel age or the vessel segment.

What we are really sticking on is that it meets the return requirements, the hurdles that we have set for ourselves because we are in a business that is volatile. Of course we need to have a decent return in order for us to utilize our capital against the asset. The luxury we have because of the platform that I also described about the charter opportunities is so that I feel very comfortable that our organization can generate maximum value out of whether it's an MR built in, you know, five years of age or 10 or 15, or whether it's one of the other segments.

That of course offers me more investment opportunities to study and look at IRRs and ultimately return invested capital from not only one angle and not only one particular type of ship because we really have the ability with our integrated platform to accommodate all of this. Obviously, coming to your point, the four, actually five vessels we have acquired, they in our opinion all of them individually meet the return hurdles that we have. Whereas if we looked at the one that we sold, that was an asset where we could see that it was actually the NPV of that sale was better than maintaining it in our fleet and operating it. It was not that we could not do it, but we had an offer that was better than what our business plan would dictate that you could get.

Frode Morkedal (Senior Equity Analyst)

Interesting. Can you remind us, I guess, on how the one TORM platform actually works in practice? I guess, you know, the way you pull intelligence, I don't know, card opportunities, positioning, essentially why that translates into the higher TCE than the arguably peers are getting.

Jacob Meldgaard (CEO)

Yeah, very happy to. Basically, I think you should look a little away from the fact that we are chartering the ships and start by looking at the ships themselves, where we have an integrated platform, where we hire all of our seafarers. We can dictate which seafarers are on what ships at what time. We can, of course, dictate the quality, but also the focus area and incentivize these to work for the same thing as adjusted.

Kim Balle (CFO)

Right.

Jacob Meldgaard (CEO)

That is the return on invested capital at the end because they are not motivated by a particular ownership structure inside of a ship management company. They are all integrated. I think it starts on both the ships and it also starts with all the technicalities that we can apply on the ships. If we take over a ship, we will probably add 20 different investments that is physically changing the ships from what, how they are today into the type of vessels with the fuel efficiency that we would like to have. It is sort of the broader picture of that. We see, of course, ultimately that it is the dialogue with the customers that dictates the price. Before you get to that, there is a whole company that is working towards enabling the chartering team to get the best rates.

I think in that sense it is different than the business models that we see in other companies where you are more of a steel owner, but where you outsource control of various functions. We actually have everything in house. The discipline we can create by that is that we actually have common KPIs. Everybody in the organization is driven by the same KPIs. I think that is the secret sauce in this. Underneath the hood, there are of course many other things you also point to. You need to be in the right markets at the right time. You need to be really clever about how you position your fleet and think forward, think. Of course we use tools in order to inform us about what we believe is the best position that you can come in to maximize earning over a longer period. I'm happy that you, we really recognize that the value of the platform is that we are delivering TCE earning. Ultimately, that is. That exceeds, obviously.

Frode Morkedal (Senior Equity Analyst)

Yes, exactly. Thank you guys. That's very good.

Operator (participant)

Thank you again. If you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Omar Nokta with Jefferies.

Omar Nokta (Equity Analyst)

Thank you. Hey guys, good afternoon. Good update.Obviously, very strong figures. I just had a couple questions. Maybe just in terms of capital deployment, you bought the 4 MRs, the LR2. Those ships are somewhat older, but it looks like perhaps maybe they're in that sweet spot of, you know, return on investment but just want to get a sense from you. Does this mark maybe a difference in how you're going to start deploying capital? Do you think going younger makes sense or is this the right age profile where we are in the cycle and I guess maybe where TORM is in its life cycle. Is this the right age to be going after at this point?

Jacob Meldgaard (CEO)

Yeah, I think coming back to the right age is the age where you get the highest return on investor cap. So we are not concerned about the age of these assets, then we would obviously not have looked that way. Yes, I think it's, it's absolutely the right thing. Could it be that we could supplement with younger tonnage? Yes. When and if the price curve gives us the opportunity to buy the right type of assets that are younger, we will absolutely look that way also Omar. But, you know for now I feel very comfortable with the choices that we have made and then we are very open for business on any potential additional to our fleet.

Omar Nokta (Equity Analyst)

Okay, very good. The second question I have is on the dividend. Looks like you bumped the payout ratio from, say, 70%-78%. I know it's not a meaningful change, but it's noticeable. Anything you're willing to share in terms of how you think about dividends going forward from here? Do you want to keep it in that 70%-78% range? Do you think it's more on the higher end going forward? Anything you're willing to share?

Kim Balle (CFO)

Yeah, thank you for that question. We were asked the same question last time, you remember that? If you go yes, the 520 and I think we were supposed to say yes, we'll get there. Luckily we are there already this quarter. You know that is not, that's not how we have designed our, you know our distribution policy is not designed to, to hit a PE or payout ratio. It is designed to distribute free liquidity we generate throughout the quarter. But of course it is correlated to our cash flow break even levels and as they go down and I'm just taking the net working capital impact out of the equation but all, all that being equal, of course, as our cash flow break even decreases the ability to pay out more, of course, increases likewise. Hopefully we will look into some coming quarters where we can keep it as at this level. I also, I think I alluded to last time potentially higher, but let's just call it these levels is very satisfactory, but it is not, it's not an aim we have on a payout ratio. It is the free liquidity we're generating that we are. That is the outset of when we propose dividends to our board and then they decide from there.

Omar Nokta (Equity Analyst)

Okay, thank you. That's helpful. Last question, just in terms of the reported interest expense, it was a bit higher than the prior few quarters. Just wondering, is that an accounting treatment? Is that a timing of a coupon payment?

Kim Balle (CFO)

No, it's the refinancing. It's the account treatment of the refinancing and the upfront or the fees that are generated there. You're just hitting.

Omar Nokta (Equity Analyst)

Yep. Okay. It smooths out kind of back to more, more a more normalized level in 4Q.

Jacob Meldgaard (CEO)

Definitely. We can have a talk about that, Omar, if you want some more details on that. But That's the accounting effect.

Omar Nokta (Equity Analyst)

Okay, very good. Thanks, guys. That's it for me.

Jacob Meldgaard (CEO)

Thanks, Omar.

Operator (participant)

Again, if you would like to ask a question, press star one on your telephone keypad. At this time, there are no further questions. I will now turn the call back over to Jacob for closing remarks.

Jacob Meldgaard (CEO)

Yeah. Thank you, everyone, for listening to the Q3 2025 report from TORM. Have a great day.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.